Aim can reward targeted investing

According to the London Stock Exchange, in the past two decades more than 3,000 companies have joined Aim, raising more than £60bn in new and further capital fundraisings. But how has the market fared in performance terms?

The FTSE Aim index has delivered a total return loss of 19.34 per cent for the period from February 6 1998 to January 30 2015. In comparison, over the same period the FTSE All-Share index returned a much more impressive 139.12 per cent, and the FTSE Small Cap excluding investment trusts index delivered a significant 158.22 per cent, according to data from FE Analytics.

Richard Penny, manager of the Legal & General UK Alpha Trust, acknowledges that Aim, in aggregate, has not been a good performer, but suggests there are some good opportunities, providing investors are selective.

“One of the dynamics that has happened is that well-run enterprising and entrepreneurial businesses go to Aim these days. These are businesses that can grow their revenues and sales at a time when it is difficult to find economic growth, and a number of investors have done well from that.”

He points to technology companies as an example, noting “it is quite marked at how unexciting… the technology of the companies on the main list is. That is because some of the more interesting ones go to Aim.”

Gervais Williams, managing director of Miton Group, notes that while Aim has had some good performance – such as between June 30 2013 and February 28 2014 when the index delivered 29.83 per cent – overall “most people’s experiences of Aim have been pretty adverse”.

Mr Williams points out Aim has more speculative companies, particularly in the oil and gas and basic materials sectors, which have been badly affected in recent months as the oil price has declined.

But he adds: “It’s a wonderful recovery market because it has a lot of companies that are regular businesses selling small-ticket items, but the whole market has been dragged down, so a lot of investors are not spending a lot of time on it. I’m very bullish that some of the quality companies will come through on Aim and the market will surprise a lot of investors.”

Mr Penny suggests part of the problem for the disappointing performance has been that too many companies are floated too early onto Aim, which, combined with higher fees through continually raising capital and in some cases disappointing corporate governance, has deterred investors.

“If you have a market where investors are not making a good return, the companies are not paying a dividend, and they consume capital all the time, they will not succeed unless something is done about it,” he explains.

“For me the attraction and essence of Aim is that it is where all the exciting, smaller-growth companies go. But the stock exchange is perhaps diluting the effects of the best companies by floating too many – kind of killing the golden goose. They should perhaps regulate it a bit more with fewer companies of higher quality and then perhaps everyone would have a better time.”

Aim is also gaining interest among investors looking for tax advantages, including the fact Aim shares can sit in an Isa and are exempt from inheritance tax after two years.

Giles Hargreave, co-manager of the Marlborough UK Micro-Cap Growth fund, adds: “The strongest of the young and innovative companies listed on the junior market offer excellent long-term growth potential for investors. However, the flipside is that, like small-caps in general, Aim stocks can be volatile. There are more than 1,000 companies listed on Aim and that means new opportunities are always presenting themselves.”

It is clear there are opportunities in Aim, with some good-value businesses that, if they do well, can graduate to the main lists and open up to a wider audience.

But Mr Penny warns: “It is something that takes a lot of work and it is not for the casual investor to take their life savings and take a punt on a couple of names.”

Mr Williams adds: “Aim is still very much off people’s radars. It is not included in the FTSE All-Share index and I think it will still be a bit of a wallflower in terms of the investment world. But that is the opportunity.”

Nyree Stewart is features editor at Investment Adviser

What’s the aim of Aim?

The London Stock Exchange states that when it created Aim in June 1995 “the objective was to offer smaller companies − from any country and any industry sector − the opportunity to raise capital on a market with a pragmatic approach to regulation”.

It added: “To join Aim, companies are not required to have a particular financial track record or trading history. Aim’s balanced regulatory regime was designed specifically for smaller growing companies, offering opportunities to both companies and investors.”