Budget 2024: What it means for UK smaller companies

Sheldon MacDonald, Marlborough’s Chief Investment Officer, said:

“We believe uncertainty about the future of the Inheritance Tax (IHT) benefits associated with AIM stocks undermined investor sentiment towards UK smaller companies.

“Confirmation in the Budget that qualifying AIM stocks will continue to provide relief from IHT, even though it’s no longer a 100% exemption, brings important clarity.

“This resulted in a strong rebound by AIM companies immediately after the Budget announcement and in our view the removal of this uncertainty has the potential to act as a positive driver for this end of the market.

“Smaller companies are also likely to benefit if the Chancellor is successful in delivering on her promises about investment and economic growth.

“Against this backdrop, investors will now be able to focus on the clear reasons why UK smaller companies offer an attractive long-term opportunity.

“Firstly, we believe UK smaller companies are significantly undervalued relative to historic averages, despite impressive resilience during the economic challenges of recent years and solid business fundamentals.

“Secondly, we see this as an under-researched area of the market, which creates opportunities for well-resourced specialist active managers to identify growth potential not yet recognised by other investors.

“Finally, it’s important to remember that historically, UK smaller companies have outperformed their larger counterparts over the long term. This ‘small cap effect’ has been reversed in recent years, which creates interesting potential for a bounce back, with falling interest rates representing one possible driver.”

Eustace Santa Barbara – Co-Manager of Marlborough’s Special Situations, UK Micro-Cap Growth and Nano-Cap Growth funds – said:

“The lesson of the past few months has been that markets hate uncertainty. Now, finally, all the conjecture can give way to much-needed clarity.

“It’s good that the government has recognised UK smaller companies’ role in driving growth and has stopped short of what could have been a damaging move.

“We’ve always said investment in these businesses isn’t rooted in hoping to catch a tax break. It’s rooted in the expectation of excellent long-term growth.

“Even if we had witnessed a worst-case scenario in the Budget, we would still regard the holdings in our portfolios as great companies with strong prospects.

“Looking ahead, we now expect the AIM market to perform well and the large discount that has developed in the face of uncertainty to narrow.

“This might not be the catalyst for a dramatic turnaround in investor sentiment on UK smaller companies, but we see it as a step in the right direction.

“The most likely policy boost for this market was always going to be monetary rather than fiscal, and further rate cuts should deliver that in due course.”

‍

‍

Risk Warnings

Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds. Our funds invest for the long-term and may not be appropriate for investors who plan to take money out within five years. The Fund will be exposed to stock markets and market conditions can change rapidly. Prices can move irrationally and be affected unpredictably by diverse factors, including political and economic events. The Fund will be exposed to smaller companies which are typically riskier than larger, more established companies. Difficulty in trading may arise, resulting in a negative impact on your investment. Shares in smaller companies may be harder to sell at a desired price and/or in a timely manner, especially in difficult market conditions. The Fund invests mainly in the UK therefore investments will be vulnerable to sentiment in that market which may strongly affect the value of the Fund. In certain market conditions some assets may be less predictable than usual. This may make it harder to sell at a desired price and/or in a timely manner. In extreme market conditions redemptions in the underlying funds or the Fund itself may be deferred or suspended. This material is for distribution to professional clients only and should not be distributed to or relied upon by any other persons. It’s provided for general information purposes only and is not personal advice to anyone to invest in any fund or product. Information taken from trade and other sources is believed to be reliable, although we don’t represent this as accurate or complete and it shouldn’t be relied upon as such. Calls will be recorded for training and monitoring purposes.

Regulatory Information

Issued by Marlborough Investment Management Limited, authorised and regulated by the Financial Conduct Authority (FRN115231). Registered in England No. 01947598. Investment Fund Services Limited (IFSL) is the Authorised Fund Manager of the Fund. IFSL is registered in England No. 06110770 (FRN 464193). Both firms are authorised and regulated by the Financial Conduct Authority in the UK. Registered Office: Marlborough House, 59 Chorley New Road, Bolton, BL1 4QP. Copies of the Prospectus and Key Investor Information Documents are available from www.ifslfunds.com or can be requested as a paper copy by calling 0808 178 9321 or writing to IFSL at the registered office above.

‍