Aim for a small cap success story

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London’s Alternative Investment Market has traditionally been a hunting ground for keen private investors, ready to take a swipe at low-traded small-cap stocks that could earn them – or lose – a small fortune.

But eight years ago Aim found a higher goal. It is now the place to be if you want to reduce your inheritance tax bill.

This week is the anniversary of the reforms initiated by former Chancellor George Osborne to hold Aim shares in a stock and Isa shares.

Designed to stimulate investment in British small businesses, Isas’ duty-free attractions were linked to the IHT loophole of Business Ownership Relief (BPR). Intended to protect family businesses from ruinous taxes, this IHT exemption also applies to certain Aim shares if they have been held for more than two years.

Of course, BPR was never intended to benefit aging “Isa millionaires”, but many of their heirs will be spared a 40% tax burden when they inherit those portfolios. Additionally, the Isa envelope means that there has not been a dime of capital gains or dividend tax payable despite the impressive performance of Aim shares in recent years. Thank you Georges!

Today, up to half a billion pounds a year is flowing into ‘IHT Isas’ offered by specialist investment management firms such as Octopus, Unicorn and RC Brown, according to estimates from the service. Wealth Club investment.

This trend has been reinforced by the pandemic, as the tax liability linked to soaring stock valuations comes up against fears of declining life expectancy.

But IHT fever alone cannot explain the impressive outperformance of the alternative index. Since the pandemic nadir last March, the FTSE Aim 100 index has rebounded 107%, nearly two and a half times the rally achieved by the FTSE 100 during the same period.

Hargreaves Lansdown, UK’s Largest Investment Platform, Says 2021 ‘On Track To Be The Biggest Year Ever’ For Aim Trading As Investors Buy In To History growth in small caps.

Data from investment brokers shows that tech, green energy and life sciences companies are the most attractive to investors, alongside commodity stocks that Aim is more traditionally associated with.

When Isa’s rules changed in 2014, there were only 18 companies listed on Aim with a market capitalization of £ 500million or more (a third were highly mineral or oil and gas exploration companies. speculative, reinforcing Aim’s reputation as a volatile market).

Today, 68 stocks have passed the £ 500million mark – and spanning a range of sectors, they are arguably much more investable.

Online retailers Asos and Boohoo are two of the most bought Aim stocks by Hargreaves Lansdown investors this year, having received a huge sales boost during the pandemic.

Other tech picks that lurk just outside the top 10 include GlobalData, which provides data analytics to thousands of governments and businesses, and identity data specialist GB Group, which claims to be able identify more than half of the world’s population. All of them have significantly increased their income in recent years.

“The FTSE 100 is full of companies from yesterday, but if you invest in Aim, you can be exposed to the winners of tomorrow,” says Alex Davies, Managing Director of Wealth Club. “It’s the closest thing we have to a British Nasdaq.”

On the rival platform Interactive Investor, the green theme dominates. Hydrogen-powered energy producer ITM Power is its best-selling Aim share so far this year, with investors betting it will benefit from changing energy needs in a more carbon neutral world.

The same favorable winds are pushing investors towards Ceres Power and Impax, an asset management company specializing in ESG.

Two questions weigh on Aim’s outperformance. First of all, did this rally go further? Second, to what extent would a future removal of IHT benefits affect its popularity with investors?

Simon Thompson, my former Investors Chronicle boss and compiler of his discounted equity portfolio, says the small-cap bull run is far from over.

“The outperformance of small caps reflects the higher weighting of the Aim indices in fast-growing sectors (technology, e-commerce and healthcare) which benefit from favorable monetary and fiscal winds – it’s that simple,” says- he.

Simon has an enviable crystal ball. He highlighted the likely sectoral winners and losers of quantitative easing in his latest book, Stock selection for profit. While he doesn’t claim to have predicted the pandemic, she has accentuated those gains as software and e-commerce companies exploit their leading positions and health stocks benefit from government largesse. However, even Simon accepts that “the easy money was made”.

He predicts the next leg of the rally will be largely driven by earnings dynamics and the rotation from growth stocks to value stocks as monetary policy begins to normalize – but luckily, it’s a market favoring breeders. actions.

As a result, his picks for the 2021 Bargain Shares portfolio include mining, oil and gas, renewables, UK retailers, home builders and a royalty company. In its first six months, the portfolio generated a total return of over 20 percent (9 percentage points more than the FTSE All-Share Index).

As Aim has grown bigger and more diverse, so have their investors. Its ranks of fast-growing tech companies have attracted traditional retail punters, while the growing size of Aim’s constituents has attracted more institutional money.

Both would help cushion the blow if Aim’s IHT advantage did not survive post-Covid tax reforms. But if the corporate asset relief was limited, I wonder how many investors would actually sell.

Some might switch to other tax-efficient investments like VCTs or EISs, or just donate the money (assuming the seven-year rule remains in place). But losing BPR would have no long-term consequences for institutions or young investors like me. In the event of a massive sell-off, we would have the opportunity to participate in the story of future growth at a bargain price.

For now, another key theme for Aim that is likely to develop is an increase in M&A activity. Simon Thompson notes that the average market capitalization of Aim companies is at an all-time high of £ 178million, although the number of listed companies has halved since 2007. This, he says, is a reflection of their superior quality. – a factor that undoubtedly tempt predators to execute their slide rules.

Claer Barrett is the FT consumer editor: [email protected]; Twitter @Claerb; Instagram @Claerb



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