Stock Market Week: Little cause for joy on AIM's fourth birthday

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THE ALTERNATIVE Investment Market is four years old this week, but there will be little dancing in the Square Mile's streets to celebrate the occasion. The guests assembled around the birthday cake will make an effort to look happy but their half-smiles will barely conceal their dissatisfaction with AIM.

As soon as the gathering breaks up in smaller groups, brokers and investors will cast their minds back to 1995, when AIM was launched as the great hope for small, growing companies.

The feeling at the time was that replacing the old Unlisted Securities Market with a new low-cost facility with flexible rules would provide the ideal forum for budding entrepreneurs and daring investors.

According to AIM's proud parents, the creation of a dedicated market for smaller companies would boost liquidity in these high-growth, high- risk stocks while supplying companies with the funds needed to progress. Fast-forward four years, and those hopes look like a youthful flight of fancy.

First, the liquidity issue. Ask anyone in the Square Mile and you will get different shades of the same answer - trading in the 319 AIM companies is more difficult than ordering a gin and tonic in a City wine bar on a Friday afternoon.

This view is shared by several AIM-listed companies. A recent survey by accountancy firm Mazars Neville Russell found that 87 per cent of firms believe there is not enough liquidity on the market.

The lack of tradeable stock is a potent deterrent to anyone thinking of punting on AIM. Investors simply hate the idea of not being able to buy the shares they want or, even worse, of being stuck with a falling stock when they want to sell.

This is particularly important for individual punters who lack the financial muscle and the array of contacts of the big brokerage houses. As a result, retail funds are steering well clear of AIM, leaving its fledgling companies without the much-needed support of the risk-taking small investor.

The problem is exacerbated by AIM's lack of a minimum free float requirement. This rule, designed to boost the market's flexibility, has encouraged directors to hog a disproportionate chunk of their companies' shares.

The London Stock Exchange counters that the lack of liquidity plague is not confined to AIM stocks and that it affects a multitude of minnows listed on the main market.

However, this argument only serves to underline AIM's failures. What is the point of having a dedicated small cap market if it suffers from the same problems as its bigger brother?

The London Stock Exchange has recently embarked on a campaign to trumpet the merits of buying into small companies but it remains to be seen whether it can convince investors.

More persuasive than the London Stock Exchange's words would be a sparkling performance by the index. Unfortunately, AIM's showing has been less than spectacular. The market has undoubtedly grown in size, moving from the original 10 companies to the current 319, with a market value of around pounds 5bn.

But the rise in quantity has not been accompanied by an improvement in quality. Despite a recent resurgence, AIM has underperformed the All- Share index by more than 40 per cent over the past four years.

That comparison may be unfair, given that the past five years have been tough for smaller companies. However, AIM has also underperformed the Small Cap index by some 26 per cent.

Supporters claim that the AIM's numbers are misleading, as some of its best-performing stocks - such as Zergo, KS Biomedix and Versailles Group - have moved to the main market over the years.

There are two obvious flaws in this argument. First, a number of dogs have also disappeared through acquisition or natural wastage. And second, why couldn't AIM replace its departing stars with a new breed of high- flyers?

Part of the underperformance can be explained by having a look at the composition of the index. Unlike its US counterpart Nasdaq, and European peers such as Germany's Neuer Markt and France's Nouveau Marche, AIM is short of the in-vogue high-technology stocks.

According to the latest figures, only around a quarter of AIM stocks are hi-tech. Some of these companies have done well, netting nearly 30 per cent of the pounds 2.4bn raised since the start of the market. However, their presence within the overall market is nowhere big enough to attract cash-rich investors in hi-tech stocks.

The LSE tacitly acknowledges this problem and is rumoured to be considering a new hi-tech index which could take in AIM and the main market's stocks.

Of course, AIM is not all doom and gloom. Its lower costs and flexible rules have helped several companies to raise funds and to post growth rates they would never have achieved on the main list. Some stocks, such as pizza chain ASK Central, oil explorer Independent Energy Holdings and broker Durlacher, have worked wonders for their shareholders with price rises of up to 2,200 per cent.

However, when the pros and cons are added up, the progress report on the first four years of AIM is: Must do better - and quickly.

At the other end of the market, the flow of blue-chips' results is slowing down to a trickle. GUS and Securicor are the only two big hitters scheduled for this week.

GUS numbers on Thursday will be uninspiring. The retailer will benefit from the first full- year contribution from Argos, conquered last year after a bitter takeover battle.

However, the Argos gains of around pounds 110m will be offset by a poor year in GUS's core mail- order business, which has been hit by fading demand for its traditional agency-based service. The upmarket clothes seller Burberrys will have been hammered by the strong pound and falling Asian sales and its profits there should halve to some pounds 5m. The financial services arm Experian - which specialises in checking people's credit worthiness - is expected to have fared better and should add some pounds 190m to operating profit. Overall, pretax profits will come in at around pounds 505m, down from pounds 555m a year ago.

Securicor, also reporting on Thursday, will try to concentrate discussion on close-circuit cameras and special locks. But what the market really wants to know is when it is going to sell its minority stake in the mobile phone group Cellnet.

Speculation is rife that the group is preparing to offload its 40 per cent holding to its co-shareholder BT for a huge premium. Despite its "it's good to talk slogan", the telecom operator has remained tight-lipped on the matter, despite having received a green light from the regulator to buy the stake.

For the record, pre-tax profits should come in at around pounds 117m, compared with pounds 90.5m last time round.