Should you hold AIM shares in your stocks and shares ISA?

Published by Andrew Pitts on 02 August 2013.
Last updated on 02 August 2013

Man thinking about AIM 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

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