By Tom Wickers, Hottinger Investment Management
The Alternative Investment Market (AIM) is a sub-market on the London Stock Exchange (LSE) which was introduced in 1995. The shares are unquoted (not listed on a recognised exchange) and provide a channel for companies to list and raise capital under lower regulatory requirements than in other developed equity markets. As such, AIM is largely used by smaller companies that do not meet the capital requirements of the main market or those that would find stricter compliance too costly, making it a hub for businesses with growth prospects rather than stable cash cows. The AIM market has grown substantially since its inception and is touted as being the world’s leading growth market. By year end 2019, there were 851 companies listed on AIM with a total value of £103.9bn, in contrast to 121 companies listed at the end of 1995 with a value of just £2.4bn. The companies listed on AIM are notably diverse, with the value in the AIM index relatively equally spread across the majority of sectors [Figure 1]. Investors can therefore allocate AIM portfolios according to forecast market trends as well as by individual stock-picking.
In 2013, AIM portfolios became more accessible to the general public as a law was passed making them permissible under an ISA wrapper. This allowed investors to mitigate capital gains and income tax via the ISA, as well as inheritance tax through the Business Property Relief (BPR) benefit of AIM investments (provided that certain criteria set by HMRC are met). The regulatory changes coincided with fundamental shifts in the characteristics of AIM stocks, leading to renewed interest from institutional investors in recent years.
Due to its venture capital slant, the AIM market holds higher intrinsic risk than more traditional indices such as the FTSE 100 Index. The companies have a lot of room for growth, but quick bankruptcies can also occur on the back of scandals or difficult market conditions. Financial news is littered with success and disaster stories; a prime example being Bidstack’s performance in 2019, climbing 526% in the first half of the year only to then lose 75% of its value in the second. However, in aggregation, particularly in more recent years when the AIM market has become more established, AIM stocks have outperformed FTSE 100 stocks in returns with similar volatility levels [Figure 2]. This is to be expected to compensate investors for the greater downside and liquidity risks involved. Drops in value are pronounced in the AIM market (as shown in Figure 2 at the end of 2018), the worst occurring following the financial crisis, where 65% losses were recorded. Between 2015-20, the AIM All Share Index performed poorly, only marginally beating the FTSE 100 Index and underperforming the AIM 100 Index. In contrast, growth in the AIM 100 index was strong, outpacing the FTSE 100 by 31% over the time period shown. Should this trend continue, the opportunity would mostly lie in the largest AIM stocks, rather than the market as a whole.
Often nicknamed the ‘Wild West’ of markets, investors initially viewed the AIM market as a playing field for short-term, gung-ho punters because it had sparse research coverage and was prone to financial scandals and collapses. Further, institutional investors did not need to get involved in the AIM market in order to access these successful companies as they were expected to move to a larger exchange once they had accumulated sufficient capital. Recently, however, larger companies have shown continued interest in staying on the AIM index, favouring the manoeuvrability that its softer regulation enables. Boohoo, currently the largest stock on AIM, has made no effort to move to the main market even though it is now large enough to list on the FTSE 100. The result is that the AIM market has become more skewed towards relatively larger and more stable companies [Figure 3], providing a more investable environment for institutions.
The AIM market has materially shifted in the past ten years, still offering access to nascent companies but also to a plethora of established businesses that have thus far brought substantial returns at tolerable volatility levels. The shift from gamble to investment proposition means that institutional and individual investors alike should continue to watch this space. However, historical slumps provide ample warning of the palpable downside risks involved when investing both in individual companies and the index as a whole. Investors should take careful stock of their capacity to absorb losses before acquiring any significant holding in AIM shares.
 FTSE 100 weekly volatility was 1.79% in the time series, while AIM 100 volatility was 1.72%
 In reference to the AIM 100 Total Return Index (Gross Dividend) on Bloomberg from peak to trough.