Joe Cox of GE Capital Direct offers a considered response to recent changes in regulations that allow AIM shares to be included within investment ISA allowances.
On August 5th the Government relaxed the rules on AIM shares in investment ISAs, to the satisfaction of some and the consternation of others.
Reasons abound as to why opening ISAs up to the alternative investment market (AIM) is a good thing for investors. Chief amongst them is opportunity for a double tax break.
In the 2013/14 tax year the ISA allowance is £11,520, all of which can be put into an investment ISA, which will attract no capital gains tax and incur a lower tax rate on dividends. Most AIM shares fall outside the scope of ‘business property relief’, which means they don’t attract any inheritance tax, giving investors a second tax break.
The advocates of AIM also see a macroeconomic benefit from opening up ISAs to smaller companies like those listed on AIM, benefiting small cash strapped businesses that are the engine of national economic growth.
“The government has tried to push banks to lend to small companies but it has now woken up to the fact that there is a vigorous equity market [in the UK] that is looking to invest in these businesses,” says Gavin Oldham, chief executive of The Share Centre, who has been campaigning for the change for 12 years.
And he may yet be proven right. According to Pensions and Savings provider Sippdeal, since the restrictions on AIM shares were lifted on August 5th a quarter of all purchases by stocks and shares ISA savers last month were for shares listed on the alternative investment market. That’s a lot of money being invested into these small companies.
The government has tried to push banks to lend to small companies but it has now woken up to the fact that there is a vigorous equity market that is looking to invest in these businesses.
Gavin Oldham, CEO, The Share Centre
Amongst the newly buoyed sectors, British gold companies are doing particularly well rising as a whole by 20% over the last two months. Condor Gold, Amara Mining, SolGold and Red Rock Resources have all seen their share price jump over the last month, as tensions in the Middle East have led to a ‘geopolitical risk premium’ becoming factored into the price of gold.
Oil exploration companies (a decidedly risky investment by their nature) have also seen boosts over the past month with Gulf Keystone becoming the top selling AIM stock in August.
If these shares sound risky, potentially volatile even, then it’s probably because they are. And this is what underlies the inherent problem most experts have with allowing ISAs to be linked to AIM.
As an asset class, AIM shares tend to display an entirely different behaviour from their more stable and established FTSE rivals. What’s more, they have far less reporting stringency applied to them by markets.
“The risks of investing in shares are multiplied when investing in small companies, particularly those where reporting requirements are not as stringent, such as shares listed on AIM,” explains Patrick Connolly, Head of Communications at Chase de Vere.
Connolly is one of the most prominent critics but he’s certainly not alone. Despite squabbles about taking start dates in bubbles and end dates in slumps, the performance of AIM, taken over any given period of time, tends to speak for itself. Whether going up or down, the alternative investment market is a very volatile beast.
Peaking in January 2000 at 2,925, the FTSE AIM All-Share index stands today at just 761 (market value as of 5th Sept 2013). Although that start date is in a bubble it doesn’t completely detract from the fact that today’s AIM index stands at just a quarter of its value thirteen years ago. In 2008 alone, it fell by 62%.
That’s not to say AIM has been on a constant downward slide since 2000. In 2010, the market rose by 44%.
Although there are gains to be made, admits Connolly, the risk of significant losses are very high indeed.
And so it all boils down to risk at the end of the day. By opening up ISAs to shares on the alternative investment market, the Government has undoubtedly opened up a huge pool of potential investment to cash-strapped businesses struggling to secure loans from banks. But are these positive effects outweighed by the negative effects. By opening up the AIM market to ISAs, is the Government encouraging unnecessary risk taking?
It could all start to look a bit like encouraging gambling. The stakes may be higher with AIM shares but the odds are that much more stacked against you.
Of course this is a pejorative explanation. Prudent investments should be made with an understanding of the asset class being invested in and therefore the type of risk one is exposing oneself to. There is a lot to be said for including AIM shares as part of a wider investment portfolio, with smaller companies offering the kind of dynamism and growth potential you’ll never see in larger firms.
The sensible advice is – and always has been – to spread your risk over a wide investment portfolio, as well as steering clear of ‘trends’ and ‘fashionable’ investments, and always taking the time to do your research. For most investors an investment fund, which would include AIM shares in your portfolio, could well be the more prudent option.
Of course it’s always advisable to keep in mind that using your ISA allowance to invest in any stocks or shares, runs the inherent risk of returning a loss. Markets are unpredictable and even blue chip companies can go belly up. Shares inevitably go up as well as well as down; it’s just that AIM shares tend to go up a lot higher and down a lot lower, and all in a much shorter space of time.
For the more risk averse investors out there is of course a tried and tested way to get a tax break from the government and that’s to invest in one of the many cash ISAs offered by large established banks, such as GE Capital Direct.
With interest rates so low across the board, taking advantage of your £5,760 individual cash ISA allowance is, for most of us, a very attractive alternative to the heady world of investing in stocks and shares, whatever index they belong to.
About the Author: Joe Cox is a finance blogger writing on behalf of GE Capital, specialising in ISAs and other savings and investment products.