Daily Mail

Hits and misses with AIM’s volatile stocks

- by Holly Black

FOR three years, savers have been able to invest in risky companies on the Alternativ­e Investment Market through their stocks and shares Isa.

And while some will have picked the winners in that time, others could have lost everything.

AIM companies tend to be smaller businesses, often start-ups or specialist­s in niche areas. The rules and regulation­s for listing on this stock market are less stringent than for the FTSE.

And all of that makes investing in this area incredibly risky. But among the 1,000 or so companies on AIM, there are some gems.

Some have gone on to become household names worth billions of pounds – online fashion retailer Asos, for example, or Majestic Wine. Others have not done so well.

Chris Hutchinson, manager of the Unicorn Outstandin­g British Companies Fund, says: ‘Among the dross there are some great businesses. But you have to filter through the ones that over- promise, under-deliver, burn through cash or are too specialist.

‘Whittle them down to around 40 and you stand a good chance of getting some decent returns.’

Get it right and you can make a mint; if you had put £1,000 in Rare Earth Minerals shares three years ago you would now have an incredible £22,765.

But getting it wrong can cost dearly. If you had put that £1,000 into diamond and gold exploratio­n company Golden Saint Resources instead, you would have just £6 left today.

Because there are so many diverse companies in this market, following it through a tracker fund isn’t a great idea.

The volatile AIM index has swung from a low of 664 points to a peak of 895 over the past five years – it’s a rollercoas­ter ride only for the strong- stomached. But investing through a fund, where an expert can try to cherry- pick businesses, can reduce the risk of investing in these firms. The Downing Micro- Cap Growth fund has around 89pc of its cash in AIM stocks, while Amati UK Smaller Companies has 59pc of its money in this market. They have returned 48.7pc and 52.4pc over the past three years respective­ly.

HUTCHINSON avoids any companies with lots of debt, where the managers don’t own shares, which are burning through cash or relying on regular rounds of fundraisin­g, and he shuns those he doesn’t understand.

That tends to mean the fund ignores oil, gas, mining and commoditie­s along with biotech and early-stage tech companies.

He says: ‘I look for proper businesses where we can understand what benefit the product or service has for customers and where we can be confident that customers will still want or need that product in years to come.

‘I’m sure our strict criteria means we end up missing some opportunit­ies. But in my experience it always takes longer and costs more to deliver than many companies say, and I’d prefer to avoid those firms.’

He is particular­ly keen that the management has a sizeable stake in the firm. Not only does that tend to mean they are investing in the business for the long-term but it often means decent dividends.

A favourite of his is flooring specialist James Halstead. The firm is in its fourth generation of family ownership and develops specialise­d floorings for specific applicatio­ns, such as hospitals, for example.

Their knowledge and expertise means they can earn a decent margin on the product and the firm has increased its dividend for more than 35 consecutiv­e years. The share price has increased from 121.2p to 420.25p over the past five years.

Another favourite is Crawshaw, a retail butcher chain which also serves hot food to go. That food often comes from its own stock which means there is little waste, which cuts costs.

The Yorkshire-based firm had a tough time after floating on AIM in 2007, just before the recession, but now has 40 stores and is expanding. To help its growth plans it brought in a new boss who spent 16 years at Lidl. Hutchinson likes that even at its lowest ebb it always had cash on the balance sheet. He says: ‘It’s one of the most exciting retail stories I’ve ever come across – it has all of the characteri­stics of being a future Greggs but no one has heard of it yet.’

Ben Yearsley, investment director at Wealth Club, says: ‘AIM is often regarded as a poor-quality market, filled with small companies which are all early- stage and speculativ­e. But there are 174 firms in there worth more than £100m and five worth more than £1bn, you just need an expert to be able to find them.’

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