Investors currently have to pay stamp duty worth 0.5 per cent of the amount they pay for a share to the taxman each time they purchase a stock.
From 1 April this duty will no longer be payable on shares listed on AIM, in an attempt to boost the market which is home to many entrepreneurial, fast-growing companies.
This means that investors who hold AIM shares in an ISA will no longer have to pay capital gains tax, income tax, inheritance tax or stamp duty.
AIM shares surged after investors were allowed to put them in ISAs last August, and receive the CGT and income tax benefits, with the market outperforming even the flying small-cap index.
Performance of indices since Aug 2013
Source: FE Analytics
UK smaller companies funds have moved heavily into the AIM market during the period, with the top-performing funds in the sector overweight AIM.
Gervais Williams and Martin Turner’s £87.4m CF Miton UK Smaller Companies fund leads the sector over one year with returns of 65.42 per cent, boosted by a weighting of 68.6 per cent in AIM.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
Martin Turner (pictured), says that the change to stamp duty itself may not be hugely significant to investors but it will serve to raise the profile of the market further.
“We definitely saw the ISA boost,” he said. “Although removing stamp duty is helpful, whether it’s something that will cause someone to buy I don’t know. It’s a nice to have.” “For investors increasing the ISA limits is probably the more important issue. I think probably more significant is the package of measures together.”
“I think people are probably aware of stamp duty but it hasn’t prevented people from investing in the past.”
Turner says that the advantage for stock-picking managers on AIM is that so many companies are barely covered by institutional research.
This means there is greater opportunity for investors to spot something that has been overlooked and generate “alpha”.
In fact, that market is probably covered more by retail friendly sources such as magazines and internet forums rather than by institutions, he says. However, the challenge for retail investors is getting the information that professional fund managers can through their access to management.
“There are thousands of companies on AIM, so I suspect this is where it is hard for the institutions to keep up to date, so imagine what it’s like for retail investors,” he said.
“Coming back to fundamentals the companies have to communicate well with investors so they understand what they are doing.”
The manager says that the increase in the ISA limit from £11,250 to £15,000 should stimulate further demand in the UK market among retail investors.
He says that this and the tax breaks are likely to benefit the UK economy as a whole by giving fast-growing businesses greater attention.
“Our position is that smaller companies are the life blood of the economy and levelling the playing field is a good thing to do,” he said.
“AIM had a bad reputation for speculative companies and it can improve its reputation. We have seen that in the recent past some of that has been the mining sector being out of favour.”
One major issue with investing in AIM is that stocks can be extremely volatile. With smaller companies in particular this can be a function of low liquidity meaning that investors have to pay a premium to sell if stock price falls sharply, with less support from institutional buyers.
However, the larger and more liquid stocks can also suffer sharp falls, which has been observed in recent weeks.
Quindell Portfolio, one of the largest stocks on the market, is 20 per cent down from its peak in late February.
However, such is the strength of its growth that it is still up 78.85 per cent this year alone.
Performance of stock in 2014
Source: FE Analytics
ASOS, another of the largest stocks on the market, is down 27 per cent since announcing its latest results last month which reported slightly lower sales growth.
Paul Mumford, manager of the Cavendish AIM fund, warned investors off the largest stocks on AIM in a recent FE Trustnet article.
However, some managers warn that the sharp rises in smaller companies, including those on AIM, is a typical event at this point of the business cycle when economic confidence has returned.
If this is so then buying in at this time you could be risking missing out on the period of best growth and being in the saddle just in time for the market to turn and sharp falls in growth stocks bid up to high P/Es could become more frequent.
Tax breaks and UK economic confidence look like meaning this surging market is set to continue for some while longer, however.
