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01 August 2022

Scoping Aim

In a world where stock markets are online and shares are available at the click of a button, it’s easy to forget that there is not just one ‘stock market’, but many. In the UK, many smaller companies are listed off the so-called ‘main market’, and instead listed on AIM, formerly known as the ‘Alternative Investment Market’.
 
Launched in 1995, AIM is a sub-market of the London Stock Exchange (LSE) designed to help growing companies access public markets. On its launch, AIM consisted of ten companies with a combined market cap of £82m, which has grown to 850 companies today with a combined market cap of £104bn.
 
The market has much looser listing requirements than the main market, with no trading record, pre-vetting of admission documents by a regulatory authority, or minimum proportion of shares in public hands required. Instead, admission documents are checked by an authorised nominated advisor, or NOMAD, who is responsible for continuing to monitor the company post-initial public offering (IPO). These are intended to attract smaller companies at an earlier stage of growth to list, and the under-researched nature of the market makes it a good source of outsized returns for investors willing to put the work in. Increased competition from the likes of private equity financing may help explain why the number of companies listed on AIM has fallen from a high of 1,694 in 2007.
 
For investors, the lower standards of governance and regulation make AIM riskier as a market, as the main authority in NOMADs monitors companies using a set of guidelines rather than strict rules. This increases the likelihood of fraud with Quindell, an insurance software provider, being one example, which overstated its pre-tax profits to £107m when it had in fact made a loss of £64m.

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Evidently, governance is a key risk, and investors should place extra care on verifying its quality. Research has shown that AIM firms that pay a dividend achieved an average five-year return of 156.5% compared to 12% for those that don’t. This isn’t to say that companies that don’t pay a dividend perform poorly, some of its most successful companies like ASOS and Boohoo don’t, but a sustainable dividend can be a barometer for strong corporate governance by showing management is conscious of shareholders. A good way of spotting fraud and aggressive accounting is to compare a company’s earnings generation with its free cash flow across time. Though some differential is acceptable, significant disparities over time could suggest management is too quick to recognise revenues. Also notable is the fact that free cash flow can be manipulated by companies delaying their bills into the next financial year, cutting investment, and selling their debtors at a discount to credit companies. Poor cash management can also be seen through large or steadily growing receivables and payables, though all numbers can ultimately be window dressed. The manipulation of figures makes it imperative to check long-term trends.

One of the key benefits of AIM shares is that many of its companies offer their holders up to 100% relief from inheritance tax when passing the shares over, so long as they have been held for at least two years and are held on death. Qualifying businesses must be trading, or ‘real’, businesses. Some businesses on AIM may also qualify to offer shares through the Enterprise Investment Scheme which gives relief to investors on their income and capital gains tax, as well as tax relief on any losses made on the shares – though they must be held for at least three years.
 
Please note, there is an extra risk of losing money when shares are bought in some smaller companies.
This article was taken from the May 2022 issue of Market Insight. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.
 
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.



 
Scoping Aim

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