AIM Comes of Age with ISA Admission – How Was it For You?

(First published in 2014 www.diyaiminvestor.com) 

Figures released by broker Hargreaves Lansdown show that investors have embraced the government’s decision to allow AIM stocks to be held in ISAs, but with seemingly mixed fortunes.

7% of its 577,000 clients lodged AIM shares in the tax-efficient wrapper in the six months after the rules changed on 5th August 2013 ; perhaps a wise minority given that during the period  the LSE’s junior market soared 18.9% compared with a rise of just 2.1% on the FTSE All-Share.

Once considered not for the faint hearted, the ‘diggers and drillers’ of old are being eclipsed on AIM by companies at the cutting edge of technological development and the index received a further boost when stamp duty was abolished on purchases in April 2014.

However, investors need to fully embrace caveat emptor as a philosophy because AIM small company shares can display extreme volatility and be harder to sell on due to lower levels of secondary market liquidity.

Those seeking the higher potential returns available from AIM companies necessarily expose themselves to higher levels of risk and potential capital losses than if they stuck with the blue chips – the classic risk/reward conundrum.

Hargreaves revealed the most popular AIM shares on its Vantage platform during the year to 30th January 2014, and also offered a rundown of the top-performing AIM shares overall during the same period.

Most popular AIM shares traded on Vantage year to 30th Jan 2014 were:  

Picking a Winner

A glance at the performance of the most popular picks shows the tremendous discrepancies that can exist between the winners and the losers, and the fact that only Rare Earth Minerals appears on both the top traded  and best performer lists show the difficulty of stock picking in this market, even for relatively sophisticated investors.

No-one who backed Rare Earth Minerals will feel short-changed with a 400% return, but those who conspired to put Sirius Minerals, Gulf Keystone Petroleum  and Fastjet at the top of the popularity charts will be feeling a little bruised, sitting on average losses of almost 57% unless they got their timing spot on.

Over the past five years the FTSE AIM market has returned 122.1% compared with the FTSE All Share’s performance of 100.9%, but within those figures there are huge differences between the haves and the have-nots when compared with the main market.

Investors should look beyond the index and short-term performance when considering AIM shares as it doesn’t paint the full picture and the market is volatile at the extremes. The prospect of identifying the next Coms, which saw its shares rise by 950% in the year to Jan 2014, or the stellar performance of fashion retailer ASOS which would have returned £211,000 for a £1,000 investment made in 2001, is what makes it attractive to some investors.

However, at the other end of the spectrum, pawnbroker Albemarle and Bond saw the value of its stock fall from over to 200p to 17.5p after over-extending itself during the year.

Other Benefits

Admission of AIM stocks in ISA wrappers allows canny investors to take advantage of tax relief in life as well as death, as returns on some AIM investments remain exempt from inheritance tax.

Once certain AIM shares have been held for a two-year period they qualify for Business Property Relief and potentially up to a 100% exemption from inheritance tax even if they were originally held outside of an ISA then transferred in.

Investors can now choose to purchase individual AIM shares and hold them inside an ISA or a Self-Invested Personal Pension (SIPP) or alternatively can access the AIM market through funds and Venture Capital Trusts.

Whilst investors choosing to invest in collectives benefit from the specialist expertise of the fund manager and a more diversified approach, there is no inheritance tax exemption when AIM shares are held this way.

AIM stocks that delivered the best returns in the 12 months to 30th Jan 2014

The number of stocks in the most traded table that have posted an annual performance beginning with a ‘-‘shows that however popular the inclusion of AIM stocks in ISA wrappers may have proven and however welcome the stimulus may have been to those companies that have attracted investment, there will be an awful lot of investors currently looking at losses that they may well have avoided had they not sought the river monsters in the junior market.

The 69 companies that came to market on AIM over the last year raised a total of £1.17billion and there is every indication that 2014 will be just as prolific in terms of initial public offerings.

Basic principles of creating a balanced portfolio to mitigate risk across a range of industry sectors apply when picking individual stocks and for those less comfortable with doing so it is still possible to add AIM exposure to your ISA via one of the pooled investment products or perhaps a fund such as River and Mercantile’s UK Equity Smaller Companies fund.

Managed by Dan Hanbury the fund was one of the best performing funds in the UK in 2013 and has around 30% exposure to AIM stocks across a range of sectors,

Clearly this is not a market for the faint hearted and whilst providing a flavour of this exciting environment, DIY AIM Investor urges any potential investor to ensure that they have done as much research as they possibly can before parting with their hard-earned and to seek professional advice appropriate to their experience and financial literacy if they are in any doubt.