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An update on the Octopus AIM Inheritance Tax Service and ISA

9:35am 21 Apr 2020 - Written by Shamik Parekh

Below is the latest update from the Octopus AIM Inheritance Tax Service and ISA.

We are currently living through extraordinary times and we hope that you and your family are safe and well. At the time of writing, much of Europe and the US remains in lockdown, with little visibility of when some of the restrictions might be lifted. 

This update is therefore based on the information that we have available to us in mid-April. The daily news broadcasts are currently grim viewing.  However, our regular conversations with the management teams of the portfolio companies are the grounds for the more optimistic tone below.

The portfolios have been more resilient than the wider market

The portfolios have been more resilient than the wider market

The portfolios are invested into established and profitable companies and are not exposed to more cyclical sectors such as Property, Mining or Oil & Gas. 

In selecting investments for the portfolio, we have favoured companies which have certain characteristics. These include high levels of earnings visibility and recurring revenues. We prefer companies that are global leaders in their field of expertise, providing critical products or services. We favour companies with strong balance sheets and high levels of cash generation. 

We also focus on each company’s ability to double profits over the next five years, because demonstrating this level of progress will ultimately make the business more valuable to a range of potential buyers. 

As a result, we have limited exposure to Leisure and Retail and no exposure to the Travel sector. This also means that several portfolio companies have had minimal interruption to their business, with some still expected to grow profits during the current year in line with initial expectations.

Some companies are raising additional capital

Some companies are raising additional capital

One of the benefits of being quoted on a stock exchange is access to additional capital should it be required.

Dozens of quoted companies across the size spectrum are currently raising money from shareholders. Some are doing so for precautionary reasons, to provide a safety net should trading conditions deteriorate beyond the worst-case scenario they’re testing for. 

In many cases, though, companies are raising extra capital to provide additional resources to take advantage of the current disruption and emerge from the lockdown in a much stronger position.  

Management teams are doing an excellent job keeping us informed

Management teams are doing an excellent job keeping us informed

Some portfolio companies have had to adhere to Government advice and temporarily shut down operations. We have been impressed with the response of the management teams to protect all stakeholders, including employees, customers, suppliers, as well as long term shareholders. 

The level of communication we have had from the management teams has been excellent, with companies sharing the stress testing and scenario analyses they have undertaken in order to reassure investors that they remain in a robust financial position. Periods of economic and social strain tend to accelerate change, which will provide opportunity for agile and ambitious smaller companies. This is something we experienced during and in the aftermath of the Financial Crisis just over a decade ago.

We will remain in close contact with the management teams of your companies and will continue to update you.

Reminder of the key risks

Reminder of the key risks

  • The value of investments discussed, and any income from them, can fall as well as rise. Investors may not get back the full amount they invest.
  • Tax treatment depends on an investor’s personal circumstances and may change in the future.
  • Tax reliefs depend on the portfolio companies maintaining their qualifying status.
  • The shares of smaller companies could fall or rise in value more than other shares listed on the main market of the London Stock Exchange. They may also be harder to sell.