Friday, 26 September 2014

Why Do Punters Love AIM so much? Mid-Caps are so much better...

OK, so I am misleading you - in the title of this post, I ask the question "Why do punters love AIM so much?", when I know the answer. It is like lottery gambling, where you are hoping to strike it rich by unearthing a multi-bagger of an investment!

And clearly there have been some notable successes chalked up, like ASOS (LON:ASC) (before its recent travails) which has been a very impressive multi-bagger if you got in early on.

But for a "real" investor who does his or her own spadework and has a well-defined investment process that they use, does it make sense to invest much cash or time on AIM companies? Let's look at some very basic statistics:


Exhibit 1: Price Performance of UK Indices since the AIM 100 index
started in late 2005




In this chart, the black line is the benchmark FTSE-100 index, the soaring blue line the FTSE Mid 250 index, the green line the FTSE SmallCap ex investment trust index, and the purple line bringing up the rear is the FTSE AIM 100 index.

Looking at these 4 indices, it is apparent that the FTSE Mid 250 index has more than doubled since late 2005, while in contrast the AIM 100 index has nearly halved, with both large- and small-caps somewhere in the middle, both with relatively modest gains. That means a near four-fold difference in performance between mid-caps and AIM stocks over 9 years!

The basic point is this: the AIM market is NOT the same as the main LSE market - the listing rules are not anything like as stringent, and the failure rate for young companies is, as we all know, high. So the risks inherent in investing not just in stocks, but in AIM-listed stocks in particular, are clearly very high. This means that investors venturing into the murky AIM waters need to do even more due diligence in their research than they would for a larger, more established company which has a longer track record and typically more mature products and services. 

OK, I understand, you don't just want to invest in the largest, boring UK-listed companies like Vodafone (LON:VOD) and GlaxoSmithKline (LON:GSK), which in any case are arguably not very British as companies these days given their global footprints.  

What is interesting is even if you invested instead in the average UK stock within the MSCI UK index (a collection of FTSE 100, FTSE Mid 250 and the largest FTSE SmallCap stocks), you would still have done substantially better than the market-cap weighted FTSE 100 index!


Exhibit 2: Equal-Weight UK Index vs. FTSE 100, FTSE Mid 250 from 1999 on


While the FTSE Mid 250 index (in green) still did much better than the FTSE 100 index (yellow line), the equal-weight MSCI UK index still gave you a cumulative 81% price gain from 1999, as opposed to only 12% from the FTSE 100. Yes you would have gained slightly more in dividends from the large-caps, but nothing like enough to start bridging this enormous gulf in performance. 

Morals of this story:


  1. The AIM market should come with a strongly-worded health warning, only experienced investors should venture in, and even then they should tread very carefully.
  2. All other investors wanting to get exposure to UK stocks would be far better off investing in either the FTSE Mid 250 index (yes there are low-cost FTSE 250 index ETFs available from both iShares and Deutsche Bank's x-trackers), or in a broad range of UK stocks drawn from the FTSE 100, Mid 250 and SmallCap market segments, weighted in equal proportion in the final portfolio. Normally, 15-20 stocks should give a decent level of diversification.


- See more at: Stockopedia post

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