Take AIM to invest in young enterprises

The chance to invest in a relatively new enterprise whilst it seeks funds to expand carries real appeal. By outpacing investors who only look at the full stock market, there is the chance to buy into a company at a fraction of its future price.

In 15 years, the Alternative Investment Market (known as AIM) has become the most successful growth market in the world, having helped thousands of ambitious companies to raise the capital required to fund their development.

From just 10 firms worth 82m in six sectors in 1995, AIM has grown to over 1,200 companies worth 60.5bn operating in 94 countries across 40 sectors. During that time, more than 3,100 firms have joined AIM, many using it as a stepping stone to a full stock exchange listing.

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Five years ago several indices were introduced to judge how this junior market performs as well as making a good benchmark to compare single AIM-listed companies:

FTSE AIM UK 50 Index

FTSE AIM 100 Index

FTSE All-Share Index

FTSE All-Share Super Sector Indices.

London's AIM is head and shoulders above the competition. In terms of companies listed, Alternext in Paris has 149, Entry Standard in Germany just 119, First North for the Nordic states 124 and Hong Kong 172. By market capitalisation, Toronto's TSX-V market is closest at 31bn.

Investing in AIM can give global exposure to one's portfolio with 463 trading internationally of which 225 are actually incorporated outside the UK.

Even during the economic uncertainties of last year, AIM was able to raise over 5.5bn which demonstrates the interest in small and mid-cap companies.

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Currently, "Aim is going through a 'renaissance' with a 20 per cent gain since July 1 as investors become less risk averse and see better value in AIM companies than on the main market," says Barry Anysz of stockbrokers Rensburg Sheppards.

He says many companies pay a dividend well in excess of blue-chip companies and building society interest and have reported excellent results despite the recession.

Yorkshire-based AIM companies feature among the success stories. They include Surgical Innovations in Leeds, with 4.5m revenue, supplying leading edge surgical equipment, and Sheffield-based Pressure Technologies.

Jonathan Baker, investment manager at Leeds stockbrokers Charles Stanley tips such other AIM successes as Brulines (equipment for recording liquid movements like beer and spirits with systems in over 22,000 pubs), Hamworthy (high-tech products, systems and services to the gas and oil industries with 19.5m annual profit on 214.3m revenue) and Majestic Wine (UK's largest wine retailer with 150 stores with profits of 16m up 117 per cent on 233.2m sales and an increased dividend).

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Energy features in a number of AIM stocks. One reporting improved results is Hargreaves Services, which provides energy support with the UK's largest bulk haulage fleet. Its profits are up 42.1 per cent to 33.5m on 503m turnover.

If investing in firms supplying the green energy market, consider Ceres, Clipper and Zenergy, tipped by Baker to take off when this sector goes forward. Acta Spa is another, providing clean energy products and environmental catalysts including low cost solar panel installations. It is based in Pisa, Italy.

To counter the effect of a prolonged downturn in the UK economy on small firms, focus on those which derive a large proportion of their sales from overseas, such as Belfast-based Andor Technology and Manchester commercial flooring suppliers James Halstead.

High street names also feature such as the Restaurant Bar & Grill and Piccolino brands owned by the Individual Restaurant Co with a 50m turnover but a market capitalisation of only 7m. This sector is attracting private equity interest with recent takeover activity at Carluccio's and others. Yet it is not all plain sailing. Many smaller stocks on AIM are illiquid and should be avoided. Watch carefully those in resources, many based overseas, which are highly speculative. Even so, the London School of Economics reported that the "failure rate on AIM is low."

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Avoid companies which both make losses and show high gearing (borrowing).

Over 40 per cent of AIM firms have a market capitalisation under 310m and 26 per cent less than 5m. "Clearly there are too many small companies on AIM and of these a large proportion are family or board controlled which in many cases pay little regard for outside shareholder interests," warns Mr Anysz.

Partly to counter the risk factor, there is a generous tax incentive to invest in AIM. A holding for just two years is regarded as outside your estate and therefore really useful for inheritance tax purposes.

Many firms leave AIM for positive reasons, such as a reverse takeover or other corporate activity, which shows signs of a dynamic rather than static market. UK smaller companies formed the second best performing sector last year (after global emerging markets), up 50 per cent, according to Morningstar research.

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To benefit from AIM but significantly reduce risk, opt for a fund. Regardless of sector, of all the funds analysed by Morningstar, the two top growth ones last year (to December 18) were:

Close Special Situations, up 241 per cent;

Close Beacon, up 181 per cent.

Both are managed by Deryck Noble-Nesbitt. The former is a unit trust which has been running six years and currently has 55 per cent invested in AIM. Its major holdings are in mining, healthcare, media and industrials. The latter was launched in 1994 and is an open-ended investment company (OEIC) and almost entirely invested in AIM. Its major sectors are support services, industrial goods and mining.

Both can be placed in an ISA and attract five per cent initial and 1.5 per cent annual fees. To reduce volatility, consider investing regularly which can be from 100 monthly.

Over the last three years to the end of September, performance among AIM funds has been patchy. In research by Lipper specially for the Yorkshire Post, the best performers were CF Octopus UK Micro-Cap Growth A (up 41.4 per cent), Baronsmead AIM VCT (standing for Venture Capital Trust)(up 3.5 per cent), Close Special Situations (down 5.5 per cent) and Bluehone AIM VCT (down 5.8 per cent).

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Among others to consider is the Rensburg AIM VCT which has over 50 per cent in AIM stocks and the balance in blue chip and corporate bonds and yet is valued at over 40 per cent discount to net asset value. It currently pays an 11 per cent dividend.

As a whole, AIM continues to perform resiliently. As the market matures, it is the only truly internationally focused growth market in the world.

Looking for consistency in the market

Dennis Fowler, pictured, who trained as a chemist and is now retired as a textiles account manager, likes to follow the stock market. He compares funds for their consistency over one, three and five years and then decides "if they are well managed or not".

Since the economic volatility, Derek, 67, has been looking at performance over one, three, six and 12 months, rather than years. "I don't seek an extra two to three per cent but prefer consistency," he says.

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In April last year, Derek purchased Close Special Situations which has 55 per cent invested in AIM stocks. He sold that holding in June 2010, achieving 87.8 per cent return. He also bought into the same fund in September and October last year.

Derek, who lives in Hudders-field, says his portfolio is "fairly well diversified, notably in bonds, and not in emerging markets".

He invests through Garrison Investment Analysis in Beverley, part of Charles Stanley stockbrokers. Derek says they are "very helpful". Garrison offer large discounts against initial fees as well as a loyalty bonus for those who use the Fundchoice platform to store their investments.

John Shires, Garrison's managing director, says the bonus equates to 30 per cent of the trail commission and is paid monthly but savers can opt to have the money reinvested. There is no charge for using an ISA or SIPP.

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