Personal Finance: Ready, AIM, buy!

Clever investors don't chase the big names

Once upon a time, there was a businessman by the name of Henry Beker who left his job to set up a company, Zergo, specialising in information security. One acquisition and seven years later, Zergo had grown and its shares were quoted on London's Alternative Investment Market, the "junior" stock exchange. The new shares were offered at pounds 1.40.

Thanks to the explosion of the Internet, and the fact that information security systems are now relevant to every single on-line business, in just 11 years Zergo has become a world leader in its field. The story has been a happy one for Zergo shareholders. Less than four years after they were first offered on AIM, Zergo shares now stand at around pounds 8.10. (Imagine if you had got in right at the beginning...)

Investing in shares on AIM can be a way of sharing in the huge potential of young companies and it is a particularly good place to find shares in the booming technology sector. AIM was set up in 1995 by the London Stock Exchange for growing companies which are not yet ready to seek a listing on the main market. Now some 300 companies are quoted on AIM, with a combined market capitalisation of around pounds 4.5bn.

The fact that a company's shares are quoted on AIM gives investors some reassurance. To become quoted, the firm must go through the process of due diligence with a nominated adviser, who makes sure the company is sound and that the claims it is making to the market are realistic. As a public limited company, it has non-executive as well as executive directors.

But picking a share on AIM with a bright future is no simple matter, and the risks can be high. "They are a very mixed bunch of companies, and some are as risky as you can get on a stock market," says Andrew Griffiths, editor of the AIM newsletter, an independent publication advising on new AIM issues and brokers' tips.

Just as there have been some rip-roaring successes on AIM in the last four years, there have been disappointments too. Victory Corporation, which owns the Virgin brand for clothes and is majority-owned by Richard Branson, was floated on AIM in late 1997, with its shares offered at 58 pence. But, as losses cause concern and Victory faces tough competition from huge established fashion brands, its shares have now sunk to just seven pence.

AIM inevitably loses its real winners when they are in a position to list their shares on the main market. This makes it difficult to measure the success of AIM shares as a whole. The FTSE AIM index has fallen over the last year, standing at around 916 now compared with 1069.2 a year ago.

Although companies go bust no more frequently on AIM than they do on the main exchange, the real problem for investors is the lack of information available on AIM companies. Stocks on the junior exchange get relatively little coverage in newspapers, although the Investors Chronicle is a good source of information.

Who are AIM investments suitable for? "It's only for those who really understand what they're doing - not for someone who's new to the stockmarket," says Jeremy King of ProShare, an organisation which promotes share ownership. "But for those who have a balanced portfolio already, then there are some good AIM companies," he says.

Be ready to do a lot of legwork if you want to buy individual AIM shares. "There are investment opportunities out there, but only for those who are prepared to find out information on those companies and research them," says Mr King.

If the active approach is not for you, you could opt for a pooled investment vehicle specialising in AIM shares, such as an investment trust or a venture capital trust (VCT). The AIM Trust is an investment trust run by Friends Ivory & Sime. It was launched three years ago and now has assets of around pounds 50m. Originally offered to institutional investors, the fund is open to retail investors too. "There are certainly growth opportunities on AIM," says AIM Trust fund manager Robert Mitchell. "They [companies on AIM] are all in their growth mode... there are many on the main market whose growth story is long past," he says.

Many firms on AIM are run by entrepreneurs who hold large stakes in their own businesses. "They're putting their wealth on the line, which gives us confidence that they are concentrating on growing their business," says Mr Mitchell.

Andrew Buchanan runs the Beacon Investment Trust which invests exclusively in AIM shares, although if a share moves from AIM to the main market, it is not immediately sold. One of its best investments was Zergo. "We quadrupled our investment in four years," he says. "I don't think Zergo will prove to be a one-off - there are some world class shares on AIM," he says.

Minorplanet Systems, which produces vehicle location systems, and JSB Software Technologies, which specialises in international Internet filtering are two particularly promising AIM shares, he says.

VCTs provide another way to invest in AIM-listed companies as part of a collective investment. VCTs carry big tax breaks, which enhances their performance, and because of this, it is generally only worth investing in one when it is making a new offering of shares. Contact the British Venture Capital Association to find out which VCTs are currently open for new investment.

Apart from the huge gains investors hope to make from AIM shares, there is another reason for choosing to invest there. Anyone making a capital gain in a particular tax year can defer paying tax on it, if they buy shares on AIM which qualify for reinvestment relief.

Trade in AIM shares is much less busy than dealings in major blue chips on the main exchange, and this can make them hard to buy and sell, so you may find them difficult to offload if you are in a hurry.

The London Stock Exchange has AIM information leaflets: 0171-797 4404; British Venture Capital Association: 0171-240 3846; AIM newsletter: 01303 230046

`The Independent' is offering a free Guide to High Risk/ High Reward Investment, which outlines the commonest ways in which savers can obtain higher-than-average returns on their funds, including AIM- listed company shares, by taking a more aggressive approach with their money. The guide, which is sponsored by Whitechurch Securities, is available by calling 0845 2711003