ISA season is truly upon us now, but our users are thinking about much more than just how to make the most of their allowances. Tax-efficient investments, wills and how to pass pensions on optimally are also top of the agenda.
Investing in AIM-listed companies offers compelling tax benefits, as well as outperformance potential, making them an exciting prospect for investors. But dabbling in the junior market can be risky and a professional’s guiding hand is wise, explains John Baillie, portfolio manager at Mole Valley Asset Management.
Look out for champagne and cake this summer at the London Stock Exchange, as the 21st birthday of AIM (the Alternative Investment Market) is celebrated in June.
AIM – also known as the junior market – was launched in 1995 to address the needs of small, growth companies, entailing less onerous regulation and lower costs than the main London market. From just 10 companies at its launch, AIM boasted 982 at the end of 2016, with a combined market value of over £80bn. In fact, to give investors a better idea of its scope, 3,700 companies have been listed on AIM to date, with some £100bn of new money raised over its 21 years. What’s more, it is an international and sector-diverse market, with the companies listed operating in over 100 countries and 40 sectors, meaning it represents an abundance of choice for investors. This is undoubtedly something to celebrate for the Stock Exchange and many of the AIM-listed companies, but is it something to celebrate for investors?
The simple answer is “maybe”. The headline numbers suggest that it has not been a good place for investors’ savings, with disappointing returns over the past 20 years for the AIM market as a whole. However, this hides many stellar returns from individual companies. This highlights that stock-picking is more important on AIM than on the main London market, where the majority of investors have indexed funds. The reasons may be simple: there is inherently more risk and more reward buying immature companies on AIM and furthermore some 30% of the stocks are in the resource sectors, often positioned at the very speculative end of the market. If Shell suffers a dry oil well it will not matter in the grand scheme of things, but that might spell the end for a tiny AIM oil exploration company. AIM also has the tendency to embrace fads – such as the internet bubble over the millennium – which always burst in the end.
Of course, many of AIM’s greatest success stories are “stolen” by the main market, as the stars often graduate up, feeling they have outgrown the junior market. This is not always the case and currently seven companies on AIM are valued at over £1bn, led by ASOS, the online fashion retailer, where shrewd (or maybe just lucky!) investors could have enjoyed a return of over 1,000% during the past decade.
Given this background in terms of AIM’s performance, it underlines the need for private investors to rely more on the services of fund managers to pick the winners and deliver positive returns. There are plenty of successful companies out there, the problem is having the time, skill and patience to find them among the 982 diverse companies on AIM. In short, it’s a full-time job for professionals, but there are very good reasons why investors should put some of their savings to work on this dynamic junior market.
One of the big attractions of AIM stocks are the tax breaks for investors and in particular, its scope to offer the possibility of 100% relief from Inheritance Tax (IHT). The secret is that shares listed on AIM are regarded as unquoted (unlisted). This means that many of the companies on AIM qualify for Business Property Relief (BPR) and are therefore exempt from IHT, currently payable at 40%, if the investments are held for two years. This represents a material financial opportunity for estate planning.
One problem is that not all the companies qualify for BPR, with businesses primarily dealing in securities, property or holding investments being excluded. Unfortunately, there is no definitive list on which of the 982 Aim companies qualify at any one time and there is the need to do your own research, but around 75% of current AIM companies do qualify. Circumstances may change for individual companies as they evolve, while those that move up to a full listing on the main market disqualify themselves. This in itself is not a problem, as relief from IHT is retained if investments are switched into other qualifying assets and there is a three-year window to reinvest the disposal proceeds. In summary, it is eminently possible to buy and sell appropriate companies on AIM and retain the IHT relief.
This potential tax break has encouraged wealth managers, such as ourselves at Mole Valley Asset Management, to launch IHT products. We offer clients a portfolio of 20 AIM-listed companies that should qualify for BPR and the focus here is on investing in growth companies across a range of sectors, targeting capital appreciation rather than income, while staying clear of the speculative end of the market. Since the launch of the portfolio on 1 June 2016 it has delivered a strong positive performance, up 12% in Q1 and 14% in Q2, giving an overall 27% return to end-November 2016, since its inception. While this level of gain may not be sustainable over the medium term, we are confident that our own in-house, in-depth research should give us the edge in picking many of the winners across AIM. Of course, such a focused portfolio does entail considerable risk and volatility and is only appropriate for certain investors – but it is possible to get significant outperformance and tax benefits out of AIM investments, meaning that they are an option many investors might like to explore.
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