AIM: a market of myths and opportunity
Smaller company investment can certainly involve greater volatility of returns and also liquidity constraints (i.e. it can take time to sell a position) when compared to larger, blue-chip stocks.
Other risks you should be aware of can include lower levels of experience among the management teams of some smaller companies, and the more opaque nature of the market (as smaller stocks tend to be followed by fewer analysts).
Not an investment risk, but a potential threat for any investor considering AIM for its inheritance tax planning potential is the possibility that the government removes AIM stocks’ qualification for business relief (which provides the inheritance tax exemption).
However for those already comfortable with the usual fluctuations of mainstream equity portfolios, AIM is worth exploring…
The reality behind the myths
AIM, created in 1995, currently has 947 companies listed with a combined market value of £103bn (as at March 2018). These range across all types of sectors, giving investors the opportunity to be markedly well diversified.
The investment case for AIM is compelling for a number of reasons: it provides strong diversification from the traditional ‘large-cap’ portfolio; the investments provide global exposure despite being UK domiciled; there is better access to companies’ management teams; and many companies have a good track record of paying (and increasing) dividends.
In addition, the market is under-researched, providing opportunities to invest at an early stage of a company’s development. As a result, we have seen historic outperformance of smaller companies over time.
Nonetheless, there are many misconceptions about investing in AIM. Given its diverse opportunities, we think it is important to challenge these myths.
Myth 1: Is AIM too UK-centric?
As AIM is designed for listing smaller companies in the UK, it is often thought the investments are exposed purely to the UK economy. However, while the stocks may be listed in the UK, many have operations and revenues from overseas, providing attractive diversity within AIM portfolios.
Indeed, it may come as a surprise that around half of revenues generated by AIM companies are from overseas, which is slightly higher than the FTSE 250. For example, the well-known premium mixer company Fever-Tree generated c.50% of its revenues from overseas this year and this is expected to expand as the group builds out its operations in the US.
Myth 2: Small companies… but how small?
AIM is the place for smaller companies to float and there are currently 947 companies listed. However, some of these are not so small: their market capitalisations range from less than £1m up to over £5bn, and there are currently 12 AIM companies with market capitalisations over £1bn. As at the end of March the average market capitalisation in the AIM index reached £109m.
ASOS, the online fashion retailer and the largest listed AIM stock, has a market cap larger than some companies listed on the FTSE 100 and 250, for example high-street retailer Marks and Spencer’s.
Myth 3: An ‘inefficient’ market… a threat, or an opportunity?
AIM is under-researched and therefore deemed an inefficient market according to Modern Portfolio Theory. However, we see this as an opportunity to discover less well-known stocks trading on discounts to their larger peers.
Unlike the majority of the companies listed on the main market that may be covered by 10 or more analysts, many AIM companies only have one analyst researching them. This provides portfolio managers with the opportunity to analyse AIM stocks and draw conclusions that other investors may not see, giving the potential for significant upside where others may not realise.
Accessing a stream of new opportunities
Under current legislation, some AIM-quoted securities qualify for ‘business relief’, with the result that they are fully-exempt from inheritance tax when held for two years. Despite the undoubted appeal of this status, it is secondary to the importance of a stock’s underlying investment potential, and a steady flow of exciting companies continue to choose to float on AIM. In 2017 there were 80 new issues coming to the market, raising over £1.5bn.
Edward Campbell-Johnston is partner and head of AIM portfolio service and Charlotte Nisbet is senior investment manager at Sarasin & Partners