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Back in the first century AD Roman Emperor Vespasian taxed the collection of urine from Rome’s public toilets. It was used in tanning and for cleaning everything from togas to teeth — I suspect mouthwash hadn’t been invented.
The man who taxed the piss-takers is one of the many memorable anecdotes in economist David McWilliams’ entertaining book, Money: A Story of Humanity, published late last year.
McWilliams charts the rise and fall of nations and empires and makes a strong case for money being one of the most powerful forces shaping human history. The book reminds investors that stock markets have a much broader economic purpose than simply to fund our retirements and give us something to leave the kids when we die.
They also raise capital for commerce. This finance enables exciting young companies to develop the strong roots they need to grow, creating jobs and taxes. A healthy stock market is vital to a healthy economy, hence why so many are concerned about the Aim market.
A sub-market of the London Stock Exchange, Aim — formerly the Alternative Investment Market — will turn 30 this year. But any celebrations are likely to be muted.
From inception to the end of 2024, Aim helped more than 4,000 companies raise over £136bn. In 2023 alone it claims it was responsible for creating nearly 800,000 UK jobs and adding £68bn to UK GDP and £5.4bn in taxes.
But in the past three years only 46 UK companies floated on Aim. Back in 2005 alone (admittedly an unusual year) it was 399. There are now just 685 companies on there — 68 fewer than in 2023 and less than half the number 20 years ago.
Certainly, investors have become increasingly sceptical towards the market. The chancellor removing half the inheritance tax benefits of investing in many Aim stocks in the last Budget will not have helped. In the past three full calendar years the total return on the Aim All-Share index is down 37 per cent; the FTSE 100 is up 31 per cent.
Much of this is arguably the impact of institutional investors reducing their UK equity exposure, which has hit smaller companies disproportionately. Higher interest rates post-Covid have also been a heavier drag on smaller companies, as these businesses tend to be more indebted.
Does it mean investors should avoid this space? In a closed-end fund it is possible to take long-term views so we have been buying Aim stocks and adding to positions.
One recent acquisition is Scotland’s biggest housebuilder, Springfield, which has a large land bank and has been selling off some of it smartly to reduce debt. It is on a substantial discount, with 140p of assets trading at around 90p.
Another cheap stock is Serica Energy. Its share price fell by more than 40 per cent in 2024 on fears about taxation of North Sea oil. It is a well-managed company, currently generating a yield of over 16 per cent and trading on about three times earnings. More reasonably valued is fintech darling Boku, which allows businesses such as Amazon and Spotify to take mobile payments globally. Its growth and prospects are impressive. And then there is aggregates producer SigmaRoc, which is building a strong market in Europe, buying assets and managing them smartly.
I do not remember the forward price/earnings ratios on our portfolios ever being this low, and a big factor is unjustifiably low smaller company valuations. Doubtless, our peers would share my view that if you are in post-Christmas bargain hunting mode you will struggle to find so many companies delivering such strong earnings and dividend growth priced so cheaply outside the UK.
Investors can easily get trapped in an echo chamber of gloom, depressing each other out of an opportunity. I see plenty of reasons to be cheerful.
Takeover activity last year — often with companies selling at significant premiums — looks set to continue in 2025.
Historically, small and mid-sized companies have generated a return premium over their larger peers — between 2009 and 2021 it was over 6 per cent a year, according to research from Lipper. That might not be repeated, given how quickly large and cash-rich companies tend to swallow up innovative tech upstarts these days, but we might reasonably expect some reversion to mean.
Forecast interest rate cuts later this year should help trigger consumer spending and discourage investors from piling quite so much into cash accounts. Once companies have got over the rise in national insurance, a drop in rates might also encourage corporate investment to fuel growth.
There are investment risks — and in Aim especially. Its light regulation helps companies that cannot afford the compliance requirements of a main market listing but leaves investors needing to do more research.
In a higher-risk market such as Aim there will always be failures, but in the past 30 years many of my biggest investment successes started out there — such as healthcare and industrial specialist Scapa and automation software company Blue Prism. Both added substantial value before they were acquired.
What encouraged me most last year was visiting Aim-listed companies and seeing the progress made behind the scenes to develop new technology, implement efficiencies and shape for growth.
Yes, Aim has problems. But so do the wider markets. Hopefully the government understands the importance to the economy of addressing these issues. In the meantime, for long-term, patient investors who do their research, buy shrewdly and diversify to reduce risk, Aim is still rich in opportunity — perhaps as much as at any time since its launch.
James Henderson is co-manager of the Lowland Investment Company and Law Debenture. The author has shares in the trust he manages, which includes shares in the companies mentioned
https://www.ft.com/content/e6ea3171-bdcb-414a-bbbc-9857dc126ed7
