Happy birthday for the market in baby companies

Now 10 years old, the Alternative Investment Market is booming, says Jenne Mannion

The Alternative Investment Market (AIM) celebrates its 10th anniversary on 19 June, and while performance has been bumpy in recent months, investment professionals say that AIM is home to a wealth of exciting investment opportunities.

The Alternative Investment Market (AIM) celebrates its 10th anniversary on 19 June, and while performance has been bumpy in recent months, investment professionals say that AIM is home to a wealth of exciting investment opportunities.

AIM, nowadays, contains some 1,300 companies. Tim Cockerill, an independent financial adviser at Rowan & Co, says that in the early days, AIM-listed companies were seen as being higher risk and of poor quality. "AIM, which is often referred to as the junior market, was initially seen as a place where tiny, risky, inferior companies that were not allowed on the main market would list," he says. "This is no longer the case - AIM is now home to many quality companies."

AIM-listed companies include Sportingbet, with a market cap of £1bn, and other better-known names such La Tasca, the tapas chain. Several more established companies, including Monsoon, started life in the junior market. AIM is also home to many oil and mining companies, which now account for nearly a third of the value of the junior market.

Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, says that one of the advantages of AIM companies is that, because they tend to be smaller and newer, they are less well researched by City professionals than bigger, well-known companies. This means that it is possible for savvy investors to unearth investment gems at cheap prices before the rest of the market catches on and the share price rises.

Andy Crossley, manager of the Invesco Perpetual UK Smaller Companies Growth Fund, which holds 40 per cent of its portfolio in AIM stocks, says that the junior market is home to many small, rapid-growth businesses that are in their early stages. "I look to invest in quality companies with strong growth prospects that are not yet reflected in the share price," he says.

Another feature of the junior market, Hunter says, is that the management and directors of smaller companies tend to hold a vast amount of their own shares. "Their interests are aligned with shareholders so have an incentive to succeed, something that isn't always felt in larger firms."

However, Hunter warns that AIM stocks are only suitable for those with an appetite for more risk. AIM stocks do not come without dangers, partly because many companies are small and unproven. He says: "AIM companies tend to focus on just one key activity. This can be seen as an advantage as bigger blue-chip companies with many activities may take their eye off the ball if they are too diversified. The flip side is that if that one activity doesn't fare so well, the company could be in big trouble."

Furthermore, the regulations for listing on AIM are more relaxed than on the main market. Indeed, this is one of the reasons for the raft of companies listing in recent years, especially since companies don't need a three-year trading history, as is the case when joining the main market.

Frank Manduca, manager of the UBS UK Smaller Companies fund, says that AIM has become the premier market in the world for small companies to raise money. But he says that investors should recognise that, while the perception is that AIM is about UK small companies, many have an international flavour. "About a third of AIM now accounts for resource stocks, and many are not actually UK-based companies," Manduca says.

While there have been many success stories on AIM, there are also some disasters. Regal Petroleum, for instance, is a recent example of a high-profile AIM company that has burnt investors' fingers. Its share price plummeted by 60 per cent in a day last month after it revealed that it couldn't extract oil from a company well in Greece at a commercially viable rate. This announcement came three weeks after raising £45m in a share placement.

The boom-or-bust nature of these companies means that investors should be highly selective when choosing AIM stocks, says Andrew Buchanan, manager of the Close Beacon fund. Buchanan has managed this portfolio, which invests exclusively in AIM stocks, since the launch of AIM a decade ago. "We vet the companies we invest in, assessing their individual merits. You shouldn't focus on identifying sector themes within AIM as this can lead to underperformance if the market gets exuberant about a sector," he says.

Buchanan adds that it is also necessary to take a long-term view. "Three years is our normal time horizon as this is the period in which we believe a company will grow up and the share price start to attract much wider interest."

AIM: Five stocks to watch

* Amino: Patrick Evershed, manager of the New Star Select Opportunities fund, says that Amino makes set-top boxes for downloading TV programmes via phone lines, and has just announced an enhanced product, which should boost profits further.

* Asos: Evershed says that this company sells fashion on the net to 18- to 24-year-olds at affordable prices. Turnover and profits have risen rapidly. "Asos has gained a significant position in its marketplace despite competing with established retailers that have opened websites of their own," he says.

* Monterrico Metals: Andy Crossley, manager of Invesco Perpetual UK Smaller Companies Growth Fund, says that Monterrico owns a large, undeveloped but proven copper resource in Peru, which "could be sold at a reasonable price to a major resource company".

* Avanti Screen Media: Judith MacKenzie, a fund manager at Aberdeen Asset Management, says that Avanti is the market leader in providing screen networks for in-store entertainment, and has rights to develop a satellite hub to provide wireless broadband internet access in the UK and Europe.

* Tanfield: MacKenzie says that as a provider of engineering and manufacturing for zero-/low-emission vehicles, Tanfield is enjoying a growing market due to regulations to minimise emissions.

AIM: Five funds to watch

* Framlington UK Smaller Companies (38 per cent AIM): Managed by Roger Whiteoak, a favourite of many advisers. Tim Cockerill, adviser at Rowan & Co, says through careful stock picking, Whiteoak outperforms his peers in bull and bear markets.

* First State UK Smaller Companies (65 per cent AIM): Paul Jourdan, the manager, took advantage of the surge in natural resources, says Paul Ilott, an adviser at Bates Investment Services: "It's one of the most volatile funds in the sector but we like it."

* Artemis UK Smaller Companies (35 per cent AIM): Ilott says: "Fund manager John Dodd looks for stocks with share-price momentum or re-rating potential - pragmatic."

* Merrill Lynch UK Smaller Companies (25 per cent AIM): Juliet Schooling, an adviser at Chelsea Financial Services, says fund manager Richard Plackett employs a strong bottom-up stock selection process.

* Marlborough Special Situations (50 per cent AIM): Schooling says: "Manager Giles Hargreave brings his considerable experience to this fund."