For our first column of 2021 in our series on minimising inheritance tax by investing in shares quoted on Aim, we will take a step back and look at how London’s junior stock market has progressed in recent years – and explore what this means for readers who follow our IHT Portfolio.
Opinions on Aim have traditionally been sharply divided. Some avoid it altogether in the belief that it is the “Wild West” of investing, full of unstable businesses run by unsuitable people out to enrich themselves rather than their shareholders; others say nowhere else offers the range of growth opportunities, to say nothing of that invaluable tax break.
Questor has always believed that both types of company are amply represented on Aim, so the best course of action is to seek out the right ones rather than turn your back on the market entirely. But there is encouraging evidence that Aim’s centre of gravity is tilting away from the fly-by-night, get-the-founders-rich-quick outfits and towards real, well-run businesses with bright prospects.
In our view, much of Aim’s equivocal reputation can be blamed on the dominance of resources stocks. This column has long believed that there are few quicker ways to lose money than to invest in small, immature miners and oil stocks, and the experience of investors in such firms quoted on Aim tends to bear this out.
We put some of this down to the inherent riskiness of any business exposed to the swings of commodity prices and some down to the particular appeal of resources stocks to the less scrupulous type of entrepreneur. Aim’s “light-touch” regulatory regime does the rest.
Happily though, the stranglehold of miners and oil explorers over Aim seems to be over. “Aim is no longer a market of resources stocks but one firmly in the technology camp,” Chris Boxall of Fundamental Asset Management, an Aim specialist, told Questor.
He pointed to some of Aim’s spectacular technology-based successes such as Asos and Boohoo, the online retailers, which are worth £5.1bn and £4.6bn respectively. He said Aim’s healthcare firms had, “after many years in the wilderness”, also come to the fore during the pandemic.
“I do feel that Aim has become a totally different market from the one we started investing in many years ago. It is now far removed from the ‘Wild West’ of old,” he added.
He said Aim’s growing maturity was supported by the data: the market as a whole was worth £131bn at the end of 2020, a record high; a record 24 Aim companies were valued at more than £1bn at the year end; and shares worth a total of £83bn were traded over the year, compared with about £60bn in 2019.
“Those are big numbers and counter the argument that Aim shares are illiquid,” Mr Boxall said. Critics had long said it was hard to buy and sell Aim shares; in our view the larger stocks at least are quite liquid enough for the needs of private investors.
We would expect a market for smaller stocks to be far more volatile than a conventional market but that over the long term the increased risk would mean bigger rewards. It was a mark of Aim’s shortcomings that for a long time its growth in aggregate was no better than that of the main market. That too seems to be changing, however.
The FTSE Aim All-Share index gained 20pc last year, while the FTSE 100 ended the year 15pc lower.
Much of this can probably be put down to the growing importance of healthcare and tech stocks and the decline of resources businesses.
Over the past five years the Aim All-Share has risen by 60pc, against just 11pc for the main market. Admittedly these figures exclude dividends, which are far higher on the main market, although many were cut or cancelled when the pandemic struck.
Our IHT Portfolio has shared in Aim’s strong showing: the average gain of our tips is 31pc and their average outperformance of the FTSE 100 is 40 percentage points.
We think there is a strong case for investing some of your money on Aim – as long as you choose with care.
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.