Why Aim stocks are for stockpickers

Aim, the UK’s market for growth stocks, has had a respectable five years, but returns are driven by a few winners.

When Aim reached its 20th anniversary in 2015, most investors were not reaching for the Champagne. Nearly three quarters of firms listed on the London Stock Exchange’s market for growth companies had lost money for shareholders, according to research at the time by Elroy Dimson and Paul Marsh of London Business School. Almost one in three firms lost 95% or more of their initial value. Overall, the FTSE Aim All-Share index was down by around 20% since inception, at a time when the FTSE 100 had almost doubled.

The subsequent five years have been better. The FTSE Aim All-Share has returned 21% (including dividends), while the FTSE 100 has returned 6.4%. It’s true that success has been unequal: only about 30% of firms have seen their shares rise, while 50% are showing losses (the rest haven’t been listed for the full five years). Just 10% are up by as much as the 21% average for the index (I’m ignoring dividends, but it won’t make much difference). Still, you expect returns to be skewed towards a few winners when investing in growth stocks, so that’s not a big problem.

Aim – a strange hybrid

Optimists will see this as evidence that Aim has matured. The first 20 years included the dotcom and mining booms – with all the attendant manias and frauds – which made it an exceptionally bad time, so the last five years look good by comparison. Aim has still seen some blow-ups recently – most notably the failure of bakery chain Patisserie Valerie in 2018 – but nothing on a par with those days.

Nonetheless, this market remains a strange beast. Many of the most popular Aim companies are not small growth stocks: some were once, but are now well established (online fashion retailer ASOS is an obvious example), while others are mature firms that list on Aim because they prefer its lighter regulation. These often trade at steep valuations because of their use in inheritance tax (IHT) planning (you don’t pay IHT on qualifying Aim stocks). Conversely, fewer good companies go to Aim for capital – they can get it via other means. So listings are a way for early investors and founders to exit or lesser firms to raise money. 

Hence Aim remains a small number of good stocks amid a great deal of dross. There is no tracker fund for Aim (low liquidity and wide spreads would make it very hard to run one), or for smaller UK stocks generally (the iShares MSCI UK Small Cap ETF is in effect a FTSE 250 tracker). After 25 years, UK small caps remain a good hunting ground for stockpickers, but a missed opportunity for investors who want broad exposure to growth opportunities.

Recommended

Just how green is nuclear power?
Energy

Just how green is nuclear power?

Nuclear power is certainly very clean in terms of carbon emissions, but what about the radioactive waste produced as a byproduct? It’s not as much of …
22 Jan 2022
Why GSK should turn down Unilever’s billions
UK stockmarkets

Why GSK should turn down Unilever’s billions

Unilever has offered GSK £50bn for its consumer division. But while the cash will be a temptation, the deal is not in the interests of shareholders or…
22 Jan 2022
The charts that matter: the start of the big crash?
Global Economy

The charts that matter: the start of the big crash?

US tech stocks fell further this week, more than 10% down on their November high. There’s what happened to the charts that matter most to the global e…
22 Jan 2022
Cryptocurrency roundup: authorities tighten the screw
Bitcoin & crypto

Cryptocurrency roundup: authorities tighten the screw

Saloni Sardana looks at the cryptocurrency stories that caught our eye this week.
21 Jan 2022

Most Popular

Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022
US inflation is at its highest since 1982. Why aren’t markets panicking?
Inflation

US inflation is at its highest since 1982. Why aren’t markets panicking?

US inflation is at 7% – the last time it was this high interest rates were at 14%. But instead of panicking, markets just shrugged. John Stepek explai…
13 Jan 2022