AIM on its 25th birthday has never been more important. The Covid-19 virus followed by the lockdown has meant many businesses having to temporarily close-down for an extended period, which is resulting in extreme cash flow problems. AIM is being extensively used to provide equity capital to companies so that they are positioned for a return of economic growth. The original objective of AIM was to be a fast and adaptable provider of equity capital. This meant less regulation and rules than the main stock market. Less regulation means less cost and greater speed, but it also means greater risk. However, if the UK economy is to grow and prosper there needs to be a culture that embraces taking on risk and rewards when the enterprise succeeds. AIM helps to provide the framework for that to happen.
It has been a turbulent 25 years and the AIM index return over the period has been disappointing. This has mainly been the fault of the Tech boom to bust in the early years of the market followed later by a Resources boom to bust. These two speculative bubbles have dragged down aggregate returns over the 25 years, but they do not undermine the real achievements of the market.
The AIM market now has a greater diversity of companies than in the past. This helps reduce some of the volatility of the returns but smaller young companies will usually experience more movement in their share price than large mature companies. This is why it can work well to access the AIM market through a closed-ended portfolio such as an Investment Trust. The closed-ended structure means the portfolio manager does not become a forced seller as a result of outflows in a weak market and can use the volatility to buy stocks in periods of share price weakness and reduce into strength.
The inheritance tax (IHT) breaks for AIM have been beneficial to private investors and a concern going forward is that they could be curtailed. Whilst the IHT break has certainly encouraged private investors to look at the AIM market, it is the operating success or otherwise of a company that will determine its success as an investment in the long term, not a tax break for outside investors. Therefore, any share price volatility on a tax change could present an opportunity for the long-term investor.
AIM has brought an efficient way for companies to raise equity capital and this capital has helped create substantial businesses. Some of the stars of the new world of retail such as ASOS and Boohoo raised money early on to implement their plans on the AIM market, as did the soft drinks company Fevertree. It’s not just in the consumer area that excellent companies have emerged; Ceres Power*, the fuel cell company, and ITM are working towards products that will make a low carbon future a reality. All of these companies have been very rewarding investments for their AIM backers making many times their original investment. They are the sort of entrepreneurial, forward looking businesses that the UK economy needs. That said, there have also been many, many companies that have failed. There is nothing wrong with an honest endeavour that fails; it is inevitable that this will happen. It is also inevitable that some that fail have not been honest but that is life. Over the coming years, AIM will help some great wealth creating companies and it will also finance many that lose all the money that goes in. But remember, every investment carries an element of risk and with AIM stocks this risk is heightened. You may not get back what you originally put in but where there are successes, it can create many multiples of your original investment.
James Henderson, Co-manager, Henderson Opportunities Trust
*A portfolio holding in Henderson Opportunities Trust
Closed-ended: A closed-ended investment company has a fixed number of shares in issue at any one time
Volatility: The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. It is used as a measure of the riskiness of an investment