17th June 2015
Hargreaves Lansdown lays bare the dismal performance of the Alternative Investment Market index over the past two decades since launch, but also highlights the success stories…
This week the AIM market, which allow investors to buy shares in smaller companies, is 20 years old, but the index still stands 24% below its starting level.
However, while the index as a whole has performed badly there have been some huge success stories, according to analysis by Hargreaves Lansdown, the adviser. For example, £1,000 invested in ASOS at its launch would now be worth £160,000.
The research reveals that16% of private investors own at least one AIM share and men are almost twice as likely to invest in AIM shares than women.
Laith Khalaf, senior analyst at Hargreaves Lansdown, says: “There have been some terrific success stories on AIM but there have been plenty of flops too. It is therefore a market to go fishing in with a line and pole, rather than a great big net.
“AIM shares have become more popular with private investors in recent years, partly as a result of them being allowed within ISAs, and the generous inheritance tax treatment. Successes like ASOS and Domino’s Pizza have also raised the profile of the market.
However AIM is a market suited to investors who are sophisticated, brave and patient. Anyone who wants to gain exposure to smaller companies but doesn’t have the expertise to pick stocks should consider investing via a fund.”
FTSE AIM has fallen 24% since launch
The FTSE AIM index was launched in January 1996 (6 months after the market opened), but the index is still 24% below its starting level. While AIM has been home to many individual success stories, the market as a whole has been “a graveyard of failed ambition”, according to Hargreaves Lansdown.
The performance of AIM compares poorly with indices from the main market over the same time period. The conclusion is AIM is not a market for investors to buy en masse in the same way they may do with the FTSE 100 through a tracker fund. Instead they need to approach it with a fine tooth comb to make sure they are picking out the winners and avoiding the deadwood.
(Performance is shown from the start of the FTSE AIM Capital Return Index and the FTSE AIM Total Return Index respectively).
22/01/1996 – 11/06/2015
09/05/1997 – 11/06/2015
|FTSE Small Cap||
Three AIM success stories
1. ASOS is currently the biggest stock on AIM, with a market cap of £3.2 billion. £1,000 invested at launch in 2001 would now be worth £160,000. It currently commands an eye-watering P/E ratio of 86 times earnings. However it illustrates the kind of returns that get investors excited about AIM stocks.
It also demonstrates that not all stocks on the AIM market are small companies. The market cap of ASOS is bigger than that of TSB, Ocado and Thomas Cook. It is big enough to be in the FTSE 250 if it was on the main market, as are around a dozen of its fellow AIM stocks.
2. Domino’s Pizza launched on AIM in 1999 and has now graduated to the main market and the FTSE 250. £1,000 invested at launch would now be worth £36,000.
3. Majestic Wine launched on AIM in 1997 and remains there today. £1,000 invested at launch would now be worth £7,700.
16% of private investors who have a HL Vantage account have at least one AIM share. This is up from 13% when AIM shares were allowed into an ISA in 2013, and up from 5% in 2007.
Broken down by gender, it looks like the AIM market is more popular with men than women. 19% of men hold an AIM stock, compared to 10% of women.
The increased popularity of AIM can probably be attributed to a number of factors. Many AIM shares are free from inheritance tax if held for more than two years, though investors shouldn’t let the tax benefits cause them to neglect the case for investing in the company in question.
Allowing AIM in ISAs has also increased their popularity, and there is now much more information available online which allows investors to do the necessary research to be comfortable investing in AIM companies.
In 1995 AIM started with just 10 companies listed, worth in total £82.2 million. Today there are 1,074 companies, worth in total £75.3 billion. The market was actually bigger in 2007 when there were 1,694 companies listed worth £97.6bn
Since 1995 3,602 companies have been admitted to the market, and have collectively raised £92.2 billion.
Five ways to invest in smaller companies
1. A portfolio of individual shares. Investors looking to invest directly in smaller companies needn’t limit themselves to the AIM market, there are plenty of small companies on the main London Stock Exchange too. The FTSE Small Cap index contains around 300 such stocks, ranging in size from £25 million to £805 million. These companies don’t carry the same generous inheritance tax treatment as AIM shares however.
2. UK Smaller Companies funds. Investors who have neither the time nor the inclination to research individual companies should consider investing in a smaller companies fund if they want to get exposure to this dynamic area. Marlborough UK Micro-Cap Growth and Old Mutual UK Smaller Companies are two funds run by seasoned investors with great track records (Giles Hargreave and Daniel Nickols respectively).
3. Global Smaller Companies funds. The UK doesn’t have a monopoly on smaller businesses, and a global fund opens up a much wider universe of companies for a talented stock picker to choose from. Harry Nimmo is one such manager, he runs the Standard Life Global Smaller Companies fund.
4. VCTs (Venture Capital Trusts) invest in a portfolio of typically around 20 fledgling companies selected and managed by a specialist fund manager. VCT investments qualify for 30% income tax relief provided you hold them for five years or more and have paid sufficient tax. The VCT dividends you receive are also free from tax and there is no capital gains tax to pay on any profits. Clearly the nature of these fledging companies means VCTs come with a high degree of risk.
5. An EIS (Enterprise Investment Scheme) is likewise a risky proposition because it also invests in early stage companies, but will tend to invest in fewer companies than a VCT. The scheme also qualifies for 30% income tax relief on investments if they are held for three years and you have pad sufficient tax, and profits are free from capital gains tax. An EIS investment also allows you to defer capital gains tax made on other assets, for instance a property, if made up to one year before or three years after the EIS investment.