Trading in AIM stocks has soared since investors have been able to hold the unquoted companies in their ISAs.
According to fund supermarket Alliance Trust, since August 5 when HMRC decreed AIM stocks could be held in an ISA, there has been a 150% increase in AIM trading on the Alliance Trust Savings platform.
Investors have favoured energy and mining stocks such as Nostra Terra Oil, W Resources and Ortac Resources, but smaller companies fund manager Gervais Williams of Miton says this is a mistake.
"Investors are choosing mining stocks because they have made them money in the past - sadly in this case I do not think history will repeat itself," he said.
Instead, Williams recommended domestically focused companies that will thrive regardless of how the economy is faring. These stocks are best invested in on a buy and hold basis taking a long term view, and - as with all AIM index investing - are only suitable for the most advanced of investors.
His three AIM stock picks are below.
Inspired Energy
Inspired Energy PLC (INSE) is a provider of energy purchasing and energy consultancy services to corporate energy users in the UK. It offers energy procurement, CRC reporting, historical audit, energy management,and renewable energy services.
Randall & Quilter
This is an insurance company, involved in insurance services. While investors are still wary of some financial stocks, such as banks, Williams says that R&Q (RQIH) is enjoying a period of growth.
"It’s probably growing at a 15% compound on a top line," he said. "It’s not far off net asset value, so very good tangible assets in the balance sheet. A decent yield looking at over a 7% yield; just a lovely business growing really well, completely wrong price in my view, again, great holding for us."
Fairpoint
Faipoint (FRP) is involved in debt management solutions for individuals, which unusually does better when the economy gets worse. This is a good hedge for investors who feel pessimistic about the UK economy.
"If we do find that the economy has a good run, but then peaks out, then it’s nice to have stocks in your portfolio which are likely to do better," said Williams. "This is a company, which is still doing pretty well. It’s on an 8.5 P/E. It’s fairly cheap. It’s got cash in the balance sheet. It’s yielding more than 5% - 5.5% to 6%, which has grown 40% in the last three years, it's a good investment."