Ask two investors what they think of the Alternative Investment Market (Aim) and there is a high chance that you will get two radically different responses.
Some will argue that London’s junior market is a stockpickers’ playground, where it is possible to make stellar returns while benefiting from a range of generous tax benefits. Others will react with alarm, citing horror stories involving corporate blowouts, fraud cases and large-scale losses. Although these views seem diametrically opposed, both are valid: that’s what makes Aim such a fascinating market.
Many investors are attracted to Aim because it contains young and dynamic companies with the potential for significant capital growth. Since it was set up in 1995, over 3,600 companies from more than 100 countries have listed on the market, including some great success stories.
Fashion retailer Asos, which has become the poster child for Aim, listed on the market in 2001. Over the past five years (to 19 March) its shares have more than tripled in value. That’s good work, and it isn’t even the top performer over the five-year period.
That accolade goes to Somero Enterprises, which makes concrete placing equipment. Its products are unlikely to get your heart racing, but its share price return of more than 1,900 per cent may well do.
However, such success stories are the exception. Since inception, the FTSE Aim All-Share index has generated an annualised return of just 0.6 per cent a year against a 5.7 per cent return from its FTSE namesake and 7.1 per cent from the FTSE Small Cap index.
Aim abounds with stories of high-profile failures such as African Minerals, Globo and Quindell, not to mention concerns over lax listing rules that some argue fail to screen out those companies with little chance of success.
Laith Khalaf, senior analyst at Hargreaves Lansdown, says: ‘You can pick up companies on Aim that are very under-researched and undervalued with exciting growth prospects. Equally, some companies have not turned a profit. Oil and gas companies listed on Aim, for example, tend to be very small and produce binary outcomes: you win or you lose.’
It is possible to make a success out of investing in Aim, but you need to tread cautiously. To give yourself at least half a chance of success, you need to understand how the market works and why so many businesses are happy to call it home.
What's Aim got to offer?
For many companies, the attractions of Aim are clear. The regulation and listing requirements are less onerous than those for companies seeking a main stock exchange listing.
Unlike a full listing, companies are not required to provide at least three years of audited statements. Nor do you need a minimum market capitalisation. Listing on Aim is also cheaper.
The government recognises the market’s value, and the vital role it can play in helping fast-growing companies to raise funds and boost employment: indeed, many companies that list on Aim qualify for the government’s tax-advantaged venture capital trust and enterprise investment schemes. Additionally, there is no stamp duty to pay on purchases as there is with mainstream shares. Aim shares can also be held within an individual savings account and can help mitigate an inheritance tax bill.
These tax benefits are there to help businesses to raise more finance. However, what is good news for companies can easily trip up investors.
The lack of trading history required before joining the market means it can be very difficult to research and assess a company’s worth. Much of the market is comprised of small, unproven companies with market capitalisations of less than £100 million, many of which are highly speculative.
Research conducted by professors Elroy Dimson and Paul Marsh at the London Business School found that investors would have lost money in 72 per cent of all the companies ever to have listed on Aim in the first 20 years of the market’s life.
Indeed, business failure is an inevitable risk when investing in small and sometimes early-stage companies. Some 105 companies left the market in 2016, with 46 delistings caused by financial stress or failure of strategy, according to business advisory firm UHY Hacker Young.
The light-touch regulation that characterises Aim can also leave investors exposed. The London Stock Exchange argues that protection is provided by nominated advisers – called nomads – who are there to police the market. Each company listed on Aim must employ a nomad, usually an investment bank or stock broker, to ensure its corporate governance is up to scratch.
However, the nomads themselves came under scrutiny in 2015 when a slew of Chinese stocks were forced to delist after nomads withdrew their support. Only a few years earlier those same nomads may have been enthusiastic supporters of the companies that later left investors high and dry. The London Stock Exchange had to step in and insist that nomads become more vigilant.
A maturing market
So, in the 21 years since Aim was launched, it clearly hasn’t all been plain sailing. Yet despite the negatives, the London Stock Exchange claims the market has been a huge success. On some measures that is true. At inception Aim hosted just 10 companies with a combined market value of £82 million. Now it is home to 973 companies. This is a big drop from a high of 1,694 listings at the end of 2007. However, the combined value of these companies is £87 billion.
As the market matures, moreover, the perception of Aim is shifting. There are now more than 70 companies with a market capitalisation of £250 million or more, dispelling the notion that this is a market solely for small and fledgling businesses. Indeed, investors can no longer assume that once companies reach a certain size they will graduate to the main market. Aim’s largest constituent Asos is valued at £4.9 billion. Moving up to the main list would put the fashion retailer in the FTSE 100.
Some companies have decided that the disadvantages of moving from Aim outweigh the benefits. Tom Selby, senior analyst at AJ Bell, says: ‘Some companies may feel that a main market listing is preferable to a quotation on Aim, if they feel they are not getting enough attention on the junior platform, that their shares are not trading in sufficient volume or their valuation relative to the peer group is suffering owing to a lower profile.
‘However, much of this will depend largely on their share structure and business model, the firm’s competitive position and its overall investment case, as the experiences of Asos, James Halstead and other longstanding Aim success stories would attest.’
Since 2000, 104 companies have moved up to the main market; but more than double that have moved from the main market onto Aim.
Of the companies that have sought a main-market listing, there have been success stories. Domino’s Pizza Group moved from Aim to the main market in 2008 to ‘attract a wider and more geographically diverse investor base’. Now, with a number of other Aim defectors, including Hiscox, Booker Group and Unite, it sits in the FTSE 250. Since it graduated, Domino’s has delivered an annualised total return of 22 per cent, according to the data company FE.
However, moving to the main market is no guarantee of success – at least from an investor’s point of view. Secure Trust Bank was the last company to make the move, in October last year, and since then its shares have lost value.
You should never invest in companies on Aim in the hope of a reward when they move to the main market, says Chris Hutchinson, director of Unicorn Asset Management, where he runs a number of Aim portfolios.
So, how do you gauge a company’s worth? Hutchinson says: ‘I look for proper businesses where we can understand what benefit the product or service has for customers. Then we ask ourselves, has it got an established track record of growing its revenues: is it profitable?’
Analysing the cash flow is also vital – is the company in a position to return excess cash to shareholders as dividends? Hutchinson is also keen that the management has a meaningful stake in the firm, as that is likely to mean it is focused on long-term growth. Finally, he avoids companies with lots of debt.
Yet, even with these guidelines, investing directly on Aim is never going to be simple. For DIY investors willing to do the legwork, there are real gems to be discovered. Just don’t forget that there are two sides to this story: for every success on Aim there are multiple failures. Are you confident you can spot the difference?
Top tips for keeping safe as an Aim investor
1) Even well-managed, cash-generative businesses are vulnerable to nasty shocks
It makes sense for most investors to access Aim through a broadly diversified fund. Hargreaves Lansdown’s Laith Khalaf recommends two smaller companies funds with exposure to Aim: Marlborough NanoCap Growthand Schroder UK Dynamic Smaller Companies.
Among investment trusts, River & Mercantile UK Micro Capis liked by Adrian Lowcock, investment director at wealth manager Architas. It looks for companies with market caps of less than £100 million, and has a strong focus on technology. Alternatively, Diverse Income, run by Miton’s Gervais Williams, is a multi-cap trust with a heavy weighting to smaller companies, including around 40 per cent Aim exposure.
2) If investing directly, be sure to study cash flow performance
Cash-generative firms may be worth investing in, while a lack of cashflow over several years could be a danger sign.
3) Don’t let the tax tail wag the investment dog
If you are not comfortable with the risks, don’t invest.
Pick of the alternative market
The five most successful
Success on the Aim market can be ephemeral. Last year’s hot stock can be this year’s dud. With that caveat at the front of our minds, what have been the ve best-performing Aim shares over the past five years (to 19 March)?
We have already been introduced to Somero Enterprises, up 1,907 per cent. What the other four stocks demonstrate is the diversity of today’s market. There’s Best of the Best (1,227 per cent), whose revenues come from displaying luxury cars as competition prizes in prime retail sites such as airport terminals. It is followed by the support services group Redde (1,030 per cent). A company involved in residential property, Sigma Capital Group (915 per cent), also makes the list, as does the oil and gas exploration company Pantheon Resources (782 per cent).
And five to watch
We asked Unicorn’s Chris Hutchinson to name five Aim stocks that should be on your radar. First comes Abcam, a producer and marketer of quality protein research tools that enable scientists to analyse cells at a molecular level. As a stock it is not cheap, but Hutchinson says it is ‘very cash-generative’.
Mattioli Woods, a provider of wealth management and employee benefit services, is another of his picks. Set up in a converted garage by chief executive Ian Mattioli and Bob Woods, who stepped down as chairman last year, it is a business that delivers on a ‘consistent basis’, says Hutchinson. Tristel manufactures infection-control products, which it sells around the world. It has a strong record of paying dividends.
A more speculative choice is Totally, which is aiming to become the leading provider of out-of-hospital care. Finally, Hutchinson offers Directa Plus as his ‘left-field’ choice. Based outside Milan, it is a manufacturer of graphene-based products used in commercial applications such as smart textiles, tyres, composite materials and pollution control.
Is crowdfunding a threat to AIM?
For entrepreneurial firms seeking cash to expand, the relative ease of listing on Aim has always been one of its big draws. However, now Aim has a challenger: one that enables businesses to raise cash more quickly and with less expense and effort.
Crowdfunding websites enable small businesses to raise funds via micro-investors – ‘the crowd’ – who all invest small amounts in the business. Some experts believe that the increasing use of crowdfunding may explain the slump in listings on Aim: in 2016 a total of 64 companies were admitted to the market, compared with 520 in 2005.
Chris Boxall at Fundamental Asset Management, an Aim investment specialist, says: ‘The large number of crowdfunding possibilities means that earlier-stage businesses can obtain funding through the crowd route far more quickly and cheaply than by venturing onto Aim, and often at valuations bordering on the ridiculous that wouldn’t be achieved through an Aim listing.’
For some companies, an Aim listing will still appear more attractive. However, the threat posed by crowdfunding is one that cannot be ignored.