The chancellor this week announced proposals to allow ISA investors to buy AIM stocks through the tax wrapper, but experts warn this is a high-risk strategy.
Adrian Lowcock, senior investment manager at Hargreaves Lansdown, says the move is welcome, and anyone happy to take on such a large amount of risk should consider investing in the market.
However, he adds that established unit trusts that invest in the AIM are a lower-risk alternative to investing directly.
He outlined the various options available to gain access to AIM stocks.
Direct investment
Investors cannot currently buy AIM-listed stocks through an ISA. Lowcock warns anyone considering this method that it will take a significant amount of research to get right, and will involve a lot of risk.
Hargreaves Lansdown’s figures show that the average return of the 10 most popular AIM stocks bought through its platform is 90.02 per cent over five years.
However, the average loss of the same stocks in the past 12 months stands at 42.61 per cent, showing that investors need to be able to stomach high volatility.
Gulf Keystone Petroleum is the best performer over five years, returning 470 per cent, although it lost 47.56 per cent in 2007 and 48.06 per cent in 2008.
Performance of stock over 5yrs
Source: FE Analytics
Natural resources stocks have proved popular, as investors take a punt on the next big discoveries, but the wide disparity between the good and the bad results shows the importance of getting stock picks right.
"The AIM market does tend to follow trends and we have seen in recent years that commodities and mining stocks are very popular," Lowcock said.
"AIM shares can be very volatile even over a short time period so investors should be aware of the risks."
Smaller companies funds
There are a number of smaller companies funds that are run with a bias towards AIM shares, and they are already available in ISAs.
"This approach is lower risk than constructing a portfolio yourself – you get access to an expert manager who spends their time researching AIM shares," Lowcock said.
"The portfolio is also likely to be more diversified, so investors will not be relying on the performance of just a few individual shares. This approach is also likely to help keep costs under control."
"It is clear that stock selection and expert investment knowledge are essential when it comes to investing in the AIM. I prefer taking the approach of investing in a fund such as Marlborough Micro Cap or Cazenove UK Smaller Companies."
Marlborough UK Micro Cap Growth, managed by FE Alpha Manager Giles Hargreave, has 67 per cent invested in AIM shares and has returned 20.49 per cent in 2012 so far, according to data from FE Analytics.
Since launch in 2004 it has made 208.46 per cent while the FTSE AIM has lost 19.9 per cent.
The largest AIM holding in the fund is API Group.
The fund is available for a minimum initial investment of £1,000 and has a total expense ratio (TER) of 1.52 per cent.
Performance of fund vs sector since 2004
Source: FE Analytics
Cazenove UK Smaller Companies, managed by FE Alpha Manager Paul Marriage, has 35 per cent invested in AIM shares and has made 33.29 per cent in the year-to-date.
Over the past decade it is up 307.81 per cent, according to our data. The largest AIM-listed holding in the fund is Telford.
The fund is available for a minimum initial investment of £1,000 and has a total expense ratio of 1.6 per cent.
Multi-cap funds
Mainstream fund managers such as Tom Dobell of M&G Recovery occasionally identify opportunities in the AIM market, according to Lowcock.
The exposure to the market is a smaller proportion of the fund so this approach could be considered a less risky strategy, he says. Dobell currently holds around 7 per cent in AIM shares.
FE Trustnet covered the fund in some depth this morning.
VCTs
VCTs are tax-friendly funds that encourage people to put their capital to use in start-up companies, frequently those listed on the AIM.
Taxpayers receive an income tax rebate of up to 30 per cent on VCT investments, tax-free dividends and tax-free growth.
Investing in the AIM was once the mainstay of VCTs, Lowcock explains, adding that over time this market has evolved and developed, with many managers finding different ways to interpret the VCT rules.
Hargreaves Hale VCT is currently the only AIM VCT open to new investors, Lowcock says. The VCT is also managed by Giles Hargreave.