Few could disagree it’s been a difficult few years for the UK market and in particular its junior counterpart focused on smaller growth-orientated companies. Despite the FTSE 100 hitting new record highs in recent weeks, the Alternative Investment Market (Aim) remains more than 30% below the record highs of September 2021.
The recent outperformance by the UK market suggests to us that this long period of underperformance, compared with other major markets, is coming to an end. With evidence that outflows are subsiding, we could well be in the early stages of a considerable period of outperformance for UK stockmarkets given the discount it trades at relative to other major markets and in particular the US.
We believe Aim, with its diversified base of over 700 companies, is overlooked and well placed to rebound pretty strongly. Stockmarkets and investors like growth, and there are plenty of fast-growing companies to be found on Aim – which once upon a time valued such companies highly.
In the wake of a severe bear market, this is not the case right now as there are a plethora of good quality, growing companies, with strong balance sheets, and often attractive dividend streams, to be found on Aim at modest valuations.
See also: Four in five advisers expect more use of business relief and Aim stocks
Names we currently favour range from Ashtead Technology, a support services company to the offshore energy sector that is capitalising on growth in offshore wind, to Sigmaroc, a construction materials business, that through a recent acquisition has become market leader in the supply of lime and limestone in Northern Europe. We believe both companies will continue to grow and thrive on Aim, attracting higher valuation multiples than are currently prescribed by the market.
If not, then as we have seen over the past year, overseas buyers and private equity may well step in to snap them up. Names such as Hotel Chocolat and Ergomed have recently disappeared from the market while two of our investee companies Lok N Store, the UK’s fifth largest storage company, and Mattioli Woods, a wealth management company, are expected to follow shortly. Both have accepted takeover offers. While in the short term, takeover premiums are often welcomed by investors, longer term they could well be giving up future gains they could have made if the company had stayed on public markets and grown to their full potential.
One thing that would benefit the UK economy and help address this trend, is the British Isa. It is a small step in the right direction which will encourage more investment, and ‘natural’ buyers, into UK companies. We predict that much of this money will find its way into mid and small-sized companies, increasing liquidity, boosting valuations and, in turn, attracting other companies to consider listing in the UK and on Aim. A win-win.
There are many perks to investing on Aim – not least stamp duty free share purchases – but a much overlooked benefit is the high percentage of Aim-listed companies that qualify for business relief. As long as an Aim business relief portfolio is held for at least two years, then the investment will qualify for 100% business relief, escaping the 40% inheritance tax (IHT) many estates are subject to upon death.
A well-constructed portfolio of such stocks can be a useful tool as part of IHT planning, while offering the potential for significant long-term growth. Importantly, an individual can retain ownership of their money, rather than giving it away.
While it has been a bruising period for those invested in Aim and UK smaller companies, we see promising shoots, signalling a much brighter period for a junior market that still remains the envy of Europe.
With a number of tailwinds now behind it, we believe today could be an excellent entry point for those investors with a long-term time horizon and the ability to withstand the inevitable bouts of volatility.
Oliver Brown is investment director and head of AIM IHT Portfolios at RC Brown Investment Management
