Handful of Dollars: A Brave New World or a Wild West City Just for Gold Diggers?
A brave new world or a wild west city just for gold diggers?
It’s hard to make up your mind about AIM, the alternative investment market that has nurtured some big names but also hosted a host of major failures.
The market’s 2020 was strong, outperforming the broader UK equities market by over 33 per cent, and continued to do well this year.
Evan Miller, AIM’s head of investment manager Brooks McDonald, says the market’s success is due to its relatively low exposure to what he calls the ‘old world economy’ – sectors such as oil and gas, mining and heavy industrial businesses.
He explains, ‘It was the stocks of the ‘old world’ economy that were most affected by the Kovid-19 pandemic and lockdown.
AIM Markets has also proven to be resilient when it comes to paying dividends to shareholders.
Her admirer is Harry Nimmo, co-manager of investment trust Standard Life UK Small Companies.
He says: ‘AIM is the envy of the world in terms of its depth and scale. It is suitable for nurturing companies ranging from very small to over £1 billion market capitalization.
‘But some old, preconceived notions of AIM as a dangerous market will take years to be overtaken by the new reality,’
Where to Pan for Nuggets
AIM is a huge market with 830 listed stocks, so it can be difficult to pick winners.
Brooks McDonald Miller says: ‘Businesses that are able to take a leading position in the market they operate – preferably from a global perspective – are the most attractive companies to invest in.’
There are plenty of household names on AIM such as clothing giant Asos, Fever-Tree Drinks, and pollster YouGov.
But there are lesser-known winners like life science company Abcam, language translation specialist RWS and ID verification company GB Group.
Lee Wilde, head of equity strategy at wealth platform Interactive Investor, also likes Kettle Safety Control Group Strix, growth consultancy Next Fifteen and engineering infrastructure business Renew Holdings. All of Miller’s templates fit the niche market leaders.
Wilde says: ‘All three have been excellent in terms of share price performance, but they also pay dividends to shareholders.’
Small companies specialist Gervais Williams, co-manager of Mitone UK Microcap Trust, is a fan of the market.
He adds: ‘Prospects of some AIM-listed technology and Meditech stocks actively improved during Covid.
“Going forward, multiple industry constraints are making it difficult for businesses to meet customer demand and we fear a squeeze on corporate profits. But in times like these, small businesses are often in a better position to avoid bullets.
Be aware of risks and pitfalls
While AIM may have spawned household names, it certainly doesn’t follow that every company is a guaranteed success story.
Brooks McDonald Miller says the broad nature of the index means it’s easy for investors to make a mistake. ‘There are many big companies,’ he says.
‘The flipside is that there are some that investors would be wise to avoid.’ Some sectors of AIM are speculative.
Miller warns that companies dealing in oil exploration, loss-making biotechnology stocks, and hydrogen fuel cell production are at risk of fluctuating stock prices.
Juliette Schooling Latter, director of research for investment platform Chelsea Financial, also advises that AIM is less regulated than the main London Stock Exchange.
She adds: ‘Most of its constituents are small, growing companies – typically at an earlier stage in their corporate life than those listed in the main market.
Hence AIM is risky and will not appeal to cautious investors. She also cautions that the market has been artificially fueled by tax loopholes that make investing in AIM a tool to protect against legacy tax bills (see box below).
Essentially, if certain (not all) AIM shares are held for at least two years, they are exempt from inheritance tax upon the death of the owner. She says: ‘If the government ever changed the rules and took away IHT protection, it could affect the AIM.’
Investment Funds to Set Your Eyes on
Choosing different stocks on AIM can be tempting, but negotiating the large number of stocks in the market is difficult. The increased risk means that it is important that you do not put all your eggs in one basket.
Ryan Hughes of Wealth Manager AJ Bell says: ‘There are hundreds of companies to choose from and so it is prudent to go down the fund route.’
Matthew Reid, senior analyst at financial research group QuotedData, agrees. He explains: ‘AIM companies have lower financial reporting requirements.
‘This may create concern for some investors, but it can be counteracted by focusing on AIM-oriented investment trusts, which have a strong focus on ESG (environmental, social and corporate governance) issues.’ He says that the smaller companies in Montanaro UK are good in this area.
There are no funds invested exclusively in AIM stocks, but there are holdings in several smaller company funds. Hughes suggests Telworth UK Small Companies, managed by Paul Marriage and John Warren – a fund that has about a fifth of its portfolio in AIM stocks.
He adds: ‘Both fund managers are highly experienced small corporate investors and, importantly, have deep knowledge of the many management teams running AIM listed businesses.’
The £500million fund has three AIM-listed stocks in the top ten holdings; Student housing developer Watkin Jones inspects spectacle frame designer and flexible office specialist Acensis. The fund is less than three years old. In the last one year, it has given an overall return of 64 per cent.
Jason Hollands, investment specialist at Tilney Smith & Williamson, also likes Tellworth Funds — as…