• The FTSE AIM All Share index has returned 22% in the last year, compared to 11% from the S&P 500, and -10% from the FTSE 100
• The index now sits at its highest level since 2007
• Around 12% of the FTSE AIM All Share sits in the tech sector
• Pharma & biotech, renewable energy stocks, and precious metal miners have driven the index up
• Active managers have lagged the smaller companies market in the last 12 months, but have outperformed in the long term
• Smaller companies funds and trusts to invest in
Laith Khalaf, financial analyst at AJ Bell:
“While all the attention has been on the woes of the FTSE 100 in the last year, smaller companies have been quietly on the march. Unlike the blue chip Footsie, which has been held back by its exposure to oil and financial stocks, the AIM market has been bolstered by its exposure to technology, pharma and renewable energy sectors.
“The AIM market has a reputation for being a home to obscure boom or bust mining companies, and it’s true the index has had its fair share of stinkers over the years. But it’s also home to companies operating in thriving areas of the global economy, like healthcare, clean energy, and technology. Indeed around 12% of the AIM market sits in the technology sector, compared to less than 1% of the FTSE 100.
“While AIM’s longer term record is patchy, the case for investing in small caps is compelling when you consider fully listed stocks and actively managed funds, and investors should consider whether they have enough exposure to the stock market minnows in their portfolio. Often the share price performance of these companies is driven more by business fundamentals rather than the broad sweep of sentiment which exerts a large influence on their blue chip cousins.
“Small caps are a more volatile area of the market, but that can be mitigated to some extent by investing in a few managed funds, to get some diversification. While the small cap market itself has performed well over the long term, active managers in this area have done even better. Smaller companies are not so heavily researched as larger stocks, which means the detailed analysis of active managers can unearth hidden gems that the wider market is ignoring.
“Not all AIM companies are small companies of course; around 30 of the biggest AIM stocks would make it into the FTSE 250 if they were fully listed, including the likes of ASOS and Fevertree. But then the midcap part of the UK stock market has been a much stronger performer than the FTSE 100 too.
“The AIM market also comes with a little tax perk - many of the companies in it can be passed on free of IHT, if held for more than two years. This would need to be directly rather than through a fund, though there are some services available to investors which offer a portfolio management service for AIM stocks. If held within an ISA of course, that means an AIM holding will be free of income tax, capital gains tax, and potentially IHT.
“However the tax break does raise one risk for the market, because if it was withdrawn, share prices would fall back. Given the very small impact cutting this tax break would have on Treasury finances, and the damaging impact it would have on the market, it doesn’t seem likely but it’s worth being aware of the risk.”
AIM Index performance
“The FTSE AIM All-Share index has returned 22.2% in the last year, and now sits at its highest level since 2007. In the last twelve months it’s shown a clean pair of heels to large cap indices in the UK, Europe, Japan, and even the S&P 500, which has itself been on a hot streak of performance. Indeed the FTSE AIM All Share Index itself has a fairly hefty weighting to the technology sector, amounting to 12.6% of the index at 31 Dec 2020. That compares to a 0.8% weighting in the FTSE 100. The AIM index still can’t quite match the returns of the tech heavy NASDAQ 100 index however.
|
Index |
1 year total return % |
10 year total return % |
|
Nasdaq 100 |
36.8 |
643.6 |
|
FTSE AIM All Share |
22.2 |
37.5 |
|
TOPIX (Japan) |
10.8 |
122.4 |
|
S&P 500 |
10.6 |
301.8 |
|
FTSE Small Cap |
7.6 |
155.4 |
|
FTSE Developed Europe ex UK |
6.3 |
106.6 |
|
FTSE 250 |
-4.1 |
129.6 |
|
FTSE 100 |
-9.7 |
64.3 |
Source FE to 19/01/2021, total return in GBP
“The renewable energy sector has led the AIM market over the last year, thanks to rising environmental concerns, and the green spending plans of the newly elected US President. Pharma and biotech have also done very well of course, as a result of the global focus on diagnosing, treating, and immunising against the coronavirus.
|
Sector |
1 year price change % |
|
Renewable Energy |
412.5 |
|
Pharmaceuticals and Biotechnology |
276.0 |
|
Precious Metals and Mining |
220.2 |
|
General Industrials |
129.4 |
|
Health Care Providers |
107.7 |
Source: Sharepad to 19/01/2021, average returns of stocks in each sector
“It’s worth noting that average returns in some of these sectors have been driven by the exceptional performance of a handful of stocks (see best performing companies below). Investors should also bear in mind that some stocks in the biotechnology and mining sectors can be binary bets with extreme outcomes. If their medical treatment proves to be effective, or they discover the resource they’re drilling for, shares can rocket. But if they don’t, there’s often not a lot else to support the share price. To begin with investors should therefore think about getting exposure to the market through a fund or managed portfolio run by a professional manager with experience in this area.”
Best performing AIM companies:
|
Company |
Sector |
1 year price change % |
|
Novacyt SA |
Pharmaceuticals and Biotechnology |
6920 |
|
Synairgen PLC |
Pharmaceuticals and Biotechnology |
2040 |
|
EQTEC PLC |
Renewable Energy |
1600 |
|
Greatland Gold PLC |
Precious Metals and Mining |
1380 |
|
Starvest PLC |
Investment Banking |
1010 |
|
Powerhouse Energy Group PLC |
Renewable Energy |
960 |
|
7Digital Group PLC |
Retailers |
930 |
|
Orosur Mining Inc |
Precious Metals and Mining |
770 |
|
Power Metal Resources PLC |
Industrial Metals and Mining |
757 |
|
Eurasia Mining PLC |
Precious Metals and Mining |
671 |
Source: Sharepad to 19/01/2021
Longer term performance
“Longer term performance of the AIM market is less compelling, and over ten years the index lags behind the FTSE 100. That’s probably a reflection of the fact the market does contain its fair share of blow outs, though that doesn’t mean there aren’t good opportunities for active investors.
“If we look at smaller companies more broadly though, including the FTSE Small Cap Index, we can see that they have performed significantly better than the FTSE 100, and indeed, so has the mid cap FTSE 250 index. However investors with a typical market weighted fund will have around 80% invested in the FTSE 100.
“Probably the broadest and best indication of the opportunity set available to small cap investors is the Numis Smaller Companies plus AIM (excluding investment trusts) index, which has returned 110.3% over the last ten years. Investors in actively managed smaller companies funds have done even better, with the average investment trust returning 193.9%, and the average open-ended fund returning 176.3%.”
|
10 year total return % |
1 year total return % |
|
|
Average UK Smaller Companies Investment Trust |
193.9 |
3.0 |
|
Average UK Smaller Companies fund |
176.3 |
6.7 |
|
FTSE Small Cap |
155.4 |
7.6 |
|
FTSE 250 |
129.6 |
-4.1 |
|
Numis Smaller Companies plus AIM (ex ITs) |
110.3 |
7.5 |
|
FTSE 100 |
64.3 |
-9.7 |
|
FTSE AIM 100 |
50.4 |
19.8 |
|
FTSE AIM All Share |
37.5 |
22.2 |
Source: FE to 19/01/2020
Best performing UK Smaller Companies funds investment trusts over 10 years:
|
Fund/ trust |
10 year total return % |
|
Harwood Capital Oryx International Growth Trust |
475.5 |
|
BlackRock Throgmorton Trust |
378.9 |
|
Liontrust UK Smaller Companies |
358.8 |
|
Merian UK Smaller Companies Focus |
340.7 |
|
Discretionary Rights & Issues Investment Trust |
338.8 |
|
R&M UK Equity Smaller Companies |
325.8 |
|
Gresham House UK Micro Cap |
324.8 |
|
Janus Henderson Henderson Smaller Companies Trust |
315.1 |
|
Marlborough UK Micro Cap Growth |
313.7 |
|
JPMorgan Smaller Companies Trust |
306.4 |
Source: FE to 19/01/2020
UK Smaller Companies funds and trusts to invest in:
Standard Life UK Smaller Companies Trust. Fund manager Harry Nimmo has been running this trust since 1993. He wants to invest in tomorrow’s largest companies today, and so runs a concentrated portfolio of smaller companies with good growth prospects and robust finances so they can weather the occasional storm.
LF Tellworth UK Smaller Companies. Paul Marriage and John Warren don’t invest in oil & gas, mining, or biotech, preferring instead to focus on more predictable areas of the market. They look for market leaders that have pricing power, as well as misunderstood companies that are going through a period of change.
TB Amati UK Smaller Companies. Dr Paul Jourdan has been running this fund for over twenty years and the whole team is steeped in experience when it comes to small cap investing. They look for high quality companies with competitive advantages. They have an emphasis on the AIM market, but they can invest in stocks all the way up to the FTSE 250.
