Aim companies face near term uncertainty because of economic reasons and the possible abolition of inheritance tax (IHT) by the Conservatives or business relief by Labour, if it wins the next election. Although Aim venture capital trusts (VCTs) don’t specifically seek Aim companies which might offer IHT relief, they still might hold them because there is a good investment case for them. And if other investors divest of these companies because they no longer have IHT benefits it could depress their share prices and even the wider Aim market affecting other stocks VCTs hold.
But these concerns should not cause you to dump your Aim holdings, or to avoid Aim VCTs if you plan to invest in VCTs this tax year.
The rumoured IHT related changes might not happen so when economic and market conditions improve, Aim stocks and VCTs might perform better. Even if there are changes, after an initial hit to the Aim market investors might again put money into Aim companies which are trading well, especially if economic and market conditions improve, increasing their share prices.
Since August 2021, the FTSE AIM Index's total return has fallen around 45 per cent so selected companies could be on attractive valuations if you can ride out any short-term fluctuations. If you invest in a fund-raising by a mature Aim VCT, you have exposure to existing holdings which may be generating healthy profits. “Underlying operating performance is good but appetite for Aim shares has dropped off so it's [arguably] an attractive time [to invest],” says Nicholas Hyett, investment manager at Wealth Club.
"There's a lot of pessimism and disinterest priced in, which should provide some opportunities for those prepared to invest while this market is so unloved," adds Jason Hollands, managing director of Bestinvest." And any further downside is partially protected by the 30 per cent income tax credit available when investing in a VCT new issue. Predators [may] start snapping up companies at premiums and Aim could be a beneficiary of commitments made by pension schemes in the Mansion House Compact to allocate more to early-stage growth companies."
Valuations of Aim VCTs’ holdings are more transparent than those of VCTs which invest in unquoted companies because they are listed and priced daily. Aim VCTs can realise holdings gradually, perhaps selling portions of a holding when it has done well - rather than having to sell all of it as often necessary with an unquoted holding. This means they can continue to hold companies which are doing well and might start to pay dividends.
"For example, there are companies that we may have had for some time and have become quite significant percentages of the portfolio," explains Kate Tidbury, senior fund manager at Octopus Investments. "We can then take some profits to manage the holding size. We do this where we still feel there is capacity for a company to grow and earn us further returns in the future."
Nevertheless, only invest in Aim VCTs if you have a very high risk appetite and an especially long-term investment horizon so you wait for performance to improve.
Higher borrowing costs might feed through to the real economy impacting Aim companies' profitability. Although valuations of Aim VCTs’ holdings are up to date, there is less liquidity in this market than the main market meaning so it's not as easy to exit these as, say, FTSE 100 companies. And Aim VCTs’ holdings are listed equities so their valuations can be very volatile.
Aim VCTs are also highly restricted in terms of which companies they can buy. Their qualifying money – 80 per cent of what they raise - can only go into new Aim issues. And not all new issues qualify: for example, a company must have gross assets of less than £15mn prior to investment and £16mn post investment, and undertake a qualifying trade. So a lack of initial public offerings on this market, as in recent years, restricts Aim VCTs’ choice of investments.
There are also fewer Aim VCTs to choose from than VCTs focused on unquoted companies. The Association of Investment Companies VCT AIM Quoted sector only includes six funds and, as of 24 October, only three have an offer open - Octopus AIM VCT (OOA), Octopus AIM VCT 2 (OSEC) and Hargreave Hale AIM VCT (HHV), though the managers of these particular funds are highly experienced.
