Deepbridge’s Warwick: The effect of China on tax-efficient investments

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With markets across the globe dramatically falling in the past week as a result of the slowdown of the Chinese economy, it is noticeable that such a downturn, no matter how short-lived it may turn out to be, has had a knock-on effect on the UK AIM market and therefore impacts many in the tax-efficient investment space.

This emphasises one of the reasons why we stay away from AIM shares within our tax-efficient investments. Tax-efficient investments, even when invested in AIM shares, are relatively illiquid and therefore shocks to the markets like this only ever act as an unwelcome distraction to investors who may trigger an unwelcome tax liability if they wish to exit.

Investing in unlisted stocks prevents a knee-jerk reaction to world markets and prevents short-term investor panic. Although any underlying investee companies may be affected in the long term by a widespread and prolonged global economic slowdown, in reality our investee companies are unlikely to be impacted by short-term ‘shocks’ to the market.

As we invest in disruptive technologies and new market entrants we also remain confident that, as long as our initial due diligence and management of the investee companies is correct, competitive advantage and market opportunities will remain. Therefore, in our view, long-term performance will unlikely be knocked off course. We also typically insist on investee companies being able to target multiple variable markets and be scalable on a global basis. These factors also help our companies mitigate risk by not being too reliant on single markets.

If tax-efficient investments are being utilised as an IHT mitigation tool, it should also be highlighted how asset-backed investments are likely to be less impacted by global actions compared to listed stocks. It makes sense that if you are looking for capital preservation within an IHT portfolio then asset-backed investments could be appealing. This is why we particularly like renewable energy projects that are not only asset backed but also subsidised and fully insurable; even with loss of income being an insurable risk.

Although we live in a global economy and events this week have highlighted how reliant the rest of the world has become on the Chinese market, we should also remain confident that in the UK we have some potentially great investment opportunities for investors. Of course, such asset-backed renewable energy projects and innovation companies investments are not right for everyone and should be considered high risk because they are in small unlisted stocks, but nevertheless more and more advisers are realising the benefits that such propositions can have for their clients as part of a diversified portfolio.

Ian Warwick is managing director at Deepbridge Advisers.