Expert View: Nervous types shouldn't ride the AIM rollercoaster

You lose some of the thrill of the chase by reducing risk or volatility
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The Independent Online

Reports of AIM's demise have been greatly exaggerated. That is why it is with rising bewilderment that I seem to keep reading about the uninspiring performance of the AIM indices over the past 12 months. AIM had a tremendous year, raising more money in primary and secondary issues than ever before. By almost any measure, AIM beat its own record numbers of the previous year.

Four hundred new companies joined in the first 11 months of 2006. The average value of a company on AIM is now £51.9m (in 2005 it was £40.5m). The aggregate market capitalisation of AIM is £83bn (£57bn). In initial fundraisings, £8.1bn had been invested in new AIM companies by the end of November 2006 - 25 per cent ahead of the amount invested in the whole of 2005. And in secondary fundraisings, arguably a better measure of investor confidence, AIM blew away its previous record of £2.5bn by notching up £5.1bn in the first 11 months of 2006.

AIM needs institutional investors to give it critical mass and liquidity. Institutional investors tend to demand liquidity, and one way to improve that is to create investable indices. The AIM indices (the AIM All Share, the AIM 100 and the AIM UK 50) allow the investor the opportunity of putting money into a portfolio of AIM companies without having to invest in the constituent members individually.

Something is clearly working. The average daily value of shares traded on AIM in 2006 was up nearly 40 per cent on 2005. The average daily number of bargains, at 14,000, was 60 per cent ahead of 2005.

So why is this increased liquidity and unparalleled investment not reflected in the indices? Timing. The peaks and troughs in the AIM All Share index were far more pronounced than those of the FTSE All Share during 2006. At its height, in early May, the AIM All Share was nearly 20 per cent ahead of January levels. The FTSE All Share was less than 7 per cent above January levels at that point and never rose more than 11 per cent. At its lowest, in October, AIM was 9 per cent down on the year, whereas at its lowest ebb the FTSE was only 3.6 per cent down on its January level. In truth, it was mere coincidence that the AIM All Share was down "only" 1.7 per cent at the end of 2006.

But should this rollercoaster ride really concern us? I think we should welcome it. The evidence seems to suggest that bigger means more stable. With stability, you remove some of the thrill of the chase associated with speculative investment by reducing risk or volatility. Absolute value is something AIM never set out to achieve and stability is something which we shouldn't expect of AIM. It was and remains a market for growth companies - for which read smaller, developing businesses. AIM has succeeded where no other market in the world has in retaining that attribute.

What that means of course, for the institutions, is that an investment in an AIM index carries higher risk. But those professionals who make the investment decisions within those institutions do so with their eyes open. Only with increased volatility does the opportunity of "beating the market" present itself. If you'd invested in the AIM All Share Index in January 2006 and got out again in May 2006, you'd have had an annualised return of over 40 per cent. Over the whole year, however, an investment in the same index was one which would have amply demonstrated that volatility can mean down as well as up. That is why AIM has proved so popular in the investment community.

AIM had a very successful 2006. What about 2007? Investment funds and property seem to be in vogue, as are renewable energy and waste management. Natural resources businesses, especially the pure prospecting companies, are less favoured.

Whether AIM will enjoy the level of success of the past two years remains a matter of conjecture. Whatever happens, though, any report of its demise is most certainly exaggerated.

John Cowie is head of AIM at accountants and financial advisers Smith & Williamson