The success of some of the bigger-name firms means there are now seven companies on the Aim market that have market caps in excess of £1bn. And yet the number of companies listed on the market has fallen over the past five years. In 2013 there were 1,087 Aim shares; today the number is 944.
Jason Hollands, managing director for business development at wealth manager Tilney, says: “Poor liquidity and less scrutiny means that Aim is a corner of the investment universe not for the faint-hearted, and a highly selective approach is essential.”
With demand for Aim shares rising, and the number of Aim companies falling, the valuations at which many firms trade has risen sharply – particularly those shares at the top end of the market that offer the most liquidity, and which are perceived to have defensive characteristics.
Chris Murphy, an investment manager focused on Aim IHT portfolios at Walker Crips, says: “There is undoubtedly an IHT premium you need to pay for some of the stocks. Liquidity is very important for investors in these products, but I think the premium is sustainable.
“Because IHT planning is such a big part of the market, and liquidity is important to those investors, they tend to put cash into the most liquid stocks. That [in turn] makes those share prices perform well, and makes the shares more liquid, which increases the appeal of the shares to the IHT planning investors. So unless the legislation changes, I can’t see that trend reversing.”
Mr Murphy adds: “Of course stocks can always become less liquid due to company-specific events, and it is my job to make investments in the companies that doesn’t happen to, as well as to invest in Aim shares that are less well known and are further down the market-cap spectrum but are good investments.”
At a time when speculation continues over the future of pension tax relief, Aim shares’ own benefits could yet fall under the scrutiny of a government keen to boost revenues ahead of Brexit. The counterargument is that policymakers may not want to be seen to contribute to funding being pulled for small businesses – a probable consequence of any such tax U-turn.
Pitfalls
Paul Parker, head of the intermediary portfolio management team at Canaccord Genuity, emphasises investors should also be aware that not all Aim shares qualify for the IHT exemption. The tax relief only applies if the company in question is eligible for BPR, and companies such as investment trusts, and businesses that derive most of their revenue from rental income from property investments, do not qualify.
