Conal Gregory: AIM for the smaller companies and rewards could be greater

The Alternative Investment Market (AIM) was launched 24 years ago next week to give small companies the capital to grow and investors the chance to plant a financial acorn in their portfolio. Almost four thousand enterprises – actually 3,852 – have joined AIM in that time, raising well over £100bn.

There is a two-way flow between AIM and the main stock exchange: 160 have transferred to the larger market (like Dominos) and 333 downsized.

By sector, AIM has a broad base, led by 18 per cent in industrials and 17 per cent in financial, followed by 13 per cent each in basic materials and technology. Oil and gas and healthcare account for 11 and nine per cent respectively. In the consumer sector, services are 11 per cent and goods six per cent, leaving just one per cent each for telecommunications and utilities.

Political uncertainty is having its effect with new issues this year only 10 per cent of the level seen by the same time in 2018.

Many planning their retirement like AIM for the inheritance tax exemption which is available for shares held for a continuous two-year period prior to death and which must not deal wholly or mainly in land or buildings. Such eligibility is subjective and no official list exists.

There are two ways to invest in AIM, either directly into individual companies or, more safely, through a fund but the latter means there is no IHT allowance. No effective tracker exists as it is almost impossible to replicate all the stocks as some are traded infrequently which would make full exposure difficult and expensive.

Since January 2000, the AIM index has fallen 67 per cent which shows how important it is to buy selectively. Where smaller firms generate their income primarily in the UK or in Europe, Brexit could play a further downward factor.

“Investing in this market benefits from fishing with a line and rod rather than trawling with a net, which is why it may be better to rely on the expertise of a fund manager who invests in smaller companies, both on the main market and AIM,” advises Sarah Coles at Hargreaves Lansdown.

Kelly Kirby, chartered financial planner at adviser Chase de Vere in Leeds, says: “There is a strong argument for including smaller company shares in your portfolio. They are usually more dynamic and have greater growth potential than larger firms. Over the longer term, it is likely that smaller companies will outperform larger.”

However, Kirby stresses there are greater risks with generally less security than larger firms which have more financial backing. The shares are less liquid with fewer purchasers when times are difficult.

Jason Hollands, at Tilney Investment Management, says that listing on AIM is far less rigour and cheaper than opting for a main market listing but “this ‘light touch’ approach can make it a little bit like the Wild West”.

He tips four: Advance Medical Solutions (wound care products), CVS Group (integrated veterinary firm with 500 practices in UK, Ireland the Netherlands), drinks firm Nichols (which owns Vimto) and Youngs Brewery.

Jonathan Baker, investment director at Charles Stanley, says the description ‘smaller companies’ is “perhaps too broad as capitalisation range from a few million to hundreds of millions”. He notes the variety from “stock market darlings such as Fever-tree, the tonic manufacturer, to more niche businesses”.

In Yorkshire, Baker has identified EMIS of Rawdon for its healthcare software and IT services, whose price is up around 30 per cent this year, and adhesive product supplier Scapa which has a large presence in Gargrave.

“AIM has been excellent for investors over the last decade owing to a prolonged period of growth-orientated investment returns and a raft of innovative companies,” says James Rowbury of Leeds-based Redmayne-Bentley. He has calculated that £100,000 investment in the largest 100 AIM firms in 2009 would be worth £218,430 today plus any dividends.

Adrian Lowcock, from adviser Willis Owen, cautions that “only a few succeed and grow rapidly but the growth rates of these can be very impressive”. He cautions that AIM investors should be comfortable with a high level of risk and volatility.

Rowbury makes two selections. Tissue Regenix of Leeds is a biotechnology firm, developing regenerative medicines for use in surgery and orthopaedics, such as DermaPure for skin repair.

Sheffield-based cloud computing company, WANdisco, has patented commercial data and has attracted such high-profile clients as Allianz, Cisco and Polycom.

Ian Forrest at private client broker, The Share Centre, suggests Dart Group from Leeds whose services range from logistics to leisure travel and include Jet2. “Its shares have performed very well, comfortably beating the market over the past five years, as sales and profits have risen strongly.”

Forrest also tips aggregates group Breedon and Renew, which dates from 1786. The Leeds firm offers services including supplying engineering staff. Lowcock likes Dart and Renew. He gives Sirius Minerals as an example of an AIM stock which has been promoted to the FTSE 250 through its North Yorkshire development of polyhalite, a multi-nutrient fertiliser.

AIM has provided wonderful successes like ASOS and Boohoo, says Darius McDermott of Chelsea Financial Services, “but many more failures”. He says researching individual stocks is essential. They can be put into an ISA for tax benefits.

One of the key elements to consider is the availability of voting shares. The AIM rules do not quote a percentage but the nominated adviser who proposes an application needs to consider it as part of the “qualitative assessment”.

Instead of recommending specific AIM shares, Coles prefers two Marlborough funds: UK Micro-Cap Growth and UK Nano-Cap Growth. McDermott, too, prefers collectives like LF Gresham House UK Micro-Cap, Unicorn UK Smaller Companies and FP Crux UK Special Situations.

Kirby likes to access through funds, notably Liontrust UK Smaller Companies, which holds 72 per cent in AIM. These include:

Huddersfield-based SimplyBiz: services to financial intermediaries

Leeds-based Tracsis: software supplier to rail industry

Wakefield-based Team 17: create video games

York-based Animalcare: develop and supply veterinary pharmaceutical products.

Further afield, Andrew Banks, senior investment manager at wealth manager J.M. Finn, likes Zytronic, near Newcastle, which design and manufacture touch screens.

It has cash of over £12m with no debt and yields 8.5 per cent. Ramsdens, of Middlesbrough, whose “shares look good value”, is his other tip. Their 150 stores offer pawnbroking, foreign exchange, jewellery and precious metals.