The Alternative Investment Market (AIM) was established in 1995 as a sub-market of the London Stock Exchange (LSE). It provides an opportunity for younger, smaller and less developed companies to secure investment through a more flexible regulatory system. This flexibility is often cited in arguments that AIM investments carry great risks, and whilst they certainly are less secure than traditional investments, risk management strategies, the potential for major growth, tax reliefs and the chance to invest in international companies provide a plethora of reasons why investors continue to bank their millions on AIM-listed firms.
By no means do I wish to argue that AIM investments carry no risks. Less than a quarter of companies that were originally listed are still in operation, but a closer look suggests that the market carries fewer risks than is thought. Although volatility remains slightly higher for AIM shares, the difference may be less than expected, with the AIM 5-year volatility figure being 12.1, compared to an equivalent measure of 10.6 for the FTSE 100.
Companies quoted on the exchange have to meet certain corporate governance rules, which were strengthened in 2018. Under AIM Rule 26, companies are required to disclose on their website details of the corporate governance code that has been applied, how the company complies with that code and any instances where it departs from its chosen corporate governance code.
There are also a variety of committees and institutions gatekeeping the market. AIM is owned and operated by the London Stock Exchange and it is subject to the UK Market Abuse Regime, with the majority of companies subject to the rules of the UK Takeover Panel and the provisions of the Companies Act.
These rules cannot prevent companies from going bust, but they do offer a level of transparency in the due diligence process that may not be found in unlisted companies, giving a certain amount of comfort to investors about the robustness of the companies they are investing in.
Huge Potential for Growth
Whilst many companies fail, the growth margins of AIM’s top performing companies far eclipse those of the FTSE 100. To the end of May 2019, the five-year annualised total return for the AIM 100 is 12.5 per cent, versus 7.1 per cent for the FTSE 100. Several cases show the high rewards that can come to investors. Victoria design manufacture and distribute flooring materials and have seen their share price increase 20-fold over five years. Another example is Novacyt, whose Covid-19 testing package has been ordered by over 80 countries. This has seen shares increase 30-fold in the 3 months up to mid-April.
Given the potential for such high rewards, it is perhaps unsurprising that investors generally comprise of a younger demographic. A recent survey conducted by TD Direct Investing reports that the AIM index has more than three times as many 30–44-year-old investors than those in the 45–75 age group. The term ‘high risk, high reward’ springs to mind.
AIM shares offer investors a number of ways to take advantage of government-sponsored tax reliefs. These include Capital Gains Tax relief, Inheritance Tax relief and various other forms of loss relief on shares that are invested in through a Venture Capital Trust (VCT), or qualify for the Enterprise Investment Scheme (EIS). The fastest-growing form of tax relief on AIM shares arises through holding them in a stocks and shares ISA. More detail can be found in the following article on AIM tax benefits.
Around 25% of AIM-listed companies are domiciled outside the UK, in countries such as the US and Australia. Moreover, AIM companies have grown their overseas sales from £7 billion in 2010 to £12.4 billion in 2019. It is, therefore, perhaps unsurprising that so many global institutions invest in AIM – over 80% of ASOS investors were based outside the UK in 2018, for example.
The full extent or reality of Brexit is yet to be realised, so the potential to invest in companies who will remain unaffected by this has becoming highly attractive.
AIM Investments: Managing Risk To Reap A Reward
In summary, there is little doubt that AIM investments provide a greater risk than traditional markets such as the FTSE 100. Nonetheless, risk mitigation strategies, the potential for major growth, tax reliefs and the internationalism of many AIM-listed companies explains why so many investors continue to operate on the AIM markets.