How AIM is a stockpicker’s market
The Alternative Investment Market (AIM) is one of those markets that divide opinion. Many private investors believe in the high growth investment opportunities to be found on AIM and appreciate the generous tax benefits available from investing in such stocks.
However, the majority of investors still avoid AIM because of the all too regular horror stories surrounding individual company failures and the pretty abysmal headline performance of the AIM Index over the past 20 years.
So which is right?
The short answer is both views have valid points.
The poor performance of AIM is well documented. Since inception in 1995 the AIM Index has returned -1.6% on an annualised basis; hardly stellar returns. Then there are the stories of high profile failures like Quindell and African Minerals, as well as concerns over the lack of regulatory oversight within the market.
It is true that the regulation and listing requirements for companies seeking a listing on AIM is less onerous than those for companies seeking a main stock exchange listing. For instance, unlike a full listing companies are not required to produce financial records for at least the past three years nor do they need a minimum market capitalisation amongst other things.
But there is a far more positive side to the AIM story that deserves to be heard too. Part of the rationale behind the less onerous regulatory framework was to create a more flexible environment in which smaller, less mature companies could raise capital. Since its launch over 20 years ago the AIM market has helped over 3,500 companies to raise capital through listing on the index. Whilst many other junior markets have failed, AIM has continued to grow from representing just 10 companies at inception to over 1,100 today.
AIM continues to be supported by the UK government, in that it clearly recognises the stimulus AIM provides in employment creation and capital funding.
As a result, tax benefits remain attractive to private investors. Despite recent European Union imposed legislation; certain constituents of the Index still qualify for the government’s tax-advantaged legislation (for VCTs and EIS), while the abolition of stamp duty and allowing investors to access AIM through their ISA has helped to attract a broader range of investors and their capital to the market.
For those investors willing to do the work, AIM presents an opportunity to find an investment with the potential for significant returns. Many of the companies listed on AIM do not have the same level of research and broker coverage that is afforded to companies listed on the mainstream markets. It is a market of opportunity and risk, and for investors willing to diligently sift through the whole market there are real nuggets to be found.
Success stories such as Numis and Abcam are just a couple of examples of hidden gems that can be uncovered if you know how to look for them. Numis has a market cap of circa £300m and has returned well over 7,500% since it first listed.
“Abcam is a great example of how well the AIM can work for profitable, high growth, high quality businesses. Abcam is a producer and marketer of quality protein research tools. These tools enable life scientists to analyse cells at a molecular level, which is essential in a wide range of fields including drug discovery, diagnostics, and basic research. Abcam is a profitable and highly cash generative business with a leading position in a growing niche market, a strong record of organic growth and an experienced management team,” says Chris Hutchinson, manager of the Unicorn AIM VCT.
He adds: “We follow a rigorous investment process and apply strict criteria when researching new businesses. This approach allows us to uncover some of AIM’s hidden gems and, perhaps more importantly, helps us to avoid the failures. From £57m at the point of investment, Abcam has grown to become a £1.6bn business and crucially it is still listed and thriving on AIM.”
What is clear is that despite being able to point to success stories such as Numis and Abcam, the number of failures outweighs the successes on AIM.
For private investors with limited resources to correctly assess the opportunities, the risks of making a potential error are greatly increased. Clearly the most effective investment scenario for AIM is to delegate responsibility to a professional fund manager with the expertise, experience and resources to identify opportunities on behalf of their investors, thereby helping to mitigate some of the risk.
Professors Dimson and Marsh summarise it nicely: “Everyone says AIM is a stockpicker’s market, but what they mean is that there are extremes of performance – both on the downside and the upside….the best people equipped to sort the wheat from the chaff are the professional investors”.
Jack Rose is head of tax products at LGBR Capital