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Caveat AIMptor - buyer beware

AIM has been a boon for companies seeking to raise cash but for investors, the need to be clued-up is even more important on this market than it is when investing in mid-caps and large-caps

First Derivatives -

It is hard to deny that AIM has been a boon for growth companies in its 25-year existence but for investors, the jury is still out.

Professors Elroy Dimson and Paul Marsh of the London Business School did some heavy-duty research on AIM five years ago when AIM was celebrating its 20th anniversary.

They found that over those 20 years, investors would have lost money in 72% of all the companies that ever passed through AIM’s doors.

At the time, 2,877 companies had listed on the junior market and in more than 30% of cases, the professors calculated that shareholders lost at least 95% of their investment.

Just 1.4% of stocks gave investors multi-year returns of more than 1,000%.

Between 1995 and 2015, the market yielded on average a negative return of 0.7% a year.

Ah yes, say AIM’s defenders, but part of the problem is that many of AIM’s better companies move on to a full listing, thus denuding the junior market of stocks that might ginger-up its performance.

Unfortunately, Dimson and Marsh’s research concluded that in AIM’s first 20 years, the performance would have been even worse had you factored in the companies that decamped to AIM.

Without the promoted stocks, £1,000 invested in a basket of AIM stocks in 1995 would have been worth £910; with them included, it would have been just £760.

The importance of being proactive

Professor Marsh was quoted at the time as saying that, “with more losers than winners, the people least equipped to sort the wheat from the chaff are private investors, and the people best equipped are the professional fund managers.”

Yet according to Ivan Sedgwick, the investments director at boutique investment and corporate finance firm LGB & Co, the market has been largely, though not entirely abandoned by institutional investors, even before fallen star stock-picker Neil Woodford came a cropper with his punts on several small-cap long shots.

“Most smaller AIM companies and many larger ones are researched by only a single broker. Many of these firms, particularly the larger ones, restrict the distribution of the research, either citing MiFID ll [Markets in Financial Instruments Directive i] or purported liability claims from private investors. A few companies pay for coverage by firms such as Hardman, Edison and Trinity Delta, but by no means all,” Sedgwick noted.

“Specialist PR [public relations] companies do a decent job for others but the absence of formal coverage makes the market terribly over-reliant on un-policed chat forums, with anonymous contributors, and questionable motives, whilst companies only provide guidance through the medium of nudges and winks to their brokers.

"Access to new issues – the lifeblood of the AIM market – is also very patchy. Pre-emption rights have been increasingly eroded. The European Prospectus Directive instead of protecting investors led to a search to avoid the need for documentation. Primary Bid has made a start in democratising access to deals, but usually on a highly compressed timetable, and private investors often can’t get access to managements and presentation material," he added.

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Sam Barton, the investment director at Close Brothers Asset Management, has offered three “top tips” (translation for Millennials: “investment hacks”) for investing in AIM stocks.

Avoid bubbles (“the value destruction after the dotcom and mining booms of 2011 was hugely damaging to investors”); do your research, concentrating on a company’s management experience, financial position and cash flow; and participate in the market.

“If you have concerns about a company’s corporate governance, vote at its AGM. AIM has made some big strides over the last couple of years by mandating the adoption of either the QCA [Quoted Companies Alliance] or FRC [Financial Reporting Council] codes of governance,” Barton advised.

“By taking a proactive stance on governance we are hopeful that AIM will continue to flourish and become an even better place for investors and dynamic companies alike,” he added.

When it comes to AIM, it’s always good to take a Proactive stance ...

Nicholas Hyett at Hargreaves Lansdown advises only investing in profitable businesses, especially those paying a dividend, and to pay particular attention to companies with large family ownerships.

“AIM is particularly suited to these kinds of businesses because of the inheritance tax exemptions that apply. The desire to pass the business onto the next generation means the company is usually conservatively run with a long term view. Over time this should benefit outside investors as well as the family,” Hyett suggested.

The largest broker of companies listed on AIM, finnCap, is perhaps not surprisingly a fan of the market.

“Although it has its critics and has experienced highs and lows over the years, on its 25th anniversary we should celebrate AIM’s growth from humble beginnings to what it is today – a mature market worth more than £100bn that gives investors the opportunity to help fund the disruptive growth businesses of the future,” said Sam Smith, the chief executive officer and founder of finnCap.

“While the world reels from the effects of the pandemic, this year AIM has lost just 9% of its value – outperforming the FTSE All-Share which has lost 18%. FinnCap has seen first-hand the many success stories borne of AIM, many of them in tech, whether it is Ideagen – now worth £424mln after only eight years on the index – or First Derivatives which was worth £35mln in 2009 and is now valued at £673mln,” she noted.

READ AIM, a capital success story

Quick facts: First Derivatives

Price: 3120 GBX

Market: AIM
Market Cap: £862.02 m

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