The UK has a long illustrious history of corporate success where companies have been started and grown by innovative, entrepreneurial, and highly talented people. Part of this success is down to the ability of entrepreneurs to access funding to finance their growing businesses.
London’s long-standing position as a leading financial centre has helped to ensure fast growing companies have been able to access the capital required to fund their growth. A premium listing on the main market of the London Stock Exchange remains the preferred choice for most medium to large sized companies. However, the Alternative Investment Market (Aim) has, over the past 25 years, firmly established itself as the market of choice for small, fast-growing businesses.
Aim’s success has been built on a balanced approach to regulation that is more suited to smaller companies that might otherwise be put off listing on the main market due to its inherent cost and complexity. Since inception in 1995, almost 4,000 companies have listed on Aim, raising over £124bn in new and further share capital. What’s more, in excess of 60% of this money has been raised in further share issues, demonstrating the long-term approach of Aim investors in supporting a company’s growth plan.
Today, there are more than 800 companies listed on Aim with a combined market capitalisation exceeding £145bn, broadly spread across 42 different sectors. This diversity reflects the maturing nature of Aim in recent years as it increasingly sheds its undeserved reputation as a frontier market for highly speculative businesses, notably those in the oil exploration and mining sectors. Aim is now home to some of the UK’s largest household brands including ASOS and Fever Tree Drinks. The average market capitalisation of Aim listed companies has also increased to around £177m, driven by strong growth in its largest and most successful constituents, as well as a trend towards new companies having a larger value at the point of listing.
Critics of Aim often highlight that its investment returns are unbalanced. A small number of highly successful companies have delivered very strong performance, while a significant number of Aim listed companies have failed, resulting in a high attrition rate. As a result, the total return from the Aim index since inception has been poor relative to the FTSE 100 over the same period. It is arguably therefore most appropriate for investors to pursue an active, stock picking approach when constructing a portfolio of Aim shares.
Despite being home to some large and highly respected companies, the majority of businesses listed on Aim remain under-researched by analysts and consequently go under the radar of many investors. The introduction of legislation requiring brokers to separate research fees from trading commission in 2018 made it even less attractive for analysts to cover smaller companies. As a result, investors who are willing to do their own research can usually gain sufficient knowledge to access a fertile hunting ground for exciting and less widely known investment opportunities with reasonable confidence.
Securing access to management teams is particularly important when analysing Aim shares. For retail investors, this can prove difficult, but an increasing number of Aim listed companies are now holding regular shareholder events for non-institutional shareholders. Smaller companies are dynamic in nature and management decisions can lead to a rapid change in outlook. Companies on Aim also tend to publish less exhaustive information in their annual reports, such as environmental, social and governance (ESG) factors. The ability to identify a management team that appear untrustworthy or have unsuitable experience might also raise a red flag that would otherwise have been missed during the investment process.
It is fair to say that Aim has enjoyed something of a purple patch in performance over the past five years. However, this strong performance has been driven by a relatively small number of the larger companies. For example, Fevertree Drinks returned +260% and HUTCHMED China gained +120% over the five-year period to 31 May 2021. Long-term shareholders in any of these companies will undoubtedly be thrilled with their returns, but the variability of returns highlights the importance of working hard to try and identify the most promising businesses at the earliest opportunity.
Undoubtedly, there remains a significant level of risk within Aim. However, the application of a rigorous stock-picking process mitigates this risk, thereby providing investors a greater chance of identifying companies that are well placed to deliver strong growth in profits and shareholder returns over the next decade. While there may well be further periods of volatility, investors who take a long-term approach are likely to be rewarded for their patience with some real investment gems.
Max Ormiston is a fund manager at Unicorn Asset Management
