Meet the manager – Alex Game, Unicorn AIM IHT portfolio - YouTube

Hello I’m Alex Davies, founder of Wealth Club.

Today I‘m with Alex Game of Unicorn Asset Management

to talk about their AIM inheritance tax service.

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First off tell me about the AIM inheritance tax service,

what does it do for investors?

So the Unicorn AIM inheritance tax service really is an extension

of the Unicorn AIM VCT. In terms of when we launched it,

we launched it at the start of 2016. It’s still relatively small, so

it’s about £30 million in terms of assets under management, so

steady growth over the time period since we launched. In terms of what we’re

really trying to achieve for investors, first and foremost clearly we’re trying

to provide mitigation of inheritance tax exposure for the investor, clearly that

is the objective of the product, so that really is the main focus initially.

Beyond that we really believe that the tax agreement really is an agreement

between the underlying client and HMRC, so for us as the investment advisor

that really does allow us to focus on selecting the best companies

for the portfolios. In terms of what makes it different, I would say

that we really do try and find our ideas further outside of the largest companies

on AIM, so many of the companies within the portfolio, they may not necessarily

be household names, they may not be well recognised, but we do have

a huge degree of conviction in the long-term investment case.

And tell me about Unicorn and also a bit about your own experience?

So Unicorn Asset Management, we are an independent specialist UK fund management

business. We take a very traditional approach to investing, so a very long-term

investment horizon. All portfolios are very high conviction, built from a

bottom-up stock picking basis. In terms of Unicorn, our product range,

we have a small range of open-ended products, a large AIM VCT

and an AIM IHT portfolio service. // In terms of your own experience?

My own experience, so I’ve been at Unicorn for six and a half years now, I’m a

fund manager on the IHT portfolio service but also a fund manager on the

Unicorn UK Growth Fund. I’m also heavily involved with the Unicorn AIM VCT

and some of the other open-ended products at Unicorn. I think, you know

just in terms of the length of time I’ve been at Unicorn, six and a half years,

I was actually the last change to the investment team, so it really does

show the stability of our investment team at Unicorn.

So let’s talk about the types of companies you invest in –

what are you looking for, what are the characteristics?

So I’ve already mentioned that we do find the majority of our ideas

further down the AIM market cap scale, that’s for a number of reasons really

but we do tend to find that valuations are a bit more attractive when you

move further away from those largest companies on AIM. In terms of

characteristics that we look for, it’s really the same philosophy that

underpins all of our funds at Unicorn, so we’re looking for either

genuine market leaders or companies which may be innovative disruptors

in their given niche or sector which they’re operating in. In terms of

the characteristics we look for, we really do have four key elements

of our investment appraisal. So the first is financials – we only invest in

profitable businesses. We like companies with very strong balance sheets.

Cash generation is hugely important. In terms of the underlying portfolios

that we offer, we do have two different options of portfolio within the

Unicorn IHT service – a growth portfolio and an income portfolio. Clearly that

cash generation does underpin a strong level of dividend income; that

helps us pay that income back out to investors throughout the income portfolio.

Within the growth portfolio, strong cash generation really does help

self-fund a very attractive organic growth profile, so that’s very

important for us. In terms of the other factors that we look for,

we do an analysis on the companies and market – is it stable, is it growing?

Then we look at the company’s market position. We like to invest in

either genuine market leaders with a strong competitive advantage, or

innovative disruptors who are winning market share through a superior

product offering to perhaps larger incumbents that maybe haven’t

invested in customer service or product in recent years. Beyond that we’re

looking at the company management team. We like to see management teams who have

had a very strong track record of meeting or beating financial expectations

and who are also aligned with shareholders, typically through equity ownership.

So we really do look for that alignment of interest with

ourselves, as equity owners, within the management teams.

Are there any red flags?

In terms of red flags, I would say, you know, we do look at

various different things from an ESG perspective, we’ve integrated that into

our investment process recently. So clearly certain ESG controversies

would be a red flag. We tend not to invest in oil, gas or mining stocks,

so they are excluded from the investment case at the initial point.

And are you finding plenty of opportunities currently?

In terms of the opportunities at the moment, clearly market volatility is

always a bit painful to go through as an investor, but every cloud

has a silver lining and we do find that we find many opportunities throughout

periods such as the one that we’ve been through where markets are

particularly volatile. I guess one example of that is a company that we’ve

recently added to the IHT income model portfolio, so this is a company called

Alpha Financial Markets Consulting. It’s a company that we know well,

we’ve invested in it within the IHT growth model portfolio for

a number of years and within the Unicorn UK Growth Fund, so this company

offers consultancy services to asset managers – it calls many of

the largest UK asset managers its clients, has a very strong market position

within the UK, and is also growing very quickly overseas. So this really is

more of a growth business, we feel. It’s typically traded on a slightly higher

valuation, slightly lower dividend yield – but really as a result of the

market volatility over the past few months it provided us an opportunity to

initiate a position in the IHT income model portfolio at a relatively attractive

initial dividend yield of about three and a half percent,

so clearly quite a compelling entry point for more of a growth company, we feel.

And any other recent investments you’ve made?

In terms of recent turnover, portfolio turnover has been

relatively low – that would be the one of note that I would pick out.

And what about longer term holdings – anything you’re excited about

or has done particularly well for you?

Yes, in terms of long-term holdings we do, you know, many of our

portfolio companies within the current model portfolio we’ve invested in since

the start of the IHT portfolio service so we’ve owned for a number of years now

and beyond that we’ve owned them in many of the other Unicorn funds, so

we really do feel as though we know and understand these businesses very well.

I’d pick out one particular example called Frontier Developments, which has been

a very strong performer, both in the IHT growth model portfolio but also in

the Unicorn UK Growth Fund where we also hold this this stock.

So this is a video game developer, the market cap has grown from

less than £90 million when we invested in 2016 to close to a billion now,

it’s grown profits from under a million to about £32 million today,

so clearly it’s delivered some exceptional growth over that time period.

We’ve been very lucky to have plenty of time meeting the management team

so we’ve met the management team twice a year for the last seven years,

I really do feel as though we know this business very well. I think in terms of the sector

that it operates in, the global video game sector, is big and growing,

it’s about $160 billion in total, growing at very attractive rates,

double digit growth rates, year in year out, so clearly the structural drivers

within that end market are very attractive. Also part of the attraction for us

within this space and this company is the evolution of business models

within the video game sector, so moving away from their traditional

physical disc sales 5–10 years ago, which were much lower margin,

to more of a software-led sale. So that has an immediate upfront margin benefit

for the video game developer, but perhaps more importantly

allows a developer to continually release high quality content,

and that essentially allows them to engage with a client over a much longer

time period and allows them to monetise that relationship over a longer time period.

So when we invested, this company had one successful game franchise –

it now has four, has a very exciting pipeline ahead, so we really are

very positive about the growth prospects for this business.

And how has the pandemic treated you and your investors?

So the pandemic has clearly been a very challenging period for

companies all across the UK. We’re very fortunate in that we have very good

corporate access, so it really does help going through periods such as this

being able to speak to company management teams regularly, hearing about

what actions they’re taking and how they’re adapting to changing conditions,

and I have to say we’re very grateful for the way our company management teams

have responded to not only protect the business in terms of revenues and profits

but also to keep the staff safe, keep customers safe throughout this period.

In terms of the underlying sector performance issues during the period,

clearly there are certain sectors that have been impacted more significantly

than others. Those sectors such as retail, hospitality, travel, leisure

really have been in the sweet spot in terms of their lockdown restrictions

that have been brought in to tackle the pandemic. So really what we’ve seen

in terms of underlying portfolio drivers is those sectors, or any companies

within those sectors, really has been hit quite hard in terms of the lockdown

restrictions that have been brought into place. On the flip side, in terms of

the IHT growth model portfolio, part of what we look for are companies that are

exposed to long-term structural growth drivers. So there is a fairly significant

weighting to technology. I’ve already talked about one of the

computer game stocks that we invested in that portfolio – we do invest in

another one, so many of these digitisation trends have actually been

accelerated by what’s happened over the past six or seven months.

So we do feel that the future is still relatively bright

for a large portion of the portfolio.

One trouble with IHT portfolios, if you sell a stock and you’re

out of the market then you can negate the IHT benefits.

So when do you sell something, what makes you sell a stock?

Yes, so ideally as long-term investors we really do want to own this stock

for many, many years. When we decide to pull the trigger and initiate

on a position, it really is under the assumption that we will own this stock

for many years. But clearly there are certain conditions that will prompt us

to review that position and may lead to an exiting of that position.

Ideally we would have a stock waiting in the wings so we can reinvest

that cash very quickly into a new idea, or otherwise we may choose a handful

of companies which might have underperformed on a short-term basis

and might present an attractive trading opportunity. So I think that’s

really important, you know, and really does speak to how we manage the portfolios.

We are active managers, we are looking at these stocks, these companies

on a day-in day-out basis, so it really does provide us with the insight to be able

to reinvest that cash quickly into companies that we think present

relative attractive short-term valuation opportunities. And just in terms of

our portfolio turnover, it is very low, I’ve already talked around that already,

but in terms of the number of companies we’re investing across both the

IHT growth and the IHT income model portfolio, there’s 40 unique investments,

27 of them we invested in at the inception of the portfolio service,

so nearly 70 percent of the portfolio has been stable for many years now.

And how risky is it, investing on AIM?

So the way I think of risk on AIM is the same as any other equity risk –

clearly investing in equities does come with risk, we’ve seen that this year.

When markets are going up in a straight line it’s quite easy to forget

the risks of equity investing, but periods such as the one we’ve been through

this year and indeed in Q4 2018, 2016, do serve a useful reminder, I think.

In terms of AIM specifically, we really do feel that AIM has improved markedly

in terms of quality over the past 10 years or so. Even if you look at 2012

in terms of the sector weightings on AIM, there would be 70% in oil and gas and

mining stocks – clearly those sectors are fairly volatile, quite speculative.

Fast forward to today, that represents less than 10% on AIM. That weighting

has been replaced by the likes of consumer goods, technology,

business services, financials – so clearly more stable and diversified

sector weightings. In terms of the underlying constituents, there are

far fewer companies on AIM than than there were say 10–15 years ago.

The companies that are listed tend to be larger, they have

much more meaningful revenues and profits, and also when you look at the number

of dividend payers on AIM, that really is a true indicator of the underlying

operating health of some of these businesses. There are many more companies

paying dividends on AIM today than there were say 10 years ago.

So I think in terms of the proportion of companies paying dividends on AIM,

in 2019 it was 35%. If you look back in 2012, that was 26%.

So it really does show the improving trend there.

And finally, if someone decides they want to invest in an AIM IHT portfolio,

why should they choose Unicorn?

Well I think I’d just like to make it clear we’re not

tax efficient investors, we are a boutique specialist UK small cap stock picker.

I think that expertise really does lend itself very well to this space. It also

allows us to identify opportunities which are highly differentiated

when compared to some of our broader AIM IHT peers which may focus

further up the a market cap scale. So despite investing in many names

which might not necessarily be well-recognised household names,

we feel as though we know these businesses very well, and they offer

a very powerful diversification relative to some of the other AIM IHT providers.

Alex Game of Unicorn Asset Management, thank you very much.

Thank you Alex.

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