Big profits up for grabs – if you brave some Wild West swings
As junior AIM market hits its 25th birthday...
DESPITE the impact of the coronavirus on share prices, London’s Alternative Investment Market (AIM) will have cause to celebrate as it turns 25 next month. The market for early stage firms began with just ten businesses that had a combined market capitalisation of £82million – see below.
Today, there are more than 800 firms listed with a combined market capitalisation (the number of shares multiplied by their price) of £70billion. And in recent weeks the AIM All-Share index, which averages their performance, has bounced back faster than its big brother on the London Stock Exchange, the FTSE All-Share Index, which reflects the performance of shares on the main market.
Joachim Klement of investment bank Liberum says: ‘Since the start of the year the AIM All-Share Index has declined 10.5 per cent, compared to a 18.5 per cent fall in the FTSE 100 and a 25.6 per cent fall in the many smaller stocks in the wider FTSE All-Share Index.’
AIM is no longer just a home for small, speculative stocks. Retail giants Boohoo and Asos are listed on AIM, while other successes include posh tonic water maker Fever-Tree. The market also hosts gold miners and healthcare companies, some of which have been boosted by the Covid-19 pandemic.
However, over the past 25 years as a whole, AIM has gained something of a ‘Wild West’ reputation. Business collapses can be sudden and unexpected, while the exchange’s reputation has been muddied by accounting scandals at Healthcare Locums and Patisserie Valerie. Some still believe it is a home for speculative, flash-in-thepan, high risk companies.
But Lee Wild, head of markets at wealth manager Interactive Investor, disagrees. He says: ‘AIM can be a good place for good companies to raise money. You can’t dismiss an entire market as speculative.’
Examples are Abcam, which provides the reagents for clinical testing kits. It is one of AIM’s top three with Boohoo and Asos. Technical translation group RWS is in the top ten, as is the Eastern European property business Globalworth.
But it is sometimes among the smaller AIM businesses that gems can be found. Klement has identified some ‘invincible stocks’ that have performed well through the market’s downturn and subsequent recovery. They include Avacta, which is pioneering a saliva-based test for Covid-19, as well as wine distributor Naked Wines and disinfectant producers Tristel.
Joe Healey, investment research analyst at The Share Centre, is keen on DotDigital, which automates digital marketing. He says: ‘The company uses artificial intelligence to enhance its software capability, which sets it apart from peers. The company is well-positioned to move forward with a strong balance sheet and good growth prospects.’
Since March, its shares have risen in price from 71p to 104p.
Judith MacKenzie, a partner at Downing Fund Managers, likes Volex, a British maker of power cords – from phone chargers right up to complex cable assemblies for electric vehicles and scanners and equipment used in hospitals.
She is also keen on EKF Diagnostics,
which specialises in developing tests for use in anaemia and diabetes diagnosis and management. The shares were at 17p in March and are now at 49p.
FOR many people, picking individual AIM stocks will feel like too risky. An alternative is to get exposure to them through a collective vehicle, such as an investment trust, unit trust or venture capital trust. Some funds have investments in both AIM stocks and those listed on the main market.
Ryan Hughes of wealth manager AJ Bell recommends investment trust Standard Life UK Smaller Companies and fund Tellworth UK Smaller Companies.
Both Healey at The Share Centre and Darius McDermott, managing director of Chelsea Financial Services, opt for funds run by asset manager Liontrust. Healey likes Liontrust UK Smaller Companies – among its top holdings are pollster YouGov, DotDigital and IT firm Iomart. Meanwhile, McDermott chooses Liontrust UK Micro Cap, which currently has 81 per cent of its assets in AIM stocks.
Returns from Liontrust UK Smaller Companies fund are flat over the past year but total 21 per cent over three years and 83 per cent over five years. Over the past one and three years, Liontrust UK Micro Cap has achieved returns of 4 and 28 per cent.
Dzmitry Lipski, head of fund research at Interactive Investor, likes fund Cavendish AIM, run by veteran fund manager Paul Mumford and new recruit Nick Burchett. Though the fund has recorded losses of 15 per cent over the past year, it has generated returns of 20 per cent and 83 per cent over the past three and five years. While AIM has weathered the coronavirus crisis so far, some experts believe that it might be vulnerable as the recovery continues and warn investors to be cautious. AJ Bell’s Hughes says: ‘While AIM has fared well this year, it underperformed the FTSE AllShare in the March selloff, which highlights the risks that can come with smaller, illiquid companies. ‘Investors should tread carefully, remember the need to diversify, and understand that losses can be significant, just as the gains can be attractive.’ Gervais Williams, manager of investment fund Miton UK Smaller Companies, says many firms will go into liquidation as the Government withdraws its support schemes for firms. Yet he believes that AIM could outperform the main market in the ‘new normal’. He says: ‘Later this year, I worry that stock markets could peak out again with little evidence of economic recovery and little recovery in dividend payments. Then fund managers would need to search for winners outside the FTSE 100 because mainstream shares just won’t deliver enough returns and may be outperformed by some small cap and AIM listed stocks.’
Many people choose AIM firms because of a genuine interest in smaller firms, but some consider the exchange’s tax status too. Most AIM stocks are exempt from inheritance tax if held for more than two years, thanks to an exemption known as business property relief. They can be held in an Isa too.
Qualifying companies can also be held in venture capital trusts or enterprise investment schemes, providing attractive tax breaks.
Chelsea’s McDermott says business property relief could be scrapped by the Chancellor as he looks for ways to replenish the Treasury’s coffers.
He says: ‘If this were to happen, it could reduce the market’s attraction and hit the share price of many companies as a result.’