Aim: Small companies, big worries

Property in eastern Europe, medical technology, Chinese energy and gaming systems. A glance at the companies that have floated on Aim, London's junior market, this year reads like a laundry list of sectors that have furnished investors with big losses in the past. And yet there is seemingly demand for this sort of investment. In the third quarter the number of companies joining Aim was higher than the number leaving for the first time in two years.

So are we heading back to the days when anyone with a desk, a questionable mining licence and a slick power point presentation can make their way on to Aim? The environment is right. As the economy improves and pulls risk appetite up with it, so small company markets should grow.
But it is too early to be bullish about Aim. While the third quarter was a good one the first half was not, with 34 companies joining but 43 leaving. With just over 1000 companies, the market is only two-thirds as big as it was at its peak in 2007. The recent popularity of Aim offerings is partly explained by changes to the tax rules that have made the market even more attractive to private investors seeking a shelter than it was before.
And over the long term Aim has not proved itself to be a great place to invest, even for those who like the risks and rewards that come with small company investing. Its propensity to attract companies and investors who like the latest fad, be it natural resources, online gaming or Chinese companies, makes it vulnerable to sharp dips when those trends fade. The Aim All-share index has lost about 2 per cent per year since the market was set up in 1996. In the same period the Numis Smaller Companies Index, which measures the bottom tenth of the main market, has gained about 8 per cent each year. Tax breaks and investment fads can only go so far.
Email the Lex team in confidence at lex@ft.com

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