Should I invest in AIM shares?

1st Jun '16 by DWit199

20 comments 12939 reads

I have recently looked at this question using StockRanks and other data from Stockopedia, comparing shares in the AIM All Share index with fully listed shares in the FTSE All Share and Fledgling indices. I am not convinced that banks, insurance companies and REITs are suitable for analysis with stockopedia's ranking system and it is clearly inappropriate for Investment Trusts etc. so the entire financial sector was excluded. Some shares had no relevant data so these were also excluded. International Order Book shares, although classified as fully listed do not appear in the All Share or Fledgling index so are not included in the analysis. All data was derived from Stockopedia and analysed in excel.

There were 697 AIM shares and 391 fully listed after the exclusions. There is a huge difference in total Market Cap, AIM £52,057 million, Full nearly 40 x greater at £1,879,212 million, mean company size £74 m vs £4806 m and median £21.5 m vs £816 m.

I then looked at winners vs losers over the last year. This just recorded share price change over 1 year and excluded dividends. A winner is simply defined as a share with a price change >0 over 1 year. AIM had 257 winners and 422 losers compared to 144 and 235 respectively for the full listing. Mean change AIM -4.8%, full -7.5%. Surprisingly the percentage of winners is very similar at just under 38% for both.

It is frequently said that AIM shares are of poor quality, so I used the stockranks to compare the two markets. I haven't performed a formal significance test, but the chart below shows that by the Stockopedia ranking system the fully listed shares are well ahead of AIM on quality, momentum and growth and just ahead on value.

There was no significant difference in "hit rate" or mean change in price over the last year between the two markets but assessed using the StockRanks system the fully listed companies should have had a significant advantage. Based on this simple analysis I am no further forward in deciding whether to invest in AIM shares.

I would welcome suggestions on any further analysis that could be done using published data to help with this decision.

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Edward Croft

1st Jun '16

I think what you've picked up on in the above chart is the fact that in general and on average AIM shares are pretty dismal investments. You only have to look at the performance of the AIM All Share Index over the last 20 years to see that that's the case.

574ea59c5884fFTSE_AIM_ALL_SHARE_INDEX_Sh

The above chart is likely the average return to investors in AIM shares over this period too - for some reason AIM investors absolutely adore investing in story stocks that have little prospects other than ongoing dilution and disappointment.

Frankly much of AIM is similar to the US OTC markets... and it's well known that OTC investments have negative payoffs. These stocks are priced like lottery tickets... lottery tickets which offer very long odds for an outsize win.... the only consistent winner in a lottery is the organiser. For AIM - the week in week out winners are the brokers.

BUT - averages are deceptive! Let's not throw the baby out with the bathwater. There are some amazing companies on AIM. Ignoring this pool of potential investments just because the average profile of an AIM stock is poor would be short sighted. Even using naive 'quality' metrics to screen for the best shares can lead to good fortune. Focusing on the subset of AIM companies that are profitable, reasonably valued and showing good sentiment is a highly profitable strategy.

As an example, Ben Hobson wrote this article a couple of years ago to highlight 5 AIM shares that might have 'economic moats'. All Ben did was screen for good free cashflow and strong & persistent ROCE & margins without any focus on valuation - a naive way to find 'quality'. The 5 shares he found were - Abcam +76%, Nichols +34%, Cenkos -15%, AnimalCare +55% and Brainjuicer -13%. This set has on average returned 27% over the 2 year period since he wrote the article (before dividends)... which is a very handsome return, far above the market. One could use the same screen he built to create a similar list today.

One only has to review some of the biggest winners in the market in recent years to see the value of investing on AIM - Abcam, Domino's Pizza (now fully listed) and ASOS are some of the multi-baggers that stand out from the last decade. I believe it's far more important to focus on finding great stocks than it is to focus on whether they list on the junior or senior market. There are of course tax benefits to investing on AIM - which you can learn about here http://www.londonstockexchange.com/companies-and-a...

Personally I like to hunt using the StockRanks without too many other filters... there are about 50 AIM shares that have a StockRank above 90 at the moment - see this screen.

Nick Ray

You could try excluding AIM stocks with very small market caps - say under £5M or £10M. There might be a threshold beyond which AIM stocks tend to have similar ratings to the fully listed stocks.

The other very simple test is to look at the standard deviations as well as means. But I suspect that this will confirm that AIM is like the Wild West compared with the main market.

garbetklb

In the same vein as Ed's comments - AIM divides reasonably neatly into a few categories :

1) Total crap - most of the blue sky, much of the overseas, frauds, plenty of the resourses stocks
2) Speculative - the better resources, some of the more plausible blue sky
3) Worth a good look - real businesses, family companies

There is a high correlation between dividend paying and 3). I'd suggest a first filter of "does it pay a dividend" would show a totally different result from the AIM index.

Yes, by filtering out non divi payers, you'll miss some interesting possibilities - but rules can be broken later.

One of Tom Winnifrith's comments a while back was that only 37(?) AIM companies pay dividends. That's complete rubbish - I hold nearly twice that number that pay dividends.....

I'd guess about 25% of AIM shares are worth a look. It's quite easy to filter out the rest. But picking the winners isn't so easy - you're quite likely to have a fairly volatile ride with even decent companies having lurches up & down.

Rusty2

There are some bad companies on the AIM that is for sure, I would exclude all foreign companies, especially chinese. Avoid companies with high debt. Lord Lee who was first ISA millionaire has made a lot of money from companies listed on the Aim. Some of my recent best performing shares are on the Aim, Boohoo.Com (LON:BOO), Burford Capital (LON:BUR), iomart (LON:IOM). There are others that have performed very well in last year or so Fevertree Drinks (LON:FEVR), £DRT, £ASCO, Breedon Aggregates (LON:BREE), Gamma Communications (LON:GAMA), Inland Homes (LON:INL), Next Fifteen Communications (LON:NFC), Pantheon Resources (LON:PANR), Redde (LON:REDD), Renew Holdings (LON:RNWH), Quartix Holdings (LON:QTX), Staffline (LON:STAF), Victoria (LON:VCP).

Don't think you should ignore the AIm there are some good companies on there. Read Giles Hargreaves interview.

cig

I would be weary of using dividends as a selection mechanism going forward. People who design stock frauds know full well that investors like dividends these days, and it's not hard to devise a scheme that includes some token dividends as part of the "pump" phase.

Ramridge

Hi David -
Should you invest in AIM shares?
- if you are a casual investor, who can only devote a small amount of your time to investing, then my advice is stay out of AIM. Don't trust tipsters, columnists or so called gurus. By the time you hear about a "hot" share, you will be feeding from the crumbs left over, if any. There are just too many sharks for the casual investor.

- However it you are prepared to devote serious time in lifting the bonnet and working out for yourself the quality of a potential holding, what makes it tick, how the financial accounts hang together or not, how to read between the lines of management statements, how to be ahead of the pack, etc, then AIM can be very rewarding. So no pain, definitely no gain.

If in doubt and if your risk appetite is low, then stick with FTSE250 or FTSE100 companies.

I think dividends ARE a good filter - but only a first filter as a way of discarding a high proportion of dross.

Especially on AIM, I wouldn't automatically buy ANY shares that are thrown up as a result of filtering a series of attributes, whether they be dividends, PE or anything else

When you've got down to a manageable number comes the research and, for me, then the key issues, especially for AIM, are :
- Do I trust the management?
- Are the management sensibly paid?
- Do I understand what they do & how they make their money?
- Do the accounts look reasonable?
- What's the debt position?
- What's the pension position?
- What's the macro view for their sector & micro view for their position in the sector?

Pretty much in that order. I've probably forgotten something vital!

Richard Goodwin

Thks for all of your work David its fascinating stuff and a topic well worth debating.

DWit199

I have now had a chance to look at the annual share price change of companies in AIM vs Fully listed.
AIM mean change -4.8% standard deviation 63
Full mean change -7.5% standard deviation 28
This is illustrated in the two histograms below, the AIM distribution much flatter with many more companies at the extremes, as you would expect from the sd.

Looking at the underlying figures 12% of AIM companies vs 2.5% of Fully listed appreciated by more than 50% in the year and 21% vs 5.6% depreciated by more than 50%, quite a striking difference between the two markets.

gus 1065

I haven't previously tried to assess my portfolio in terms of AIM vs. main market board ("MB") performance, but this discussion thread has prompted me to do so. Clearly it is a single snapshot based on one portfolio so not very scientific. Anyway, for what it is worth, here goes.

I would characterise my investment style as that of a farmer with a diversified portfolio across all sectors of the market. I'm happy to try out different strategies ranging from fundamental analysis through factor investing to occasionally dabbling with TA (albeit on a pretty unsophisticated level). I have trawled through the various Guru screens and merrily pinch ideas from a range of other sources as a prompt for further research before investing. Since subscribing to Stockopaedia last Autumn I have significantly increased the number of holdings and reduced my average exposure in individual stocks (with a few exceptional "conviction stocks" in which I hold quite a substantial part of my portfolio). If nothing else, this platform provides a very good means of screening ideas, gathering information and monitoring performance.

Although I have been investing actively for over 20 years (mainly in funds previously due to restrictions placed on dealing individual stocks by my job), there has been quite a bit of portfolio turnover in the last year and a move into individual shares. I estimate that my current average holding period is probably as little as six months although now the "crops" are more or less fully planted I expect most of these to become longer term holds subject to a bit of pruning and harvesting here and there.

The current portfolio comprises 130 UK stocks. By chance, these are split exactly 65 AIM/ 65 Main Board. The value of the holdings is similarly even at 49% AIM:51% MB. Overall, the aggregate mark to market value of the portfolio from offer to bid (inclusive of dealing costs) is up 9.1% (i.e. from an initial investment of £100 the total current value is £109.1). The AIM portfolio is up 11.9%, the MB portfolio is up 6.3%. Performance wise, my AIM selection has done considerably better than MB shares. I suspect this differential would be slightly narrower taking into account dividend income (my MB stocks are typically higher yielding) but given the relatively short average holding period this effect is probably marginal so far.

In terms of the underlying quality of the portfolio, the average rankings for the AIM stocks are SR69 V59 Q64 M65 G60. For the MB stocks the equivalent figures are SR69 V66 Q63 M60 G62. Although there are differences, the average rankings are (to me anyway) surprisingly similar. Digging a little bit deeper, I would comment that there seems to be a greater variance in my AIM stocks (i.e. a wider distribution about the mean) although this is possibly due to my experimenting with a 25 stock NAPs portfolio (originally all with a SR in the 90's) and my prediliction for investing in some of the small oil, gold and other resource companies which although quite lowly ranked have seen some pretty spectacular gains (and occasionally losses!) in 2016.

I am still thinking through the implications and freely accept there is quite a bit of "noise" in what is a very simple analysis. For example, I haven't taken into account any P&L effects from the stocks that have been sold during the period - this is simply a valuation of the change in value of the stocks currently held from the point of purchase to the present day. Even so, as an initial tentative conclusion I would say that my personal experience has been that over a relatively short average 6 month holding period my selection of AIM stocks has significantly out performed my MB stocks.

Whether this is down to luck or judgement remains to be seen.

TraderTim

2nd Jun '16

To echo what others have said. If you are new to investing or intend only to be a passive investor, then you should avoid AIM. While there are some really strong growth stories, there are plenty of disasters that you don't hear about in addition to the disasters you do hear about. The regulation on AIM is a lot less stringent than the FTSE index, so it can induce companies that have been badly managed.

I trade AIM stocks quite a bit - they are much more volatile and can be better for quick returns. However, as above, this comes with greater risk and is only something I really embrace for trading given the shorter term outlook that I have. Also, I am trading smaller multiples than I would invest, which reduces my exposure. Interestingly, looking at my investments, stocks that I am looking to hold long-term with the exception of Boohoo.Com (LON:BOO), I am not looking or even considering any from AIM. I see few companies that have sustained growth on AIM (some do, but very few IMO) - lots will 10x in value before halving in value - the casino of volatility. You'll probably hear the stat that 10% of AIM companies achieve 10-bagger status, which I assume is true (but I never verified this). What they don't tell you is how they perform once 10-bagging because in my experience many that achieve feat crash back down to reality shortly afterwards. In my opinion, you'd be much better off holding non-AIM stocks for long-term investments.

WarrantStar

Thank you, David Withers, for your very interesting analysis.
My comments would be:
1) Of course it is possible to invest in BOTH AIM & Fully listed shares. It is not necessary to restrict oneself to only one category.

2) On AIM it is more important to filter out the junk, to try & prevent big losses

3) I note that, on average, fully listed shares have a significantly higher Stockrank value for each of V,M,Q,G &S. And yet the mean change in share price on both markets was the same. Does this mean that Stockranks are useless? Far from it! I'm sure that Ed Croft can come up with endless evidence for how useful a tool they can be! I think that the other factor at work here is that bigger companies are far more researched than smaller ones. So big companies will have far more brokers analysing them and publishing forecasts for them. Also the biggest fund managers will be conducting their own unpublished research into the bigger companies. They won't do this for the smaller companies because the scale of the biggest fund managers investments means that it is just not possible for them to make meaningful investments into the smaller companies. I believe that this under researching of smaller companies by the brokers & fund managers can make it more likely that a private investor can have more of an edge in the area of smaller companies. But it only really works if you are prepared to do your own research.

I (or, more accurately we) are in AIM as investments, not to trade - because the majority of our holdings are in my mother's name for IHT planning. From a purely practical point of view, the more stable portfolio I've been running, the easier the it will be to deal with HMRC at probate. I'm also pretty poor at selling......

We've had a fair few disasters, as well as some v good results - we've been doing this for 3 years, although money has gone in as and when available up to the start of this year. Some immediately, the balance as we got probate for Dad & then the sale of Mum's house as she downsized. I've just done a rough calculation of our returns - slightly overstated as I pick up share prices from Google Finance that uses the last trade, which may have been a "buy". I'm budgeting a liquidation cost against my Google Finance portfolio value of about 2%.

We have about 50 holdings of 0.50% and over - 1 share where we have 9% of our portfolio, the rest under 5%. After all expenses, we appear to have a CAGR of around 21.7%, which I'm delighted (and a bit surprised) by. That includes a windfall gain on a relatively minor part of the portfolio originally invested in bank preference shares - for income, whilst I was assessing Mum's income/outgoings - which I can't easily disentangle.

We've had 1 spectacular success, Crawshaw, which accounts for about a third of our overall gain. Otherwise lots of decent investments - and a fair few disasters.

I came to this pretty inexperienced - I'd managed my pensions for a couple of years, mainly Investment Trusts. Made plenty of mistakes (especially story/blue sky shares) initially, but now have much more of a "style" - as outlined in posts above.

From my past career in insurance, I've a v strong view that success strongly depends on avoiding disasters. So I filter out stuff I'm uninterested in & try to size positions according to comfort level. I still can't resist the urge to buy the occasional story stock, but keep the investment small - at least until I've built up knowledge / comfort.

I've try to meet/judge management - at David Stredder's Mello suppers & his larger events, by watching PI World's excellent videos & by visiting companies. Visiting companies is interesting -at one extreme one company keeps brushing me off with phone calls from their financial PR company who I've no interest in talking to (I've not invested any more), at the other extreme I spent 3 hours with the MD of a small "unexciting" AIM company - and the FD joined us for half of that time; most are inbetween and are often a bit surprised to be visited by a private investor. I've visited a couple with a friend I met at an investment event - very productive as we have v different personalities.

3rd Jun '16

Thanks to everybody who responded. Plenty of food for thought.
I need to look at the highest performing AIM shares and see whether StockRanks would have been predictive, but it will take a while.
I have also analysed my portfolio that was guided by a quality and value ranking that I calculated myself from an alternative data source and more recently using StockRanks. I have taken account of all purchases, sales and dividends. Since 1 Jan 2014, XIRR calculated in excel is 6.3%. This is better than the broader market averages but is never going to make me rich. The portfolio has been constructed entirely from fully listed companies, hence my interest in expanding my investment universe to include AIM.

Following up on my previous post on this thread (see above0, I've done a bit more digging into the correlation between Stock Ranking and profitability on the 65 positions in the AIM part of my portfolio. In particular, I wanted to see if over a relatively short period of time (6 months) there was any relationship between Stock Rank and profitability from investing in my sample of 65 AIM stocks.

To this end, I have plotted the percentage contribution to the overall AIM portfolio P&L of each position starting from the lowest Stock Rank (Sound Energy (LON:SOU) at 11 on the left) to the highest (Shoe Zone (LON:SHOE) at 99 on the right). The bars represent the percentage of the total aggregate movement for all stock values since purchase for each of the 65 stocks. This is done by weighting the % appreciation/ depreciation by the total value of each stock held such that each bar shows both the direction (up for profit, down for loss) and magnitude of the gain or loss for each stock.

For the purpose of the chart, I have excluded the entry for Pantheon Resources (LON:PANR) (SR of 31), since this stock is both my largest single holding (currently 31% of my AIM stocks total value) and also in percentage terms (up 45%) one of my most profitable positions such that it represents some 47% of my total portfolio's aggregate value movement over the past 6 months. In comparison, the next largest gains are from Ithaca Energy Inc (LON:IAE) (+10.0%/SR55) and Boohoo.Com (LON:BOO) (+4.3%/SR73) while the largest faller is Amur Minerals (LON:AMC) (-5.2%/SR27).

Observations: Admittedly this is a small sample taken over a short period. There is a lot of the "monkey" in the underlying stock selection such that although there is a fair bit of hard nosed objective analysis of individual stocks there is also a fair bit of subjective sentiment in some of the picks. A few initial observations:-

The split between "winners" and "losers" is roughly 50:50. Overall my aggregate AIM portfolio is up by about 12% over the 6 month period, largely due to the impact of a small number of significant "winners" and the incidence of only one material "loser".

The lower Stock Ranks seem to be more volatile both up and down, although bear in mind that the mean average stock rank is 69 so overall the portfolio is towards the better end of the Stock Rank spectrum. In this sample, I have had 5 decent "winners" which have all had a Stock Rank below 73 and one big loser (SR 27).

Three of the big winners with low stock ranks are O&G and Resource stocks (Sirius Minerals (LON:SXX) is the other ~+4% stock ). As discussed on one of the other discussion threads, the Stock Ranks do not seem to have been an accurate predictor of out performance in these two "forward looking" sectors in the recent past.

The very highest Stock Ranks (85 and above) appear to have substantially more winners than losers, albeit in smaller amounts. In part this is probably due to these being largely composed of my NAPs portfolio which are relatively small positions chosen primarily on the basis of Stock Ranking/my NAPs screen filter.

Overview: Overall I am quite pleased both with the overall performance of my AIM portfolio and the benefit of using both the Stocko metrics and discussion boards/blogs/guru screens for both the initial picking of stocks and also deciding how big a position to take and when to increase/top slice. Still very much work in progress, but I am gaining confidence in the tools available and their efficacy in allowing me to look at a broader, more diversified range of stocks than I would have previously considered.

You must have bought Boohoo.Com (LON:BOO) recently, 6 months ago it was 35p but the SR was only 42.

Hi Herbie.

I've held Boohoo.Com (LON:BOO) since last November (with a couple of top ups since). The Stock Ranks used here are current as of Wednesday rather than at the time the investment was made, hence the relatively high 72 ranking. I do keep the stock ranks at the time my initial investment is made so could do a similar chart for the time of investment.

Best,

Gus.

4th Jun '16

Thanks Gus, I see but Boohoo.Com (LON:BOO) has gone up about 57% in the last 6 months, I presume your +4.3% figure is for your overall portfolio of AIM shares?

Hi Herbie.

Yes that's right.

In my original chart, the 4.3% shown for Boohoo.Com (LON:BOO) represents the proportion of my total AIM portfolio share price movement (up and down) made by this stock taking into account the absolute share price move (for the tenure of my holding BOO is up +39%) and the proportion of my total portfolio made up by each stock (BOO represents about 3.2% of my AIM portfolio by current value). So for example, if half my stocks went up by £6,000 in aggregate and half went down by £4,000, the total movement would have been £10,000 and the Boo element would have been 3.9% of this, i.e. +£390 (hope this explanation makes sense!).

In terms of the movement of the individual stocks, the following chart shows the change in value between sum invested and current market value for each of the 65 stocks ranked in the same ascending Stock Rank order from Sound Energy (LON:SOU) at SR11 to Shoe Zone (LON:SHOE) at SR99. As mentioned previously, the chart is slightly deceptive in that although there is a broad range of Stock Ranks, the average rank is 69 and 45 of the 65 (69%) have a Stock Rank of 60 or above.

In simple terms, my biggest winner has been Ithaca Energy Inc (LON:IAE) up by over 150% in value while the biggest loser has been Mobile Streams (LON:MOS), down by 69%. Fortunately I only took a very small position in MOS as a punt (Paul Scott referred to this company as a "Fizz Stock" but it's gone pretty flat so far) so that although the proportionate drop in value is very big, the absolute cash loss is quite small. The text in the chart legend is quite small and hard to read but you can at least have a chuckle at some of the stock picks in the portfolio!

One further thing I want to look into is the change in Stock Ranks for each stock over time. I suspect there has been a bit of a migration for the losers from right to left and for the winners from left to right which would explain the apparent bunching of losers in the 3rd quartile and winners in the top quartile, Another project for a rainy day......

Gus

Hi Gus,

Thanks for clarifying, it was just difficult for me to see the performance, I'm used to seeing how each share has gone up/down individually rather than how much it has moved the overall portfolio. I don't have any figures for my AIM shares, I've have a few winners Boohoo.Com (LON:BOO) +60%, Burford Capital (LON:BUR) +89%, also now sold Inland Homes (LON:INL) +85%, Ab Dynamics (LON:ABDP) + 80% and Metal Tiger (LON:MTR) + 75% and of course some losers, STM (LON:STM) is down 30%, Fairpoint (LON:FRP) down 25%. Actually my biggest losers are on the full markets. So I think Aim shares have done rather well for me.

I do wonder about SR, if the share price starts to fall then the SR also falls if value was high, also if the price goes up the SR usually follows have noticed that on some shares, Inland Homes (LON:INL) is one example, when SR went up to 98 I sold.

Should I invest in AIM shares?

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DWit199

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