The rules changed on 5 August and the AIM market is up 20.65 per cent since then. The FTSE Small Cap index has made just 12.11 per cent in that time and the main market as a whole just 4.39 per cent.
Performance of indices since 5 August
Source: FE Analytics
Smaller companies managers with a high weighting to the market say that the rule changes are one of a number of reasons for this trend, with strong retail investor demand supporting the market’s growth.
Richard Power, head of smaller companies at Octopus, said: “There has been a notable increase in investor interest in AIM over the last six months.”
“The new ISA rules, which came into effect in August last year and allowed investors to invest in AIM-quoted shares through their ISAs, undoubtedly had a part to play in this.”
Martin Turner, co-manager of the CF Miton UK Multi Cap Income fund with Gervais Williams, said: “We saw almost from day-one there was more activity. It’s definitely played a part in levelling the playing field.”
However, both managers claim that there is increasing interest from investors in the smaller end of the market which has finally pushed through into AIM.
“I think there’s a wider trend where people are more interested in smaller companies,” Turner said.
“That’s the consequence of the weak macro environment: smaller companies can continue to grow regardless.”
Power said: “The main driver for renewed interest in AIM was more to do with the investment cycle and investors’ appetite for risk, which has been building over the last few years, than the change to the ISA rules.”
“Micro caps, for example, are always later cycle, so for the smallest, more speculative companies to participate, investor confidence needs to be fully reinstated.”
“The catalyst for this, which occurred during the summer of 2013, was significantly brighter news on the outlook for the broader UK economy.”
“People finally believed that economic recovery was underway and the financial statistics backed it up.”
“The change to ISA rules at this time certainly made a contribution to the positive climate by extending a Government seal of approval to AIM.”
“This was particularly powerful as it coincided with the wave of support for small growth companies in the UK and the news that many of them were performing really well.”
The AIM index as a whole lagged a long way behind the main markets for some time before the recent surge, FE data shows.
A high weighting to energy and resources stocks was one of the key factors. AIM was seen as a place for retail investors to take a punt on striking gold or oil.
Performance of indices 3yrs to 4 August 2013
Source: FE Analytics
Power notes that 40 per cent of the index was made up of mining and oil and gas stocks in 2010 as commodity sectors boomed and new companies came to market, but this has shrank to around 20 per cent today, although that weighting has continued to hinder performance.
“AIM is a platform for small growth companies to raise new capital and therefore somewhat inevitably tends to attract the investment fad of the day,” he said.
Data supplied by Octopus from professors Elroy Dimson and Paul Marsh of the London Business School shows the FTSE AIM as a whole made 21.3 per cent last year as the resources stocks on the index lost 16.4 per cent. The FTSE AIM ex resources made 39.6 per cent.
Turner notes that the consumer discretionary and technology sectors have made the strongest gains, with the IT sector up 35.25 per cent and the telecoms sector 42.42 per cent since the end of August, according to Bloomberg data.
“People are buying AIM but still being discerning,” he said.
“AIM suffered from being seen as speculative, but people are being discerning and avoiding speculative stocks.”
“In terms of performance, they [mining and energy stocks] are less important, and in terms of interest, and part of that is driven by retail.”
“People want to buy companies that people think they can understand and analyse, but it’s hard to estimate the likelihood of drilling a successful well.”
FE Trustnet reported yesterday that smaller companies have been heavily overweighting tech and it is noticeable that many funds have built up significant weightings in AIM.
Turner suggests that the two trends could be affected, and some portfolios may have seen their weighting to the sector expanded by the strong performance of certain stocks.
For example Quindell Portfolio, which sells software and consulting services, is the second-largest holding on the CF Miton UK Multi Cap Income fund. It has seen extraordinary growth over the past three years, appreciating by 450 per cent as the FTSE All Share has risen by just 27.02 per cent.
The stock has risen by 60 per cent since December. It is held in just two UK Smaller Companies funds’ top-10 holdings, however.
Another tech stock that Turner likes on the index is Seeing Machines. The company has developed technology that tracks the movement of eyeballs and is used to spot when drivers are falling asleep.
The company has a distribution deal with machinery manufacturer Caterpillar.
“It’s not as simple as saying tech has done really well, but some companies have done really well,” Turner said.
He also points out that stock selection remains extremely important in the market – investors would have lost 52.97 per cent of any investment in Mulberry made one year ago, for example.
Performance of stock vs indices over 1yr
Source: FE Analytics
Both managers say that the number of IPOs that are coming to market is another factor boosting AIM, which tends to see lots of new launches.
“The anticipated flow of IPOs on to AIM during 2014 will also help to dilute the impact of this sector further,” Power said.
“We believe this is just the start of the AIM revival. The IPO market picked up significantly in the fourth quarter of 2013 and we are busy meeting companies looking to float during 2014.”
“Increased IPO activity will help boost AIM, providing a healthy injection of new investment opportunities during an exciting period for small growth companies, which in turn will also help to rebalance and diversify the index, as well as reduce the impact of the resources sector on AIM’s performance.”
Turner and co-manager Williams say that the market is entering a prolonged period of smaller company outperformance that is likely to last for two decades.
Power says that the cycle favours small and micro cap companies and this story has a lot further to run.
“The improving outlook for the UK economy and the growth in investment opportunities combined with increased investor interest in smaller companies looks set to make 2014 a great year for AIM,” he said.
