Our award-winning AIM expert names the sectors and stocks that the pros pick for their own portfolios.
Last month I wrote about the attraction of business property relief, also known as inheritance tax (IHT) relief. This is a way of reducing IHT liabilities via long-term investment in eligible AIM shares. Fund managers provide ready-made AIM ISA IHT portfolios and some of these have impressive records. However, many investors want to be in control of where their money is invested and would prefer to choose their own investments for an AIM ISA used to shelter against IHT.
That does not mean that the fund manager portfolios should be ignored. They do have experience of the type of AIM company that fits the profile for this type of portfolio, as well as which companies qualify. It can be difficult to be sure if a company qualifies, although if it has a trading business it should be eligible.
Tax rules state that an asset is not relevant business property if it consists “wholly or mainly of one or more of the following, that is to say, dealing in securities, stocks or shares, land or buildings or making or holding investments.”
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Obviously, illiquid and highly speculative investments are not ideal because they could end up losing more money than the tax that would have been payable. That type of risky investment has a place in a wider ranging portfolio because of the potential upside, but it is not as suitable as an investment for IHT relief.
That is why resources companies rarely feature prominently in these portfolios. Even though the shares have to be held for two years to qualify for IHT relief, liquidity is important because one of the attractions of AIM IHT portfolios is that if the cash is needed for any reason investments can be sold. That cannot be done if money is put into trusts to avoid IHT.
IHT portfolio stocks that fund managers like
There are other sectors that are more popular, though. Support services is one of the most popular sectors with fund managers. Most of the larger portfolios have between one-fifth and one-quarter of their cash in support services companies. Next Fifteen Communications (LSE:NFC), which I wrote about last month, is one example.
IP translation services provider RWS Holdings (LSE:RWS) is in the support services sector, although it has a significant software business following the merger with fully listed SDL. RWS chose to stay on AIM. If it had moved to a premium listing it would no longer qualify for IHT relief. RWS has an excellent track record and that seems likely to continue.
Johnson Service Group (LSE:JSG) has been hard hit by lockdowns in the hotel and catering customer base for its linen hire activities, which were 11% of past levels in the first quarter, although workwear rental has held up better. Johnson Service Group has slumped in value over the past 18 months, although the share price has started to recover.
In March, workwear volumes were 96% of normal levels and the new plant in Exeter should be completed before the end of the year. Hotel and catering volumes were up to 30% of past levels in the last two weeks of April and the full reopening of pubs and restaurants on 17 May will aid recovery. The new hotel linen plant in Leeds should be open by then. The company will continue to be a consolidator in its markets and there is plenty of recovery to come.
Another support services business in fund manager portfolios is Sureserve (LSE:SUR), which is reporting its interims on 18 May. Energy services are going to be a growth area in the coming years. This division’s profit should bounce back this year. Smart meter installation is gaining momentum and home insulation is important in the achievement of government plans for energy efficiency. The compliance division, which offers gas and fire safety maintenance services, should grow steadily. The valuation is relatively modest and there is scope for upgrades.
Tech companies with tax benefits
Software and IT services companies account for around one-fifth of many portfolios, although there are some portfolios where they are not as prominent.
EMIS Group (LSE:EMIS) supplies software systems to GPs and pharmacies and it has a strong base of recurring revenues. The company’s software is being used to organise the Covid-19 vaccination programme.
Recurring revenues increased in 2020 but overall revenues were unchanged at £159.5 million – after a small dip in the first half. Growth should be enhanced over the next couple of years by the launch of EMIS-X, which is a suite of analytics tools that helps the NHS to analyse its data.
EMIS has a record of increasing dividends every year. There was a 3% increase to 32p a share in 2020. EMIS is an excellent AIM IHT investment because of its combination of income and growth.
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Identity and fraud prevention services provider GB Group (LSE:GBG) is in a strong position to benefit from increasing levels of ecommerce. The company performed ahead of expectations in the year to March 2021. It increased revenues by 9% to £217 million and underlying pre-tax profit by one-fifth to £56.3 million. There was some deferred expenditure and cost savings due to Covid-19, which helped in the improvement. Net cash was £21 million at the end of March 2021.
GB Group has sold its employ and comply business to First Advantage so that it can concentrate on its core businesses. The business sold contributed around £2 million in operating profit. This led to a small downgrade in 2021-22 pre-tax profit to £44.9 million. The cost base has been increased in order to generate long-term growth in areas such as fraud prevention. There should be benefits to come from cross-selling of services from recent acquisitions.
Gamma Communications (LSE:GAMA) is a telecoms services provider and it has built up a good track record of organic and acquisitive growth both in the UK and in Europe. Pre-tax profit increased from £48 million to £61.3 million in 2020 and an improvement to £71.1 million is forecast for 2021.
There has been an upward trend in the share price since the flotation in 2014 – pre-tax profit was £11.5 million in that year. Unified communication services have become increasingly important over lockdown as people are more aware of cloud-based services. The long-term growth prospects for Gamma are excellent.
Best of the rest
Electricals is a significant sector in some portfolios and that is mainly down to a couple of companies. Strix Group (LSE:KETL) is another company I wrote about in the previous article and the kettle components manufacturer is certainly a favourite amongst the fund managers.
The other major electricals investment in the portfolios is electrical accessories supplier Volex (LSE:VLX) which has had a spectacular share price rise in the past couple of years.
Construction and financial services are also well represented in the portfolios. Renew Holdings (LSE:RNWH) could be included under construction or industrial support services. Again, I suggested this provider of regular maintenance services for rail, water, nuclear and telecoms last time.
Floor-coverings supplier James Halstead (LSE:JHD) is an old favourite for IHT relief, although it is no longer as prominent in most fund manager portfolios. It trades on a high multiple.
A popular financials company is corporate foreign exchange services provider Alpha FX Group (LSE:AFX), which has been quoted for just over four years. The original placing was at 196p and the current share price is more than seven times that level. Even though trade has been disrupted, revenues increased from £35.4 million to £46.2 million, thanks to growth in alternative banking, while pre-tax profit improved from £13.5 million to £17.1 million.
The Canadian office has become profitable, and the new Amsterdam office is building up its revenues. The alternative banking business is still at an early stage of its development. Earnings are expected to rise by 18% to 37.3p a share in 2021, while the dividend is forecast to increase by 10% to 8.8p a share. The shares are trading on around 37 times prospective earnings. That assumes a lot of growth in the future.
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Healthcare is not as represented as other sectors, so these portfolios have lost out on some of the gains in that area. Of course, these gains have mainly come from riskier, loss making companies and that is why they were not previously deemed to fit the bill.
Advanced Medical Solutions (LSE:AMS) is one healthcare investment that does feature in the portfolios. AMS has been held back by the lack of use of its woundcare products because of delays in elective surgery. AMS has remained profitable, and the profit should bounce back this year even though surgery levels will still not be back to normal. New products, such as laparoscopic gastrointestinal sealant device Seal-G MIST, will grow the potential market. The decline in the share price over the past year provides a buying opportunity.
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