Why Aim could become a self-fulfilling loop

Aim has had a gruesome few weeks. The junior share market, which is lightly regulated and houses 700 British listed companies, is a place of horrors. Rachel Reeves’ budget, due next week, could eliminate the inheritance tax exemption, which makes Aim shares so attractive.

But the concerns about the market are much more than that. , a damning report by the Tony Blair Institute for Global Change and Onward (the centre-right think tank) last week, said that Aim was “not fit for purpose”.

As the missiles fell, N Brown – the fashion retailer aimed at larger women – agreed to accept a £191million take-private offer from the Alliance family, which will see it delisted. The Alliance family stated explicitly that their unhappy experience with Aim is one of the reasons for calling it quits.

It said that its shares were not liquid, and fund managers weren’t interested in buying smaller consumer stocks listed on Aim. It “did not benefit from its Aim listing, while having to pay significant costs”.

In the last 15 months, more than 80 companies have delisted from Aim. MusicMagpie is another to say goodbye to the market in the past month.

New Financial, a City think-tank and lobbying firm, has stated that the ecosystem for smaller listed firms is under threat. Listed companies are down sharply, IPOs have become rare, and institutional investors, as well as analysts, are pulling back. It noted that specialist UK smaller company funds had just experienced their 36th consecutive month of outflows. The number of council pension plans with a specific allocation to UK small companies has fallen from 18 down to one in the last decade.

The report concluded that “the danger is that small listed companies are in a self-fulfilling “doom loop” of lower demand and lower valuations. This leads to lower performance and lower cost, as well as higher governance and regulation requirements.

The report called for new incentives and tax breaks in order to revitalize the sector and combat the “safety culture” that is affecting the market. It said that the decline was not inevitable, and pointed to other junior markets, such as Sweden or Australia, which had a much better track record of nurturing tiddlers.

Investors say that the Aim’s past investment returns are the elephant in the room. The adverse structural problems that reduced valuations were certainly not helping. However, this was not enough to explain the abject performance of the market. It was due to the poor performance of many Aim members.

Tim Bush, who is a spokesperson for Pirc (which advises institutional investors), said that the overall performance of investments was poor. “The dog who hasn’t bark in the debate is that all of these aspirations for growth aren’t dealt with by Aim. Aim was created to do that.

Aim has had a particularly poor performance. The performance of smaller companies listed on London’s main market has been much better. Deutsche Numis, an important broker for small companies, conducted a study that found returns on the main London market from smaller companies were 869 percent over 25 years, which is a record. This was higher than the S&P 500 in America, which delivered 602 percent. Aim stocks only delivered a paltry 177 percent.

Recent records were even worse. In the last five years, the smaller companies of the main market have produced an annualised rate of return (2.8%), while Aim shares went downhill, with a -0.5% a year.

A glance at the stock prices of many Aim companies will tell you the whole story. Boohoo was once a £4billion giantkiller, and Aim’s darling, five years ago. It is now worth £371m and considering a breakup.

Marcus Stuttard is the London Stock Exchange executive that has been running Aim for 15 years. He denies the performance of the constituent companies are the problem. He claims that “no one is saying it is a company quality issue”, dismissing high profile collapses such as Quindell or Purplebricks.

Aim Companies contribute £68 billion in gross domestic product to the UK and sustain 778,00 jobs.

The fact that “three of the six American companies floated on Aim last year were American” puts to rest the idea that the IPO traffic in transatlantic is mainly going east-to-west.

Some brokers admit that the low average return hasn’t helped. Charles Hall, Peel Hunt’s head of research, said: “There were a number of companies which should never have even been listed and that should have been removed.” I’d love to say we were more selective, but we had both great failures and successes. “Small companies have a higher risk.”

Aim supporters argue that critics must accept the fact that it’s a stockpickers market, where smart analysis will help you avoid the garbage and select winners. Aim’s popular Octopus AIM inheritance tax service fund is a good example. It has increased by 177% between June 2005 and December 2023. This compares to the less impressive total return of Aim for the same time period, which was only 6 percent.

Hall argues that the inevitable losses from certain speculations is a price well worth paying. He adds that Aim’s quality has “miles” improved since ten years earlier. Hall says, “I believe that we should be doing these moonshots because these are the large companies of tomorrow. AstraZeneca, Shell and other large companies started out as small businesses. “We should not be afraid of failure.”

Aim’s immediate results could be even worse if Reeves withdraws the inheritance tax subsidy on October 30. Aim shares have lagged blue-chips by 10% since June, but they could fall further if Reeves withdraws the inheritance tax prop. Stuttard warns that “it’s not fully priced in”.