Love it or loathe it, the AIM market cannot be ignored, according to Chris Hutchinson, Director of Unicorn Asset Management.
The Alternative Investment Market (AIM) is one of those markets that divide opinion.
Many private investors believe in the high growth investment opportunities to be found on AIM and appreciate the generous tax benefits available from investing in AIM. However, other investors avoid AIM because of some of the horror stories surrounding individual company failures and the relatively poor performance of the headline FTSE AIM Index over the past 20 years.
So who is right? The short answer is that both views are valid.
The poor performance of AIM is well documented. Since inception the FTSE AIM All-Share Index has returned -2.41% on an annualised basis; hardly stellar returns. Then there are the stories of high profile failures like African Minerals, Globo and Quindell, as well as concerns over the lack of regulatory oversight within the market.
It is true that the regulation and listing requirements for companies seeking a listing on AIM is less onerous than those for companies seeking a main stock exchange listing. For instance, unlike a full listing, companies are not required to produce financial records for at least the past three years nor do they need a minimum market capitalisation amongst other things.
But there is a far more positive side to the AIM story that deserves to be heard. Part of the rationale behind the less onerous regulatory framework was to create a more flexible environment in which smaller, less mature companies could raise capital. Since its launch over 20 years ago the AIM market has helped over 3,500 companies to raise capital through listing on the index. While many other junior markets have failed, AIM has continued to grow from representing just 10 companies at inception to over 1,000 today with a combined market capitalisation of over £75 billion as at the end of August 2016. There are now 70 AIM-listed companies which have a market cap of £250 million or more, including some household names such as ASOS and Fevertree Drinks.
Government support
AIM continues to be supported by the UK government, which clearly recognises the stimulus that AIM can provide in terms of capital funding and employment creation. As a result, the tax benefits available remain attractive to private investors. Many companies that seek a listing on AIM are eligible to receive State Aid funding under the government’s tax-advantaged VCT and EIS schemes, while the abolition of stamp duty and the ability for individuals to hold AIM stocks in their ISAs has helped attract a broad range of investors (and their capital) to the market.
For those investors willing to do the work, AIM presents an opportunity to unearth investments with the potential to deliver meaningful returns. Many of the companies listed on AIM do not receive the same level of analyst research and broker coverage that is afforded to companies listed on the main market. AIM is therefore a market that represents both risk as well as significant opportunity. For investors willing to diligently sift through the whole market there are some real gems to be discovered.
Success stories such as Numis and Abcam are just a couple of examples of tremendous AIM listed companies that can be highly rewarding as investments if you have the time and resource to unearth them. Numis now has a market cap of c.£250 million and has returned well over 7,500% since it first listed.
Abcam is a great example of how well the AIM market can work for profitable, high growth, high quality businesses. Abcam is a producer and marketer of quality protein research tools. These tools enable life scientists to analyse cells at a molecular level, which is essential in a wide range of fields including drug discovery, diagnostics, and basic research. It is a profitable and highly cash generative business with a leading position in a growing niche market, a strong record of organic growth and an experienced management team.
We follow a rigorous investment process and apply strict criteria when researching new businesses. This approach allows us to uncover some of AIM’s hidden gems and, perhaps more importantly, helps us to avoid the failures. From a market capitalisation of £57 million at flotation on AIM, Abcam has grown to become a £1.7 billion business and crucially it is still listed and thriving on the AIM.
Failures vs successes
It is clear however, that despite being able to point to success stories such as Numis and Abcam, the failures outnumber the successes on AIM. For private investors with limited resources to accurately identify opportunities, the risk of making investment errors is greatly increased. The most effective strategy for investing in AIM is probably to delegate responsibility to a professional fund manager with the expertise, experience and resources to identify opportunities on behalf of their investors, thereby helping to mitigate some of the risk.
Professors Dimson and Marsh of the London Business School summarise this thought in a particularly succinct way: “Everyone says AIM is a stockpicker’s market, but what they mean is that there are extremes of performance – both on the downside and the upside…the best people equipped to sort the wheat from the chaff are the professional investors.”
So, if it’s best to leave the stockpicking to the professional investors what products do they offer for private investors?
Although it is possible to gain exposure to AIM through a variety of different products (OEICs, Investment Trusts & Enterprise Investment Schemes) the two most popular investment vehicles for private investors are VCTs and the AIM IHT ISA Portfolio Service. As mentioned earlier, attractive government legislation has proved extremely important in supporting investment into the AIM market and none more so than the changes made in August 2013, which for the first time allowed people to invest in AIM stocks through their ISAs.
Although investing in AIM companies for IHT mitigation is not a new phenomenon (it has been possible for decades), the changes to ISA rules in 2013 were a catalyst for new wave of investment into AIM from investors looking to mitigate inheritance tax (IHT) by switching at least a portion of the value of their ISAs out of fully listed companies and into AIM quoted companies.
This rule change opened up the market for specialist providers to manage assets in a previously inaccessible marketplace – there are now at least 22 million ISA account holders which together represent over £500 billion in total assets and so it is clear that this represents a significant opportunity.
The IHT issue
This has been fuelled by a growing IHT issue for many people. To put this in context, IHT receipts have increased 60% in the last five years with a record £4.6 billion taken in IHT receipts last tax year. Investing in AIM listed companies that qualify for Business Relief (the government legislation that affords them inheritance tax relief) can provide a welcome solution for clients. It is difficult to come up with a precise figure for the amount invested on AIM for this purpose but we estimate around £1,000 million. There are over 20 different providers offering AIM-based IHT solutions, which means clients have plenty of options to consider, but with so many providers offering access to a similar service how should investors decide between them?
Obviously, cost is an important consideration and it is essential to look at all the charges including any dealing and custodian fees that could be levied. However, I would suggest that looking for managers with a long track record of investing in and managing AIM portfolios should be the most significant consideration.
Does the manager have a robust investment philosophy? How well resourced is the investment team and how much experience in AIM investment do they have? How long have they managed AIM portfolios?
Although past performance is no guarantee of future performance, Managers who have managed AIM portfolios over multiple market cycles should give greater confidence in their investment approach. A track record in managing tax advantaged portfolios is key, as the rules around tax-advantaged structures can be complicated. It is also important to be able to demonstrate an investment track record in AIM (either in a tax structure, or outside one) – it is pointless having an expert understanding of the legislation if the underlying investment does not perform. It needs to be clear from the Manager that this is an investment-led solution, not just a clever solution to a tax issue.
As a final thought for those considering tax advantaged products, there are several independent research sources which review providers and can provide due diligence such as; The Tax Shelter Report, The Tax Efficient Review and MiCap. Finally, as with many investments, diversifying across several providers can help to spread and reduce investment risk.
