Rachel Reeves's inheritance tax raid has killed our portfolio. Here's our first step to salvaging it
Inheritance tax relief on Aim shares was halved in last year's Budget. This means that, from April next year, the effective inheritance tax rate on qualifying Aim shares that have been held for at least two years will be 20pc instead of the current 0pc rate.
Clearly, this could still represent a substantial tax saving in some cases. However, when coupled with the potential for further tax changes in future budgets, in Questor's view, it is no longer sufficiently appealing to justify the existence of our Aim portfolio.
Indeed, by solely focusing on Aim shares, we have previously accepted the opportunity cost of missing out on high-quality companies that are listed elsewhere in the UK stock market in order to obtain a significant inheritance tax saving. Given that the inheritance tax saving from Aim shares could become even less enticing, this column feels that it is more logical to instead allow a broader range of companies to be held in the portfolio that can potentially deliver higher long-term returns.
As a result, we will no longer consider just inheritance tax relief and will now include UK-listed companies from outside the FTSE 100 in our portfolio.
The reason for excluding FTSE 100 stocks is twofold. Firstly, it limits the crossover with our wealth preserver and income portfolios, which are dominated by FTSE 100 stocks. Secondly, we wish to retain the portfolio's reliance on UK-focused firms because of our upbeat stance on the domestic economy's long-term prospects. Given that FTSE 100 members generate over 80pc of their revenue from abroad, versus 55pc for the FTSE 250, a portfolio that focuses on small and mid-cap stocks fits the bill.
With that in mind, FTSE 250 member Cranswick becomes the first addition to our new-look portfolio. The food producer has been tipped several times by Questor over recent years, with its share price having risen by 71pc since our 'buy' recommendation in July 2022. In doing so, it has outperformed the FTSE 250 by 55pc.
The company's recently released first-quarter trading statement showed that it continues to make encouraging progress. Like-for-like revenue rose by 7.9pc, with strong volume growth leading its top line higher. The company confirmed that it is on track to meet financial guidance for the full year, while its medium-term outlook remains upbeat. Indeed, the firm is expected to generate 7pc annualised earnings growth over the next two financial years.
Some investors, of course, may feel that Cranswick's earnings multiple of 19.2 is a steep price to pay given its good, but not great, profit growth forecasts. Indeed, there are a wide range of small and mid-cap shares that offer superior earnings growth prospects over the coming years. However, in this column's view, the firm's relatively dependable financial performance as a result of its defensive characteristics means it represents good value for money.
Furthermore, the company's solid financial position and substantial competitive advantage highlight its status as a high-quality business that is worthy of a premium valuation. For example, despite a 73pc rise in net debt during its latest financial year, the company's net gearing ratio amounts to just 18pc. Meanwhile, net interest costs were covered over 20 times by operating profits last year.
Despite its modest use of leverage, return on equity stood at 14pc in the company's latest financial year. This suggests the firm has a clear competitive advantage, while a rise in its operating profit margin of 48 basis points to 7.6pc last year further indicates a continued improvement in the firm's competitive position.
To make way for the addition of Cranswick, hospital software specialist Craneware will now be removed from the small and mid-cap portfolio. It has produced a 28pc capital gain since being added in January 2018. This represents a 57pc outperformance of the FTSE Aim All-Share index.
In Questor's view, Cranswick offers a favourable long-term investment opportunity. Its solid fundamentals and upbeat, as well as relatively dependable, growth outlook mean it has scope to deliver further capital gains and index outperformance over the coming years.
Ticker: CWK
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