More AIM Woes - Investment Trust Wind-downs And Forced Selling

16th Oct '24 by Mark Simpson

29 comments 4698 reads

Last week, I wrote about the potential for changes in tax legislation to lead to significant outflows from UK small caps and, in particular, from the AIM market. We are likely already seeing those outflows because investors fear an immediate change in capital gains tax rates. What I missed when I wrote in the last article is that rumours over a lower tax-free sum for SIPPs may be driving short-term selling, too. With such investors liquidating 25% of their equity portfolio in short order to get the cash out, this will be generating significant selling pressure.

The impact is particularly high on AIM stocks since there is also a fear that the inheritance tax relief that some AIM shares enjoy may be removed or curtailed. Given that some estimates put the amount of money deployed in the strategy at over 30% of the AIM market capitalisation, this would greatly impact share prices. Ironically, it would hit the higher-quality, normally stable companies much harder than the speculative stocks.

Is AIM broken?

These fears have led some investors to avoid the AIM market altogether, particularly as the long-term performance of the average AIM stock, as measured by the AIM100 Index, is woeful. However, in normal times, I am index-agnostic. I prefer to use my investment experience, plus the Stockopedia tools, to avoid companies where management teams are not aligned with shareholders' interests. While it is rare to see outright untruths published, there is often no one checking the public statements of fully-listed companies. Whereas with AIM companies, a NOMAD will have signed off their announcements. This may not mean much, depending on an investor's view of a particular NOMAD. Still, it undoubtedly adds an extra level of scrutiny that may not be present for smaller main-market-listed companies. There may be plenty of companies listed on AIM that investors will want to avoid, but I see little reason to avoid a company simply because it happens to be listed on AIM.

It isn't just individual investors that have been net sellers of smaller companies recently, either. Many investment managers focused on smaller UK companies and have continued to see net outflows. Take Liontrust Asset Management (LON:LIO) , for example. Last week, they reported further net outflows of £1.1 billion for the three months ended 30 September 2024, of which £904m was redeemed from retail funds. Having looked more positive…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Dragon

17th Oct '24

"ISAs - equally illogical and disproportionately benefitting millionaires"

How? The only reason there are ISA millionaires is because they were able to take a 20k annual contribution and invest wisely. They can't put there millions in to an ISA.

ken mitchell

Your post reveals almost zero understanding of share ISAs. A lot of investors in share ISAs are small investors and often with limited funds to invest each year. These investors use ISAs to benefit from all capital gains being tax free and also all dividends are also tax free.

Investors can only invest a maximum of £20000 in shar ISAs each year, and there will be many small investors (including this one) who either can’t afford to invest new money each year, or who eventually become wealthy by investing the full ISA allowance every year, along with investing that money successfully. That’s how John Lee became the first ISA millionaire.

Best perhaps to check if your opinions are sensible before posting them?

timarr

Hi ken

Although you might disagree with their opinions I don't think Quoz Zouq's point is unreasonable. It's important to remember that the government doesn't provide tax breaks on ISAs out of the goodness of their happy little hearts, but to incentivise people to save. Incentivising millionaires to save isn't really the point.

As John Lee himself noted in a recent IC podcast, the £20,000 per year tax break on ISA's is extraordinarily generous and can only really be fully utilised by people who are already wealthy, which is surely not the point of a generalised tax break intended to incentivise saving for the masses?

There's certainly justification for addressing this while trying to find ways of encouraging less wealthy people to invest in stocks and shares at a young age. The ridiculous Cash ISA should be scrapped for a start. I can also see no justification for the UK government incentivising people to buy shares in non-UK companies, I think ISAs should be for UK quoted companies only.

I wouldn't be surprised to see the annual ISA allowance reduced and possibly a lifetime allowance introduced in the upcoming Autumn Statement. At the very least there needs to a significant simplification of the entire ISA structure.

timarr

simoan

Very interesting article, Mark. I just can’t fathom how a professional fund manager can end up with so much junk in their fund. Or, more importantly, how they can have so little conviction that they need to hold 143 different companies. What are they paid for?

And when you look at their performance it makes you wonder whether they shouldn’t hand back their the fees and wages as part of the redemption process! I know, unlike me, many round these parts consider fund managers like rock stars, but tbh I think Thom Yorke and Jonny Greenwood could do a better job than the vast majority of them. Or in the case of these funds, a monkey throwing darts.

Hi timarr

Thanks for the (as always) well argued reply. If I was too harsh about Quog Zuog’s post it was because of the apparent suggestion to get rid of all share ISAs. That would be a terrible mistake. Obviously there are rich people who have invested the full allowance every year and combined that with being competent investors who I agree are getting excessive tax free benefits. But there are a lot of ordinary non wealthy investors who deserve their share ISA tax breaks.

I agree with you about those ridiculous cash ISAs and that only UK shares should be allowed in share ISAs as long as Investment Trusts that allow us to invest worldwide and in more obscure areas are still allowed. By limiting ISAs to UK only it would encourage more investment in UK Companies where so many quality shares are ludicrously cheap but have been for so long. E.g like Aviva (LON:AV.) Legal & General (LON:LGEN) M&G (LON:MNG) Phoenix group (LON:PHNX) where the huge up to 10% dividends that they are in some cases increasing every year reflect that share price undervaluation. And why so cheap for so long? Because so many either invest in the booming US markets or in the case of Pension Funds avoid investing in the UK. No wonder UK shares have underperformed.

And I agree again that it’s not unreasonable to reduce that generous £20000 a year annual allowance nor to introduce a lifetime allowance. It’s surprising that this hasn’t already happened and the fact that it hasn’t might be because so many including politicians and their advisers and commentators seem so clueless when it comes to investments. That reflects the lack of any such education. A lot of the rich appear to rely on their financial advisers.

jonthetourist

Nice article Mark, as usual.
Contrast with Crystal Amber, also pushed into wind-down. They fought the pre-pack theft of Hurricane by the debt holders, and then refused to wind down until their last quoted holding, De La Rue, had a fair valuation. Which the sale of a division has just achieved.
I thought Judith at Downing had a similar activist approach, but I guess when the tide refuses to turn you just have to get out of the water.

intuitive6191

Quite a complex discussion and important to recognise that many people have chosen to use iSAs to save for retirement rather than a conventional pension.

If someone has lumpy earnings, they may not be able to contribute the full amount (20k) to an iSA each year but would welcome the opportunity to contribute 20k in a good year.

I dont have any fixed views on whether foreign shares shuld be included in ISAs - though there is the concern that restricting ISA investment choice might drive up costs on the various investment platforms which have come to rely on this ISA volume.

If the Government wishes to promote interest in the UK stockmarket - thats fine. it should do so in a positive manner rather than reducing the options for investing abroad. Interesting to see what (if anything) is announced in the budget.

Silver Moon

Maybe QUoz was thinking of SIPS contributions.

Nothing wrong with the share ISA timarr, it's the games the Banks play with cash ISA's.

Hi Ken, £20000 is only half a new car and this amount has not kept apace of inflation. Though having just my pensions meaning I can't save much these days I am bed & ISA-ing shares from my trading account each April. The time is coming when I won't have anything left in my trading acount but doing this will help me on the way to becoming an ISA Millionaire ;-)

Edit: It's Thursday and I have done my Styles Survey. As a result I sold Centamin (LON:CEY) and have picked out two Hi-Flyers in my portfolio to add, BAE Systems (LON:BA.) Rolls-Royce Holdings (LON:RR.) . I have more Contrarians than anything else on the wrong side of Falling Stars but then, an ex-Bonnevlle rider is a risk-taker!

Mark Simpson

18th Oct '24

Hi Jon,

Judith & team may yet wait to get a better price on the remaining holdings, but I think that goes with ongoing costs (some of which will be reduced by delisting), and there is the time value of letting investors have their money sooner. So, it will be a balancing act in reality.

Cheers,

Mark

Hi JohnDoe,

It is always tricky to know what to do in these situations, as we don't know the future with budget details or whether Miton UK Microcap Trust (LON:MINI) will wind down, nor do we know how much of these possibilities have already been priced by the market.

Personally, I tend to think in terms of valuation, so if it doesn't change the valuation, I don't tend to react with existing holdings. Although it helps that I own very few high flyers, which are most susceptible to the double-whammy of tax selling and then momentum buyers quickly becoming momentum sellers in response to that price action. However, with new holdings or where I am underweight, I tend to be much slower at topping up when I know a potential overhang may be on its way. Hopefully, this gets the balance right, but we won't know until the future happens!

Funderstruck

19th Oct '24

Mark an excellent ,well timed ,article. Thanks for investing so much of your time in fully researching this piece, as of course you do always .

andyfwwrench

20th Oct '24

ISAS are pretty useless to millionaires. If one only has £1mn in cash / investments £20k is just 2% of that. It takes decades of adding money to get to meaningful amount added. To make a meaningful difference to a millionaire they would have to find consecutive multi-baggers, which is difficult. Long run equity returns are circa 8%/y. On the other hand a person with modest means can shelter a significant proportion of their wealth.

It's cash ISAs that need banning as when one looks at the interest rate offered the delta between those an rates outside tax shelters ends up greater than the tax saving for a standard rate income tax payer.

Harry Hindsight

Miton UK Microcap Trust (LON:MINI) The Grand ol Duke of York he marched them up to the top of the hill and marched them down again - and when they were up (a bit) and when they were down (a lot) then the only way was down.

Do remember an article on the managers long time ago, and hope they keep the 'chin up' and remember "all that glitters is not gold".

Albertos

I do wonder what some of these fund managers do - and what they are doing is perhaps responsible for the demise of actively managed collective investments.

A few months back, John Rosier (Investors Chronicle - Private Investors Diary) invested in Herald Investment Trust (LON:HRI) - decided out of interest to have a look.

This trust has over 300 holdings!

If nothing else you are creating a situation where you need more bodies to look after all those holdings and therefore increasing costs to pass on to the investors in your trust. But, equally, have they never heard of Diworsification, which much be a risk.

Bizarre/Strange/Worrying

Brilliant Leader

21st Oct '24

And yet, they have comfortably outperformed the global smaller companies benchmark over 1, 3, 5 and 10 years Herald Investment Trust (LON:HRI)

Cricketfan

22nd Oct '24

Thanks Mark for an excellent article and thanks to the community for so many interesting comments.

JD2378, you ask what to do. FWIW, I have done two things:

1. Reassessed my portfolio to highlight anything not in the HighFlyer or SuperStock categories for a further rodding

2. Applied the intrinsic value idea outlined by BnB in excellent piece on 12/10/24. Again throws up some holdings needing further reconsideration.

Apart from some actions (not many am pleased to say!) as result of the above, I am content that what I have Is basically sound so am sitting on my hands.

Quoz Zouq

30th Oct '24

My ISA is pretty useful . Loaded with much denigrated AIM shares many eligible for IHT relief, amongst others. Sometimes you just have to take a societal view, and in my opinion they should be capped. The chancellor clearly disagrees and I bow to her superior wisdom. Thank you very much.

More AIM woes - investment trust wind-downs and forced selling

Is AIM broken?

Unlock the rest of this article with a 14 day trial

About the Author

Mark Simpson

29 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...