Why invest in AIM?
Investing in AIM-quoted companies that qualify for Business Relief has been and continues to be a compelling investment and tax planning tool. Investors can obtain 100% relief from potential Inheritance Tax (‘IHT’) in the UK, if the investments are held for two years and still held at death. The short two-year qualifying period is compelling for elderly investors, particularly those with sizeable existing portfolios invested in equities, notably accumulated in Individual Savings Account (ISA) wrappers.
Investing in qualifying AIM shares avoids the costs associated with forming a trust, or the risks associated with gifts which are the traditional ways to mitigate IHT. AIM shares are also a viable asset class in their own right, to complement a balanced and diversified investment portfolio.
AIM, the London Stock Exchange’s international market for smaller growing companies, is home to nearly 1,000 companies. Even more importantly, AIM is no longer just about highly speculative micro caps that may never generate a profit – or cash for that matter! There are now hundreds of AIM companies with robust business models and a history of excellent profitability, cash generation and attractive dividends. Many of these excellent businesses have seen their shares soar over the past few years, far outperforming larger but lower growth, companies on the main stock market.
While AIM continues to be a market for small, relatively early stage businesses it is also attracting a growing number of more mature, highly profitable, family or founder-controlled companies. The major shareholders of these mostly UK based businesses clearly view AIM as a good route to access the capital markets yet still retain an active interest in the business and enjoy the IHT benefits of Business Relief. For many owner managers AIM also represents a viable alternative to the private equity exit route. Furthermore, shareholders need not give up the dividend income they are used to enjoying as many AIM companies, especially the older more mature businesses, now offer meaningful dividends. At a time when interest rates are close to zero, this is clearly compelling for investors, particularly for those contemplating a move from blue chips to AIM.
AIM shares include famous and well-managed companies such as household names like ASOS and boohoo.com, the online shopping retailers, Nichols, owner of the Vimto brand and Mulberry Group, the luxury fashion brand. Scores of other less well-known, but well-managed firms have delivered year-on-year capital growth. CVS Group, the veterinary services provider, RWS Group, the specialist patent translator and James Halstead, the commercial flooring company, have been stalwarts of AIM for IHT portfolios for many years, generating fantastic returns for shareholders.
In general, AIM IHT portfolios have significantly outperformed the FTSE AIM All Share over the past 10 years as this index indicator tends to be dampened by speculative and volatile commodity companies which managers of portfolios of AIM shares for IHT planning generally avoid.
Investment managers specialising in AIM for IHT planning tend to avoid the more speculative companies on AIM and focus on better established, profitable and cash generative issues, typically headquartered in the United Kingdom where they can gain access to company management. Investment managers also adopt a diversified approach, spreading investment across a larger number of AIM companies than would normally be the case for a blue-chip portfolio of equivalent size.
Advisers and clients are sometimes concerned about the liquidity risk of investing in AIM and the difficulty in selling shares when the time arises. While AIM shares are less liquid than blue chip stocks, unless portfolios are very large (£1m+) it should be possible to liquidate a well-diversified AIM portfolio within a week, assuming normal market conditions.
Investing in AIM quoted companies for IHT planning purposes gained in popularity following the ISA rule changes in 2013 which permitted ISAs to hold AIM stocks for the first time. The Government offered this new tax break on AIM stocks in an effort to encourage investment in growing companies.
The period of low interest rates has also encouraged more investment in smaller quoted companies, many of which offer attractive dividend income. While we never encourage investors to invest in AIM quoted companies for income purposes, the growing maturity of AIM means a greater percentage of AIM companies offer some kind of yield, which compensates, to a certain extent, for the loss of income they might incur from moving out of blue-chip stocks into AIM.
AB Dynamics Plc
Founded in 1982 as a vehicle engineering consultancy, AB Dynamics has grown steadily to become one of the world’s most trusted suppliers of automotive test systems. Clients include the top 25 global vehicle manufacturers, all seven Euro NCAP laboratories and numerous government test authorities. Applications range from highly-efficient durability testing to precision control for critical new areas of technology development such as active safety and autonomous driving, all with efficient data and protocol integration from virtual to physical to real-world.This business has performed brilliantly since arriving on AIM in in 2013 when the market capitalisation was only £14m. It has since grown to £300m and has built a wonderful new premises to support its considerable growth prospects.
Advanced Medical Solutions plc
Advanced Medical Solutions plc is an independent developer and manufacturer of innovative and technologically advanced products for the global advanced wound care, surgical and wound closure markets. AMS manufactures a wide range of products and materials that include silver alginates, alginates, foams, tissue adhesives, sutures and haemostats. Quality businesses like AMS, generating consistent and meaningful revenue and earnings growth, high margins, strong cash flow and decent returns on equity often come at a high price. This is even more relevant in the medical sector where it takes many, many years to break-in and, once in, an incumbent like AMS with excellent products is very hard to displace.
James Halstead plc
Mr James Halstead began his company in 1915 dyeing, finishing and later waterproofing and rubberising textiles for rainwear and other outdoor clothing. The family business developed rapidly under the stewardship of his sons Herbert and John and it was they, in 1934, who expanded the manufacturing capabilities to include flooring products, this proved to be an inspired decision. After many experiments to develop uses for the synthetic polymer PVC, Halstead technologists provided a real breakthrough when they were able to make a homogeneous vinyl sheet product. Branded Polyflor, this product and its many adaptations became the cornerstone of the company’s success. James Halstead plc originally floated on the main market of the London Stock Exchange in May 1948 and subsequently arrived on AIM in February 2002. The Halstead family continues to guide the business with Mark Halstead current Chief Executive.
Operating margins of nearly 20%, which have actually grown over the past few years, and a Return on Equity of 35% highlight the quality of James Halstead, which evidently possesses a significant protective moat. This should appeal to long term investors, notably those investing for Inheritance Tax Planning purposes.
RWS Holdings plc
RWS Holdings is the world’s leading provider of intellectual property support services (patent translations, international patent filing solutions and searches), a leading provider of life sciences and commercial language services and, following a substantial recent acquisition, a technology-enabled provider of localisation services. Localisation is the adaptation of content, software, websites, applications, marketing materials and audio/video for hundreds of languages and geographies which is an essential function for companies seeking to globalise their business. Localisation forms part of the overall US$43.1bn language services market, which has grown at 7.9% per annum. It doesn’t sound the most thrilling of activities but the results for shareholders have been stupendous. The Group’s activities in China are also growing strongly and further expansion here could really move this business up another level. Shareholders can be reassured that founder and Executive Chairman Andrew Brode still holds a meaningful 33% stake in the Group, having never sold a share.
Watkin Jones plc
Watkin Jones was established in 1791 by carpenter, Huw Jones, and is a ninth-generation family business, making it one of AIM’s older businesses. The Group has experienced significant growth since 1999, when it entered the student accommodation market, since when it has delivered over 38,000 student beds to date, over 117 sites, making it a key player and leader in UK Purpose Built Student Accommodation. In addition, Watkin Jones has been responsible for numerous residential developments, ranging from starter homes to executive housing and apartments. More recently it added the Fresh Property Group, a specialist accommodation management company, to its portfolio of activities. Fresh manages over 15,000 student beds on behalf of its institutional clients and is growing strongly on the back of the Group’s development activities. Watkin Jones is also now expanding its operations into the build to rent sector.
Stephen Drabwell is Co-Founder of Fundamental Asset Management