Chris Hutchinson, director at Unicorn Asset Management, reveals how the group has retained a conservative approach to investing even when dealing with Aim's early stage and smaller businesses.
The Aim market delivered a year-on-year return of 26% in 2017; one of its best performances of the past decade. Despite this, the index continues to be shunned by some investors as a ‘risky' market. In recent months, concerns that too much money is chasing too few stocks has led to fears that some valuations are out of sync. This may be as a result of a rise in the number of IHT strategies focusing on investing in Aim stocks that qualify for business property relief, which can assist investors in mitigating tax on death.
According to Chris Hutchinson, director of Unicorn Asset Management, there is no doubt there is an increasing weight of money chasing Aim stocks following government rule changes in 2013, which allowed investments in Aim shares via an ISA. A number of innovative IHT strategies have been launched by providers since. However, the notion that the index is in ‘bubble' territory is just one of the many misconceptions that has plagued the market in recent years.
"There is a slightly superficial view of Aim that every company on the index is high growth, early stage, and pre-revenue. In reality, Aim has matured," he says. "Today it is a thriving index for younger companies, and there is a wider acceptance among fund managers that it offers some of the best high quality investment opportunities available."
The Aim index is a specialty of Unicorn Asset Management. Consolidation in the fund management industry has resulted in fewer managers participating in the Aim market in recent years. Unicorn has remained a specialist manager committed to this smaller sub-market of the London Stock Exchange, however.
Hutchinson himself has managed the group's main AIM VCT for over a decade, though it has been in existence for 18 years. The Unicorn AIM IHT, a discretionary portfolio service, was launched in 2015 and is designed to mitigate IHT liability after two years by investing in stocks on Aim that qualify for business property relief. The group offers two portfolios under this service, an income portfolio that offers quarterly dividend payments, and a growth portfolio. Both are managed by Hutchinson, in collaboration with two of his Unicorn colleagues.
Though he characterises the early years of Aim as being akin to a lightly regulated "wild west" of asset management, Hutchinson argues that Aim has now matured. Meanwhile, Unicorn has always been a notoriously conservative investment firm, particularly in its approach to how it manages money in smaller companies over the long-term.
"All too often, investment is over-complicated. But we have always stuck to some basic fundamental rules about what we define as a ‘good' business, and those criteria do not change," he explains. "Capital preservation is hugely important to us because we understand how quickly people can lose money in difficult market conditions."
To emphasise this he references the financial crisis a decade ago and the subsequent recession that followed. Losses on Aim during 2008 reached a "painful" -62%. The Unicorn AIM VCT's average loss, over the same period, was a more pared back -32%, however.
"When you compare our performance to that of the Aim index during difficult market conditions, you can see the benefits of the defensive approach that we try to implement in our portfolio construction. We do not chase the ‘popular' stocks on Aim. We are not trying to shoot the lights out. We accept that if we back the best, most consistent smaller businesses, we should be able to deliver very healthy returns over the long term."
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