Twenty years of AIM – should you invest?

Today we’re going to take a look at twenty years of AIM – the Alternative Investment Market celebrated its 20th birthday last week.

What is AIM?

The Alternative Investment Market launched 20 years ago in 1995 as a junior market of the London Stock Exchange. It has a less rigorous and less expensive regulatory framework, and is aimed (geddit?) at smaller, faster-growing companies.

Initially AIM was home to mostly speculative companies, with dramatic share price rises and falls. This was particularly true during the tech / dot com boom and bust of 1999-2002.

Since then, AIM has evolved somewhat into a tax-efficient home for growing smaller companies, but there is still a tendency for investment fads (resources stocks, overseas property, online gambling) to have a disproportionate presence on AIM.

AIM listings

Starting with just 10 companies in 1995, over the past two decades close to 3,000 companies have listed on AIM.

The peak for AIM listings was in 2005-06 – 519 companies joined the market in 2005 and £10bn was raised in 2006. In 2007 there were  1,649 companies listed on AIM.

The drivers for all this were bull markets in shares generally and commodities in particular. Many of the new listings were small oil, gas and mining companies, often already listed on exchanges in Canada or Australia.

The financial crisis ended the boom and many companies left AIM. By 2013 there were only 1,087 companies. But new listings are on the up again.

State of the market today

Today AIM is home to around 1,100 companies, with a combines value of almost £73bn. Most are concentrated in London and the South East.  A total of £92bn has been raised over the 20 years.

As well as tech stocks, AIM is also home to large numbers of small, speculative oil and gas and mining shares which are only for the brave. ((Some would say foolhardy))

There are also more regular businesses like engineering company Renew and storage firm Restore a storage business, as well as a range of popular family owned firms.

There is a wide spread of company sizes, but two thirds have a market cap below £50M.

Performance

As a market, AIM has been a success. Despite ongoing criticism of its “light touch” regulation and regular corporate governance issues, the market has outlasted domestic and international rivals:

• the Plus Market (UK) lasted only seven years from 2005 to 2012, and was bought by Icap after financial problems
• Germany’s answer to the Nasdaq – the Neuer Markt – closed
• France’s Deuxième Marche also disappeared

As as investment, AIM as a whole has been terrible. Even after 20 years, the FTSE AIM Index is 24% below its starting level, an annual loss of 1.6% since AIM began. Even with dividends reinvested, £100 would have turned into £83.

The FTSE-100 has doubled over the same period, and the most comparable small companies benchmark – the Numis Small Companies Index – is up 500%.

So to make money you need to choose your stocks carefully. This is not a market for passive investment via an index tracker.

Even then, nearly three quarters of the companies listed on AIM have lost shareholders money. According to Elroy Dimson and Paul Marsh of LBS, 72% of firms lost money, and almost one in three lost 95% or more of the initial investment.

At the other extreme, there have been 39 companies that have returned more than 1000%.

Winners

There have been some terrific success stories on AIM. The most famous AIM share is Asos (ASC), which floated in October 2001 at 20p.

The shares peaked in October 2014 at £71 (a gain of 355x), giving the stock a market cap of £5.9bn. It’s since fallen to £39 (market cap £3.2bn), but it remains on AIM. A £1K investment in 2001 would now be worth £162K, and annualised return of 45%.

Interestingly, Numis (NUM) – Asos’ broker – is the second best performer.

Other success stores like Domino’s Pizza (DOM), which quadrupled over five years, and Mears Group (MER) have since migrated to the main market.

Five of the top ten best-performing AIM shares of all time have taken this route, although the subsequent performance of the 100 or so companies that have transferred from AIM has been poor.

Losers

As well as the winners, there have been plenty of flops too.

In recent years there have been a number of accounting scandals (eg. insurance IT company Quindell – QPP – which collapsed by 75% in 2014/15). There has also been a rash of foreign (usually Chinese) companies that seem to exist merely to sell worthless shares to gullible UK investors.

Other notable busts include:

• ScotOil, known through most of its life as Oilexco, with a market capitalisation of over £2bn at its peak
• African Minerals, also valued above £2bn at its height
• XXI Century Investments, the Ukrainian property company, and
• Rangers FC, which was delisted after a series of boardroom battles

Some improvement in the regulatory regime is required, probably in the area of punishing the sponsoring agent (the nominated advisor, or NoMad) of the fraudulent companies.

The LSE has been quietly consulting on potential changes, though they are likely to be minor. Marcus Stuttard, head of AIM at the LSE, said: “We have continued to evolve the model and will continue with education. Our enforcement activity is about educating participants.”

Tax treatment

AIM shares have become more popular with private investors recently, partly because of the tax treatment. £4bn flowed into the market in 2013/14 when AIM shares were allowed into ISAs. Well publicised winners like ASOS and Domino’s Pizza have also raised the profile of the market.

To summarise the tax advantages:

• AIM shares are eligible for ISAs, which means no tax on capital gains or dividends
• there is no stamp duty on share purchase, saving 0.5% on the way in
• there is no inheritance tax if the shares held for two years ((This is via Business Property Relief, which doesn’t apply to companies which invest in shares or land – but most AIM companies are eligible))

The inheritance tax treatment has encouraged a number of long established family businesses to transfer to AIM:

• flooring manufacturer James Halstead
• Vimto maker Nichols
• pub company Young’s Brewery

What do you need to invest in AIM?

Patience and bravery are needed when investing in small caps, particularly on an “adventurous” market like AIM.

It’s a good idea to steer clear of the smallest stocks (market cap less than £50M) and the penny shares (share price less than 50p, which typically means a wide bid-offer spread). These small companies are nick-named “lobster pots” – easy to get your money into, but almost impossible to get it out again.

Foreign (Chinese) stocks, speculative oil and gas stocks, and growth stocks on PE multiples of 25+ should also be avoided.

You can get some idea of which shares to investigate by following our own SmallCap growth portfolio, which invests exclusively in AIM stocks.

Anyone who doesn’t have the expertise to pick stocks should consider investing via a fund.

AIM investing via funds

The AIM market is well suited to collective investment, as these vehicles provide a spread of underlying shares that can offset the volatility of AIM companies.

Available open-ended funds (OIECs or unit trusts) include:

1. Marlborough UK MicroCap Growth Fund, 88% invested in AIM
2. AXA Framlington UK Smaller Companies Fund, 32% of its assets in AIM
3. Franklin UK Smaller Companies, 32% in AIM
4. Fidelity UK Smaller Companies Fund, 20% exposure to AIM
5. Cavendish AIM fund

If you prefer closed ended, exchange listed vehicles, investment trusts looking at AIM include:

1. Artemis Alpha (ATS), 40% in AIM
2. Diverse Income Trust (DIVI), 34% in AIM
3. Henderson Opportunities (HOT), 34% in AIM
4. Strategic Equity Capital (SEC), 34% in AIM
5. Blackrock Smaller Companies (BRSC), 29% in AIM
6. Standard Life UK Smaller Companies (SLS), 25% in AIM
7. Miton UK Micro Cap (MINI)

AIM investing via VCTs

It’s also possible to invest in AIM via Venture Capital Trusts (VCTs), which coincidentally celebrated their 20th anniversary earlier this year.

VCTs offer 30% income tax relief on the way in, dividends are tax free and there is no CGT on gains.

There are restrictions on the size and age of companies they can invest in however. They can also only invest when companies raise new money, so some of the better AIM stocks will be ineligible.

AIM VCTs have outperformed the AIM index (not the toughest benchmark) over 1, 3, 5 and 10 years.

Available VCTs include:

• Amati VCT and Amati VCT 2
• Artemis VCT
• Downing One VCT
• Hargreave Hale AIM VCT 1 and Hargreave Hale AIM VCT 2
• Octopus AIM VCT and Octopus AIM VCT 2
• Rensburg AIM VCT
• Unicorn AIM VCT

Of these, Rensburg, Octopus and Unicorn have the best track records.

Until next time.

Sources

1. A guide to AIM – London Stock Exchange
2. A guide to AIM tax benefits – London Stock Exchange
3. Two decades of AIM – Giles Hargreave, Hargreaves Lansdown
4. VCT sector and AIM market both celebrate 20 year anniversary – AIC
5. Chart that tells a story: Aim listings – Jonathan Eley, FT
6. Aim is more miss than hit for investors as it marks 20th anniversary, Claer Barrett and Kate Burgess, FT
7. AIM: 20 years of a few winners and many losers, Claer Barrett, FT
8. Time to add colour to Aim market’s game of chance – Kate Burgess, FT
9. AIM’s mixed record – Andrew Van Sickle, MoneyWeek
10. How to profit from Aim via funds and investment trusts – Leonora Walters, Investors Chronicle