Just before they were shown the door, the Labour government was actually threatening to do something useful. This was to review the issue of whether shares listed on the Alternative Investment Market (AIM) should be eligible for inclusion in tax-free Individual Savings Accounts (ISAs).
Other Small cap news...
ITM shares jump 40% with news of new US deal
ITM shares jump 40% with news of new US deal
- ITM Power (ticker: ITM) jumps on news that it has been awarded a new $81,000 sub-contract.
- The deal has been agreed with the US company NextEnergy and is for the design of an alpha prototype Small-scale Hydrogen Fuelling Appliance.
- ITM shares have ticked up as high as 40%, to 31.5p, since yesterday.
- ITM shares have ticked up as high as 40%, to 31.5p, since yesterday.
Whether the new administration will pursue this issue remains to be seen. The coalition members may still be asking themselves this very question.
But since we are in an era of cost-cutting and do not want civil servants sitting around in endless committee meetings, let me provide a simple answer. Yes they should!
All AIM shares (and not only those that currently qualify through the back-door of a parallel overseas listing) should be eligible for ISAs. And I will tell you why…
Why you should be free to include all AIM shares in your ISA
The purpose of ISAs is to encourage people to save. Given that the looming pension funding shortfall dwarfs that of any previous financial crisis, the importance of this cannot be exaggerated.
People need to save regularly and for the long term. In the latter respect, an ISA has one good feature.
Once you have made your annual ISA contribution (to a maximum this year of £10,200), your money is beyond the reach of the taxman – indeed you need not even declare it on your tax return. But if you take your money out of your ISA it immediately becomes taxable again. This acts as a strong incentive to keep it there.
But where successive governments have got in a real muddle is over the nature of eligible investments within ISAs. They hate the idea that Mr Joe Public, having been persuaded of the merits of the ISA, will then lose his money.
So people are encouraged to invest in bank deposit accounts, despite the derisory interest rates on offer. And they are denied the opportunity to invest their money in the very asset class that is most likely to deliver them a good return over the long term – for which the ISA is designed.
How penny shares have outdone the bluechips on long-term gains
This asset class is small companies. In my book, How to Make Big Money in the Exciting World of Penny Shares, I quote the calculations of Professor Elroy Dimson and his colleague Professor Paul Marsh of the London Business School.
Over the last 55 years, they say, an investment of £1,000 in the average small company would have grown to be worth £2.6m. That is a return of about 17% per year. But £1,000 invested in the average large company would have become worth just £0.5m. That is a return of just 7.4% per year.
This is a huge difference and the clearest possible evidence that long-term savers should be encouraged to invest in small company shares.
Instead – thanks to a rule that makes AIM-quoted shares ineligible for ISAs – we are denied the opportunity to invest in such shares. This does not make sense. What governments seem incapable of seeing is that they would not only make a difference to our own financial health, but also to the state’s onerous duty to look after retired people.
When this rule was introduced there were a fair number of small companies that had their shares traded on the Main List of the London Stock Exchange – and thus were eligible for ISAs. But over the years most small companies have chosen to move to the low-cost Alternative Investment Market (AIM), thus rendering themselves ineligible.
This crazy rule misses two key points. The first is that just because a company is small it does not necessarily mean that it is risky.
There are several small AIM-listed companies that have sound balance sheets, are profitable, pay dividends, have been around for years and show every sign of being around for plenty more – James Halstead (ticker: JHD) and RWS Holdings (ticker: RWS) to name but two.
But these clearly sound investments are off-limits to ISA investors. Instead they have been permitted to invest in the likes of Royal Bank of Scotland and British Airways. These, despite all their talk about Risk Management and Corporate Governance, are basically corporate basket cases that no sane investor would touch with a barge-pole.
The other point is that the government needs to understand is that there is a trade-off between risk and reward.
Allow people to back small companies and some of them may, indeed, turn sour. But, as long as they spread their money over a few different companies, they are far more likely to make money over time than by investing in the ex-growth giants of the All-Share Index.
What is more, they can provide a useful source of finance for hard-pressed small businesses – the very sort that the government should be doing everything possible to support.
It’s great to know we’re on the same wavelength
It’s been great to receive such kind feedback lately about Penny Sleuth. Some readers raved about penny shares I’ve written about. Others thanked me for flagging up new investment strategies they’ve not come across before.
That’s great. Because it means I’m hitting two goals I set out to achieve. The first is to bring you insights and ideas on the penny share market. I live and breathe this market. And I love to share my experience with someone who is as excited by it as I am.
And my second goal is to pass on ideas I think can help you, from people I trust. Investing is such a huge area and my expertise is in a very small niche of it. So if someone I trust has an interesting idea that could make you money, I’ll let you know. I hope that you’ll also let me know if you have any interesting ideas.
So, thank you if you’ve written in recently about Penny Sleuth. I always knew we had something good going here, but it’s nice to get confirmation that we’re on the same wavelength. And if you have anything you’d like to add, or have any ideas or suggestions, please do get in touch.
Good investing,
All the best,
Tom Bulford
For The Penny Sleuth
P.P.S. If you want to follow the insights of a small company investor, and uncover the hidden gems of the stock market, find out more about The Penny Sleuth by clicking here.
