Coronavirus: impact on AIM market and AIM fund manager reactions

The impact of COVID-19 on global financial markets is widely reported in the financial and mainstream press. But what impact is COVID-19 having on AIM?

Here we give an overview, alongside comments from fund managers of AIM IHT and AIM VCT portfolios.

How is the AIM market faring so far?

Of the 100 largest stocks trading on AIM, values have fallen on average by 36% in 2020 so far, and by 29.6% in the month of March (to 23 March 2020) – for context, the main stock market fell by 34% in the same period. 

Looking closer, the picture is more nuanced. AIM share price reactions have varied significantly. The ten best-performing stocks have averaged a positive return of 4.0% this year, whilst the ten worst have averaged a return of -69.3%. Past performance is not a guide to the future, of course – for falls as well as rises.

Some clear winners and losers seem to be emerging. 

The stocks that so far appear to be most resilient are those geared to the rapid changes in consumer behaviour, such as computer gaming businesses, as consumers continue to seek different forms of entertainment. Team17, an independent video games label, is one example. Its shares have risen 23.7% this year. Technology businesses solving real-world problems also seem to remain in favour. For instance, ITM Power, the hydrogen power generation and storage business, has seen its share price rise 46.6% this year.

Predictably, the hardest-hit part of the market has been businesses facing significant disruption due to government restrictions, changes in consumer behaviour and supply chain issues. The most notable examples are companies within the travel and leisure, as well as retail sectors. For example, Dart Group, the owner of low-cost airline Jet2.com, has fallen by 70.3% this year. ASOS, the online clothing retailer, has seen its shares fall by 67.0% due to disruption to supply chains and consumer spending. Whilst Purplebricks, the online estate agent, has seen its shares fall by 73.8%.

Comments from AIM fund managers

We have contacted a select group of fund managers of AIM VCTs and AIM Inheritance Tax Portfolios.

AIM VCTs, as the name suggests, are VCTs that invest predominantly in AIM-quoted companies. AIM Inheritance Tax Portfolios are discretionary portfolios of AIM shares that qualify for IHT relief and can be held in an ISA, potentially making it IHT free after two years. Read more on AIM ISAs »

Below we reproduce the fund managers' comments – we’ll add more as soon as we receive them. Please note, these represents each manager’s views, not those of Wealth Club. They contain opinions and forward-looking statements – these do not guarantee future performance and you shouldn’t place undue reliance on them.

Go straight to:

Amati AIM VCT Octopus AIM IHT ISA
Blankstone Sington AIM IHT ISA Downing AIM Estate Planning Service ISA
Puma AIM Inheritance Tax ISA  

Amati AIM VCT

Of the current market reaction, the Amati investment team had this to say:

“The market is going through a phase of shock similar to that of 2008. In this phase, it is very easy to make huge miscalculations because not enough information is available to understand where things are heading. If 2008 is anything to go by, in this phase the market goes from being too relaxed about the major problems arising to significantly over-estimating their long-term impacts. While standing in the very midst of the crisis it is very difficult to keep perspective. What in February we may have rationalised as a deep but short term problem, in March, now the shutdown has started, appears to present systemic threats and an unending series of upsets as we feel our way down the painful path of minimising the number of tragedies caused by the virus.”

Looking ahead, Amati is waiting for panic selling to abate and for some normality to return to markets:

“Over the next few weeks, we would expect the market to begin to adapt to the new normal, as panic selling eases and more information becomes available about how long the economic shutdown is going to persist, how likely it is to recur, and when some medical breakthroughs will be made to deal with the underlying problem. As this happens the market should find its feet again and much more reasonable assessments can be made about the valuations of businesses again. Our job right now is to try to remain levelheaded, to do the detailed work on our investee companies and potential new investments, so that we can have confidence in their ability to recover when the tide does turn.”

Octopus AIM IHT ISA

Richard Power, Head of Smaller Companies at Octopus Investments, provides a fund manager’s update on how the current situation has impacted the Octopus AIM IHT Service. 

“The Octopus AIM Inheritance Tax Service is invested across a portfolio of between 25 and 30 companies listed on the Alternative Investment Market (AIM). These portfolios are actively managed by my experienced team of AIM specialists.

These companies are established and profitable. In fact, many of our core holdings are global leaders in their sectors.

The team looks for a sound business model and has a natural lean towards technology and business services. This is intentional, as these companies tend to have more reliable earnings, especially in times of crisis.

We have limited exposure to the areas impacted most in recent weeks. We have minimal exposure to the leisure and retail sectors and no exposure to the banking or oil and gas sectors.

We take a three to five-year investment view, so it’s important to bear this in mind against a backdrop of markets that react to hourly news bulletins.”

Richard Power also describes what Octopus expects in the coming months:

“Equity markets have suffered steep falls across the globe, reflecting the level of uncertainty that persists.

We expect there to be significant opportunities over the next few weeks as markets tend to over-react in these instances. We are therefore selectively buying shares for new portfolios at price levels we believe will prove attractive on a twelve-month view.

We expect to see share prices begin to normalise once the peak of the virus has passed, based on what has happened to share prices in China.”

Blankstone Sington AIM IHT ISA

Blankstone is seeing severe share price reactions within the AIM market:

“Newsflow is fast-moving and policymakers were initially slow to react but are now ramping up measures to try and mitigate both the human and financial fallout from the virus. The sell-off has been violent, with many examples of investors selling irrespective of price. In this phase there is very little ‘signal’ and a lot of ‘noise’, with wild intraday volatility in share prices. For example, core holding Tristel, whose high-level disinfectant is driving bumper demand currently, saw its shares close at 443p on 16 March before falling to a low of 280p on 19 March only to rally today to 450p (23 March). When panic and fear are driving markets often the best course of action is to do nothing; ‘don’t just do something, stand there’.”

Blankstone adds:

“We held a deliberately balanced portfolio going into this crisis, with stocks such as Begbies Traynor and FRP Advisory, both insolvency practitioners, set to actively benefit from a recession. We have minimal retail exposure beyond Shoe Zone, whose management team has been through recessions before; it’s no accident it favours a strong net cash balance sheet. We never knew toilet roll would literally be fought over but Accrol, the leading supplier of own name toilet roll to both discounters and supermarkets, was already on a strong recovery path and will only benefit further from the extreme hoarding. The bulk of the portfolio is in business-to-business companies rather than business-to-consumer, which should add a further leg of resilience. In 3-5 years, the prices on offer today will be looked on as bargains. To sell now is to bet against human ingenuity; that has been an expensive mistake to make through millennia.”

Looking ahead, Blankstone is focused on new opportunities:

“An equity is, at least in more rational times, nothing more than the value of the next 20-30 years of cashflow. An overly myopic focus on the next 6-12 months has created opportunities that one seldom sees. Fundraisings of good companies with bad balance sheets will be required and we will look at opportunities to selectively participate in the second half of this year. You will see portfolio activity levels rise this year as we look to rebalance from stocks that held up well into select recovery names, but there will also be a chance to buy into long-term structural growth companies that we have long admired but were just too expensive to own previously.”

Downing AIM Estate Planning Service ISA

The Downing investment team is focused on making sure its portfolio companies are adequately funded to weather the storm:

“The COVID-19 virus is currently taking hold in the UK on an unprecedented level. This creates uncertainty for any business, on a global scale. We are focusing on ensuring our companies are adequately funded, and defensive in their activities. It is now about weathering the storm. At this time of volatility, we do not believe that we can rely on the market to fairly value micro-cap companies. This will throw up some pricing anomalies and opportunities and therefore we have been defensively building cash in our portfolios. As long-term investors, our prudent approach in this time of volatility should allow our portfolios to deliver long-term and uncorrelated performance.”

The Downing investment team sees the sharp and indiscriminate fall in share prices as potentially the greatest buying opportunity in a lifetime:

“Markets have sold off broadly and with limited exception meaning that there are already some fantastic bargains to be had for the diligent investor that knows where to look. There is likely to be further bad news to come; this could be the greatest buying opportunity for a generation. Whilst the duration of the current situation remains unclear, we think that it is unlikely that the COVID-19 virus will undermine the global financial system as we know it, and from that perspective now is a great time to be investing in the market for those with a long-time horizon.”

Puma AIM Inheritance Tax ISA

The Puma AIM IHT service is managed by Puma Investments, part of the Shore Capital group. Investment director Justin Waine provides a portfolio update in light of the recent events:

"In the current year to 20 March 2020 the Puma AIM IHT Model Portfolio has declined by -29.84% net of fees and costs. 

The portfolio is invested in profitable, cash-generative companies, which provides us with some reassurance during troubled times. We also look at the strength of the balance sheet and own companies with net cash or modest net debt. 

Over 26% of the Puma AIM IHT Model Portfolio is in companies with Net Cash positions. Certain companies’ debt relates to pension deficits and leasing liabilities which if were excluded from the calculation would increase the share of net cash companies further. 

We have no exposure to airlines/tourism (e.g. Dart Group), public transportation or restaurants. We do not own companies in the leisure sector (e.g. Everyman Media Group – the chain of cinemas), or real estate (e.g. Purplebricks). We have limited exposure to retail in the broadest sense of the word. This accounts for less than 9% of the portfolio. 

However, this includes H&T Pawnbrokers which accounts for over two-thirds of our weighting in retail. Pawnbrokers usually benefit in difficult economic times due to people needing to borrow and a rising gold price. Offsetting this is the negative impact on their substantial store network. Our other two retail exposures both have significant online presences. 

In terms of other sector exposures, we have a position in manpower services company Impellam which is likely to be negatively impacted. However, it has a substantial healthcare placement business which is likely to benefit from NHS demand. 

In terms of positive sector benefits, we have exposure to some companies in the healthcare sector that may benefit from increased healthcare demand in general. 

An example is EMIS, the leading software supplier to GPs, which has already indicated it is providing support for COVID 19, though new orders are delayed as healthcare professionals now have higher priorities. We also own shares in scientific instruments manufacturer Judges Scientific, subsidiary, Quorum Technologies, may benefit as it supplies market-leading scientific instruments primarily used for electron microscopy (EM) sample preparation.

We would expect to see material temporary dividend cuts in the model portfolio over the next couple of months as companies seek to conserve cash during the lockdown period. It remains to be seen whether these dividends will be caught up or simply forgotten when things recover."

Justin also describes potential portfolio changes:

"We have already taken advantage of the decline in prices to buy some Fevertree Drinks (circa 1% of the model portfolio), this was done from cash in the portfolio. 

We are further assessing any changes we can make to take advantage of declining prices. This will be to improve the quality and company market cap within the portfolio. 

Fortunately, we have been fairly well-positioned (as much as we can be) for this decline and our companies have so far held up well operationally. However, the situation is fluid and we expect many further negative operational updates in the coming months. Reassessing the fundamentals of our companies will be ongoing, so it is too early to say everything still stacks up, but to date, the fundamentals are still stacking up. 

The key challenges will be changing the portfolio to benefit the upmost from the recovery when it comes. Let’s be clear, we will not be able to time the bottom, so it will be progressive sequential changes. Also, be aware that it is likely that any upward move in the markets will be large cap lead and as such small caps will lag the initial recovery."

See five-year performance of shares mentioned above

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