Ignore AIM at your peril! Investing in AIM has delivered superior returns to the FTSE 100

AIM is often seen as a slightly maverick relation of the more traditional main market of the London Stock Exchange. But some savvy investors have enjoyed stellar annual gains of over 200% in the last five years. If you’re wondering how to invest your stocks and shares ISA for this tax year, AIM might well be worth a look.

It’s also managed to weather the challenge of the pandemic. According to Nicholas Hyett, Investment Analyst at Wealth Club, “The AIM 100 index is now some way above where it started 2020, actually performing better than the FTSE 100.”

Here, I explain what you need to know about investing in AIM and look at some of the top-performing shares.

[top_pitch]

How does AIM work?

AIM – or the Alternative Investment Market, to use its full name – is a sub-market of the London Stock Exchange, along with the better-known ‘main market’. AIM enables smaller companies to raise capital through a public listing while benefitting from greater regulatory flexibility than the main market.

Nicholas Hyett from Wealth Club describes AIM’s reputation as being “the Wild West of the UK stock market”. He attributes this to “small oil and gas and mining companies” historically using AIM “to raise money for giant holes in the ground on the off chance they struck it lucky.”

However, times have changed. Wealth Club reports that natural resources, financial and property businesses have declined in significance. While technology, healthcare and consumer businesses now account for 45% of the market.

It’s also expanded in size. Hyett reports that 30 £1 billion-plus companies were listed on AIM in 2021, compared to only three in 2015.

Who’s listed on AIM?

You might be surprised by some of the companies listed on AIM. Household names include Jet2 (£2.7 billion), Fevertree Drinks (£2.1 billion), YouGov (£1.4 billion) and Boohoo (£1 billion). And ASOS has just moved to the main market after 20 years on AIM.

Despite their size, some of the largest companies are still delivering high growth. According to Nicholas Hyett, seven of the non-property ‘AIM giants’ achieved average revenue growth of over 30% in 2021.

Who are the top performers on AIM?

Hargreaves Lansdown reports that these companies delivered the highest share price growth to investors:

According to a report by IG, AIM attracts “risk hungry investors” as although “the risk may be higher, there can also be much higher rewards”. While a survey by Interactive Investor showed that the AIM index had over three times as many investors aged 30-44 as in the 45-75 age group.

IG also analysed the post-IPO performance of shares of companies on AIM and the main market. The AIM companies consistently delivered a higher share price growth in the month after an IPO.

What are the tax benefits?

There are some possible tax advantages of investing in AIM companies:

• Inheritance tax relief: according to the investment team at Barclays, “most AIM stocks are exempt from inheritance tax provided they’ve been held for more than two years.”
• Income tax and capital gains tax relief: this may apply to some AIM shares through the Enterprise Investment Scheme and Venture Capital Trusts.

However, it’s important to remember that tax rules are complex, and it may be wise to seek independent advice before making any decisions.

[middle_pitch]

How can you invest in AIM companies?

Investors have been able to hold AIM shares in their stocks and shares ISAs since 2014. 

As with investing in shares on the main market, there are two main ways to hold them in your ISA:

• Buying shares directly, as with main market shares
• Investing in small-cap ETFs (exchange-traded funds) that hold AIM companies, such as the iShares MSCI UK Small Cap UCITS ETF

To save you time and money, we’ve produced a guide to our top-rated stocks and shares ISA providers. Or, if you’re looking to buy AIM shares outside your ISA, take a look at our top-rated share dealing accounts.

The final word goes to Harry Nimmo, manager of the Standard Life UK Smaller Companies investment trust. He says “AIM is the envy of the world in terms of its depth and scale. But it will take many years for some of the outdated, preconceived notions of AIM as a dangerous market to be overtaken by the new reality.”

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.