Should you hold AIM shares in your stocks and shares ISA?
The Alternative Investment Market (AIM) is stuffed with companies that you've likely never heard of.
Tiny fly-by-night shell companies and oil and mining exploration operations arrive and disappear quicker than you can say "boom and bust". And the market as a whole has hardly been an advertisement for the fast-growth companies it was set up to support: in the past year to 9 July, the FTSE Aim All-Share index has fallen by 6.5%, while over five years it is down 22%.
Now the government has announced that Aim-listed shares qualify for inclusion in stocks and shares ISAs. But faced with such underwhelming performance figures most investors will understandably give Aim the cold shoulder.
However, the Aim pool is more diverse than you might think: it lists 979 companies, according to Thomson Reuters. And they are not all minnows - six are valued at more than £1 billion, the largest of which is the popular online clothing retailer ASOS, which has a market capitalisation of £3.3 billion. You'll find other well-known brands on Aim, too: Majestic Wines, Mulberry Group and brewer Young & Co, to name just a few.
As they get bigger and build up a corporate track record, many of these companies graduate to a main market listing. But there are plenty of others that are happy to stay put on Aim. That's certainly true of family-controlled companies: many Aim-listed companies qualify for business property tax relief, which means holdings (and family control) can be passed on in a tax-efficient manner.
I think there are three kinds of investor who will want to put Aim shares in a tax-sheltered ISA: those who recognise the benefits of investing alongside steady-as-she goes companies, which are often run by families. Investors will also benefit from a double whammy of tax relief: if qualifying Aim shares are held for more than two years, they don't attract inheritance tax on death.
Then there will be investors who are looking for fast-growth companies such as ASOS and, lastly, speculative investors pinning hopes on hole-in-the-ground operators striking oil, gold, diamonds and the like.
But what many people don't know is that they can already access Aim-listed shares in their ISA in any case, mainly via UK small company funds and trusts and so-called "special situations" funds.
One such fund is L&G UK Alpha, a multiple-award winning fund run by Richard Penny. The portfolio is chock full of high-performance Aim stocks that, as I mentioned earlier, you've probably never heard of. Shares in the fund's three largest holdings - Smart Metering Systems, Optimal Payments and Globo - have made gains in excess of 100% over the past year. Other Aim-listed shares that make up the fund's top 10 holdings by value - InternetQ, Iomart Group, OPG Power Ventures, Restore and WANdisco - are all up by 50% or more, with the last-named up 425% over the year.
However, Aim-listed shares can suffer from poor market liquidity (which can mean big differences between buying and selling prices), so investors should not ignore the advantages of investment trusts, which can sell their shares when the price is right. In contrast, open-ended funds (unit trusts and OEICs) can be forced into selling shares if too many investors cash in their holdings.
Artemis Alpha is an award-winning investment trust that regularly delves into Aim. It is co-run by John Dodd, who also happens to be something of a specialist in energy exploration. Indeed, oil and gas currently account for 31% of the portfolio, although this is very much an international "best ideas" trust.
UK smaller companies investment trusts with significant exposure to Aim include BlackRock Smaller Companies, Standard Life UK Smaller Companies, Strategic Equity Capital and Throgmorton.
There may be instances when investing directly in Aim shares will serve you well, but most private investors should be better off entrusting their money to the expert investment managers who know their way around the marketplace.
Andrew Pitts is investment editor of our sister website Interactive Investor and editor of Money Observer magazine. Email him at firstname.lastname@example.org.
A way of valuing a company by the total value of its issued shares and calculated by multiplying the number of shares in issues by the market price. This means the market capitalisation fluctuates continually as the value of the shares change in the market. For example, HSBC has 17.82bn shares in issue at a price of 646.2p making a market capitalisation of £115.15bn.
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Alternative Investment Market
AIM is the London Stock Exchange’s international market for smaller companies. Since its launch in 1995, 2,200 companies have raised almost £24 billion listing on AIM. The market has a more flexible regulatory system than the main market and can offer tax advantages to investors but its constituents are a riskier investment than bigger companies listed on the main market.