The Daily Telegraph - Saturday - Money
Aim offers tax perks and divis – but some investors lose everything
Investors in stocks listed on London’s “junior” stock exchange are expected to receive record dividends of £1.2bn this year. Dividend payments from companies quoted on the Alternative Investment Market will grow by 20pc in 2018 and continue to rise next year, research by Link Asset Services suggests. Aim is part of the London Stock Exchange but is specifically designed to give fledgling companies a way to raise capital.
The impressive recent payouts will have caught the eye of astute retail investors. Many will also be attracted by the generous inheritance tax relief on offer. Throw in the market’s outperformance of the FTSE 100 – by about 17 percentage points over the past five years – and the case for investing seems strong.
However, the very nature of the market means that choosing winners is fraught with risk. For every highprofile success story like Fever-Tree, the upmarket drinks maker, there is a Conviviality, the distributor that collapsed earlier this year.
Alex Davies of Wealth Club, an investment platform, said: “Aim is the most successful market in the world for raising capital for smaller businesses but just because a company is listed on Aim it doesn’t follow that it’s a good company. There are some really good ones, but an awful lot of dross too. There’s probably only a third of the market that is actually investable.”
One firm that sums up the volatility and unpredictability of Aim-quoted companies is Xcite Energy. It was formed in 2002 and joined Aim five years later. Investors ploughed hundreds of thousands of pounds into Xcite, which had secured a licence to drill one of the largest undeveloped fields in the North Sea.
Professional money managers frequently backed Xcite in the belief that the discovery of oil would send the shares rocketing. Even during a slump in oil prices in 2015 the firm said it was optimistic that work would soon begin. But a year later Xcite collapsed, reportedly more than £100m in debt. A proposed “debtfor-equity” deal was scrapped and bondholders liquidated the company, leaving shareholders with nothing.
Some angry investors claim they were misled over the company’s financial health. One 61-year-old shareholder told Telegraph Money he had bought £42,000 worth of Xcite stock in 2011 after previous success investing in Aim-quoted oil companies.
“We are so far down the list of creditors now that we may as well not exist,” he said. “It was meant to be my pension. I haven’t worked in a long time so I’m living on a small pension. Things are pretty grim for me financially.”
Another reader who invested £120,000 in the company admitted to feeling foolish for having put such a large portion of his wealth into one stock but said he naively believed the positive statements from the company’s board.
Paul Jourdan, who co-manages Amati Aim VCT, an investment trust, said: “The natural resources segment of Aim is quite hazardous for private investors. It all comes down to the Mark Twain definition of a mining company: ‘a hole in the ground with a liar at the top’. You have to rely on consultants and very technical reports.”
It’s much easier for a company to join Aim than list on the main market, so investors need to do more due diligence themselves before they commit money.
The junior market has also outperformed the FTSE 100. But there are many risks, warns Sam Meadows ‘I lost my pension. Things are pretty grim financially for me right now’
“Picking successful Aim stocks is not for the faint-hearted,” said Mr Davies. “You need to know what you are doing. If you are familiar with markets, can follow what the specialist fund managers are doing and spend lots of time researching, it could work.
“But it’s not like investing in the main market; it’s more time-consuming and there are certainly more traps. We are on the lookout for stable companies with long-term growth prospects.”
Another benefit is “business relief ”, which exempts eligible Aim stocks from inheritance tax. Shares generally qualify as long as the company’s business is not trading in or owning assets and must be held for at least two years. However, there are fears that the tax break could be scrapped.
Numerous fund managers run specialist portfolios that seek to take advantage of IHT relief and The Telegraph’s Questor column has an IHT portfolio of Aim companies. Updates are published regularly. Questor added seven new stocks in June, including clothing retailer boohoo.com and Majestic Wines. Visit telegraph.co.uk/questor.