20th June 2016
The AIM market is now 21 years old, yet the FTSE AIM index still stands 30% below its starting level says investment firm Hargreaves Lansdown.
Laith Khalaf, senior analyst, Hargreaves Lansdown says: “The AIM market may be 21 years old, but most of the companies listed on it are still pretty immature. It’s a market to go fishing in with a line and pole, rather than a great big net.
“The attraction of investing in smaller companies is plain to see from some of the success stories on the AIM market, but unfortunately there have been plenty of flops too.
“AIM shares have become more popular with private investors in recent years, partly as a result of them being allowed within ISAs, and the generous inheritance tax treatment. Successes like ASOS and Domino’s Pizza have also raised the profile of the market.
“However AIM is a market suited to investors who are sophisticated, brave and patient. Anyone who wants to gain exposure to smaller companies, but doesn’t have the expertise to pick stocks, should consider investing via a fund, where a professional investment manager picks a portfolio for you. This is an area where investment managers can really use their research resources to bear fruit, because the companies on AIM aren’t subject to the same level of global analysis as the big blue chips on the UK market.”
FTSE AIM has fallen 30% since launch
AIM market was launched on 19th June 1995, with the FTSE AIM index launched in January 1996 (6 months after the market opened). Yet the index is still 30% below its starting level. While AIM has been home to many individual success stories, the market as a whole has been a graveyard of failed ambition says Khalaf.
The performance of AIM compares poorly with indices from the main market over the same time period.
Khalaf says that the conclusion is AIM is not a market for investors to buy en masse in the same way they may do with the FTSE 100 through a tracker fund. Instead they need to approach it with a fine tooth comb to make sure they are picking out the winners and avoiding the deadwood, or alternatively buy a fund where a fund manager does this on their behalf.
|Price return||Total return
|22/01/1996 – 15/06/2016*||09/05/1997 – 15/06/2016*|
|FTSE Small Cap||124%||220%|
*The AIM market launched in June 1995 but the FTSE AIM Index which measure performance was only launched 6 months later, in January 1996, with the total return index arriving in May 1997, performance data therefore dates back to the launch of these indices.
Three AIM success stories
In 1995 AIM started with just 10 companies listed, worth in total £82 million. Today there are 1016 companies, worth in total £75 billion. The market was actually bigger in 2007 when there were 1,694 companies listed worth £98 billion.
Since 1995, 3,673 companies have been admitted to the market, and have collectively raised £97 billion.
Why invest in smaller companies?
Khalaf says smaller companies have much greater growth potential than the big blue chips, but the flip side is they are riskier. Often their fate lies in their own hands though, as their share prices are typically driven by what is going on in the company more than events unfolding in the wider economy. Investors should therefore consider smaller companies as a way of diversifying an existing blue chip portfolio, as well as for hunting out exceptional returns.
Mid caps should also be on investors’ radar. The FTSE 250 has been the best performing segment of the UK stock market over the last 20 or so years by quite some margin. Companies admitted to this portion of the market are often in a sweet spot because they have typically reached a size which gives them some measure of robustness, yet they still have lots of room left to grow.
Hargreaves suggests 5 ways to invest in smaller companies