Can AIM aim Higher?

                                         AIM 20

 

Twenty years on, Jon Levinson considers the performance of the LSE’s Alternative Investment Market and concludes that its contribution far outweighs that suggested by a FTSE AIM All Share Tracker

 

 

How is growth counted?

In a Stockmarket context, it’s the increase in financial value, nothing more. The graph below shows that AIM (grey-line) could be considered not to have had much to celebrate at its twentieth birthday soiree on the 19th June.

The AIM market is at a lower level now than when it started in 2004.  Out of the 3,500 or so companies that have raised funds on AIM around 1,100 are currently listed. The biggest successes are the 4% (or 15 Star Performers) that have grown to become FTSE 250 stocks.

The initial Market Cap of the smallest star that grew to shine so bright, was £89m. This opportunity for stellar growth is just not available in larger caps, but we can see from the Small Cap Index performance (yellow-line) that this growth is not being reflected by the AIM Index.

 

Specs

 

AIM was constructed as a ‘lite’ compliance and regulatory system, originally designed to let the ‘market decide’ via the Nominated Advisor system.

The practice over the 20 years has been for the regulators to issue increasing guidelines on best practices, which are admirably aimed at improving liquidly.

Market Theory and Regulatory Practise are challenged with small AIM companies. To improve liquidity or trading volumes, AIM has regulatory guidance on companies websites, its news flow, with ‘add guidance’ on the suitability, percentage free float and size of fund raise. This reduces transparency and adds to cost of the listing.

Higher listing costs seem to have been passed on as an increase in IPO Market Cap of AIM companies, but without necessarily any increase in the value of the underlying investment proposition. AIM investors have been paying more for less performance.

 

 

AIM Graph

 

 

The graph above shows the AIM All Share’s 20 years of underperformance in all but the Dot.com manic period of 2000, which was the equivalent of the South Sea, Tulip and Bitcoin bubbles.

The mining semi surge between 2003- 2008 was never really convincing, with too much digging and not enough producing to add sustainable value. Investors encouraged by the tax breaks given to AIM companies now invest in profitable companies with growth opportunities.

The AIM market theory is sound. A less regulated market helps earlier stage companies raise development funds to accelerate growth. This funding of innovative start-ups in the early stages will never easily translate into out-performance in a comparative index.

New jobs, however have been created and new technologies and better management practices have been absorbed by the wider market.

AIM is a success for enterprises and capitalism, it remains a battle ground for regulation and practice, so the historic index performance does not tell the real story of AIM.

The UK economy is growing at over 2%, CPI inflation is a rounded 0%, and wages growth is 3.2% for the last three months.

A near Goldilocks economy and although interest rates may increase this year, small caps seem set to out- perform. As the UK economy grows, smaller companies are still finding it hard to raise expansion capital, and we believe there is very attractive value in some smaller companies.

We raised £30m expansion capital in the last quarter for around 14 companies, ranging from; Proton Beam Therapy to Gold exploration/production; from producing Graphene to the development of e-commerce in Myanmar; from smart meters to digital apps.

 

Graphene

 

AIM will remain a breeding ground for higher risk growth companies but increasingly as the index matures it will be underpinned by fundamental value.

 

We believe that the UK small cap sector offers good investment opportunities, for both value and out-standing growth; few will make it to the FTSE 250.

 

Our Smaller AIM Companies EIS fund offers an opportunity to acquire stakes in ‘sound’ listed companies with the potential for significant growth.

The main EIS (Enterprise Investment Scheme)  tax break allow investors, in qualifying companies, upfront Income Tax relief as well as capital gains that are tax free after three years and are Inheritance Tax free after two years.

This can allow up to 60p to be reclaimed out of each 100p invested to a investor who can benefit from all the tax breaks available.

Investing in small caps is, in my longer than I like to admit, experience partly art and partly science, with an added dollop of good memory.

We look for a hockey stick formation which is a company with a high gross margin ((Turnover-Cost of Sales)/Turnover x100) the higher the margin the quicker the earnings fall though the ‘black-hole’ of administration costs to value enhancing profits.

Next we look for earnings growing faster than administration costs are rising. This is because once past the break-even point a large proportion of the incremental turnover feeds straight though to profits.

Companies with the highest gross margins are often in services, technology and media sectors where, after years of investing in development and needing frequent fund raisings to cover losses that can cause the market value to slip behind the real value of the opportunity, the darkest hour really is just before the dawn.

Examples of companies with low capital intensity and high gross margins such are;  Sabien (LSE: SNT), whose energy saving device has a new channel to market,  Newmark Technology (LSE: NWT), which recently won a £2.5m four year contract with a large UK financial institution and Forbidden Technology (LSE:FBT)which has at last launched its video Facebook.

AIM does not need to aim higher; it should remain a breeding ground for higher risk growth companies but will increasingly be underpinned by fundamental value.  Our best tip is to avoid AIM Index trackers, pick the shares yourself  or invest in a proactively managed fund.

 

 

 

About the author  

 

Jon joined in 2014 as a Corporate Broker. His experience of small cap quoted companies stretches back many years- in a range of capacities; Analyst/Head of Research (Teather & Greenwood, Insinger Townsley), Journalist (Penny Share Focus ) EIS Fund Manager , Best Investment, t1ps and Corporate Broking Director (Hoodless Brennan, Rivington St). He has deep knowledge of the small cap sector and a pragmatic, proactive approach to adding value to the investment proposition.  Jon completed his MBA in 1992 at Southbank University with ‘Filling the Small Companies Equity Gap’.  





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