Shares: Week Ahead - Why Ofex and AIM are heading in the right direction

Shares indices, for whatever reason, have an unfortunate tendency to give the wrong impression. The Stock Exchange admitted as much when it adjusted, some might say rigged, the New Year's Eve Footsie calculation by changing the closing prices of 11 blue chips.

I suspect Theresa Wallis, responsible for running the Alternative Investment Market, would dearly love the opportunity to tinker with the FTSE AIM index, which allegedly plots the direction of the junior market. AIM has come in for rough criticism, much of it unjustified. As a market specialising in small, start-up, entrepreneurial companies it was bound to have a succession of thrills and spills.

But since it was launched in the summer of 1995 only two constituents have gone bust. Mind you, a few have skidded and slipped and may not escape the corporate grave yard much longer. But for a wealth warning market, which has had more than 350 companies and claims a capitalisation of pounds 5.4bn, the array of casualties is surprisingly light.

True, profit warnings have taken the shine off quite a few constituents. Even so, they live to fight another day.

The FTSE AIM index does not help to allay the more critical perception of the market, showing shares bumping along uncomfortably near their lowest level since the first calculation. Yet the AIM contingent shares, on average, have increased in value by 17 per cent since their flotation. So why does the index mirror such a miserable display?

It's down to the way it is calculated. When the bigger and perhaps more successful AIM companies, such as high-flying pubs chain SFI, graduate to the main market they are immediately stripped from the calculation with no backward adjustments. So, shorn of many of the stars, the remaining index constituents are left to give an inaccurate illustration of just how the market has behaved.

AIM also suffers from rather thinly spread research. Still, efforts are being made to increase coverage. For example, stockbroker Durlacher has started a monthly bulletin. In its first issue editor Dru Edmonstone comments: "The AIM market is by no means perfect; it is still evolving but major progress has been achieved in a relatively short period of time."

He adds: "As with any new financial market, AIM has had a few teething problems. Those have mostly been centred around the areas of perceived inadequate adviser due diligence, inaccurate illustrative profit projections; poor stock liquidity; limited market/company research."

AIM, not surprisingly with its bedrock of small companies, has only moderate appeal for institutional investors, who have found to their cost it is often difficult to extricate themselves from small company investments.

Institutions have, on average, 22 per cent of AIM companies; perhaps, more significantly, they have provided around 60 per cent of the pounds 1.6 bn of the new capital raised on the market.

Institutional support is more evident in the bigger companies and the long established groups which switched from the old matched bargains 4.2 market.

Jennings Brothers, the Cockermouth, Cumbria, brewer, is an example. It has four institutions with more than 3 per cent of its capital. Biggest stake, 9.75 per cent, is held by Mercury Asset Management, now part of Merrill Lynch.

All told, 64 former 4.2 companies took AIM. Others went to the more lightly regulated Ofex market, while others decided to exist in what is a share wilderness with the occasional stockbroker, or the company itself, providing a market.

Genus, a cattle breeding and agricultural consultancy group, used to handle deals in its own shares. But with 30,000 shareholders it found the task too daunting and moved on to the fringe Ofex market last month. Dealings started at 110p; the price is now 140p, giving a pounds 32m capitalisation.

Ofex is run by a Stock Exchange member firm JP Jenkins. It has nearly 200 companies giving a valuation of pounds 2.45bn. However, two of them, National Parking, which owns National Car Parks and the Green Flag vehicle repair and recovery operation, and Weetabix, the family-run breakfast cereals business, are worth nearly pounds 1.1bn.

Ofex has had its casualties. Four have gone bust and question marks hover over a few more. Its disasters include Display IT, once more than 800p, and Woodstock, a pubs group which went belly up only months after raising pounds 600,000. The outlook for Skynet, once 275p, is bleak.

Ms Wallis at AIM and John Jenkins, the man behind Ofex, have felt obliged to tighten their rules since the inception of the markets. Both stress that regulation must be a continuing process. But at the end of the day their powers are limited - in the case of companies it is suspension, then expulsion. Advisers are perhaps more vulnerable. AIM companies must have a nominated adviser as well as a stockbroker, although often it is the same firm performing both functions.

There is, I believe, little doubt the markets have become an essential part of the investment scene and perform valuable capital raising functions as well as providing expansion opportunities. By their very nature AIM and Ofex will suffer more disasters but that should not be allowed to overshadow their undoubted success.

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