When chancellor George Osborne pointedly axed the stamp duty on alternative investment market stocks this spring, he added yet another carrot to an already tantalising stick.
Now free of this 0.5 per cent charge on trades of over £1,000, besides existing inheritance tax exclusions and Isa permissions, Aim stocks have naturally returned to the limelight.
With a reputation for limited company research and a proliferation of maverick chaff amid the wheat, Aim investing can seem an unnerving prospect. But as with most reputations, this one is part earned, part myth. Indeed, Aim-listed companies are incredibly diverse, stemming from a huge range of sectors.
Diversity
This broad base and inherent diversity – set beside the lesser-known status of its listings – can make the junior market both an intriguing and nerve-wracking place to invest.
But, in reality, as a junior market to the main London Stock Exchange, the Aim is neither new nor particularly radical. Now in its twentieth year, it has raised close to £24bn for over 3000 small and medium-sized enterprises. The companies listed here often arrive from high-growth areas such as green technology and biotechnology, but the market does represent a broad spectrum of industries.
Drawn by the submarket’s lesser regulation, absence of capital requirements and prospects for unlimited share issuance, Aim-listed SMEs are looking to raise capital to support their growth. In part to encourage this investment, Aim companies often offer better access to management teams, allowing investor and company goals to be closely aligned. By extension, these teams can also prove more dynamic, entrepreneurial and incentivised than their senior LSE counterparts. Overall, the purpose of Mr Osborne’s encouragement to investors seems a relatively simple one: invest today in the smaller companies that could be tomorrow’s economic giants.
Collectively smaller and riskier than their senior counterparts though they may be, it is important to note that the Aim is not composed of start-up companies. In fact, the Aim boasts a rather unexpected number of household names. From Italian restaurant chain Prezzo to online retail giant Asos, and from British potters Portmeirion to the masters of the mixed case, Majestic Wine, some of the so-called junior market’s flagship participants might surprise potential investors.
However, while there is some movement down from the main LSE to the Aim, the general goal for Aim companies is to grow and graduate from the submarket.
In this sense, not only can investing in Aim stocks provide a useful diversifier within a wider portfolio (as they are unlikely to overlap with more mainstream portfolio investments), it can also offer an early entry point into some compelling long-term investments.
It is therefore important to remember that some of the best investment opportunities may lie among less recognisable Aim-listed companies. Indeed, beyond the sprinkling of household names, Aim stocks also include a series of lesser-known but strikingly hard-hitting businesses.
Crucially, this is an under-researched market, creating significant potential for capable investment managers. In particular, a focus on finding those companies offering high-quality service and a sustainable competitive advantage, a robust balance sheet and a convincing management team is likely to lead to the submarket’s most compelling opportunities.
DX Group, for example, joined the Aim index relatively recently, as a new issue floated in February 2014. A UK and Ireland independent courier and logistics network operator, the company provides next day delivery services (business and residential) nationwide.
This is not an obscure or miniature investment story: DX Group delivered over 170m items in 2013. A major beneficiary of increasing demand from online retail, the group is second only to the Post Office as the UK’s largest operator in the field. The group’s new management is working hard to streamline the cost base of the business in a highly cash generative business, indicating a dividend of 6p for the coming year alongside a stock yield of around 5 per cent (at the current price of 120p).
Meanwhile, one of the largest companies listed on Aim (by market capitalisation) is James Halstead, a largely family-owned manufacturing firm based in Manchester. While its main business – industrial floor coverings – may not immediately set pulses racing, a recent market cap value of around £550m, high cash generation and a regular special dividend (in addition to a regular 3 per cent dividend yield) is impressive. The company’s long-term story is one of conservative and prudent management, with clients across the world and brands used extensively in hospitals, schools and commercial premises.
These are just two examples among over 1000 companies listed on a submarket that includes everything from international advertising agencies to innovative recruitment firms, from palm oil producers to potash exploration.
Effectively hidden in plain sight, Aim-listed businesses clearly offer exciting opportunities for savvy investors. And while no opportunity comes without risk, combining a deep understanding of the Aim space, in-depth stock analysis and wider market research can provide a route to the potential long-term winners within this diverse marketplace.
Christopher Pease and Edward Campbell-Johnston are Aim portfolio managers of City firm Sarasin & Partners
Key Points
Free of the 0.5 per cent charge on trades of over £1000, besides existing inheritance tax exclusions and Isa permissions, Aim stocks have returned to the limelight.
Aim-listed SMEs are looking to raise capital to support their growth.
the general goal for Aim companies is to grow and graduate from the submarket.
