Investing in Aim shares: High octane small caps can deliver sparkling growth

Investing should be based on rational decisions, balancing risk against reward. But some people also want excitement – and why not? 

This is why they are drawn to the Alternative Investment Market, better known by its snappy abbreviation Aim. 

The junior market, set up in 1995, has a diverse set of young and long-standing companies in healthcare, online retail and technology and renewable energies, just the thing if your goal is to be more planet-friendly. 

The Aim cool gang includes names like Fever-Tree, the mixer drinks business which has made spirits chic again, and Team17, the video games developer behind Worms, a lockdown favourite, and now also the owner of Gwyf (Golf With Your Friends). 

Whatever the motive for investing, backing some of the stars of Aim has recently offered both entertainment and gains. 

The Team17 share price is 80 per cent higher than a year ago, while Fever-Tree is up by 75 per cent. But these increases are modest compared with some other Aim constituents’ feats. 

The Covid-testing business Novacyt has risen by 1388pc over the past year. Synairgen, a maker of respiratory drugs, has been another pandemic beneficiary, with a 1400pc increase. Thanks to such performances, the FTSE Aim All-Share Index gained 20 per cent in 2020, putting the blue-chip FTSE 100 index in the shade. 

The Aim index is 27 per cent higher than a year ago, a statistic to surprise the cynics who still see the market as home to over hyped companies whose executives are adept at hitting up investors for new money but less able to produce growth. Can this continue? 

In 2020, Aim companies raised more than £5billion from their shareholders – but it looks as if the cash is being put to good use. Today more than 20 of the 865 Aim companies are worth more than £1billion. 

These stars include the £3.8billion drugs group Hutchison China Meditech; Asos, which is now a £4.9billion business, and Boohoo whose market capitalisation is £4.4billion. These two fast-fashion empires have this month spent some of their funds, with Asos acquiring a number of Arcadia brands, while Boohoo has bought Debenhams. 

Despite these deals, the threat of an online sales tax this week hit the shares of disrupter retailers, highlighting that Aim is still a risky proposition, regardless of its new respectability. 

Aim valuations are also supported by hugely desirable tax breaks: most of the shares are inheritance tax-free, if held for more two years. 

As the Budget approaches, there will be the usual rumours of changes to this concession, which would deal a blow to the market. 

Analysts contend, however, that the Government will be keen to boost smaller and medium-sized businesses, rather than impede their prospects. Aim company managers typically hold large-ish stakes in their businesses, representing the species of entrepreneur essential to economic recovery. If you want to get involved, be ready to do research: this is a stock-pickers’ market.

Some followers routinely check each company’s website for institutions buying and selling the shares (this must be disclosed under Aim rule 26) seeing the appearance of a new investor as a sign that something may be up. 

The managers of funds with large Aim stakes are extra choosy in their stock selection. Alexandra Jackson, manager of Rathbones UK Opportunities fund, likes a high-quality company that produces plenty of revenues. 

The fund’s holdings, which are based on this criterion, exemplify Aim’s diversity. There are stakes in Team 17, aggregates group Breedon, Abcam, a biotech group dubbed ‘the Amazon of antibodies’ and Ceres Holdings which makes fuel cells to convert hydrogen and natural gas into electricity. It is building a plant to make cells to power the data centres of the appliance giant Bosch. 

But the fund steers clear of Asos and Boohoo. Jackson says: ‘We stay away from Boohoo because of its labour practices.’ 

The feeling that you are backing some winners of the future and doing your bit for recovery is one way to become more involved in your investments. For me, at least, this is particularly important. 

Draper Esprit is an Aim-listed venture capital company which provides exposure to ‘early-stage’ businesses to which private investors have less access. 

Last year it raised £110m, but also made £18m from the sale of UK fintech Transferwise. 

Its portfolio encompasses names like Cazoo, a used car platform, Trustpilot, the consumer reviews website and UiPath, a robotics software business. 

The 41 per cent jump in Draper Esprit shares over the past year is based on the belief that this Aim star has spotted some of tomorrow’s stars. 

This is inspiring, but while reaching for the stars raises the spirits, a fall to earth can be painful.

This post first appeared on Dailymail.co.uk