Three reasons to consider investing in AIM

Although companies listed on the Alternative Investment Market (AIM) are generally considered to be riskier than main market companies, not least because they are generally smaller and less rigorously regulated, there are several reasons for why you might want to consider investing in them.

First of all, various tax advantages have widened the appeal of AIM to private investors.

They may be able to avoid taxes on income from dividends, capital gains and inheritance tax, depending on what type of investment wrapper they use to access the market.

Attractive currency play

These include enterprise investment schemes (providing 30% initial income tax on the investment provided it is held for three years, capital gains tax deferral and other tax breaks) and inheritance tax plans utilising business property relief (which provides exemption from inheritance tax after two years' ownership).

Second, some AIM companies may provide an attractive currency play at the moment, because they are smaller companies with material export sales, says Chris Boxall, co-founder of Fundamental Asset Management (FAM).

Much of the cash generated by FTSE companies goes into topping up their growing pension deficitsOverseas customers are keen to buy from them because suddenly sterling is worth a lot less.

The third reason is that a good proportion of cash generated by Footsie-listed companies is redirected into topping up their growing pension deficits, as opposed to reinvestment in the business, according to FAM.

A growing problem for many mature businesses on the main market is the requirement to support an increasing historical pension deficit.

Interest rates, gilt yields and corporate bond yields have fallen materially in the UK; these are key factors in determining the rate used to discount corporate pension liabilities, so low rates result in a significant increase in the value of pension deficits.

Pension funding

Chris Boxall, co-founder of FAM, says: "While there are mature businesses on AIM who have pension deficits, it's much more of a rarity for an AIM business to have a pension deficit. AIM is largely made up of more youthful enterprises that aren't weighed down by the baggage of history."

Flooring manufacturer James Halstead and soft drinks group Nichols are two examples. While both have pension deficits, they are also cash-rich and can easily support their pension funding requirement without impacting their dividend.

'The disappointment is AIM companies are attracting takeovers'Other examples include Pressure Technologies, which operates in the oil and gas arena. While the low oil price has been a significant challenge, this company hasn't had to contend with the additional cash demands of a pension deficit, explains Boxall.

Fulcrum Utility Services, which used to be part of National Grid and provides unregulated gas connection services to the residential, commercial and industrial markets in the UK, is another example.

Cash generated from installations are used to build their estate of owned pipeline assets, instead of propping up a pension deficit.

The disappointment is AIM companies are attracting takeovers, says Boxall. He believes that if investors hold onto shares for two to three years or longer, they'll do substantially better than by simply targeting potential takeovers. It's "better to be patient and be rewarded in multiples".

This article was originally published by our sister magazine Money Observer here

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.