Writing in MoneyWeek on Friday, Matthew Lynn lamented the declining number of companies on the Alternative Investment Market (Aim). He’s right to draw attention to the matter – but I don’t agree with his solutions.
One problem, says Lynn, is that too many companies are leaving Aim while not enough are joining. Another is that the market is not doing enough to provide capital to its companies. In truth Aim has always seen its constituent numbers fluctuate with the economic cycle, and the rise and fall of investment fads.
The big boost to Aim’s numbers in recent years came from junior mining companies, but investor appetite for this type of play is now sated. Numbers are drifting lower and the London Stock Exchange needs a new strategy.
Why there can’t be a small company market for the world
Two or three years ago, the London Stock Exchange (LSE) was branding Aim as the small company market for the world. Officials jetted off to distant lands to persuade companies to “tap the expertise and capital of the London market”.
I criticised that strategy at the time. The natural investors in Chinese companies, for example, are the Chinese themselves. London investors are rightly cautious about investing in obscure and distant businesses. What has happened is that one or two Chinese companies here have failed spectacularly, tainting the reputation of all the rest.
The LSE congratulates itself for luring more companies onto Aim. Unless these companies and their investors are happy with the subsequent experience, though, this is not a lasting formula for success.
I meet countless Aim-listed company directors, and many are not happy. Let me deal with Lynn’s suggested remedies. First, he wants to cut the regulatory burden on Aim companies. I dare say this might be possible on the margin, but Plus Markets already fills that niche; I think that a listing on Aim should be a serious affair with proper corporate governance and scrutiny.
Next, Lynn suggests that the Bank of England spends £7.5bn of taxpayers’ money on Aim shares. Not a chance! I can see the headlines now – ‘Taxpayers’ cash used to line City pockets’!
Sensible suggestions that would make a real difference
More sensibly, Lynn would like to offer Aim investors a genuine tax break. I am against interference with the free market, but since shares listed on the main market are eligible for Isas then why not Aim shares? Already we have the ridiculous anomaly where a few Aim listed shares are in fact Isa-eligible by dint of having a listing on a recognised overseas stock exchange. This allows Isa investors to hold just the sort of racy mining plays that the FSA would like us to avoid.
The FSA is biased against all small companies. It regards them en masse as risky. But I could point you in the direction of several cash rich, profitable, dividend paying companies on Aim (eg Concurrent (CNC), James Halstead (JHD)) which look nothing like as risky as many shares on the main market.
Risk is not always a matter of size, it is a matter of the nature of the business and its financial characteristics. Many private investors would love to hold Aim shares in their Isa, and this would give UK investors a fair chance to back UK small business.
But the thing that Aim directors complain about most is the lack of support they get from their City advisors. In today’s age of webcasts and digital media, broker research notes may seem a bit old hat. But investors still want to see proper and regular analysis of the business along with some forecasts. When brokers bring companies on to Aim they should be duty-bound to produce such analysis at least twice a year.
Finally, the stock exchange must create a proper market in Aim-listed shares. Too often investors find it hard to trade their Aim shares. At the first sign of excitement the market makers widen their dealing spreads and run for cover. When done well, market-making is very profitable. But it is not supposed to be easy. In my opinion, the LSE should insist that market makers are at all times and without fail ready to trade in a minimum of, say, £10,000 of shares within a maximum 10% bid/offer spread.
Today we have a government that espouses the cause of small business. Some straightforward changes to Aim would allow it to match its words with action. What do you think? Let me know by leaving a comment below.
• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
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