25 years of AIM – three tips to help achieve investing success

The Alternative Investment Market (or AIM) was launched on 19 June 1995, with ten companies worth £82m. Today it’s home to around 850 companies worth over £100bn in total.

AIM was designed to make it easier for small companies to raise money by selling shares to investors. However, just because these companies start small doesn’t mean they’ll stay small. Because smaller companies are often fast growing they have the potential to deliver great returns.

The largest company listed on AIM, online clothing retailer Boohoo, has grown so much that it would be in the FTSE 100 if it were listed on the main market. In fact smaller companies have outperformed larger companies over time.

FTSE 100 vs FTSE Small Cap

Scroll across to see the full chart.

Past performance isn't a guide to the future. Source: Lipper IM, 08/06/20.

However, small companies are also higher risk. They often lack significant financial reserves and can often only have a handful of customers or products – leaving them very exposed to small changes in the market environment. The AIM also has some unique traits that can make investing in these companies particularly high risk.

To make it easier for small companies to list on the stock market, businesses listing on AIM don’t have to meet the same standards of corporate governance as those on the main market. Corporate governance rules are there to protect investors and weaker rules mean less protection. There have been several high profile corporate governance scandals on AIM over the years, so it’s a very real risk.

All this means taking advantage of the opportunities on AIM while avoiding costly mistakes can be daunting. While there’s no substitute for doing your homework, we think three simple tips could help improve your investment results.

This article is not personal advice. If you’re unsure, please seek advice. All investments and their income, fall as well as rise in value, so you could get back less than you invest. Past performance is not a guide to the future.

Three tips for investing in smaller companies

1. Only invest in profitable businesses

   This might sound obvious but a surprising number of AIM listed companies aren’t making a profit today and probably never will. Speculative oil & gas, biotech and mining companies are the primary culprits. These companies promise big rewards if they hit oil, gold or a coronavirus vaccine, but most don’t deliver the goods.

   Loss making companies usually burn though cash to keep operations running, especially since in lots of cases they’re not making any sales. As a result they often turn to shareholders for help – issuing new shares and diluting existing holders. If the company can’t get the extra funding it might go bankrupt altogether leaving shareholders with nothing.

   They often sound exciting, but loss making AIM stocks leave their investors poorer more often than not.

2. Focus on companies that pay a dividend

   This is essentially an extension of rule number 1. If profitable companies are better than loss making companies, then dividend paying companies are better still.

   The logic behind this rule is rather simple. It’s possible for companies to report a profit without actually generating cash. There are good reasons why that might happen, but paper profits are less reliable and are more vulnerable to aggressive accounting. For that reason investors prefer profits that are backed up by cash.

   While you can use a company’s cash flow statement to work out whether profits are supported by cash or not (and we would recommend that you do), the fact the company is paying a dividend acts as a kind of short cut. Dividends are paid to investors as cash in hand. By being able to sustain a dividend over time it’s usually a good sign the company is generating genuine cash profits.

   Investors could reasonably argue that applying this rule would have meant missing out on the likes of Boohoo and ASOS. These are two of the most successful companies on AIM and have never paid a dividend. However, across the market as a whole, dividend paying AIM stocks have still performed far better. In fact, as you will see from the graph below, AIM stocks which pay a dividend delivered a 229% return over the last 10 years whereas non-dividend paying companies actually lost 16.6%.

Dividend paying AIM stocks vs. non-dividend paying AIM stocks

Scroll across to see the full chart.

Past performance isn't a guide to the future. Source: Bloomberg, 08/06/20.

3. Pay particular attention to companies with large family ownerships

   AIM is well suited to family owned businesses because of the inheritance tax rules that apply. However, that can work to the advantage of outside investors too.

   The desire to pass the business onto the next generation often means family owned companies are conservatively run while managers take a long term view. That can mean little or even no debt, and a relatively high level of investment.

   These companies aren’t going to “shoot the lights out”, and aren’t the kind of company you usually think of when talking about AIM. However, over the long term we think high quality companies should deliver good returns. We find a surprising number of family owned companies that fit the bill.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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