Aiming for AIM, or better to set sights elsewhere?
Category: Thought for the day
Now that it is possible to include shares in companies listed on the AIM market within ISAs, investors are left with a quandary. Is it time for private investors to embrace AIM, or might the best advice concerning this market place include the words ‘barge pole’ and ‘don’t touch’?
First let me vent a gripe. My original plan in writing this piece was to tie in companies listed on the AIM market with an article about the so-called silicon roundabout – that’s a cluster of businesses situated in an area of London at the junction of Old Street and City Road. It is hailed by many as the UK’s answer to Silicon Valley and could yet prove to be a key hub as the UK economy tries to grapple with the global economy during this era of technological revolution. Alas, as far as I can make-out, there is not a single company based in this cluster that is listed on the AIM. I find that quite shocking.
Lots of companies that you will have heard of are listed on AIM. Among them are Gulf Keystone, Majestic Wines and Mulberry. Some companies listed on this stock exchange have turnovers in excess of £1 billion, and could quite easily justify a listing on the mainstream exchange. Maybe it is just a matter of time before they do. For an investor considering putting his or her money into one of the indices’ bigger companies the decision process is not that different from putting money into a company listed on the main stock exchange. The fact that investors can now include AIM companies in their ISA is good thing; it gives them more choice.
But, there are not many truly big companies listed on the AIM. For the vast majority of AIM shares volume is low, and volatility high. Management is often unproven, and their business models are far from stable.
Investing in companies listed on this market is risky. It is very risky. And my advice to an investor considering making a foray into this field is to be very careful.
You might be better off investing into an investment trust that specialises in AIM, and letting their experts do the research for you; letting their judgement provide diversification. But then that is not new. You could have held shares in investment trusts before the recent rule change on AIM stocks and ISAs.
The overall returns on the AIM market have not been good. The FTSE AIM All Share Index is lower now than five years ago, and much lower than three years ago. The general feeling out there is that there are exciting companies listed on the market, but most of the businesses are really not good investible propositions. Therefore, I question the usual received wisdom about the benefits of diversification. A truly diversified portfolio of AIM listed shares will not perform well.
I would suggest the key to investing in AIM listed companies is to know your stuff. If you have a particular knowledge of a sector – perhaps you work, or used to work in it, or you have good contacts with people who do – then investing in companies listed on the AIM market, which specialise in your sector of expertise and which you have reason to think might do well may be worth a punt.
On the other hand, let me throw a simple equation at you. When you invest in a company the most you can lose is all your money. That is to say 100 per cent. The most you can gain is … well I am not sure there is a limit, certainly the upside potential runs into several thousand per cent or more. If you can combine good research, diversification and focus on businesses which are scalable – that is to say have the potential for considerable increases in turnover, without corresponding rises in overheads – then potential for riches are substantial. You might only need one or two successes for your portfolio to shoot up in value.
But then again I question whether the AIM market is the right place for such a strategy. It brings me back to my gripe about lack of silicon roundabout companies on the market.
I know the comparison is not precise, but generally people think of AIM as being the UK equivalent of the NASDAQ. But the NASDAQ boasts some of the largest companies in the world. Many NASDAQ listed companies have indeed seen shares rise in value by several thousand per cent. I would like to see the AIM being more like NASDAQ. Otherwise, I am tempted to ask what is the point? It seems like a lot of risk, for not that much potential gain.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees