Review: Unicorn AIM IHT & ISA Portfolio
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
Investing in AIM is akin to visiting a large foreign city for the first time: you can have a great time, but only if you know where to go and, importantly, where to avoid.
There are around 1,000 firms on AIM. As Chris Hutchinson, the lead manager of the Unicorn AIM IHT & ISA Portfolio Service puts it: ‘Among the dross there are some great businesses. But you have to filter through the ones that over-promise, under-deliver, burn through cash or are too specialist. Whittle them down to around 40 and you stand a good chance of getting some decent returns.’
And that’s what Unicorn aims to achieve. Its AIM IHT & ISA portfolio only launched in early 2016, but Unicorn’s AIM track record goes a long way back, although past performance is not a guide to the future. Unicorn manages over £313 million in AIM stocks across its funds, including the Unicorn AIM VCT (see page 7), the largest of its kind.
The IHT portfolio often invests in businesses Unicorn has known for years and previously backed by the VCT. Chris Hutchinson is the lead manager for both.
Watch an exclusive video interview with manager Chris Hutchinson of Unicorn:
A choice of income and growth portfolios
You can choose between an Income and a Growth portfolio. The former will pay out any dividends received quarterly, whilst the latter will re-invest them. Please remember, dividends are variable and not guaranteed.
Each of the two portfolios currently includes 30 AIM-listed companies, spread across a variety of sectors and independently assessed as likely to qualify for BPR.
A similar investment strategy applies to both. However, for the Income portfolio, a greater emphasis is placed on the level and sustainability of dividends.
Churchill China plc (Growth Portfolio)
Churchill China is a leading manufacturer of high-quality ceramic crockery. The company can trace its origins back to 1795 and the foundation of its first factory in the heart of what later became the Staffordshire Potteries.
Over the years the company has combined heritage and innovation. One of its original patterns, Blue Willow, is still in production after over 100 years. At the same time, Churchill has progressively developed, building a strong reputation as an innovative and reliable supplier of quality table-top products.
To date, Churchill products are used in hospitality establishments in over 70 countries worldwide, achieved through a 508 strong global distributor network. Portfolio company case studies Churchill China exhibits many of the qualities Unicorn looks for in an investment opportunity: a high-quality product offering, a strong track record of earnings growth and consistent delivery against market expectations, although please note past performance is not a guide to the future. In addition, Churchill China still is, in some respects, a family business. The Roper family has been at the helm since 1922 and still holds a significant share of the business.
EMIS Group plc (Income Portfolio)
EMIS Group started in 1987 in North Yorkshire as Egton Medical Information Systems. Its founders included two GPs, who identified an opportunity to develop and supply practice management software to GP practices at a time when GPs’ systems and records were largely paper based. The Group's first GP clinical software was launched in 1990.
Today EMIS Group serves healthcare professionals in over 10,000 UK organisations. It offers GP systems, pharmacy software, online appointment booking and specialist care software, enabling the NHS to provide a faster, better connected and more efficient digital health service.
EMIS is a good example of the kind of company Unicorn favours. It generates high levels of recurring revenue from the sale of software licences. This has enabled the management to grow the dividend at a compound annual rate of over 12%, since listing on AIM in 2010, although past performance is not a guide to the future.
Unicorn believes the business is well placed to benefit from an increase in the level of digital investment across the NHS, which is expected to receive £450 million in additional funding through its IT Futures programme over the next three years – not guaranteed.
Invest in the 'blue chips' of AIM
Unicorn only looks at established, profitable, cash-generative businesses. Indeed, the average market cap is £382 million for the Growth Portfolio and £288 million for the Income Portfolio (December 2018). All the companies across the two portfolios were profitable at the time of investment. All but three pay dividends.
Mr Hutchinson aims to avoid any companies with significant debt, which are burning through cash or relying on regular rounds of fundraising, and he steers clear of those he doesn’t understand.
For instance, he avoids investing in oil, gas, mining and commodities along with biotech and early-stage tech companies.
He prefers businesses where the founders – or the founding family – still have a significant stake. An example is James Halstead, an established and profitable flooring manufacturing company which has been running since 1915. Now under the lead of the fourth generation, with Mark Halstead as Group Chief Executive, the company is worth nearly £1 billion (5 Feb 2019). James Halstead is the largest holding in the Income Portfolio.
Another example is Young & Co.’s Brewery. Members of the Young family are still amongst the largest shareholders 188 years since the business was established.
The Roper family has been at the helm of Churchill China since 1922 and still holds a significant share of the business (you can read a brief case study to the right).
It stands to reason family businesses could be more prudently run. The current generation will probably want to ensure the business is around in 10, 50 or even 100 years, although there are no guarantees.
History of good performance
Despite the volatility in the AIM market, since inception, the Growth Portfolio has grown by 22.9% and the Income Portfolio by 10.2% with a weighted annual average yield of 3.8% (the target is 2-4%). Please remember: past performance is not a guide to the future. Dividends are variable and not guaranteed.
Make your ISA IHT free
When you invest in the Unicorn AIM Inheritance Tax portfolio in your ISA you could potentially take advantage of both the usual ISA tax benefits of tax-free income and growth, and full IHT relief after two years. Tax rules can change and benefits depend on circumstances.
Keep control of your money
Should your circumstances change, you can withdraw funds at any time, subject to payment of an exit fee. Once withdrawn, the funds will no longer be IHT free nor eligible for ISA tax benefits.
What to bear in mind
AIM shares tend to be riskier and more volatile than typical investments in an ISA portfolio, such as unit trusts or shares listed on the main market. AIM stocks are also more illiquid.
To benefit from IHT relief, you must hold the shares for at least two years and on death and the company must remain qualifying.
Liquidity of companies listed on AIM is the key risk in this service, as it can be a volatile market with little trading at certain points. Both the Income and Growth portfolios will be fairly concentrated with between 25 and 40 holdings placing more importance on the stock-picking abilities of the manager.
This is a long-term commitment and capital is at risk: you could get back less than you invest.
Under current rules, BPR-qualifying AIM investments held for at least two years and on death are exempt from IHT, but remember tax rules can change and tax benefits will depend on circumstances.
What to consider next
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.
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