What do the following have in common: metatarsally challenged footballing wonderkid Wayne Rooney, two-time-Ashes-winning spin bowler Phil Edmonds, one-time Greek oil explorer Frank Timis, and ‘Brian Cohen’, the eponymous hero of The Life of Brian? Is it that they are not messiahs, but in fact rather naughty boys; or that they are all regarded favourably by Gordon Brown; or that you can invest in them all via the London Stock Exchange?
This is, of course, a trick question. The answer is, implausibly enough, all of the above, because they all represent controversial but strangely tax-efficient investment opportunities on London’s junior stock market. Welcome to the colourful world of Aim.
Aim, or the Alternative Investment Market, was set up in 1995 as an exchange on which shares in small companies could be issued and traded. It offered a lower-cost and less heavily regulated alternative to the ‘official list’ of the London Stock Exchange, hence the semantic distinction between fully ‘listed’ and Aim ‘traded’ companies. So it’s not surprising that more than 1,400 companies have since issued shares on Aim, raising more than £11 billion in the process. But with lower costs and less regulation have come, well …all-comers. Hence the unlikely, sometimes messianic and occasionally naughty characters that now inhabit Aim.
Wayne Rooney’s management company, Formation, floated on Aim in 2001 — but was tripped up earlier this year by reports of the player’s unpaid gambling debts and his agent’s possible Football Association ban. Mr Edmonds’s oil company, White Nile, saw its shares rise from 10p to 138p in their first week of trading on Aim last year — only to get bogged down in a drilling deal with the Sudanese People’s Liberation Movement in southern Sudan that ignored a rival company’s existing deal with the other Sudanese government sitting in Khartoum, which claimed to hold sway over oil rights throughout the war-torn country.
Mr Timis’s oil company, Regal Petroleum, also saw its shares rise, from 120p to 509p in a matter of weeks in 2004, but then fall from grace to 35p in February 2005, not because of his previous convictions as a heroin dealer, but because of his feigned conviction in talking up a worthless Greek asset, and his attempt to flog the company without telling fellow directors. Even HandMade Films, the production company behind the fictional Brian Cohen, moved in a mysterious way on to Aim this week through a reverse takeover of a film-library business, despite the fact that the 1979 film of Brian’s life was deemed so blasphemous that it couldn’t be shown in Jersey until 2001.
In many ways, these four characters and their companies encapsulate the multifarious risks of investing in Aim companies. What they don’t capture, though, is the genuine investment potential, improved standards of scrutiny, favourable tax treatment and mainstream acceptability of the other companies traded there.
Despite headlines focusing on the more speculative companies coming to Aim — the past weeks have seen a Russian oil and gas investor, a Chinese software developer, and an Israeli telecoms group announce share issues — the vast majority of Aim shares are in small, fast-growing UK companies. This home-grown potential has been plain to see, too. Even after the recent stock-market correction, the top ten risers on Aim in the past 12 months have produced returns of over 200 per cent. Five were plays on the mining boom, but the others were established businesses in growth sectors, including the building contractor Speymill (up 685 per cent), the pharmaceuticals group Henderson Morley (414 per cent) and the property developer Northacre (285 per cent).
Returns like these are not a flash in the gold prospector’s pan, either. Research by the London Business School shows that shares in the smallest 10 per cent of Aim-traded and fully-listed companies, as measured by the Hoare Govett Smaller Companies Index (HGSC), have significantly outperformed the FTSE All Share Index. From the beginning of the bull market in March 2003 to the end of December 2005, the HGSC produced a total return of 168 per cent, against the All-Share’s 97 per cent. From the start of 1955 to the end of 2005, a period of bull and bear markets, the HGSC’s outperformance is even more marked, having produced an annualised return of 16.4 per cent, against the All-Share’s 12.9 per cent. In other words, had Aim been in existence in 1955 and you’d invested £1,000 in the smallest 10 per cent of companies, you’d now have an investment worth £2.3 million.
Aim is also increasing the scrutiny of the companies that trade on it, while maintaining the attraction of low regulatory costs. According to broker Canaccord Adams, it is still 60 per cent cheaper for a company to float on Aim than on its US equivalent, Nasdaq. But every Aim company must now have a nominated adviser with corporate governance expertise to check its documents and announcements. And, following speculative rises in the shares of natural resources companies, new guidelines have been drafted to ensure that all information is vetted by a qualified person, such as a geologist. As one analyst at Hargreave Hale puts it: ‘Anything that tightens up what companies say is a good thing.’
What Gordon Brown and HM Revenue & Customs (HMRC) say about Aim companies is even better, though. As the companies are not on the ‘official list’, they are deemed to be ‘unlisted’ for tax purposes. So as long as they are trading companies — that is, doing something other than investing, property dealing, or offering financial services — they qualify as business assets. This means that even private investors get tax breaks. After one year, only 50 per cent of any gain on qualifying Aim shareholdings is taxable. After two years, only 25 per cent of the gain is taxable. So a 40 per cent taxpayer holding Aim shares for two years pays only 10 per cent tax on the profit.
And it gets even better. New issues of Aim shares under the Enterprise Investment Scheme (EIS) qualify for upfront 20 per cent income tax relief, and become free of capital gains tax after three years. Capital gains tax is deferred if previous gains are reinvested in Aim shares under the EIS. After two years, qualifying Aim shareholdings become exempt from inheritance tax.
What HMRC will not say — with typically bureaucratic obfuscation — is precisely which Aim companies qualify, so investors need to take advice on this. But what Gordon Brown has said — in uncharacteristically lenient legislation — is that the tax breaks are still available to everyone.
Finally, Aim is not only about relatively obscure small companies. Since 1995 it has also attracted large household names such as Monsoon (market capitalisation £672 million), Domino’s Pizza and Majestic Wine, plus another 190 companies from the Stock Exchange’s official list. Last year saw its largest flotation — fund management group New Star (£1.2 billion) — whose shares were among the highest risers in the following six months. It is potential like this that makes one fund manager, Stuart Harris, invest a quarter of his Credit Suisse Smaller Companies fund in Aim shares, and leads him to conclude, ‘There are many high-quality companies on Aim with no plans to move.’ So with this potential and those tax breaks, there are plenty of reasons for private investors to look, like Brian, on the bright side of life.
Matthew Vincent is editor of Investors Chronicle.