June 2007

AIMing high

John Monaghan, Origen

In the ultra competitive sectors of UK All Companies and UK Smaller Companies many managers have been searching high and low for stocks that will drive their returns higher, in an attempt to separate them from their peers.

In order to achieve this, several have been allocating funds to those companies quoted on the FTSE AIM market. While we have been conducting our research we have seen varying levels of exposure, but what exactly is AIM and what type of companies choose to quote their shares on it?

AIM was launched in 1995 and since then over 2,500 companies have joined raising more than £34bn in the process through both initial public offerings (IPOs) and further capital raisings. This capital has helped fund their development and pursue their ambitions with many making the transition to a full quote on the London Stock Exchange (LSE).

The listing rules are less stringent than those required to join the full exchange and to join AIM, companies do not need a particular financial track record or trading history.

There is also no minimum requirement in terms of size of company or number of shareholders. This more flexible approach reflects the fact that AIM was designed specifically for smaller growing companies.

As of the end of April, there were 1,637 companies quoted on AIM; approximately half of which have a market capitalisation within the £10-£100m range.

Within the context of the FTSE, these are indeed fairly small companies, however the mix is very diverse and there are also several incumbents (around 500) within the index that are headquartered outside of the UK. The largest sectors are oil, gas and mining which account for around one third of the market.

This heavy concentration of commodity may go some way to explain the excellent returns delivered during the first half of 2006 but following the sharp sell off experienced across most equity markets early last summer and subsequent shift into 'quality names', AIM failed to make any real headway in the second half of the year.

During 2007, AIM has outperformed the other major UK indices by a comfortable margin and as at the end of April, it had delivered a return of 12.3% compared to its closest rival, the FTSE 250's return of 7.5%.

Returns have been primarily driven by bid activity which remained high and the return of the market's appetite for risk saw investors become more prepared once again to enter into the smaller end of the market.

At Origen we believe that there is significant value to be generated from investing in certain companies within AIM, however we typically recommend funds that have allowed investment into AIM but are not wholly invested in that market. Our preference is using managers who have the flexibility to explore as many areas of the UK equity arena as their mandates allow.

John Monaghan
Investment Manager
Origen