Investing in technology via the UK’s alternative stock market

I’ve been working in the investment industry for more years than I care to remember, but I’m constantly learning – it’s why I love my job so much.

So my ears pricked up a couple of weeks’ ago, when I listened to the FundCalibre podcast, and Guy Feld, co-manager of Marlborough UK Micro-Cap Growth and Marlborough Special Situations funds, pointed out just how many small tech companies we have in the UK, which are all accessible via the AIM stock market.

“In the US, tech stocks represent nearly 30% of the value of the large cap index, the S&P 500,” he said. “By contrast, the FTSE 100 has only three companies that I classify as genuine tech - and they account for less than 1% of the overall value of the index.

“If, like us though, you're looking at UK smaller companies, there are far more technology companies to choose from. Around 70% of our fund is invested in stocks on AIM, the junior market, and it holds about 84 technology companies.

“In addition, there are plenty of AIM companies that might not be classified as pure play technology stocks but are certainly technology enabled. Many of these tech and technology-led companies are operating in areas that have performed particularly strongly during the crisis.

“Ecommerce and digital gaming companies are both areas that have done well with people being stuck at home during lockdown. Payment processing companies have also reaped the benefits as the crisis has accelerated the move away from cash, and cyber security is another growth area because cyber-attacks are increasing with people spending more time online, and in many cases being less well protected when working from home.

“We've also seen an acceleration in the trend of businesses and government departments using digital channels to talk to people. That’s meant greater demand for the services of companies providing technology for text message communication, emails, web chat, chat bots, and video. So there's a thriving ecosystem of smaller tech companies in the UK.”

What is AIM?

When talking about the UK stock market, most people tend to think of the FTSE 100 or the FTSE All-Share. Both are quoted on the daily news bulletins and referenced by investors all around the world. They are part of what is called the ‘Main Market’ on the London Stock Exchange.

But the London Stock Exchange has another, less tightly regulated market, providing a lower-cost alternative for growth companies seeking investment. The Alternative Investment Market or ‘AIM’.

Launched in 1995 with just 10 companies valued at £82m, AIM is today home to around 725 companies with a combined market cap of £67bn*.

While there are some large and highly successful companies on AIM like ASOS, Fevertree and Hotel Chocolat, most of its constituents are smaller, growing companies, typically at a much earlier stage in their life than those listed on the Main Market. It is therefore riskier and won’t appeal to more cautious investors or those seeking an income from more established dividend-paying companies.

Performance of AIM shares

The AIM market also doesn’t have the best track record. While there are a handful of companies that have made stellar returns for investors over the past 25 years, there are many more that have gone bust.

The 25th anniversary of AIM coincided with the peak of the pandemic and stock market falls. As a consequence, the occasion passed by with barely an acknowledgement. But on its 20th anniversary, research conducted for the Financial Times by professors Elroy Dimson and Paul Marsh at the London Business School revealed that, over the first 20 years of its existence, investors would have lost money in 72% of all the companies ever to have listed on AIM***.

This shows in the cumulative performance. Over the lifetime of the index the FTSE AIM All Share has returned 48%, compared with 218% for the FTSE All Share and 381% for the FTSE Small Cap index^.

This is why we’ve always suggested it is a market best left to the professionals – people who can try to pick the winners and avoid the losers.

But in the past three years, the fortunes of the AIM index have started to pick up. Over the past three years, it has returned 14% compared with 16% for the FTSE Small Cap, 2% for the FTSE All Share and 0% for the FTSE 100^^.

Since the market lows in March 2020, it has stormed ahead – returning 98% compared with 74% for the FTSE Small Cap, 45% for the FTSE All Share, and 40% for the FTSE 100^^^.

While the type of company in the AIM index will always make it a risker market in which to invest, perhaps there will be more winners going forward, as weaker companies bit the dust and the stronger become stronger and as trends accelerated by the pandemic gain traction.

As Guy concluded in his interview: “Many of these businesses have done very well during the crisis and we believe are positioned for strong growth over the longer term.”

Other Chelsea Selection funds investing selectively in the AIM stock market include:

  • LF Gresham House UK Micro Cap
  • Liontrust UK Micro Cap
  • TB Amati UK Smaller Companies

*Source: London Stock Exchange, 7 January 2021
**Source: Financial Times, 19 June 2015, analysis of data on the 2,877 companies to have listed on AIM in the first 20 years
^Source: FE fundinfo, total returns in sterling, 06 February 1998 to 6 January 2021. NB: The data does not go back as far as 1995 when the AIM market first launched.
^^Source: FE fundinfo, total returns in sterling, three years to 7 January 2021
^^^ Source: FE fundinfo, total returns in sterling, 23 March 2020 to 7 January 2021

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views of the author and fund manager quoted are their own and do not constitute financial advice.

Published on 08/01/2021