Take aim at young companies and rewards can be greater

Conal Gregory looks at how to invest in youthful companies

One of the best ways to back new businesses and gain from their success is to invest in the Alternative Investment Market, otherwise known as AIM.

AIM has grown from just ten UK companies worth £82m in 1995 to over 1,100 worldwide worth over £81bn today. During the intervening time, over 3,100 companies have been listed.

For investors, AIM is the most successful growth stock market in the world. For ambitious companies, it is the route to raising capital to fund their development. Over 83 per cent of listed firms are each worth over £50m.

By creating a market for a company’s shares, it broadens the shareholder base and places an objective market value on a business, which can be useful for founders and inventors.

By listing on AIM, employees can be encouraged. Staff are likely to be better motivated and improve performance if a share scheme is made more attractive which, in return, should ensure investors obtain even better rewards.

Once quoted, an AIM firm can increase its ability to make acquisitions, using its shares as currency. A quotation will also enhance a firm’s status with both customers and suppliers.

AIM is no longer a UK-wide operation. Its members operate in 94 jurisdictions. A fifth are incorporated overseas. Much of the non-UK momentum comes from Asia Pacific, India, central and eastern Europe, together with notable success stories in Australia and Canada.

By sector, it is also diverse. From six industrial and service sectors at birth, AIM now offers investment opportunities in 40 sectors. The largest sectors are mining (11 per cent), general finance (11 per cent), support services (nine per cent) and IT (eight per cent), followed by property and oil and gas.

Small to medium-sized companies raise capital through AIM to realise their ambitions and potential. In the process, they share their enterprise with investors. Of course, this means some firms are unrealistic and fail.

Savers should not over-rely on the regulatory regime as it is less onerous than many markets. Some investors are temperamentally unsuited to AIM because of both its greater volatility and the higher risk that comes from a less mature stock market.

Nurturing acorns which have the capability to grow into oaks takes time and patience. Those with mid to long investment times ahead are well placed, such as savers building up a personal pension or children growing funds for when they turn 21.

Investing in individual shares carries more risk as savers have discovered with seemingly safe and secure companies like The Royal Bank of Scotland, BP and Lloyds TSB. For AIM firms where reporting requirements are less stringent, there is the potential to make massive gains but also the risk that everything could be lost.

Shares on AIM are less liquid as fewer savers wish to trade when times are hard. To compensate for risk and encourage seed money for financial acorns, there are two generous tax carrots:

n as AIM holdings are classed as business assets, they are free from inheritance tax if held for two years;

n qualify for reduced Capital Gains Tax.

Not all AIM shares enjoy such benefits. An AIM firm must not be quoted on another stock exchange and so check with your stockbroker.

Grant Thornton, accountancy advisers to many AIM listed companies, would like AIM shares to be eligible for inclusion in ISAs as they are currently ineligible. However, AIM holdings do qualify for EIS relief which means that 30 per cent tax relief can be obtained on investments up to £500,000, rising to £1m from April 2012.

Martin Payne of Brewin Dolphin, Leeds stockbrokers, tips three AIM shares: Avanti Communications (providing fixed satellite services and hoping to expand broadband in rural areas and abroad), Advanced Medical Solutions (which design products focused on wound care and closure) and wine warehouse chain Majestic Wine.

Over the last three years Payne’s three tips have jumped 17.3 per cent, 33.9 per cent and 30.2 per cent.

Simon Martin, investment manager at Charles Stanley stockbrokers in Leeds, also likes Avanti but also recommends both Ceres Power (which develops solid oxide fuel cell technology) and the low-cost hydrogen generating firm of ACTA.

Private client stockbrokers Killik have designed an AIM Inheritance Portfolio. This is to ensure that 40 per cent of an individual’s estate over £325,000 is not taken in tax. Among the stocks Killik tips are Abcam (manufacturers of antibodies for scientific researchers) and pub chain Young’s.

Investec Wealth & Investment (formerly Rensburg Sheppards) also offer an IHT Planner portfolio which has returned 15.7 per cent over three years and 14.2 per cent over five. It holds 15-30 stocks depending on the sum invested.

Barry Anysz, AIM divisional director at Investec in Leeds, says that the 5.6 per cent fall in AIM shares overall in the first fi ve months is largely the result of overseas stocks in the oil and gas sectors, which now account for almost 40 per cent of the market.

He looks for stocks that have at least £25m capitalisation, a good track record, talented management, excellent products, strong balance sheet (preferably with no or low gearing) and solid sustainable growth.

An alternative to investing in single AIM firms – and thereby significantly reduce risk – is to track one of the indices, such as the FTSE AIM UK 50, FTSE AIM 100 or FTSE AIM All-Share. Such a broad remit should ensure a good base at a low management cost.

Another way to gain some AIM exposure is through a fund. Close Beacon, launched in 2004, invests solely in AIM with some 45-50 holdings. It has achieved 37.2 per cent growth in the last year and 48.1 per cent over three years.

Close Special Situations has a proportion of holdings on AIM and achieved an impressive 48.1 per cent growth over the last three years and almost 109 per cent in the last five years.

Andy Parsons, of The Share Centre, likes both L&G UK Alpha fund, targeted mainly on AIM with 30-35 holdings. Its cumulative total return over three and five years has been 60.6 per cent and 115.5 per cent respectively.

Parsons also tips Marl-borough Special Situations, which was launched in 1995. To keep any downside to a minimum, no holding is more than two per cent of the portfolio. Its cumulative total return has been 36.6 per cent, 37.6 per cent and 93.6 per cent over three, five and 10 years.

Finally, consider F&C UK Smaller Companies fund which has almost 17 per cent invested in AIM. Monthly instalments from £50 make a good way in and reduces volatility. It also qualifies for ISA inclusion.