Investing in the Alternative Investment Market, April 2022

When it comes to movies and sport, I always cheer on the underdog. And I particularly like a fairy-tale ending, such as the one we witnessed last weekend at the Grand National.

40 horses and riders competed for the top prize at Aintree, with Any Second Now favourite to win at 15-2, followed by Run Wild Fred at 8-1 and Minella Times at 9-1.

But it was 50-1 shot Noble Yeats – ridden by Sam Waley-Cohen in his last ever race – that managed to pull away to take the title.

Investing in the underdogs

While it can be tempting to back the favourites, sometimes it can be even more rewarding to back the underdog. And this is also true when it comes to our investments.

And one place to find such businesses in the UK is in the Alternative Investment Market (AIM).

Launched in June 1995, the intention was for AIM to provide a stock market for smaller, earlier stage companies, to help them access funding and fuel their growth. Starting life with just a handful of members, more than 3,600 firms have since listed, taking advantage of the less stringent regulations.

Not everyone is a winner

However, as with any event that features an underdog, the AIM stock market has had its challenges. And, despite the growth potential, overall returns have been disappointing.

While there have been a few investment gems over the years like ASOS, boohoo and Fevertree, the FTSE AIM All Share has returned just 34.8* over the past 25 years. In comparison, the main UK market, the FTSE All Share, has returned 263.7%*, while the Numis Smaller Companies ex Investment Trusts index has returned a huge 689%*.

This is because while the AIM index has a lot of stocks with great potential, it’s had more than its fair share of failures. Careful stock-picking has been crucial to making decent returns over the past quarter of a century.

Since Brexit, however, fortunes have been looking up and the index has crept ahead, returning 55.6%** versus 49.8%** for the FTSE All Share and 46.3%** for smaller companies.

So, what do fund managers think about the index and it’s potential? Here, three professional investors give their views.

LF Gresham House UK Micro Cap

This highly concentrated, high conviction UK micro-cap fund is on the Chelsea Core Selection. It has been managed by Ken Wotton since its launch in 2009, with the support of the 50-strong specialist team at Gresham House. The fund only invests in companies in a select number of sectors where the team has specific expertise.

“AIM has grown hugely,” began manager Ken Wotton. “It was like a casino in the early days, but over the last 15 years or so the number of companies has come down and the average market cap and quality of companies has gone up. So, returns have been better, and it is less volatile than it once was.

“It was originally full of dot.com and oil and gas businesses which were cyclical, and you tended to get very binary outcomes for stocks. Now it’s a more balanced index. Companies stay in it longer and governance concerns have been reduced. Today I don’t differentiate between AIM and the Numis Smaller Companies index – at least not initially. I go through the process and only look where a company is listed at the end.”

TB Amati UK Smaller Companies

This Chelsea Selection fund is an unconstrained portfolio, seeking structural UK growth businesses that can grow faster than the economy. It is managed by a highly experienced team of small cap specialists. The portfolio of 65-70 companies focuses on structural growth businesses, which the managers believe can add value in the under-researched small and mid-cap part of the market.

Co-manager Scott McKensie said: “AIM makes up about 45% of the portfolio – so it’s actually a huge part, showing how positive we are about the opportunities within it.

“The market has changed a lot in recent years. It used to be the wild west or where companies went to die and was full of rubbish. But there has been a lot of progress and while there is still less regulation than the main market, it is far more dynamic.”

IFSL Marlborough Special Situations

This fund has evolved as it has grown over the years and today invests slightly higher up the market cap scale. The investable universe is more than 2,000 stocks from the FTSE AIM, FTSE Small Cap, FTSE Fledgling and smaller companies from the FTSE 250. Generally, these stocks are less well covered by sell side analysts and availability of information is somewhat constrained. 

Eustace Santa Barbara, a co-manager on the fund told us: “AIM, on aggregate, hasn’t been a great market and there were some pretty speculative stocks on there, particularly in 2006 -2007. But today about 40% of our fund is invested in AIM companies (as it was in 2000) so that proves you can find some great ideas.

“AIM is now a good market – it provides good capital for higher growth companies at a cheaper price. And one of the greatest things about UK smaller companies is that we have so many entrepreneurs and business leaders willing to use capital markets. So, you can find some real gems – firms with management teams that are extraordinary, catch them early and then stay with them as they grow.”

*Source: FE fundinfo, total returns in sterling, 6 February 1998 (when data first available) to 11 April 2022
**Source: FE fundinfo. 23 June 2016 to 11 April 2022

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice. Reference to specific securities is for illustration purposes only and should not be taken as a recommendation to buy or to sell.