Elroy Dimson and Paul Marsh, experts on stock market performance at the London Business School, call this drastic underperformance a "lasting puzzle". They have ventured four explanations. First, Aim's popularity with IPOs has exposed it to the poor returns typically generated by newly floated companies (which, as I discussed in the issue of 14 Feb, is something of a puzzle in itself). A related point is Aim's heavy exposure to what turn out to be investment fads - most spectacularly the internet in 2000, more recently natural resources.
Third, "Aim stocks are more volatile, unmarketable and less regulated." This was appealing in the post-Thatcherite euphoria of the late 1990s, but became steadily less attractive as the tide turned against equities in the 21st century, prompting investors to favour more mature companies. Finally, "investors learned slowly about the nature and prospects of Aim stocks"; in other words, the market has deflated very gradually with investor expectations.
One popular explanation that does not wash is that Aim loses its stars - think of Melrose (MRO), listed on Aim with £13m of equity in 2003, now on the main market with a market capitalisation of £3.1bn. The professors found that companies performed very strongly in the period leading up to a transfer to the main market. Less predictably, however, the outperformance only persisted for a couple of months. At the end of 2013, of the 104 companies that had left Aim for a full listing, 61 were down on the transfer price and 27 had lost more than 90 per cent of their value. If Aim's alumni were included in the Aim All-Share index, its performance would look even worse.
None of this, however, means investors should simply ignore the nearly 1,100 companies quoted on Aim. In fact, the market's dire historical performance may not matter much, for two reasons. The first is that the exchange has matured. The number of listings has shrunk by about a third since 2008, with few IPOs to replace all the smaller, less liquid, distressed, foreign or dual-listed stocks that have bowed out. Quality has consequently improved - even as share prices have fallen to a level that makes better performance in future more likely.
Last year, indeed, Aim put in a reasonable showing, with a total return of 21 per cent, exactly the same as the FTSE All-Share. Moreover, if you strip out investment companies and the embattled resource sector, the average Aim stock rose 42 per cent - five points better than the average main-listed small and mid cap.
The other, more important reason why investors shouldn't be daunted by Aim is that nobody buys the average. The FTSE 100 index matters: investors hold tracker funds, and even actively managed funds often track it closely. But there are no funds tracking the Aim 100, still less the Aim All-Share. The junior exchange is truly a stock-picker's market. This is clear from the performance of the 10 venture capital trusts focused on Aim. Their average total return over five years is 259 per cent - compared with 99 per cent for the Aim All-Share. More important still, only one of the funds underperformed that benchmark over the period. This is one market where research yields clear results.
This is why my colleague Simon Thompson focuses his efforts on Aim. It is also why we last month published our Aim 100 review, with short sketches of and views on the largest 100 companies on the exchange, and why we write an Aim tip most weeks. As Gervais Williams, a veteran small-cap manager now at Miton (MGR), points out: "If you're looking for overlooked stocks, you've got a better chance of finding them on Aim than on the main market."
It is nonetheless instructive to bear the dismal track record of the average Aim stock in mind - as a warning against being seduced by big stories or the fantasy of getting rich quick. Focus instead on stocks backed either by conservatively valued assets, such as Conygar (CIC), or steady cash flows in protected, niche markets. Stanley Gibbons (SGI) is a good example of the latter - as last week's tip explains.
