On the 25th birthday of the Alternative Investment Market (AIM), we track the growth index’s recent performance
AIM celebrates its 25 year anniversary
Looking back to the 2008 global financial crisis it’s clear the AIM index suffered in comparison to the FTSE All Share, showcased by a maximum drawdown of over 60% compared to the All Share’s rough 43% drawdown. Therefore, from historical data you might have assumed we would see similar margins in the aftermath of the current crisis. However, this is not the case so far; the margin between drawdowns is just over 4% with AIM falling roughly 39% from the start of 2020 to its lowest point. Despite these large falls it has since recovered well, now only 7% down for the year compared to the wider FTSE 100 and All Share fall of approximately 16%.
In my opinion, two key reasons for this include the structural backdrop of this crisis compared to that of 2008 and the weightings of the indexes themselves heading into the crisis.
Firstly, Central Bank and Government support were both implemented quickly, helping to support the likes of smaller businesses that would have experienced material cash-flow difficulties, effectively throwing them a lifeline. In addition, consumer culture and technology has evolved, meaning some smaller businesses have been able to offset the reduction of high-street direct consumer purchases through online methods. The big question post-crisis will be how quickly demand returns and whether we will still see similar levels to pre-crisis. In the case of high-street retail I’m doubtful, particularly at the beginning as economies start to re-open meaning we may see a rise in bankruptcies and businesses trying to shift old stock through waves of discounts.
Secondly, when we take a look at the AIM index’s sector breakdown we can see relatively large weightings towards healthcare (14%) and technology (13%) which has offered some real opportunities since the beginning of the year. This includes the likes of Novacyt and Avacta, both examples of companies that have experienced a surge in share price growth since the onset of Covid-19. When we compare this top-level outlook to an index like the FTSE 100, which has much larger relative weightings in industries such as financials (20%) and energy (12%) who have been battling low interest rates and oversupply, it’s clear to see why performance has shifted in favour of AIM through 2020.
Evolution of AIM
AIM has evolved greatly over the years. Many more companies have entered the fray and some have pioneered cutting edge technology and services, helping to provide critical services for bigger businesses and consumers. Some big companies include the likes of Boohoo and Fever-Tree who are recognised internationally and have helped stabilise the index with solid business models and balance sheets. In the last three months, Boohoo and Fever-Tree have seen share prices increase by roughly 39% and 64% respectively. As the need for online products and services becomes greater, it will not be a surprise to see more and more investors turn their heads to AIM for investment opportunities.
Sectors and companies
From a sector perspective, AIM’s top performers unsurprisingly come from the utilities and healthcare sector which tend to be places that investors flock to in hard times in a bid to gain exposure to defensive cash-flows. The biggest laggards included travel and leisure and chemicals as a result of the destruction of global demand and the uncertainty over their return.
Fast fashion has been one of the positive stories from the retail sector in past months, with demand rising as consumers shift to make their purchases online. Furthermore, Boohoo’s competitive pricing and dynamic sub-brands have helped capitalise on a growing market. Full-year results announced in April highlighted the cash-rich balance sheet and impressive top-line revenue growth of 44%. The company’s momentum remains strong and, despite the need for investment, we see the company continuing to progress as fast affordable fashion continues to remain in the consumer spotlight.
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