Everything you need to know before you buy Aim shares
Aim is the the LSE’s ‘entry-level’ platform, with a focus on small companies
By Kam Patel
There’s no doubt that the Alternative Investment Market (Aim) has been a huge success for the London Stock Exchange. Figuring out how well investors who buy Aim shares have done ismore complicated. But it’s well worth the effort, as it provides pointers on how to successfully gain exposure to the index.
Aim was launched on 19 June, 1995. The objective was to attract small companies from around the world who needed access to capital to support growth. The index launched with just ten constituents – all homegrown – with total market value of £82m.
By February 2015, Aim boasted nearly 1,100 companies, including 217 from outside the UK. And over the past two decades, more than 3,000 companies have joined Aim at some point, raising more than £60bn in capital between them.
As it is the LSE’s entry-level platform, with a focus on small companies, Aim is often described as the ‘junior market’. More importantly for investors, it is also often referred to as ‘lightly regulated’. That’s because the admission requirements for companies wanting to list on Aim are far less onerous than for the main market, which serves larger, more established companies such as those in the FTSE 100 or FTSE 250.
Aim has different listing requirement to the main market
It’s worth investors being aware of these differences in listing requirements, as they have an impact on the type and quality of company attracted to the two markets and by, implication, the potential risk being taken on through investing in them.
For instance, to list on the main market a company needs to declare audited financial records for at least three years and be worth at least £700,000. With Aim, there is no such trading record requirement and no minimum market capitalisation. Also, with Aim-listed companies, shareholder approval is only needed for the largest transactions, and financial disclosure and reporting requirements are generally less demanding than for the main market.
Furthermore, while the main market demands that 25% of shares must be in public hands at flotation, there is no such requirement for Aim. That means if you plump for Aim stocks with a very little liquidity (the ease with which shares can be bought or sold on the open market) you might have great difficulty selling them at a later date. That can be a big headache if the company disappoints for some reason – say it issues a profit warning – and you would like to sell quickly.
With all these potential drawbacks to investing in Aim stocks, it is not surprising that the junior market has a reputation for being risky for investors. Certainly there have been many sore disappointments over its 20-year history. Only last December, trading firm Banc De Binary revealed that 87 companies, or 8%, of the near-1,100 listed on Aim were members of “the 90% club” – companies whose shares are now worth just 10% of their peak value over the last five years.
Forget index trackers, Aim is a stock picker’s market
Yet, as one the UK’s most successful small cap investors Giles Hargreave stresses in an exclusive interview, there have been and are many good companies on Aim boasting good management, profitability and prospects.
Well-known success stories to have emerged from Aim over the years include the likes of stamp specialist Stanley Gibbons; wine retailer Majestic Wine; Domino’s Pizza (now on the main market); flooring group James Halstead; fashion retailer ASOS; and luxury handbag maker Mulberry.
So how can you benefit from these sorts of success stories? Well – much as we like them in many cases – the last thing to do is buy an index tracker fund (even if one were available). Data put together by broker Hargreaves Lansdown and Thomson Reuters for MoneyWeek show that the FTSE Aim Index, comprising all Aim stocks, has delivered a total return loss of 17% since the index launched in 1997.
By contrast, the FTSE All-Share Index, the most representative index of UK shares, reflecting nearly 1,000 companies, has returned a hearty 160% over the same period. And the total return from the FTSE 250 index since 1997 (excluding investment trusts) is even more impressive at 520%. On the same basis the FTSE Small Cap index – comprising companies outside the FTSE 350 – has generated a return of 178%.
The aggregate performance of Aim since its launch therefore can only be described as disastrous. So it’s not surprising that you won’t find investment vehicles that track the FTSE Aim All Share or Aim 100.
For investors the big draw of buying Aim shares is that they hold the potential to grow extremely quickly compared to, say, much larger companies on the main market. Get it right, and investments can double, triple, or even more in relatively short periods of time. Imagine having bought into Microsoft or Apple when they were just geeky start-up minnows.
But get it wrong and, as the members of the 90% club demonstrate, it can be painful.
But Aim shares do suit some fund managers particuarly well
For DIY investors then, the Aim’s heady mix of the good, the bad and sometimes very ugly, means it is a market that demands very careful analysis of companies, their balance sheets, quality of management and prospects, with regular reviews if chosen for portfolios. A healthy appetite for risk is an essential prerequisite.
But it is a market that seems to suit some fund managers particularly well, so it’s worth considering managed investment vehicles. Hargreave’s Marlborough UK Micro Cap Growth fund, for instance, has delivered a total return (with dividends reinvested) of 350% since it launched ten years ago. That compares to a return of 123% for the FTSE All Share; 268% for the FTSE 250; 123% for the FTSE Small Cap and a total return loss of 15.5% for the FTSE Aim Share.
Marlborough UK Micro Cap has had, on average, 60% of its portfolio exposed to Aim over its lifetime, though it has been as high as 78% and currently sits at about 70%. Aim-listed stocks among its current top ten holdings include secure payment specialist Eckoh; IT group Redcentric; pharmaceuticals firm Clinigen; healthcare minnow Cello.
Other funds worth considering if you are looking to gain exposure to Aim include Liontrust UK Smaller, managed by the high regarded duo Anthony Cross and Julian Fosh.
The UK equity unit trust is managed for long-term capital growth through investment in a portfolio of stocks from the FTSE Small Cap, FTSE Fledgling (the 200 companies outside the FTSE All Share) and Aim. Cross and Fosh like to see directors of companies they invest in owning at least 3% of the listed equity.
Over ten years the fund has returned 178% versus 130% for the benchmark UK Smaller Companies; over five years 129% versus 98%; and over one year -3% against a loss of nearly 4% for the benchmark.
Aim-listed companies amongst its top ten holdings include healthcare group EMIS; automated revenue solutions expert Craneware; wealth manager Brooks Macdonald; and IT firm Redcentric.