By Nicholas Hyett, Investment Manager, The Wealth Club
The 5th August marks ten years since it became possible to hold AIM shares in an ISA.
The UK was emerging from recession, and George Osborne, the then Chancellor, believed encouraging investment into smaller and newer businesses would help jumpstart the economy. Making AIM shares ISA eligible meant investments into AIM shares were potentially free of income tax, capital gains tax and, after two years, inheritance tax – one of the most generous sets of tax reliefs available to UK investors.
Wealth Club has looked back over the last ten years, to see what’s changed, what hasn’t and what the future could hold. In our view, AIM is looking far more attractive today than it did ten years ago – especially for IHT conscious investors.
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How’s the market changed?
Of the 50 largest companies quoted on AIM in 2013, only 8 are still in that list today – Jet2 [LON:JET2], EMIS [LON:EMIS], Hutchmed (China) [LON:HCM], James Halstead [LON:JHD], Polar Capital Holdings [LON:POLR], RWS Holdings [LON:RWS], Smart Metering Systems [LON:SMS] and Youngs & Co Brewery [LON:YNGA].
Back in 2013, 30% of the top 50 were speculative oil & gas or mining companies, whereas today energy stocks account for just 6.5%.
In 2013 six companies had a market capitalisation of more than £1bn, four of them were oil & gas companies. The average market capitalisation of the top 50 stocks on the market was £588m.
By 2023 nine companies were valued at over £1bn, none of which were in the oil & gas sector, while the average market capitalisation of the top 50 stocks on the market had risen to £790m.
How’s the market performed?
The AIM All Share has returned 15.4% over ten years. But the market has been a rollercoaster ride, comfortably outperforming the main market at times and lagging at others.
Recent weakness and changes to the sorts of companies listed on the market mean AIM is looking attractive valuation wise, trading on a PE ratio of 10.6x and a dividend yield of 2.4% (the highest at any point in the last ten years).
AIM has changed a lot over ten years
While at the smaller end the market continues to support fundraising by a wide range of young businesses, many of its early constituents have matured into bigger, more stable businesses. It’s these companies, rather than more speculative commodity stocks that now form the backbone of the market.
That is good news for investors, especially for those looking to benefit from the AIM market’s potential for IHT relief.
For starters shares in oil & gas and mining companies don’t qualify for BPR relief – which is what entitles investors in many AIM quoted companies to IHT relief after two years. But secondly, these more mature, often dividend paying, businesses have the potential to deliver attractive long-term returns.
Of the eight companies that have kept their places in AIM’s 50 largest companies since 2013, seven paid a dividend in 2013 – not at all common on AIM now or then. And all have delivered returns far in excess of the wider market. In fact, we think dividends are a good sign of quality when investing in smaller companies generally, and particularly on AIM. They indicate profitability, cash generation and a shareholder centric view that is supportive of long term returns.
What are the popular AIM stocks with fund managers?
As it’s matured AIM has become more popular with professional investors.
Looking at all UK fund managers in the IA UK All Companies, UK Equity Income and UK Smaller Companies sectors several AIM companies have attracted interest.
- GB Group
- Gamma Communications
- Jet 2
- RWS Holdings
- Serica Energy
- Smart Metering Systems
- Next Fifteen Communications
- Alpha Financial Markets Consulting
- Fevertree Drinks
- Team 17 Group
Investing in AIM for IHT
You need to invest directly in an AIM share to benefit from IHT relief, so if a smaller companies fund you invest in holds AIM shares you won’t benefit. This leaves investors with two options. Either pick individual shares themselves, or invest in a discretionary AIM ISA portfolio.
For a lot of people, choosing individual AIM shares is fraught with risk – not least because investors concerned about inheritance tax risk missing out if they accidently pick shares which do not qualify. That might make a specialist AIM portfolio more appropriate. It’s professionally managed and well diversified – helping to minimise some of the downsides of AIM while still offering exposure to the rapid growth AIM can deliver. There are several options out there to choose from, but we think the RC Brown AIM IHT ISA and Unicorn AIM IHT ISA are particularly compelling offers.
Popular AIM ISA portfolios
RC Brown AIM IHT ISA
RC Brown is an established investment management boutique with a close-knit investment team. All members of the team have a stake in the business, which may translate into high levels of service for clients, and greater dedication from the investment team. The business has a long history of investing in AIM and has focused on investing newly listed companies for over 30 years.
Unicorn AIM IHT ISA
Unicorn is an established fund manager with significant experience in the AIM market and managing UK small-cap portfolios. The team has been investing in AIM for over two decades and also manage the UK’s largest AIM VCT. The investment strategy is uncomplicated, targeting established and profitable companies, preferably whose founders or management team have retained a significant stake in their business. Investors into the service have a choice between the dividend or growth portfolio, as well as responsible investment options for both portfolios.