Aim — originally the Alternative Investment Market — is a curious entity that understandably excites conflicting responses. Since its launch in 1995, London’s ‘junior’ market has raised some £24 billion in new capital for smaller companies. But more than 70 per cent of companies listed on this relatively laissez-faire exchange have failed to make money for investors. A huge number have disappeared: the best taken over or promoted to the main market; many more simply insolvent; some spectacularly fraudulent. The official Aim index, which tracks the performance of its 1,100 constituent members, remains 27 per cent lower today than it was when Aim opened two decades ago — and it excludes companies that have gone south in the intervening years.
Yet, paradoxically, Aim has also been a resounding success. Not only has it provided equity for many businesses transitioning from start-up to grown-up, but it is also — as Gervais Williams, a small-cap fund manager at Miton, observes — the only market for growing companies that comes close to matching the success of Nasdaq, the US exchange which boasts Apple, Facebook and Amazon among its constituents. And unlike Nasdaq — now so big on the back of its world-beating tech companies that it can no longer sensibly be described as a ‘smaller company’ market — Aim remains both an important source of capital for smaller companies and a fertile ground for bargain hunters in the nether regions of the quoted universe.
Of course, there have been notable horror stories. With its purposefully light regulatory regime, Aim has always attracted more than its fair share of unscrupulous promoters in pursuit of gullible punters: dotcom stocks in the late 1990s, or dubious mining companies in faraway places. More recently there have been well-publicised cases such as Quindell and Globo, whose shares have crashed amid allegations of accounting irregularities and other shenanigans. But less widely appreciated is the fact that Aim has produced exceptional rewards for investors who know what they are doing. The fundamental reason behind this phenomenon is that, amid the dross, Aim has a core of solid, established companies that in terms of profitability, balance-sheet strength and dividend flow are every bit as good as better-known corporate brethren higher up the market-cap scale. They just happen to be small.
The returns from these hidden gems can be remarkably good, in part because of the tax advantages of investing in Aim. A majority of Aim-listed shares (though not speculative mining and resource companies) qualify for business property relief, which enables those who hold them for more than two years to pass them on free of inheritance tax. It’s not just outside shareholders who benefit: this intergenerational perk can be hugely important for family-owned businesses, which is one reason why a number of well-run family businesses choose to list on Aim. One such, the flooring manufacturer James Halstead, is already into its fourth generation of family ownership.
Since 2013, just as importantly, it has been possible for investors to hold shares of qualifying Aim companies inside an Isa — an opportunity to shelter dividends from income tax and long-term gains from capital gains tax. The key proviso, as with any tax-advantaged investment, is not to let the idea of sheltering your money from HMRC blind you to the risks. It is no more than common sense to make sure that, when venturing into Aim, you build a portfolio of qualifying investments which stand on their own merits, not just on their tax-saving potential.
How best to do that? One way is to try and do it yourself — but you’ll have to be very lucky or skilful. A more promising route is to ask a professional investment manager to do it for you. Many wealth managers and financial advisers now offer an IHT portfolio service: collections of Aim stocks that qualify for IHT relief. But be aware that sensible advisers will subcontract stock-picking to a specialist fund manager, so be sure you know the fee structures involved, and who is actually picking the stocks. Most schemes have a minimum investment threshold of £50,000–£100,000.
The majority of all London-listed companies are poorly researched, and it requires a particular combination of judgment and experience to be able to pick winners consistently — something your run-of-the-mill IFA certainly won’t have. Better to entrust your money to someone like Richard Hallett, one of a team of small-company specialists at the broker and fund manager Hargreave Hale. He has one of the best track records in Aim, with 20 years’ experience, yet remains known only to the cognoscenti.
His typical portfolio will hold 20 to 25 stocks — but you won’t find any of the racier oil, mining or biotech ventures that excite the amateur share sleuth. Hallett’s ideal holding is a boring company you’ve probably never heard of; well-managed, with a sensible balance sheet, and either already paying dividends or likely to do so soon. He prefers to hold his stocks for several years, ignoring short-term volatility. Even the best Aim stocks — being less liquid than main-board shares — have a tendency to drift sideways for longish periods, simply for lack of reasons to trade between results announcements. It’s easy for impatient investors to lose faith and bail out when they would be better served by soldiering on.
Hallett runs around £200 million in IHT port-folios. Longstanding holdings include the online fashion retailer Asos, which he has owned through various ups and downs since its listing ten years ago; the document storage business Restore, up fourfold in the past three years; Abcam, which produces antibodies for pharmaceutical companies; GB Group, which specialises in ‘identity management’ database services; and Marshalls, the paving-stone maker. The average return on his IHT portfolios has been 90 per cent over five years, more than three times the total return (with reinvested dividends) on the FTSE100 index. What makes him most proud is that his Aim portfolios fell less sharply than the wider stock market in both the big bear markets of the past 20 years — a riposte to the idea that small-caps are necessarily riskier.
1,100
Aim stocks for investors to choose from
70%
Proportion of Aim stocks that have failed to make money for investors
£24bn
Capital raised on Aim for smaller companies
In fact, one reason Aim portfolios are becoming more popular, he thinks, is that wealth managers have started noticing that their clients’ Aim portfolios are performing better than the traditional blue-chip variety which the Financial Conduct Authority insists are more suitable for clients with low risk tolerance. It turns out that bigger is not always better, even on a risk-adjusted basis. Another advantage that Aim stocks enjoy, according to Gervais Williams, is that they tend not to be highly correlated to the rest of the stock market, giving them useful diversification value in a broader portfolio.
A riskier way to tap into the junior market’s potential is through a dedicated Aim venture capital trust, a structure which offers greater tax advantages for investors with serious wealth. The rationale for the favourable tax treatment of Aim VCTs is that they are designed to encourage a flow of capital from rich individuals to small growing businesses to which banks won’t lend. Aim VCTs are popular with wealthy investors not just for IHT advantages, but because investments attract upfront income-tax relief and pay dividends tax-free. But beware: eligibility rules on which investments can be included have recently been tightened under pressure from Brussels.
Unicorn Asset Management is another small-company fund manager with a strong track record: as well as a £150 million Aim VCT, it also manages IHT portfolios. According to Chris Hutchinson of Unicorn, its screening process excludes more than 75 per cent of Aim stocks. Like Hallett, he prefers conservatively run ventures that are managed for long-term growth. The VCT takes higher risks because it is required to invest in early-stage businesses, but many of his initial holdings have matured into stable companies.
Will increasing investor enthusiasm for Aim drive up prices and reduce potential gains? That’s possible, Hutchinson says, but valuations don’t look particularly demanding even now and it’s just as likely that success will attract more good-quality companies to apply for Aim listings. Of course, the profitable track record of a handful of specialist Aim portfolio managers isn’t guaranteed to persist. Stock market fashions wax and wane. Smaller company shares have had a particularly good run since the crisis. The fees on Aim portfolios can look quite high. But for those with the knowhow, the old saying that ‘where there’s muck there’s brass’ holds true.
This article first appeared in The Spectator on 20th May 2016.
Jonathan Davis 