Since the Alternative Investment Market (AIM) was founded in 1996, it’s fair to say that those invested in the index have endured a rocky and volatile road.
When the technology bubble burst in 2000, the index went from posting gains of more than 50 per cent in the opening months of the year to being 25 per cent down by the time 2001 started.
Performance of indices in 2000
Source: FE Analytics
The financial crisis inevitably dealt the smaller companies market a further blow, sending the index spiralling below both the FTSE 100 and FTSE 250 indices by 67.79 and 59.43 percentage points respectively since the start of 2008.
Performance of indices since 2008
Source: FE Analytics
However, the AIM market, which now has a total market cap in excess of £75bn according to London Stock Exchange, has increased in popularity recently as investors take bigger risks for potentially more appealing returns.
In fact, since the start of the year both the FTSE AIM 100 and the FTSE AIM All Share have outperformed the FTSE 100 and the FTSE All Share indices by double on average, as shown in the graph below.
Performance of indices in 2015
Source: FE Analytics
This recent success of London’s junior market comes at an appropriate time, as this month marks the index’s 20th anniversary.
In light of this, the Association of Investment Companies (AIC) has today published a list of the 10 trusts that have more than 10 per cent exposure to AIM in their portfolios, a number of which have achieved impressive returns.
A good example from the list is the Diverse Income Trust, which is co-managed by Miton’s Gervais Williams and Martin Turner.
The investment company has a hefty 35.5 per cent exposure to the AIM market, which is second only to Artemis Alpha at 40 per cent.
Launched in 2011, it has outperformed its average peer in the IT UK Equity Income sector by 31.48 percentage points, with top-decile returns 98.98 per cent over three years.
Performance of trust vs sector over 3yrs
Source: FE Analytics
Williams (pictured) said: “During the wide ranging growth of the credit boom, many investors narrowed their investment universe.” 
“In the future, in a world where growth is scarce, it will be necessary once again for investors to expand their opportunity set. Many AIM companies have the ability to buck the wider economic trend due to their greater growth potential on account of smaller scale.”
“As a multi-cap portfolio The Diverse Income Trust has taken full advantage of its wider investment universe alongside good dividend growth which we believe is sustainable. AIM could well turn out to be the next NASDAQ.”
The Diverse Income Trust is trading at a premium of 1 per cent. The £336.8m trust is not geared and yields 2.8 per cent.
Another two successful trusts that have large exposures to AIM stocks are BlackRock Smaller Companies, which has 29 per cent of total assets invested in AIM, and BlackRock Throgmorton Trust, which has a 24 per cent exposure.
Both trusts, which are managed by Mike Prentis, have consistently outperformed their average peer in the IT UK Smaller Companies sector over one, three, five and 10-year periods, with BlackRock Smaller Companies almost doubling the sector average over 10 years with a top-decile return of 430.75 per cent.
Performance of trusts vs sector over 10yrs
Source: FE Analytics
Prentis said: “Our approach to AIM listed stocks is no different to fully listed stocks. Generally we like well-run, market leading businesses which have strong records of earnings growth and cash generation and have strong balance sheets. We like companies whose main source of growth has been organic. This has allowed us to make investments in companies such as CVS Group, the veterinary surgeries business, Restore, the document storage business, and Advanced Medical Solutions, the leading provider of wound care and closure products.”
“AIM is often associated with resources and technology companies and we do selectively invest in these. We have owned shares in Gemfields, who mine emeralds and rubies, and meet our tests in terms of management quality, market leadership and profitability. Within the technology space we have investments in companies such as EMIS, SQS and First Derivatives. There have been some excellent IPOs on AIM, Fever-Tree Drinks being one that has served us well in recent months.”
BlackRock Smaller Companies has 9 per cent gearing, is trading at a discount of 7.6 per cent and yields 1.7 per cent. BlackRock Throgmorton Trust is 28 per cent geared, is trading at a discount of 13.2 per cent and yields 1.5 per cent.
A trust which has begun reaping the benefits of AIM stocks more recently in comparison is Lowland Investment Company, which has doubled its exposure over the last five years and now has a 10 per cent weighting in the market.
Over this time frame, the trust has achieved a top-decile return of 162.42 per cent, outperforming both its FTSE All Share benchmark and its sector average by more than 100 percentage points.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
Laura Foll, deputy fund manager of Lowland Investment Company, say that despite AIM’s bad publicity for poor long-term performance or corporate governance issues, some of their trust’s top-performers, such as Scapa and Johnson Service Group, have been AIM stocks.
“Given many managers desire for liquidity, the area often gets overlooked and this presents an opportunity for those willing to do the work,” she explained. “Many of these companies held are established, profitable businesses with good opportunities to grow sales and earnings and yet trade at a discount to their larger cap peers.”
The £451.7m trust is 13 per cent geared and is currently trading at a discount of 4 per cent. It yields 2.9 per cent.
