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2022 is proving a challenging year for many investors. The S&P 500 is down 18.7% since the start of the year, and the NASDAQ (including the US’s big high-flying tech stocks) is down 28%. The US, at the time of writing, is now looking down at a possible bear market. The UK’s FTSE 100, which has not been as overhyped (or overvalued) as across the pond, is down only 1%. Yet many investors are wondering how, in such an environment, to produce better returns and safeguard their portfolio – especially given that inflation is nearing double figures.
Below, our team at Bure Valley Group explores where the UK’s alternative investment market (AIM) offers investors a way forward. We hope you find this content useful. To find out more about our EIS and other investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding (for investors and founders, respectively), you can reach us via:
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AIM: an overview
The alternative investment market is the “growth” market of the LSE (London Stock Exchange). Formerly known as the Unlisted Securities Market (USM), AIM offers smaller UK companies the opportunity to raise capital and scale. In the 20+ years since its inception, the market has grown from 10 companies valued (collectively) at £82.2m to over 1,000 companies, with a total market capitalisation exceeding £90bn.
The LSE is a prestigious exchange. Yet it isn’t easy for companies to get listed there. Stringent regulations impose challenging requirements for businesses to float (e.g. sufficient capital is needed for at least one year of trading), and the costs involved are unaffordable for many. Here, AIM can be a more attractive, feasible option for smaller companies.
Companies looking to make an IPO (initial public offering) on AIM typically seek to raise £1m to £50 (although some have gone over £100m). Once companies grow to a large size, they usually move to the LSE; although a few with market caps over £1bn have chosen to stay.
AIM and the 2022 investment landscape
The market has brought impressive returns for investors since its inception. ASOS, for example, has produced a 5,737.35% return since 2001, although the stock price is down over 71% over the past 12 months. One advantage of AIM is that the companies listed there encompass 37 sectors (90, if you include sub-sectors) – giving the investor a high level of diversification if they wish to allocate a portfolio percentage to the whole market. Indeed, over 250 companies on AIM are based abroad, giving a high degree of global diversification, too.
As mentioned earlier, the UK economy is facing challenges right now on multiple fronts. Notably, inflation is now at 9% – the highest since the 1980s, with forecasts that this could exceed 10% by the autumn. This means that investors face greater pressure to deliver strong “real returns”. The S&P 500, for instance, has historically delivered a 10.5% average return between 1957 to 2021. With US inflation now at 8.5%, that means that investors would only achieve a 2% real return before taxes and fees are even taken into account.
High inflation, unfortunately, also puts downward pressure on company profits due to increased input costs (e.g. raw materials). This means less/no dividends for investors and compressed share price growth as companies struggle to hit sales targets. Moreover, the Bank of England (BoE) has raised interest rates four times in the last six months – up to 1% today – to attempt to control inflation, with little success. This acts as further gravity on share prices, since investors become more attracted to “safer” assets which now offer a better interest rate (i.e. bonds).
Investing in AIM, amidst this landscape, partly depends on your perspective. The FTSE AIM 100 index has declined from over 6,500 GBP in August 2021 to 4,553 GBP today. This puts it near the recent 5-year average. Some might see this as a sign to avoid AIM right now. However, this could also be viewed as a buying opportunity whilst shares are “cheaper”.
The other advantage of AIM shares is that they can present generous tax-saving opportunities. In 2022-23, you can invest in AIM via a stocks and shares ISA. Here, you can put up to £20,000 into the “wrapper” and generate capital gains, dividends and interest without tax. Moreover, there may be an inheritance tax (IHT) exemption upon your death if your AIM shares qualify for Business Relief (50% or 100%).
Of course, due diligence is important when approaching AIM investments. Smaller companies are typically more vulnerable during tough economic times, as they have lower reserves than a large, established public company. Stable profitability may also yet to be established, and the business model may not be proven yet. As such, it is wise to build a diversified portfolio which takes your risk tolerance goals into account – as well as other tax-efficient investments that can achieve inflation-beating returns, such as the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).
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