This article first appeared in FT Adviser.
With a combined market capitalisation of more than £70 billion (1), the Alternative Investment Market (AIM), is easily the world’s most successful market for fast-growing smaller companies. Since its introduction in 1995, the junior market for the London Stock Exchange has hosted more than 3,600 companies plying their trade in more than 100 countries and operating across 40 different sectors (2).
The economic contribution of AIM shouldn’t be underestimated either. In 2013 AIM-listed companies made a direct economic contribution of £14.7 billion to UK GDP, and were responsible for creating 430,000 jobs in the same year. It also swelled the coffers of the Exchequer in 2013 with tax contributions of £2.3 billion. The indirect impact of AIM – for example, benefits to suppliers and employees spending wages, shows the total economic contribution of £25 billion of GDP, including indirect employment of over 730,000 people. This is more than the UK’s aeronautical or pharmaceutical industries (3).
At a time when the FTSE 100 is dominated by international companies (and is, therefore, a poor indicator of the fortunes of UK plc) AIM could arguably be viewed as the City of London’s greatest success story. Yet AIM’s 20th birthday in June disappointingly brought with it some criticism of the market along with the celebrations. In other countries, many of which have failed to establish a market for smaller companies, AIM is envied as a great source of long-term finance for innovative, aspirational companies requiring capital to reach their full potential. Back home, however, the highly laudable objectives of AIM are frequently misunderstood, and June’s 20th anniversary gave many journalists and market commentators the opportunity to deliver some predictably mixed reviews, based purely on aggregate performance.
To rush to its defence, AIM has, over the years remained true to its founding principles: accessibility for ambitious growth companies, open to investors of every kind, a regulatory approach that recognises the needs and capacities of growth companies, and a market open to learning and evolution.
From an investment perspective, it’s been characterised as a rollercoaster of a market, dominated by extreme highs and lows from individual companies. For every high-flyer such as clothing retailer ASOS, which since listing has seen its share price increase more than a thousand percent, critics can point to a number of companies that have gone bust.
But AIM was never meant to be risk-free. Moreover, concentrating on the extremes, or focusing on the returns of the market in total, fails to offer a meaningful analysis of AIM’s achievements over the past two decades. I would argue that the key to understanding AIM is not to think of it as one homogenous market, where all the members share the same high growth characteristics. Instead, it needs to be considered as a stable of highly individual companies, with their own distinctions and virtues. The real challenge, therefore, rests in finding the better performers capable of achieving long-term returns.
Some investors may choose to access AIM through direct investments, but the necessary due diligence requires time, resources and experience. Investing via a dedicated AIM-focused fund is likely to alleviate some of these concerns, while potentially also increasing the diversification benefits to investors. Active management generates most value when an asset class is inefficiently priced. This is certainly the case with smaller companies where a lack of research and market coverage creates pricing inefficiencies. These pricing inefficiencies are typically exacerbated following a period of volatility. Expertise and focus in smaller company AIM-listed shares, therefore, creates the opportunity for significant outperformance. It’s certainly not the ideal place for passive investing or index-tracking funds, but again, it was never really intended for that purpose.
The good news for investors attracted to the growth potential of AIM is that there are now several ways to gain access. Octopus has been an investor in AIM for many years, and manages two AIM Venture Capital Trusts (VCTs), which offer significant tax benefits to compensate for the investment risk, as well as the Octopus AIM Inheritance Tax Service (ITS), which invests in AIM-listed shares that qualify for Business Property Relief, in order to become exempt from inheritance tax if held for a minimum of two years and retained until the shareholder passes away. This invests in a portfolio of 20-30 AIM quoted companies and focuses on the larger more established companies with characteristics such as being profitable, dividend-paying, having a strong balance sheet and a proprietary product or service.
In fact, AIM is celebrating another anniversary this week. It is now two years since the government permitted the inclusion of AIM-listed companies in Individual Savings Accounts (ISAs). Octopus was the first company to launch an AIM Inheritance Tax ISA, and investor take-up has been impressive, with funds under management already at almost £220 million (4).
Because of its star performers, and also its failures, AIM is always likely to attract bouquets and brickbats in equal measure. Recently we’ve witnessed larger, more established, growth companies choose AIM over the Official List of the London Stock Exchange. For those investors prepared to accept the risks in pursuit of the returns, the way to approach AIM is to recognise that it requires patience, a willingness to take the rough with the smooth and a long-term investment horizon. Fortunately, a number of AIM stocks offer tax incentives designed to encourage investors with the necessary fortitude over the longer term.
For use by journalists in their professional capacity and should not be relied upon by retail clients. This document is issued by Octopus Investments Limited which is authorised and regulated by the Financial Conduct Authority. The value of investments and the income from them may fall or rise. The information in this document should not be construed as offering investment or tax advice. Venture Capital Trusts (VCTs) and products that use business property relief (BPR) put investors’ capital at risk and should be viewed as high risk. Tax treatment depends on the individual circumstances of each investor and may be subject to change. The availability of tax reliefs also depends on the portfolio companies maintaining their qualifying status. Such products invest into small and/or unquoted companies, which are likely to have higher volatility and liquidity risk than shares quoted on the Main Market of the London Stock Exchange. This product is not suitable for everyone and we recommend investors seek independent investment and tax advice before investing in our products. Please refer to the relevant product brochure/prospectus for further information. This advertisement is not a prospectus and investors should only subscribe for VCT shares on the basis of information in the relevant prospectus which can be obtained from www.octopusinvestments.com when available.
(1) (2) Source: London Stock Exchange Group, AIM 20: The report 2015
(3) Sources: London Stock Exchange Group (AIM 20: The report 2015) and Grant Thornton, The Economic Impact of AIM (April 2015)
(4) Source: Octopus Investments, 30 June 2015