Discovering the Alternative Investment Market
The Alternative Investment Market (AIM), created in 1995 is the London Stock Exchange’s international market for listing smaller companies.
Often perceived as a more risky area of the UK stock market, AIM has been plagued by a number of misunderstandings. What can investors really expect?
Smaller company investment can certainly involve greater volatility of returns and also liquidity constraints (i.e. it can take time to sell a position), but for those already comfortable with the usual fluctuations of mainstream equity portfolios, AIM is definitely worth exploring…
The reality behind the myths
AIM currently has 804 companies listed with a combined market value of £104 billion (as at 31.11.17). These range across all types of sectors, thus giving the opportunity for investors to be markedly well diversified.
The investment case for AIM is compelling for a number of reasons: it provides strong diversification from the traditional ‘large-cap’ portfolio; the investments provide global exposure despite being UK domiciled; there is better access to companies’ management teams; and many companies have a good track record of paying (and increasing) dividends. In addition, the market is under-researched, providing opportunities to invest at an early stage of a company’s development. As a result, we have seen historic outperformance of smaller companies over time.
Nonetheless, there are many misconceptions about investing in AIM. Given its diverse opportunities, we think it is important to challenge these myths.
Myth 1: Is AIM too UK-centric?
As AIM is designed for listing smaller companies in the UK, it is often thought that the investments are exposed purely to the UK economy. However, whilst the stocks may be listed in the UK, many have operations and revenues from overseas, providing attractive diversity within AIM portfolios. Indeed, it may come as a surprise that around half of revenues generated by AIM companies are from overseas, which is slightly higher than the FTSE 250. Currently across the Sarasin AIM portfolio roughly 30% of earnings are sourced from overseas, providing diversification and reducing the risks associated with a highly UK-centric portfolio. For example, the well-known premium mixer company Fever-Tree generated 55% of its revenues from overseas this year and this is expected to expand as the group builds out its operations in the US.
Myth 2: Small companies… but how small?
AIM is the place for smaller companies to float and there are currently 804 companies listed. However some of these are not so small: their market capitalisations range from £1 million up to £5 billion, and there are currently 12 AIM companies with market capitalisations over £1 billion. In May 2017, the average market capitalisation reached a new high of £99 million. ASOS, the online fashion retailer and the largest listed AIM stock, has a market cap larger than eight companies listed on the FTSE 100. Within our portfolios we typically invest in companies with a minimum market capitalisation of £100 million in order to reduce liquidity risk.
Myth 3: An ‘inefficient’ market… a threat, or an opportunity?
AIM is under-researched and therefore deemed an inefficient market according to Modern Portfolio Theory. However, we see this as an opportunity to discover less well known stocks trading on discounts to their larger peers. Unlike the majority of the companies listed on the main market that may be covered by 10 or more analysts, many AIM companies only have one analyst researching them. This provides portfolio managers with the opportunity to analyse AIM stocks and draw conclusions that other investors may not see, giving the potential for significant upside where others may not realise.
Accessing a stream of new opportunities
Under current legislation, some AIM-quoted securities qualify for ‘business relief’, with the result that they are fully-exempt from inheritance tax when held for two years. Despite the undoubted appeal of this status, it is secondary to the importance of a stock’s underlying investment potential, and a steady flow of exciting companies continue to choose to float on AIM. This year alone there have been 68 new issues coming to the market, raising over £1.4 billion.
At Sarasin & Partners, we pick stocks with clear competitive advantages, experienced management, strong balance sheets, good cash flow and growing dividends, and which we believe are going to be beneficiaries of long-term global economic trends. When it comes to accessing AIM, our ultimate goal is to provide clients with quality exposure to this highly successful growth market.