UK Edition
Heightened fear among investors can be particularly bad news for smaller companies. Worried investors often favour mature and diverse businesses that are usually found in the FTSE 100, rather than the generally smaller firms quoted on Aim.
America’s “Vix” volatility index more than doubled between the start of the year and the first week of March. Although its rise reflects greater fear among US investors, the invasion of Ukraine and rising inflation are concerns shared by British savers.
As a result, the FTSE Aim All-Share index has fallen by 15pc so far this year. The FTSE 100 has lost a far more modest 1pc over the same period.
Of course, the smaller companies that largely make up our Inheritance Tax Portfolio offer strong long-term growth potential as investors’ sentiment improves. As a result, recent market movements have done little to change our opinion of current holdings.
Clearly, some have declined more than others over recent months. Among the biggest fallers is the online retailer Boohoo.
Its shares have lost 30pc so far this year as challenges including higher product return rates, rising freight costs and supply chain problems in international markets have hit its financial performance – they prompted a profits warning in December.
While those challenges may persist, to some extent at least, in the short run, the company’s long-term prospects are far more encouraging. For example, it is due to open its first US distribution centre next year.
Alongside the use of greater automation in its existing warehouses, this should help to offset rising costs. It will also improve the firm’s product availability in America should today’s supply chain problems persist.
Over the past two years Boohoo has doubled its market share in Britain and America. This positions it for long-term growth, while its “pure-play” online status will allow it to benefit from a continuing shift towards digital retail among consumers.
This is a long-standing trend that shows little sign of slowing; in fact it is likely to have been accelerated by the pandemic.
The company has also increased the size of its total addressable market through acquisitions over recent years. The purchase of brands such as Debenhams provides scope for growth in areas such as beauty and home products that could offer cross-selling opportunities to existing customers.
And, with supply chain constraints unlikely to last beyond the short term, the firm’s strong performance in Britain bodes well for its international operations as reopening-related difficulties ease.
Since we added the shares to the IHT Portfolio in June 2018 they have fallen by 59pc. While this is clearly a disappointing result, Boohoo’s long-term recovery potential appears to be sound.
The net cash it has on its balance sheet provides a solid financial foundation from which to deliver sustained investment in its distribution network and recently acquired brands. Hold.
Questor says: hold
Ticker: BOO
Share price at close: 86.46p
Update: Gamma Communications
Another holding in our IHT Portfolio, Gamma Communications, has also performed poorly since the start of the year. The shares have fallen by 20pc so far this year; much of the decline took place following the release of its annual results earlier this week.
The results showed that the cloud communications firm had generated a 14pc rise in revenue. While its reported pre-tax profits declined by 10pc, this was due to a profit on the sale of an asset being included in the previous year’s figure. On an adjusted basis, pre-tax profits moved 25pc higher.
Encouragingly, the company’s recent UK and European acquisitions made a positive contribution to its financial performance. It also successfully launched a number of new products during the year that position it for long-term growth.
Since we added them to the portfolio in January 2018, shares in Gamma Communications have more than doubled. While its price-to-earnings ratio of 20.7 is hardly cheap even after its recent share price fall, growth opportunities in Britain and Europe mean it continues to merit a place in our Inheritance Tax Portfolio. Hold.
Questor says: hold
Ticker: GAMA
Share price at close: £13.24
Read the latest Questor column via telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.
Read Questor’s rules of investment before you follow our tips.