OpinionAug 11 2015

Aim should be celebrated not derided

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Aim should be celebrated not derided
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It is now two years since the government permitted the inclusion of Aim-listed companies in Isas.

The Alternative Investment Market is easily the world’s most successful market for fast-growing smaller companies.

Since its introduction in 1995, the junior market for the London Stock Exchange has hosted more than 3,600 companies plying their trade in more than 100 countries and operating across 40 different sectors.

The economic contribution of Aim, which features companies with a combined market capitalisation of more than £70bn, shouldn’t be underestimated either.

In 2013 Aim-listed companies made a direct economic contribution of £14.7bn to UK GDP, and were responsible for creating 430,000 jobs in the same year.

It also swelled the coffers of the exchequer in 2013 with tax contributions of £2.3bn.

The indirect impact of Aim - for example benefits to suppliers and employees spending wages - shows total economic contribution of £25bn of GDP, including indirect employment of over 730,000 people.

This is more than the UK’s aeronautical or pharmaceutical industries.

At a time when the FTSE 100 is dominated by international companies (and is therefore a poor indicator of the fortunes of UK PLC) Aim could arguably be viewed as the City of London’s greatest success story.

Yet Aim’s 20th birthday in June disappointingly brought with it some criticism of the market along with the celebrations.

In other countries, many of which have failed to establish a market for smaller companies, Aim is envied as a great source of long-term finance for innovative, aspirational companies requiring capital to reach their full potential.

Back home, however, the highly laudable objectives of Aim are frequently misunderstood, and June’s 20th anniversary gave many journalists and market commentators the opportunity to deliver some predictably mixed reviews, based purely on aggregate performance.

To rush to its defence, Aim has, over the years remained true to its founding principles: accessibility for ambitious growth companies, open to investors of every kind, a regulatory approach that recognises the needs and capacities of growth companies, and a market open to learning and evolution.

From an investment perspective, it has been characterised as a rollercoaster of a market, dominated by extreme highs and lows from individual companies.

For every high-flyer such as clothing retailer Asos, which since listing has seen its share price increase more than 1,000 per cent, critics can point to a number of companies that have gone bust.

But Aim was never meant to be risk free.

Moreover, concentrating on the extremes, or focusing on the returns of the market in total, fails to offer a meaningful analysis of Aim’s achievements over the past two decades.

I would argue that the key to understanding Aim is not to think of it as one homogenous market, where all the members share the same high growth characteristics.

Instead, it needs to be considered as a stable of highly individual companies, with their own distinctions and virtues.

The real challenge, therefore, rests in finding the better performers capable of achieving long-term returns.

Some investors may choose to access Aim through direct investments, but the necessary due diligence requires time, resources and experience.

Investing via a dedicated Aim-focused fund is likely to alleviate some of these concerns, while potentially also increasing the diversification benefits to investors.

Active management generates most value when an asset class is inefficiently priced.

This is certainly the case with smaller companies where a lack of research and market coverage creates pricing inefficiencies.

These pricing inefficiencies are typically exacerbated following a period of volatility. Expertise and focus in smaller company Aim-listed shares therefore creates the opportunity for significant outperformance.

It is certainly not the ideal place for passive investing or index-tracking funds, but again, it was never really intended for that purpose.

Because of its star performers, and also its failures, Aim is always likely to attract bouquets and brickbats in equal measure.

Recently we’ve witnessed larger, more established, growth companies choose Aim over the official list of the London Stock Exchange.

For those investors prepared to accept the risks in pursuit of the returns, the way to approach Aim is to recognise that it requires patience, a willingness to take the rough with the smooth and a long-term investment horizon.

Fortunately, a number of Aim stocks offer tax incentives designed to encourage investors with the necessary fortitude over the longer term.

Richard Power is head of smaller companies at Octopus