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AIM: an exciting place to be for small cap investing

For investors looking for growth opportunities, entrepreneurship, and disruption, paying attention to stocks listed on the alternative investment market (AIM) could be a good choice. But the opportunity for higher returns comes with additional risk.

There are plenty of compelling reasons why small cap companies are a worthwhile investment, the most obvious being their potential for growth. Unlike large companies like those typically found in the FTSE 100, small caps are still far from maturity. They offer investors the chance to reap the rewards of investing in companies still in their infancy, but with plenty of potential.  

On average small companies outperform their larger peers. If you had invested £100 in the Numis Smaller Companies index (NSCI), which tracks the bottom 10% of the UK main listed market by value, in 1955, your investment would have been worth £724,531 by December 2020. By comparison, investing £100 in the FTSE All-Share Index would have been worth £106,638 over this period. Why has the smaller companies index outperformed the FTSE-All-Share index? We explore some reasons below.

London’s AIM is a great place for investors seeking to invest in disruptive, younger, and dynamic companies that could go on to shape what the world will look like in the next 30 years.

AIM provides an excellent growth environment for smaller companies. There are several reasons for this. Companies listed on AIM face fewer hurdles when it comes to merger and acquisition activity, meaning these companies have the potential to grow faster than their larger rivals. AIM also enables firms like Quilter Cheviot to add real value to our clients through analysis of AIM stocks. Unlike with large cap companies, there is often not extensive research already carried out on smaller cap companies. This gives us the chance to spot exciting opportunities that have gone unnoticed to the wider market and offering something different to clients’ portfolios.

Investing in AIM companies can also form part of a person’s tax planning strategy. Certain companies listed on AIM qualify for business relief, meaning if an investor dies after holding qualifying AIM stocks for a minimum of two years, loved ones can save up to 40% on inheritance tax. This incidentally is why some businesses still significantly owned by their founder(s) choose to remain listed on AIM, despite growing large enough to be eligible for mainstream markets.

AIM tends to be populated with disruptive businesses. We like businesses operating in a structurally growing market such as CVS Group, one of UK’s leading integrated veterinary services, And then there’s Fevertree, now a household name, which has revolutionised premium soft drinks. Companies like Fevertree makes the entrepreneurial and innovative side of small cap investing so fascinating.

While investing in AIM is an exciting prospect, it is not without drawbacks. With higher growth opportunities comes greater risk. While some companies listed on AIM will go on to become success stories, with eventual market caps running into the billions, others will fail entirely. Due to the heightened risks involved, we typically only recommend clients invest between 1-2% of their assets in AIM stocks for a balanced portfolio.

With the growth opportunities and benefits to be found on AIM, it is certainly a space that investors should not ignore. However, it should be invested in as part of a diversified portfolio to spread the risk that comes from typically more volatile, growing companies.

 
The Quilter Cheviot AIM Strategy is available to clients who are introduced through a professional adviser.

Investors should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future returns. You may not recover what you invest. This document is not intended to constitute financial advice; investments referred to may not be suitable for all recipients. This is a marketing communication and is not independent investment research. Financial Instruments referred to are not subject to a prohibition on dealing ahead of the dissemination of marketing communications. Any reference to any securities or instruments is not a personal recommendation and it should not be regarded as a solicitation or an offer to buy or sell any securities or instruments mentioned in it.