The Alternative Investment Market (AIM) has rebounded strongly since Coronavirus first struck the UK and knocked equity markets for six in the first half of last year. Since then, lots of positives have emerged for AIM investors, from the market’s outperformance of the FTSE 100 and the S&P 500 in its speed of recovery to the rapid access to funding that the market has been able to offer.
At the time of writing, the Numis Alternative Markets Index has not only recovered its pre-COVID level, but has also surpassed its 2018 peak.
While that is great news for AIM as a whole we think that, for investors considering the market, the story is a little more complex.
We’ve no doubt that the sell-off created some great investment opportunities, but AIM has, like NASDAQ in the US, been the subject of stimulus and lockdown-fueled tech hype. In all the excitement, we saw AIM-quoted Boohoo’s dramatic fall from grace following an investigation into its UK supply chain. The fact that the shares returned 15.1% during 2020 in spite of failures of both governance and social welfare are testament to the powerful allure that growth companies have exhibited of late. Against this backdrop, we believe it is more important than ever that investors are discriminating in their stock selection.
Identifying the right shares on AIM is about more than finding the biggest companies, the fastest growth or even the highest price drops. Beyond the highly publicised fall and subsequent recovery, there are still interesting opportunities for the more discerning.
Fundraising jumps up
2020 saw AIM quoted companies raise a total of £5.2bn in further issues1 as businesses tapped investors to weather the storm and raised funds for expansion. That was the highest amount in further issues in a decade, and over 70% more than the total funds raised in 2019 on AIM.
This exemplifies what AIM was always intended to be and has now been doing for 25 years. In view of the past year, it’s hard to argue with the London Stock Exchange’s former CEO (now FCA CEO) Nikhil Rathi when he says, “AIM has provided a resilient platform for growth companies to raise equity capital. Supporting companies throughout changing business and economic cycles, AIM has become the most successful growth market in the world.”2
AIM remains an attractive venue for companies looking to list because of the ease of fundraising, ably demonstrated by N Brown’s decision to delist from the LSE’s main market and join AIM to benefit from quicker and cheaper access to capital.
Just as importantly, there is clearly an abundance of investors – from institutions to individuals. But what makes it so attractive to investors, even in the most difficult of times?
Understandable attraction
It is clearly a world class shop window for companies with high growth aspirations. Perhaps it’s not surprising that AIM is where they want to be when you consider that 40% year-on-year revenue growth is reported by AIM companies in the first three years following IPO and 20% in years four and five3.
It is also home to the types of innovative companies that can turn on a dime and adapt to shifting conditions as we’ve seen digital technology, e-commerce and med-tech businesses doing recently.
But there is also a growing maturity, with the proportion of AIM companies worth over £250 million steadily climbing. Although 2020 saw dividends dramatically cut as a result of COVID, before that AIM investors were seeing record levels of dividends. Link Group estimates dividends will return to these record levels in 2022 or 20234. Aside from the heavily-promoted stocks, there are many under-researched companies allowing our team at Close Brothers Asset Management to uncover some real gems. Proprietary research is vitally important, particularly in a post-MIFID II world where the amount of independent analysis has reduced markedly.
Add to this the availability of tax reliefs on some AIM shares with the potential to reduce Inheritance Tax (IHT), income tax and capital gains to zero* (if held in an ISA), and you’ve got a very powerful combination. And if you are looking for impact investing, according to Grant Thornton, AIM companies directly supported more than 430,000 jobs and generated a tax contribution of £3.2bn to the Exchequer in 20195, making the estimated £480m cost of Business Property Relief (BPR) in 2018/19 pale into insignificance.
So what are the keys to successful AIM investing?
Long term view
Perhaps counter-intuitively, AIM is home to a lot of patient capital. Much of it comes from those investing for BPR purposes, qualification for which requires investors to hold AIM shares for a minimum of two years. While this is an accelerated method to achieve zero IHT on those shares in the context of other estate planning methods (which typically can take 7 years, not to mention the 14-year rule which can also come into play), investors must be holding the investment at the time of their death and/or transfer to be able to claim BPR.
This means that they are generally held for much longer than two years – for investors in the Close Inheritance Tax Service (CITS) it is more likely to be seven years or more. And it is this longer term investment horizon that can really make AIM work for investors. It allows volatility to play itself out. It also demands stock pickers who can unearth intrinsic value where investors are likely to benefit from growth in share price and dividends over an extended period.
Astute selection strategies
As we’ve seen, a lot of hype can be generated by animated market activity in tumultuous times. Over the last year, we have seen some spectacular short-term share price performances. It is vital for investors to question whether elevated valuations are sustainable when the tailwinds abate and market exuberance wanes. Conversely, we have found a number of shares which have been sold off indiscriminately but haven’t enjoyed the same recovery in share price as others – ultimately, price discovery will occur over time. Nor is a capital raise necessarily a bad thing: yes, some businesses have needed to shore up their balance sheets – often as a precautionary measure – but others have gone on the offensive, having spotted a competitive advantage that they intend to capitalize on.
This has created an environment ripe with new ideas, and we have been adding new holdings to CITS portfolios at a rate not seen for the last decade. There may be a lot of over-excitement, but there are also lots of opportunities if you know what you’re looking for. So, for those who have sat on the sidelines watching the rally, it’s not too late to invest.
While AIM investing is certainly not an exact science, we have extensive experience investing in smaller companies within CITS. For those with clients looking for accelerated relief from IHT, this solution is the full package – a long term investment outlook, research capability, stock picking know-how and a proven track record over nearly two decades. Along with the knowledge and confidence to understand that not everything that glitters is gold.
> Explore the Close Inheritance Tax Service
1London Stock Exchange, December 2020
2London Stock Exchange: A significant anniversary during an unprecedented time
3London Stock Exchange/Grant Thornton: AIM at 25, March 2020
4Citywire: AIM dividends expected to slide by a third this year, September 2020
5Grant Thornton: Economic impact of AIM, June 2020
Important information
This article is only intended for use by UK investment professionals and should not be distributed to or relied upon by retail clients. Please note there is no guarantee that the CITS investment objective will be achieved. The value of investments will go up and down and clients may get back less money than they invested. Past performance is not a reliable indicator of future returns. The information contained in this document is believed to be correct but cannot be guaranteed. Opinions constitute our judgment as at the date shown and are subject to change without notice. This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation.
Specific information
CITS is a tailored discretionary investment portfolio management service that invests in both the Alternative Investment Market (AIM) and the Aquis Stock Exchange Growth Market (AQSE), with the benefit of major tax advantages introduced by the Chancellor of the Exchequer in his budget of March 2000. CITS is an Inheritance Tax mitigation service based on current tax law and practice. The tax treatment depends on the individual circumstances of each client and may be subject to change in the future. CITS invests in ‘qualifying shares’ in smaller companies which may be more volatile than investments in more established companies. Such companies can be subject to certain specific risks not associated with larger, more mature companies. Consequently this can make the CITS portfolios more volatile as the value of an investment may fall suddenly and substantially. CITS is considered suitable only for informed and experienced investors.