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Finding winners on AIM

6 August 2018

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

It’s the 5th anniversary of investors being able to hold AIM shares in an ISA.

The Alternative Investment Market, or AIM for short, is designed to help growing companies access investment. Having attracted over 3,600 businesses since launch it’s the most successful growth market in the world.

Companies listing on AIM don’t have to meet the same standards of corporate governance as those on the main market, making it easier for small companies to list early. For investors, a lot of AIM shares are exempt from the stamp duty usually charged on share trades, and some investments are potentially exempt from inheritance tax.

Even though it was launched in 1995 it wasn’t until August 2013 that AIM shares could be bought in an ISA. Holding AIM shares in an ISA means your investments won’t be subject to income tax or capital gains. Bear in mind though that all tax rules can change and any benefits depend on your individual circumstances.

Potential for high reward, but higher-risk as well

Not all AIM companies are small, though many tend to be. AIM-listed ASOS is large enough to be knocking on the door of the FTSE 100, were it listed on the London Stock Exchange’s Main Market.

How to buy shares

Smaller companies have the potential to deliver fantastic returns for investors. Getting into companies early in their listed life means you can be taken along for the ride as they prosper and grow, and in recent years the UK’s smaller companies have far outperformed their larger cousins, though there are no guarantees this trend will be repeated in the future.

Total Return on FTSE 100 vs. FTSE Small Cap

Past performance is not a guide to future returns.

Source: Lipper IM, 31/07/18

Small companies are also higher-risk. Because they’re young businesses, many haven’t tasted tough market conditions. They’re more likely to hit problems than larger companies when times turn tough, and often lack experienced managers. They tend to go bankrupt more easily than larger companies.

AIM shares are often under-researched and can sometimes be difficult to trade in large volumes. Some of the shares have a large 'spread', the difference between the buy and sell price, which adds risk.

The combination of greater losses from losers and better returns from the winners makes picking the right share all the more important.

Picking AIM shares

It might sound obvious, but ultimately the successful companies are those that generate profits. That’s not something you tend to see with all smaller businesses. In fact, a surprisingly large number never make any profits at all.

Ideally you also want those profits to be turning into cold hard cash. Cash is money a company actually has in the bank to pay down debt and invest in growth. Without it, growth has to be funded by debt and that makes companies vulnerable to a downturn.

Searching through the 944 companies listed on AIM to find one that matches these attributes is a tough ask. But a useful cheat can be looking for companies that pay a dividend.

Dividends can only be paid out of profits, and since they’re usually paid in cash, they’re a good indicator of cash generation as well. We also think that the decision to pay a dividend shows that directors have investors’ interests front of mind.

The dividend

Historically a bias towards AIM shares that pay an income has served investors well, as shown by the graph below.

Dvidend Payers vs. non-Dividend Payers on the AIM

Past performance is not a guide to future returns.

Source: Bloomberg, 01/08/18

How to buy shares

Clearly the fact a company pays a dividend is no guarantee of success, and not paying a dividend doesn’t mean a company is doomed to failure.

But we think it’s a good initial indicator of quality – and generally helps to keep clear of some of the more dramatic collapses AIM has seen over the years. Remember though that all investments, and any income from them, can fall as well as rise in value so you could get back less than you invest. This article isn’t personal advice, so if you are not sure an investment is right for you seek advice.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

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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    Investment notes
    No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

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