Why Less is More for AIM Investors

(First published on 27 January 2010)

The Alternative Investment Market (AIM) is still "the most successful growth market in the world, powering the companies of tomorrow". That at least is the spin given by the London Stock Exchange - despite a dismal year for all those City professionals who have fed upon it for so many years.

A count of the companies populating the index tells a different story. At the start of 2008 there were 1,694 companies quoted on AIM. A year ago this had fallen to 1,550. By the start of this year another 293 companies had decided that the "most successful growth market in the world" was not for them. That meant that, offset by 36 who did brave the market for the first time; AIM's population slumped to 1,293. This is bad news for anyone with a vested interest in the City - but great news for penny share investors.

Ever since the flood of new AIM flotations turned into a trickle and disaffected company directors concluded that the £175,000 or so annual cost of a listing was not worth the money, the AIM market has started to recover.

The index is up 75% over the last year and shows no sign of stopping. This is great news for the one interested party that has routinely been ignored by the London Stock Exchange - the shareholder.

How the LSE dilutes AIM's value

The LSE runs AIM. It has only one ambition: to persuade as many companies as possible to have their shares listed on the market.

It sends its staff all over the world. It holds seminars in smart hotels in Russia, China, Latin America - just about everywhere - luring companies with the promise of enthusiastic investor support, a liquid market in their shares and the good advice of City professionals.

And, surprise, surprise, those City professionals - the brokers, the lawyers, the accountants - are in attendance, poised to sign up new clients and set the fee clock ticking...

Maybe I should expect no more from the LSE and these hangers-on than that they will pursue their own goals. But two years ago I wrote a series of articles warning against such self-interest. I pointed out that AIM would never prosper if investors in the companies listed on it were not being kept happy. I have been proved absolutely right in this.

The AIM market suffered from having too many companies. All were striving for the attention of investors, but few managed to retain it for long. Any company that failed to live up to the promises made at its market debut was instantly given the cold shoulder. All those advisers who should have been helping them along were too busy raking in the fees from the next flotation.

Now, though, the pendulum has swung.

Why an exodus from the Aim market will benefit investors

Although there are a few new companies braving the market for the first time, there are still many more heading for the exit. A weeding out process is under way.

Many is the time that I have been told by City professionals that there is "a lot of rubbish" on AIM. This rubbish was, of course, always the product of their rivals' efforts and never their own.

In fact, I disagree with this description. It's true that there have been plenty of companies that have been unable to deliver what they have promised. And they have paid the price for fanning expectations. But they may still have an interesting business proposition.

But whether they are bad businesses or just those that have failed to live up expectations, many are now deserting AIM. That has two consequences.

First, it is tipping the supply/demand balance in favour of investors who are attracted to the excitement and tax breaks of AIM and find they have fewer shares to choose from. Second, by thinning out the ranks of the underachievers it is raising the average quality of companies on the market.

So while City advisers are wondering where the next fat fee is coming from, investors should welcome this trend.

I do not want to exaggerate the situation. There are still over 1,000 companies listed on AIM. They are still generally ignored by the big City investors.

But when you look at the best performers on the stock market over any time period, almost without exception they will be shares quoted on AIM. And as the number of AIM companies falls this is a case of less equals more for the investor.

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John tells us… “Of the eleven companies I have invested in I am up in 10 and slightly down in 1, and not counting having sold Gulf keystone at 144% profit, I am 7% up on the remainder - where else can I get that sort of return?"

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