‘Good things come in small packages’ – perhaps one of the most appropriate phrases when looking at investing in UK companies.
The Alternative Investment Market (AIM) comprises a broad range of companies with a leaning towards small and medium sized growth companies looking to raise capital via a listed exchange with a slightly lighter and lower cost regulatory regime than the main indices.
Companies listed on AIM tend to carry higher investment risk than that of their larger more established counterparts – those listed on the FTSE 350 for example – but they also offer the potential for rich rewards.
Smaller companies are generally at an earlier stage of their lifecycle making it is easier for them to generate material earnings growth, which in turn delivers strong returns for investors. This goes some way to explaining how the FTSE AIM All Share has outperformed the FTSE 350, 250, 100 and All Share over the last one, three and five years (Source: FTSE Russell).
AIM has a 23 year history and while it may be the smaller, less well established relative of the FTSE indices, it has seen many household names on the list including Young’s Brewery and the global advertising agency M&C Saatchi.
Starting with just 10 UK businesses and none from overseas in 1995, by February 2018 the index listed 950 companies of which 150 were international. The market capitalisation currently sits at over £105bn and more than 3,700 organisations have featured on the index to date.
The appeal of AIM lies not just in its ability to attract investment gems; the shares of certain companies listed on the market also qualify for notable tax breaks, including inheritance tax (IHT) relief.
To encourage investors to support smaller businesses, the Government allows shares held in qualifying companies that are not listed on any stock exchange and those listed on AIM to qualify for Business Relief (formerly known as Business Property Relief). This means that once owned for two years, the shares no longer count towards the taxable part of an inheritable estate and are free from inheritance tax at point of death. The Government has also made it easy to invest in AIM. Since 2013, AIM shares can be held in ISAs which means that investors can enjoy tax free growth and dividends.
This means holding AIM shares can offer investors both tax free growth if held within an ISA, and IHT relief if they have been held for more than two years and are still held at point of death.
It is no surprise then that investors looking for tax efficient growth are considering investing in AIM companies.
Investors can create their own portfolio of AIM listed shares or invest with a fund manager which gives access to professional expertise. As not all AIM shares qualify for BR, investors looking for relief from IHT would be wise to focus on managers with specific experience in these types of investments and a track record of achieving BR for investors.
Of course, opting for a fund manager comes at a cost but these fees can be reduced by choosing a smart passive AIM investment strategy.
Traditional passive management generally involves replicating or tracking the performance of a particular market or index. Since passive management – or index tracking – requires less day to day attention from the fund manager than active management, it is usually lower cost.
A purely passive approach however does not filter out individual stocks on a market and arguably therefore, it is not well suited to AIM investing.
AIM listed companies do not have to adhere to a minimum trading period, which means they may have only been around for a short period of time. Investors may wish to avoid such early stage company risk. There are also particular sectors such as mining and exploration that historically have proved very volatile and experience significant company failure rates. Again, an investor may wish to avoid such holdings in their portfolio.
A third way – smart passive – allows for lower cost management but incorporates more expertise and risk management on the part of the manager, possibly making it more suited to AIM investment.
What is smart passive investing?
Using a smart passive strategy means investors can avoid some of the limitations of a pure index tracking approach and should also limit volatility.
A smart passive strategy gives investors exposure to the strongest companies within an index while removing certain biases which may negatively impact risk adjusted returns.
The screening is done on a strict, methodical approach which means the strategy is not affected by human factors such as emotional investing, or the loss of a key fund manager.
For example, TIME Investment’s smart passive AIM portfolio comprises 30 stocks which must meet specific investment criteria. The first is ensuring that all the shares included in the portfolio qualify for Business Relief since an AIM listing does not in itself automatically provide BR. Finance, property and investment companies for example do not qualify – and manager expertise is necessary to identify qualifying companies.
Second, TIME’s managers only select the largest, most mature and robust BR qualifying companies for inclusion in the portfolio, and these are reviewed periodically to ensure a balanced weighting.
Third, to reduce volatility, the process excludes AIM companies that operate in traditionally high-risk sectors – such as the exploration of natural resources – or those that have historically demonstrated higher than average price volatility.
The strategy also excludes AIM companies that are either unprofitable or are trading on high valuation multiples such as fast growing internet based companies.
Smaller companies have much to offer, but investing in the sector is not without risk. Choosing a smart passive approach can help manage some of the volatility while providing risk adjusted returns and grow your portfolio today while protecting it for the next generation.
Key features of TIME:AIM
- Available within an ISA and non-ISA wrapper
- Inheritance tax relief in just two years
- Focus on reducing volatility
- Removal of stock picker bias
- Lower cost than traditional AIM business relief services
What is Business Relief?
Shares in qualifying trading companies, including those listed on AIM, can attract 100% Business Relief (BR) provided they have been held for a minimum period of two years at the time of death. From that point qualifying shares become exempt from any IHT liability. Some of the main types of relevant business property and the rates of relief they attract are:
- a business or interest in a business – 100%
- shareholdings of unquoted companies – 100%
- controlling shareholding in a quoted company – 50%
land, buildings, machinery and plant used for a business carried on by a company controlled by the transferor or a partnership in which they were a partner – 50%
If you would like to find out more about TIME:AIM, or any of our investment opportunities, please contact us on 020 7391 4747 or firstname.lastname@example.org.