However, the AIM is neither a small- nor micro-cap index. It now comprises predominantly mid-caps. Using quarterly data for the last five years and market-cap ranges as follows: Micro= <£150m, Small= £150m-£500m, Mid= £500m-£4bn, and Large= >£4bn; over the last five years the AIM’s mid-cap allocation has increased to over 40%, at times breaching 50% in mid- and large-caps, whilst its micro-cap allocation has subsequently halved. Indeed, the AIM is home to a few big companies – tonic water revolutionary Fevertree (market cap of £3.2bn), legal market financier Burford Capital (£3.6bn), and online fashion retailers Asos (£2.5bn) and Boohoo (£2bn).
These larger names provide a talking point around another questionable view that the AIM is highly exposed to the UK economy. This view arises from the belief that the index comprises small- and micro-caps which, by theoretical market cap definitions, are more exposed to the UK economy because they have not had time to expand their revenue bases globally.
As the above discussion revealed, the AIM has almost 50% mid cap exposure within which a significant portion of revenue is generated overseas – Fevertree, for example, is generating more than half of its revenues from the US and Europe on the back of aggressive efforts to expand globally; Burford Capital is headquartered in the US where litigation financing opportunities abound, and Boohoo has proved itself in expanding into global markets with successes in Australia and New Zealand.
The notion that smaller companies are, by definition, more UK-focused is untrue particularly for the AIM which attracts many international companies. For example, the index has 15% exposure to energy and materials, compared to only 7% in the FTSE Small-Cap index. These sectors naturally have large foreign revenue bases – African Battery Metals, for instance, generates all revenue in Africa (unsurprisingly) from strategic metals exploration; Agriterra invests in established beef and maize ventures in Mozambique; whilst Asiamet Resources generates its revenues from copper-gold and polymetallic exploration in South-East Asia. Tech is the other significant sector exposure (15%) within the AIM. Whilst many of these companies are UK-headquartered, their revenue-base is notably global – Blue Prism, Maestrano, and Quixant spring to mind and the list goes on.
Lastly, the view that the AIM index is more risky than other small cap indices is not necessarily untrue. However, the source of this risk is largely regulatory as opposed to performance related, as is commonly believed. When looking at volatility and maximum drawdown over the last five years on a rolling one-year basis, the AIM has, on average, been less risky than its main market contemporaries.
Regulatory risk relates to the fact that, unlike their main market contemporaries, AIM companies are not required to provide audited financial statements before listing, nor have a minimum level of publicly owned shares, nor require shareholder approval for substantial transactions once listed. Whilst this flexibility can be advantageous from a growth perspective, it does allow scope for mis-management.
A recent example of the manifestation of these risks was the Conviviality saga. The drinks company enjoyed strong growth on the back of integrating its retail and wholesale subsidiaries. The firm’s acquisition-spree, poor working capital management, and questionable financial accounting culminated in profit warnings and eventually administration. Arguably, some of these factors could have been avoided had the company been listed on the main market with greater shareholder accountability and reporting requirements.
So, contrary to widely held beliefs, it can be argued that the AIM is predominantly a mid-cap index, with low to moderate UK exposure, and investment risk stemming largely from its less stringent regulatory framework.
– Amy Kennedy is a fund analyst at FE