Does it still make sense to invest in AIM 30 years on?​

The world was a very different place when London’s Alternative Investment Market (AIM) launched during June, 1995. Perhaps, then, it should be no surprise that three decades on there are legitimate questions over its future viability and its suitability as an investment proposition.

Originally conceived as a sub-market of the London Stock Exchange, AIM’s main purpose was to provide smaller, potentially high-growth companies with access to capital without the cost and regulatory requirements attached to listing on the main market. Later, AIM shares were given 100% exemption from inheritance tax (IHT) provided they were held for two years, in a bid to incentivise investors.

But, it is difficult to say AIM has been a massive success on either front – particularly with the IHT relief being reduced to 50% from April next year. While the likes of Ladbrokes owner Entain have graduated to the main market over the years, the number of companies doing likewise has been diminishing. And AIM itself has been shrinking – the index had nearly 1,700 constituents at its peak, but today that has fewer than 700.

AIM was conceived as a sub-market of the London Stock Exchange (Picture: Henry Nicholls/AFP via Getty Images)

From an investment perspective, returns have also been poor – the FTSE AIM 100 sits far below its 2007 and 2021 peaks, and has delivered paltry returns over most timeframes. This has all but negated the IHT benefits offered to investors – in the majority of cases, you would have been better off investing elsewhere for a better return and paying any IHT due.

Part of the reason for these performance issues is the profile of the companies on AIM. Their size has meant that trading isn’t necessarily daily, leading to liquidity issues and the lower barrier to entry inevitably makes them riskier investments – in turn, rendering many unsuitable for the average investor and even less so for those in later life.

Equally, investing in AIM means taking a highly concentrated bet on the UK. Combined, all UK indices account for just 3% of the global market – and the FTSE All Share represents that vast majority of that figure.

While small-cap companies have tended to outperform their larger peers over the long term, there are other fund and ETF options which can provide that type of exposure without the risks that come with AIM – whether specifically in the UK or globally. Even the FTSE Small Cap could prove a more suitable choice, with superior historical returns – although these are no guide to future performance – and more diligence over the companies of which it comprises.

There are more sustainable alternatives to AIM, says Adrian Murphy

For investors with an eye on passing down wealth, capital preservation and income should be front of mind. And there are businesses that invest in infrastructure, renewable energy, and smart metering that may not have the allure of fast-growing companies, but have similar tax advantages and provide stable levels of income without the downside risk.

If you’re investing with IHT in mind, there are more sustainable alternatives to AIM. Weigh up your options and remember that the tax tail shouldn’t wave the investment dog – don’t let the opportunity to reduce a tax bill sway you away from a more suitable choice for your circumstances, which would ultimately more than likely deliver better post-tax returns in the long term.

Adrian Murphy, CEO of Murphy Wealth