Aim shares set for inclusion in Isas with IHT benefits. But are they suitable for the broader investor?

18th March 2013

The Government is set to allow Aim investments into Isas from this Autumn. It is easy to see the benefits from the Government’s perspective – because it will encourage people to invest in small businesses disintermediates those nasty banks, who aren’t keen to lend much anyway, and it gets the economy moving once again. However, the benefits for investors are less clear as investment journalist Cherry Reynard reports.

The Government proposals would allow Aim-listed shares to be held within an Isa, but crucially also proposed that the Inheritance Tax benefits associated with holding Aim shares for more than two years should remain. At the time, it said that this would encourage more investment in growing companies and create an “important capital injection” for small to medium-sized enterprise equity markets. Trade website Fundweb reported this week  on the broad industry welcomed given by the Industry. Tony Vine-Lott, director general of the Tax-Incentivised Aavings Association, says: “This sends a good message that supporting equity investment in SMEs can be a strong lever to deliver growth and job creation. It can also give investors wider choices when making ISA investment decisions. Tax incentives have a key role to play in encouraging investors towards investment in high growth companies.”

In theory, there should be significant advantages for investors. As this Investors Chronicle article points out some of Aim’s largest companies – such as Asos or Majestic Wine – have delivered strong returns. The Asos share price is up almost 80 per cent over one year, Majestic Wine has performed less well recently, but delivered a 500 per cent return between 2009 and 2011. Small cap manager John McClure, manager of the Unicorn UK Income fund, has made good returns from Aim stocks such as Arbuthnot banking group, up over 100 per cent over one year.

However, the Investors Chronicle also highlights some of the drawbacks of Aim stocks. They may be great when they work well, but the illiquid nature of the vast majority of Aim shares means they can be hit hard when the market turns against them. The article suggests that Isa inclusion could lull people into a false sense of security over their inherent risk. Opponents of the move say although gains would enjoy the same protected from capital gains tax, it would also mean losses could not be offset against taxable gains. That might begin to suggest that an Isa might not be the correct route, nor a typical Isa investor the right person.

Added to this, the overall performance of the Aim market has been relatively weak. The FTSE Aim All Share index is down 8.1 per cent over one year. Admittedly, it had stellar years in 2009 and 2010, returning 61.54 per cent and 42.72 per cent respectively, but it is substantially behind the FTSE 100 over one, three and five years.

Tellingly, it is also behind other small cap indices. The FTSE All Small is up 26.25 per cent over one year and ahead over five years.

However, some will argue, in a market dealing with small and illiquid shares, there will naturally be some losers that will distort the overall performance of the index. The trouble is, even the best fund managers have struggled to identify the winners and the record of Aim funds is patchy when compared to broader smaller companies funds. Financial Express statistics show that of the five Aim VCTs, the Unicorn Aim VCT is the top performer, delivering 144.7 per cent over three years. The Rensburg Aim VCT has also been strong, but Aim trusts such as the New Century Aim VCT have lost investors over 30 per cent over the past three years. In some cases, such as the Cavendish Aim Retail fund, investors would have been better off in the manager’s mainstream UK equity funds and would not have had to suffer such volatility.

The question for investors is whether the Aim market is poised for a revival, whether its weakness has been a function of the general risk aversion, or an inherent problem with this part of the market. Rob Morgan, investment analyst at Hargreaves Lansdown, argues that it might be the time to re-examine the Aim market: “The junior market of the London Stock Exchange is much maligned -companies listed there have, in aggregate, delivered poor returns since the inception of the index in 1997 – save for brief periods such as in 1999. However, there are also many thriving businesses that have experienced remarkable growth. AIM can be a lucrative hunting ground for the canny stock picker able to identify under-researched and undervalued companies, although it is risky.”

Certainly there are some skilled managers operating in this part of the market – Giles Hargreave, John McClure, Paul Mumford, to name three. Equally, the sector has failed to keep pace with the widespread re-embracing of risk and may be due for a turnaround. Investors have disliked any illiquid parts of the market, but in a climate of greater risk appetite, this prejudice may not persist.

However, a real question for investors should be whether, if they are going to take this type of investment risk, they should be doing it through a VCT. VCTs have far wider tax incentives than Isas, even with the IHT benefit thrown in for Aim. Crucially, investors can get income tax relief. The inclusion of Aim shares within an Isa may help the Government’s agenda in channelling money to small businesses, but investors should be careful that it is the right option for them.

1 thought on “Aim shares set for inclusion in Isas with IHT benefits. But are they suitable for the broader investor?”

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