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The FTSE Alternative Investment Market index outperformed the FTSE All-Share by 12 per cent last year. It is a statistic that is tempting private investors to put money into “off-plan” investments such as the small and new companies listed on Aim or Ofex, or even in unquoted shares.
But how should investors evaluate the opportunities in the smaller markets or in unlisted companies? And how well have such investments performed?
Harry Nimmo, smaller companies fund manager at Standard Life Investments, says he now has at least 10 per cent of £1bn under management in smaller companies in Aim stocks.
“These days there are plenty of large Aim stocks to choose from,” he says. Majestic Holdings, an Aim-listed company, is the fourth largest holding in the SLI UK smaller companies open ended investment company.
Mr Nimmo says three-quarters of new companies seeking initial public offerings are choosing to list on Aim. One of the implications of this is that of the three alternative off-plan investments - Aim, Ofex and unquoted shares - Aim companies are the most researched.
The market, run by the London stock exchange, imposes fewer restrictions on the kind of companies that can be listed. It is often used by smaller companies with good growth potential as a stepping stone between private ownership and a full LSE listing.
Since Aim opened in 1995 more than 1,300 companies have been admitted and more than £11bn has been raised in total. Last year there were a record 200 initial public offerings on Aim.
By comparison, there are only 133 companies listed on Ofex, which began life at the same time as Aim in 1995. Ofex is officially now known as Plus Markets after shareholders in the private company approved a refinancing package last year.
Both Aim and Ofex are designed to allow small companies that have been in business for a relatively short period to gain access to external investment capital. Listing on either market is much cheaper than on the full stock exchange.
The most obvious advantage for investors looking to invest in Aim or Ofex companies is that there are some juicy tax breaks available, some of which also apply to investment in unquoted companies.
All Aim shares are treated as business assets. That means any CGT liability, under taper relief rules, is likely to be smaller compared with conventional shares. For example, if a £20,000 profit is made on a FTSE 100 stock held for five years, tax will be paid on 85 per cent of the gain above the annual exemption limit. For an Aim stock, held over the same period, it would be 25 per cent. There are also some CGT benefits from gifting Aim shares.
The Enterprise Investment Scheme provides 20 per cent income tax relief to investors who buy new shares in a qualifying Aim-listed company. This is up to a maximum £200,000 investment in a year, so long as the investment is held for three years. If this is the case, there is no CGT on disposal either.
Investments in qualifying Aim companies can, if held for two years, gain total relief from IHT, although it is important to contact the company before you invest to make sure it is eligible.
In spite of attractive tax breaks, fund managers warn that investors must be aware of the risks in investing in these smaller markets.
“Aim stocks need to be treated very much as caveat emptor,” says Standard Life Investments’ Nimmo. “The amount of disclosure is much lower, and corporate governance is generally poorer [than companies listed on the main exchange].”
Companies on Aim or Ofex are, by their very nature, often young and sometimes run by inexperienced managers. Some are likely to go under, and some will be bought out.
Investors must also realise that, because there tends to be little trading in many Aim or Ofex shares, they can be volatile and often have wide bid-offer spreads. Aim or Ofex shares cannot be held in an Isa, and Ofex shares cannot be held in a self-invested personal pension - although Aim-listed shares can.
It is often difficult to evaluate Aim-listed companies. Research may not be readily available, as companies are sometimes too small to be included on analysts’ radar screens, and some are “cash shells”, effectively takeover vehicles with no real activities of their own.
Although it outperformed both the FTSE All-Share and the Smaller Companies index last year, Aim’s performance over the longer term has been less impressive. The Aim index was at 1,000 when it was launched in 1995 and 1,006 last year.
This compares with a peak of nearly 3,000 at the height of the dotcom boom.
Over the past nine years, the Aim index has been the worst performer when set against the FTSE Smallcap (excluding investment trusts), the FTSE Fledgling, the FTSE 100 and the Hoare Govett Smallcap. Nimmo points out that two-thirds of Aim companies five years ago were technology stocks and now roughly the same proportion is in mining and oil and gas.
“There is a faddish element to investing in Aim, as long as it lasts,” he says.