With a background of ever-growing IHT receipts, investing in AIM through an ISA can be a powerful planning option for the right person, writes Jack Rose, as he offers investors and their advisers 10 tips on the subject
Well into the final month of this current tax year, advisers are more than likely to have encouraged their clients to look at their ISA investment - and perhaps to consider the option to invest in the Alternative Investment Market (AIM), as part of their inheritance tax (IHT) planning.
Since 2014 - when rule changes allowed investors, for the first time, to hold AIM shares within their ISA - there has been an influx of investment in AIM shares for IHT purposes. This is not that surprising when you consider there is approximately £500bn invested within ISAs today, with more than six million of the UK's 21.7 million ISA investors over the age of 65. Against a background of ever-growing IHT receipts, investing in AIM through an ISA can be a powerful planning option for the right person.
It goes without saying, however, it will not be for everyone and AIM is one of those markets that divides opinion. Some believe in the high growth investment opportunities to be found on AIM and appreciate the generous tax benefits available while others still avoid AIM because of negativity around individual company failures and concerns over the lack of regulatory oversight within the market.
But there is a far more positive side to the AIM story. For those investors willing to do the work, AIM presents an opportunity to find an investment with the potential for significant returns. It is a market of opportunity and risk, and there are real nuggets to be found.
Rather than investing directly on AIM, however, using a professional investment manager who has the knowledge, experience and resources makes sense and will hopefully help to minimise some of the risks. Here are some tips for investors and their advisers to consider when selecting an AIM manager.
1. Experience of multiple market cycles
Although it can be no guide to future performance, having long-term experience of investing in the AIM market, over multiple market cycles, is invaluable. Many AIM IHT products have opened since the changes to ISAs - so finding a manager with a track record of investing in AIM for 10-plus years and delivering value for shareholders is crucial.
2. A well-resourced team
AIM is often called a ‘stockpicker's market'. As much of the market is under-broked and under-researched it creates an opportunity for managers to exploit the inefficiencies of the market and create value for investors. That said, there are around 1,000 companies on AIM, so you need a well-resourced investment team to help research and filter the market, conduct company meetings and go on site visits.
3. Proprietary research
This follows on from the second point, but it is important managers can demonstrate they do not just rely on broker notes. Meeting investee companies, their management teams and being able to get ‘under the hood' and understand the business is imperative. Many companies may only have a couple of brokers covering them, which means a manager's own proprietary research is crucial.
4. Robust and clear investment philosophy and process
This may seem obvious but in a market such as AIM it is also absolutely essential. A manager must be able to identify and articulate clearly what they look for in companies and how they filter the market - for example, a focus on cashflow, profitability of the business, levels of debt and a dividend policy. The process should not only be about finding the winners, but avoiding the howlers. You want to be able to see that a manager is highly selective in their approach.
5. AUM within AIM
Personally, I like to see that an investment manager is running a decent proportion of their assets within AIM. Since the rule changes allowing AIM investment in ISAs, the market has grown significantly and there is now an abundance of offerings within the space - so it can be a challenge to filter the universe down.
A good initial port of call are those managers who are true specialists at investing within AIM and smaller companies across multiple structures - whether that be venture capital trust, enterprise investment scheme, OEIC or investment trust.
Take Unicorn Asset Management, which specialises in AIM investment - approximately one-third of its assets under management (AUM) is within AIM. This gives confidence the investment team is comfortable within the space. Additionally, Unicorn manages AIM money across multiple vehicles - not just an IHT ISA portfolio - which demonstrates credibility within the space.
6. An alignment of interests
This is more than the investment manager investing in their own products, or having ‘skin the game', which is always important. It is also about the investee companies they invest in. There are many businesses on AIM that have been in the same family for generations - flooring manufacturer James Halstead, for example - or management teams that retain a meaningful stake in the business, such as RWS Holdings.
There is an alignment of interest, as those businesses are still listed on AIM for exactly the same reason many ISA investors will look at them - the IHT relief granted through business relief. For this reason, you can be assured the management team will be incentivised to run the business prudently, as a substantial amount of personal wealth is tied up in the business.
7. Relationship with the brokers
Investment managers who have been investing in AIM over the long term will have developed a strong relationship with the brokers and will be in a good position to have a front row seat for new IPOs. This relationship is also invaluable when working on AIM trades and is key to extracting the maximum value for investors.
8. Low portfolio turnover and long average holding periods
A low portfolio turnover and long average stock holding periods give confidence in the investment manager's investment process. Hopefully they are doing a lot of the hard work in terms of researching an investment upfront, so they will not need to change too many things going forward or incur expense on portfolio ‘churn'.
9. Focus on dividends/natural income
People often assume AIM and smaller company investing is purely for growth and that there is little or no income to be found. A focus on dividend paying stocks can, however, lead to significant long-term outperformance.
10. Look at the charges
There can be several charges associated with AIM investing, some of which may differ from other investments. Charges can include the initial charge, dealing fees, ongoing management and admin fees and potentially exit charges. When comparing products, investors should look at fees in their totality to build up the best picture. As an example, one product may have a lower initial charge but a higher dealing fee, offsetting any saving.
Jack Rose is head of tax-efficient products at LGBR Capital
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