Stellar AIM IHT ISA

Stellar Asset Management (“Stellar”) manages assets of £290 million, of which £93.5 million in its AIM IHT service (December 2022). 

The Stellar AIM Inheritance Tax Service was set up in 2014 and was previously managed by Manchester-based stockbroking firm Pilling & Co. 

In 2020, the business brought the AIM IHT service in-house with the appointment of the well regarded AIM fund management duo, Stephen English and Phil Kirwan, to serve as Investment Director and Portfolio Manager respectively.

The manager

Stellar Asset Management is an independent firm wholly owned by its directors and staff. The business has a focus on estate and succession planning. Its clients include individuals, trustees, business owners and those with a lasting power of attorney.

Stellar offers a range of tax-efficient investments – from forestry and farms to renewable energy and residential property development – each managed by a specialist investment team with experience in the sector. Stellar Asset Management manages £290 million in asset-backed investments and £93.5 million within its AIM IHT service. 

In 2020 Stellar brought its AIM IHT service in-house, appointing Stephen English and Phil Kirwan to serve as Investment Director and Portfolio Manager respectively. 

Stephen English began his career on the dealing desk of Blankstone Sington in 2002 and launched the firm’s AIM IHT service in 2010, managing it for ten years. Stephen joined Stellar Asset Management in 2020 and is responsible for the portfolio investment philosophy and for analysing, selecting and monitoring stocks and implementing risk controls for the Stellar AIM Inheritance Tax Service. He holds the Chartered Financial Analyst (CFA) designation and is a Chartered Fellow of CISI.

Phil Kirwan is responsible for rebalancing portfolios, communicating with clients and intermediaries, preparing reports, valuations and liaising closely with Stephen on portfolio construction. Phil holds the CISI Chartered Wealth Manager qualification.

The administrator for this service is Wealthtek LLP and the custodian is CACEIS Bank, which will hold investor shares using a nominee structure. 

Investment strategy

The Stellar AIM Inheritance Tax Service is a discretionary managed portfolio service that comprises between 25 and 40 AIM-quoted companies expected to qualify for Business Property Relief, so could be free from inheritance tax if held for two years and still held on death. It aims to provide investors with a blend of capital preservation and growth – not guaranteed.

The investment team will invest approximately two-thirds of the portfolio into companies it considers to be offering “growth at a reasonable price”, and a third will be invested into “Value” or “Special Situation” opportunities, such as companies undergoing a turnaround. The team believes these stocks will complement the wider portfolio and add diversification. 

The team will conduct its own due diligence when assessing the risk/reward of each company, appraising accounts, culture, strategy and business model, as well as investor sentiment. Particular attention is paid to three factors:

1. Founder and manager-owned businesses – The team favours companies where the founder(s) – or those running the business – hold a significant minority interest. The team believes these companies are more aligned with investors’ interests and may have a more sustainable business model. 
2. Smaller companies – The team sees particular value at the smaller end of the AIM market, i.e. companies with a market value of less than £200 million. It believes this end of the market is often less researched, potentially creating pricing anomalies to exploit.
3. Price momentum – The team believes the price you pay for a stock has a significant bearing on the eventual return. It also believes value investing alone is not enough. For a stock to be attractive, it must also be increasing in value. 

Due to the focus on smaller AIM-quoted companies, there will come a point where (if assets continue to rise) the team will be buying larger stakes in each business than they consider prudent. For this reason, assets within the service are expected to be capped at approximately £200 million. The service currently has assets under management of £93.5 million (December 2022). 

Current portfolio overview 

Investors into the service can expect to receive a portfolio of 25 to 40 holdings across a range of sectors. The current portfolio has a bias towards smaller AIM-quoted companies. In aggregate c.60% of the portfolio is invested in businesses with market capitalisations of under £250 million (December 2022). The average market cap of investments within the service is £306.1 million.

The charts below shows the portfolio sector breakdown for the top 10 sectors, which together account for c.80% of the portfolio, and the market cap value distribution.

Sector breakdown (%)

Market capitalisation breakdown (%)

Examples of portfolio companies

Oxford Metrics - example of a growth stock

Oxford Metrics has been designing ‘smart sensing’ technology since 1984. The group operates across four segments: engineering, entertainment, life sciences, and virtual reality and is best known for its motion capturing division, Vicon. 

The group sells to over 70 countries across 10,000 active customers. A few of its real word applications include FIFA’s goal-line technology, holographic visuals for ABBA’s concerts, and enabling NASA to operate a helicopter on Mars. The company’s motion capture technology was used in film The Golden Compass, which won the Oscar for Best Visual Effects in 2008. 

In the 12 months to September 2022, the business recorded sales of £28.8 million, up 4.3% on the year prior, as well as a record order book at year end, up 307% to £24 million. During the same year, the group successfully sold its subsidiary, Yotta. The businesses sold for £52 million, a gain of £43.6 million, and should provide the group with increased financial firepower to accelerate organic investment as well as selective acquisitions. 

The market capitalisation of the business was £139.6 million (as at December 2022).

Flowtech Fluidpower - example of a turnaround

Flowtech Fluidpower is a group of companies specialising in the distribution of engineering components and assemblies, with a focus on the fluid power industry.

Fluid power is used to drive and control all kinds of mechanical motions; indeed, there is scarcely a machine or vehicle which could perform movements – linear, rotary or a combination – without fluid power.

The company’s revenue dipped in 2020 following global supply chain challenges but in a recent trading update were reported to have recovered to just above pre-pandemic levels (as at December 2022).

In 2021, the Group started to operate under three distinctly branded segments and has made significant progress in consolidating supply chain operations, improving logistics, and maximising procurement synergies. In the twelve months to December 2022, the company reported unaudited revenues of £114.8 million, up 5.2% on the previous year. 

While the company’s share price has recovered from the lows of 2020, Stellar feels the job is only half done and still considers it a turnaround story. Flowtech Fluidpower currently has a market capitalisation of £66.1 million (December 2022). Past performance is no guide to the future. 

Accrol

As is to be expected, not all investments will be successful. A recent example is Accrol. 

Accrol is the UK’s leading independent tissue converter, producing everything from toilet paper to biodegradable wet wipes. 

Stephen English (then at Blankstone) invested when the company floated in 2016. By this point, Accrol had secured a 35% share of the UK’s discount market and was targeting further growth with the larger grocers. 

Despite its strong defensive nature the company struggled following a ‘perfect storm’ of issues, including soaring pulp, transport, and energy costs which together drove up the cost base by £50 million. 

These factors, together with a deterioration in the balance sheet, led the team to sell in March 2022. Overall, this resulted in a loss of 32%, including dividends of 6.3p.

Performance 

The Stellar AIM Inheritance Tax Service was set up in 2014. The chart below shows the performance of the service over the last five years against a peer group of other AIM ISA portfolios available via Wealth Club. 

The track record includes the performance of the Stellar AIM Inheritance Tax Service prior to Stephen English’s appointment in September 2020. Like other IHT portfolios, this is a discretionary managed service so each portfolio is likely to be different. 

Five-year cumulative performance to 31 December 2022

Access to your investment

Investments in this portfolio are for the long term. However, if your circumstances change, you can sell some or all of your shares, although sometimes this can take a while depending on market conditions and liquidity. In normal market conditions, Stellar aims to fulfil withdrawal requests within 10 days, but this is not guaranteed. Any amount you withdraw will no longer be IHT free. Withdrawals may result in a Capital Gains Tax liability unless held in an ISA.

Risks – important

This, like all investments available through Wealth Club, is only for experienced investors happy to make their own investment decisions without advice. Those considering AIM Inheritance Tax Portfolios should be comfortable with the significant risks of investing on AIM.

AIM IHT portfolios should only form part of a balanced portfolio. Your capital is at risk and you should not invest money you cannot afford to lose. If a service is managed by a small investment team, it could create key person risk. The fewer the companies included in the portfolio, the higher the risk of loss if things don’t go to plan. 

AIM stocks can be hard to sell, particularly at the smaller end of the market, and can be illiquid. AIM shares can be very volatile especially if the market falls sharply. The difference between the buying and selling price (spread) of AIM shares is often wider than the spread for shares listed on the main market. 

Eligibility for BPR, based on current rules, is assessed at the date of death and will depend on the companies in the portfolio remaining qualifying. Broadly speaking, you will need to have held a BPR qualifying stock for at least two years and still hold it on death to qualify. Tax rules can change and benefits depend on circumstances.

Before you invest, please carefully read the Risks and Commitments and the offer documents to ensure you fully understand the risks.

Charges

A summary of the main charges and savings is shown below. The investment may have additional charges and expenses. Please see the fees document for more details. If you would like a full breakdown or a personal illustration, please let us know.

Our view

Stephen English is a fund manager we rate highly: we have known him for some time.

The investment strategy is focused on smaller AIM-quoted companies, blending both “reasonably priced” growth stocks and stocks in special situations such as turnarounds. More than half the portfolio’s assets are invested in companies worth less than £250 million, in contrast to many AIM IHT services, which focus on larger AIM-quoted companies. The portfolio may offer diversification benefits to a wider AIM IHT portfolio.

The service currently has assets under management of £93.5 million. In order not to jeopardise the investment strategy, which seeks to back smaller AIM-quoted companies, the service is expected to close to new investors once it reaches £200 million.

The fees are middle of the range compared with other AIM ISA portfolios. The minimum of £20,000 could make it a contender for this year’s ISA subscription.

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.