The AIM Segment Of The London Stock Exchange; Benefits and Risks

  • Oct 22, 2019 BST
  • Team Kalkine
The AIM Segment Of The London Stock Exchange; Benefits and Risks

The British empire during its full glory was the largest empire in the history of mankind and for over a century it held the distinction of being a global superpower. During its hay days It controlled nearly a quarter of the world’s land masses as well as a quarter of its inhabitants. In fact such was its dominion, that the phrase “ the empire upon which the sun never sets” was often used to describe the empire, literally so  because the empire’s  expanse around the world was so great that the sun was always shining on at least one of its territories.

So how did a country so small in its own geographical abode come into possession of such global dominion. Well the answer to it was its explorers and exploits of their exploration. The country sent travelers across the world who not only brought back with them immense wealth but also established trade links with far flung geographies which eventually transformed into dominions. The country’s tryst with explorers and adventure seekers thus has been deep rooted, with the crown still reaping the benefits of their exploits even after centuries have passed since those men hung up their boots.

The AIM segment of the London Stock Exchange is a place for the modern-day explorers who harbor such ambition and glory as their predecessors and are willing to take extraordinary risk in pursuit of the same. The market plays host to the most unconventional of ideas and experiments which would not be able to find their place in the conventional strictures of other established capital market systems.

The AIM (Alternative Investment Management) segment is the London Stock Exchange’s market for small and growing companies coming both from within the United Kingdom as well as other parts of the world. AIM provides the most suitable environment for such high growth companies to access capital and liquidity of London’s financial markets, which is the largest and the most sophisticated of the international capital markets. The shares of AIM listed companies, however, belong to the ultra-high-risk class, but also come with very high reward potential as well. AIM stocks, which at one point of time struck fear in the hearts of mainstream investors who believed that the market was full of small mining companies whose volatility wasn’t worth the ensuing anxiety, now boasts of companies which are worth billions and have given returns far exceeding their large cap counterparts listed on the FTSE 100 in the London Stock Exchange main market. Yet the market could still prove to be dangerous to the unsophisticated investor or even for larger investors who lack both the knowledge and skills to conduct proper enquiries into a firm's prospects and its activities or who may be lacking in strong internal control and risk management set-up. As a consequence, the market’s investor base is largely composed of institutional investors and high net worth individuals.

Unlike the main market segment of the London Stock Exchange, the AIM market segment is unregulated; it does not press upon its listed companies most of the mandatory regulations contained in European Union directives, which is implemented in other financial market systems in the United Kingdom, as well as the rules that are applicable to companies listed on the main market segment of the London Stock Exchange. The administration of the market segment is of the opinion that self-regulation is crucial behind the AIM's low regulatory supervision. Companies that seek listing on this market segment of the London Stock Exchange are not subject to significant admission requirements as required for the main market. After a company is admitted into AIM, they must however, adhere to with the ongoing obligations of the market which are comparatively slack, relative to the ones that govern the operation of the main market of the exchange plus there are certain corporate governance provisions that are enforced on the main market listed companies that are not mandatory for AIM companies. These aspects of the market segment, however, often make AIM-listed companies susceptible to manipulation by institutional investors.

Usually the AIM-listed companies only need to abide by the corporate governance requirements of their country of domicile, which, as a matter of fact, can be varying widely. However, the regulatory requirements for AIM-listed companies are more onerous than their private counterparts. The AIM listed public limited companies are, however, required to prepare audited annual accounts under IFRS.

Since the launch of AIM in 1995, more than 3000 companies have been admitted to the market, cumulatively they have raised more than £60 billion in initial and subsequent capital raising exercises in this market. Smaller and lesser known companies from across the world and at different development stages are able to join AIM. Operating within the regulatory ambit of the London Stock Exchange, AIM provides enhanced access to capital, liquidity and profile of London's capital markets to a wide range of international businesses. This financing over the years has enabled the AIM companies to fund their development and pursue their growth ambitions and has resulted in a number of stupendous success stories to write home about. Of the listed number of companies there are now over 500 currently operating on the AIM having a majority of their earnings coming from operations spread outside the United Kingdom in over 100 countries.

Market Index services are provided by the FTSE Russell company for the AIM market as well. The company operates and maintains three indices for this segment, the FTSE AIM All share Index, the FTSE AIM UK 50 Index and the FTSE AIM 100 Index. The FTSE AIM All Share Index is further divided into 18 segments based on major industrial sectors its constituent companies belong to, namely; Automobiles and Parts, Banking , Basic Resources, Health Care, Industrial Goods and Services, Insurance, Media, Oil & Gas, Personal & Household Goods, Retail, Chemicals, Construction and Materials, Financial Services, Food & Beverages, Technology, Telecommunication, Travel & Leisure and the Utilities sectors.

The risks and rewards of investing in the Alternative Investment Management Market

Like the FTSE 100 index which reflects the biggest companies listed on the main market segment of the London Stock Exchange, there is also the FTSE AIM 100 index that dons the top 100 stocks on the junior market by market capitalization. Some of the stocks on this list are indeed large with Fevertree Drinks Boohoo Group Plc, Burford Capital and ASOS valued at more than a £1 billion each by market capitalization, occupying the first four positions. According to the latest FTSE AIM factsheet published by the London Stock Exchange, these four companies contribute to 6.06%, 4.24%, 4.03% and 3.41% of the weightage of the host index (FTSE AIM 100 index). The FTSE 100 index is actually a far less concentrated than the FTSE AIM 100 index. On the FTSE AIM 100 index, the top 10 stocks by weighting on the index currently have about a third of the total market capitalization of the index compared to more than 50 per cent weightage the top 10 stocks listed on the FTSE 100 index have.

The AIM listed companies have performed well versus their larger counterparts over the years, although volatility remains slightly higher for AIM shares. The market, which was previously regarded as the preserve of only mining sector companies and of companies belonging to other high-risk sectors, now boasts of a  much wider actual composition of companies coming from a diverse array of as many as 18 different sectors led by Financial Services, Retail and Industrial Goods and Services sectors.

The benefit of investing in AIM listed shares is that if one gets it right, it could really add immense value to one’s portfolio. This market is best suited for longer term investors, for whom the risks associated with long term investments in individual stocks might not be so intimidating.

Alternatively, one may invest in an AIM fund or AIM Investment trust. However, there are currently no AIM Index funds tracking the AIM in operation today. Most of the operating funds are actively managed and of late many of these funds have performed well. Some of the decent performing funds in this segment are TB Amati UK Smaller Companies, LF Livingbridge UK Micro Cap and TM Cavendish AIM.

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