No Pain, Go Gain: Change AIM, and you may still score a bull's-eye

Is the AIM game over? I think not, but there is no doubt that the Stock Exchange's junior market is facing an exceedingly testing time.

The Alternative Investment Market has been an outstanding success since its rather subdued launch in 1995. It has captured companies from around the world, defying bitter American criticism likening it to a casino – but it has also hosted the inevitable spectacular disasters. During its existence, it has attracted an astonishing 2,900 companies. Its current strength is about 1,665. It boasted it was "the growth market of the world".

But in the past year or so, the AIM story has looked increasingly fragile. The rush to join has dwindled to not much more than a trickle. And many of its small-cap shares have endured torrid times. Trading in them is often thin. Not surprisingly, questions are being asked about its future.

The credit crisis has sent many investors running for cover. They have unloaded small-caps in a scramble to put their cash into what they regard as more secure havens, such as blue chips.

But the travails of mortgage banks Bradford & Bingley and Northern Rock demonstrate that big is not necessarily beautiful. Blue-chip disasters are not a recent phenomenon; remember GEC and Polly Peck? It is not only the disenchantment of private investors – the main supporters of AIM (and, indeed most micro-caps) – that is creating problems. Institutional investors, never very keen on the lower reaches of the stock market, are now largely ignoring AIM shares. The fall in values that has occurred since last summer has dramatically reduced capitalisations. Many companies are now valued at less than £20m, even £10m. For example, Myhome International, a No Pain, No Gain portfolio constituent, was once priced at around £50m; now it is worth just £11.3m.

Clearly, few institutional investors are going to look at companies with such low valuations. And even when good – perhaps outstanding – profits are achieved there is unlikely to be much positive share-price reaction. Too few investors, big and small, seem interested.

The casino jibe prompted the Stock Exchange – quite rightly – to intensify the regulatory requirements, a move that has led to higher running costs for AIM companies. Deep Sea Leisure, a former portfolio constituent, last month exited the junior market, citing yearly costs of £60,000 and the demands AIM made on executive time as some of the reasons for its departure.

And more companies are expected to leave. Executives are growing increasingly exasperated by the way their shares are treated. The internet tipster Tom Winnifrith believes that around a third of the present contingent could leave the market – by going private or seeking to be taken over, or moving to the fringe Plus market where regulations are less onerous and costs are lower. The JP Jenkins unlisted market could also capture a few disaffected AIM companies. It is probably significant that Paul "the plumber" Davidson descended on Plus with his new listed enterprise, Fluid Leader. It enjoyed a spectacular debut.

With the flow of new entrants much reduced, and many existing constituents disenchanted, the Stock Exchange may be forced to reshape what has been an outstanding creation. Meanwhile, possible takeover bids offer investors their most rewarding option. The collapse in valuations must increase the chances of corporate activity.

The lack of investor interest in AIM stocks was underlined this week by the reception given to Printing.com's results. The shares were 75p in 2005. They hardly stirred when profits came in 5.7 per cent higher at £2.42m and the year's dividend lifted by 20 per cent to 3p a share. The group has now launched in France and has eyes on Australia. Cash is £3.5m.

Chief executive Tony Rafferty is "cautiously optimistic" and intent on maintaining a progressive dividend policy. Stockbroker Brewin Dolphin expects £2.7m this year (down from £2.9m) and points out that the historic dividend yield is now 7.6 per cent.

I accept that Printing. com's profits performance is, compared to some, rather pedestrian but I would have expected rather more enthusiasm than a short-lived 0.5p advance to 40.5p – not much above the year's low.

The yield is higher than many savings accounts and the dividend policy underlines the group's strength. Even in these days, with many AIM investors on strike, the shares deserve more support.