Hats off to the London Stock Exchange.
They were 100 per cent supportive after my advanced warning that this column was critical of some Aim-listed shares. The LSE views this web site as an unbiased, objective tool to help level the playing field between private investors and City pros.
I was encouraged to fire away with both barrels if I believe my Aim criticisms are valid. To my way of thinking, their thoughtful stance deserves to be acknowledged.
On to the source of my complaint.
For those not fully familiar with Aim, the Exchange launched its Alternative Investment Market (Aim) in 1995 to provide smaller companies with an opportunity to raise money.
By design, Aim companies are more lightly regulated than those listed in the main market. The small size and reduced level of regulation puts off some risk-aversive investors. But many private investors are undeterred by a higher level of risk.
The recent historical record suggests their decision to invest in Aim was a good one. Aim shares have done rather well since the current bull market began in March 2003. The FTSE-Aim All Share index gained 84 per cent in the last three and a half years, about the same as the FTSE-100.
Unfortunately, these figures disguise an important problem. . Investing in new Aim entrants is often a poor deal for UK investors. A basket of new Aim shares typically delivers much less profit than a similar-sized basket of shares of older, more established Aim companies
Here is a case in point. The FTSE-Aim All Share index rose by more than six per cent in the first half of 2004. But fewer than a quarter of the three dozen companies accepted by Aim in the first quarter of 2004 advanced by June 30. The average share in this group turned a loss of 4.2 per cent.
Weakness continued through the third quarter of 2004. As a group, shares of new listed companies fell by more than one per cent during July to September. In contrast, the broad Aim index continued to rise, with shares gaining an average of four per cent during this quarter.
Signs of improvement finally began to emerge in the final quarter of 2004. By year-end, share prices for 20 of the 38 shares finally rose above their starting price. The average fourth-quarter profit for the group was about two per cent. But the broadly based FTSE-Aim All Share index rocketed up another 10 per cent during the fourth quarter for a full-year return of 20 per cent.
A similar trend occurred for Class of 2005. Eighty nine companies were newly listed in the first quarter of the year. As of the end of June, shares in only eight of them turned a profit. By year-end, this group had lost five per cent of its value. In contrast, the broad Aim index gained four per cent for the year.
Recall that 2005 enjoyed a tremendous rally in the commodity arena, triggered by rapid economic expansion in India and China. Substantial share price increases were enjoyed by many mining, exploration and mineral production companies throughout the year.
But newly listed Aim shares that operated in these segments failed to keep up. Only five of the eighteen exploration and mineral production companies coming to market in the first quarter of 2005 advanced by year-end. As a group, their shares lost 4.4 per cent of their value since coming to market during the hottest commodity bull market within living memory.
As yet, we do not know how 2006 will turn out. But as of the end of September, only one-third of the shares that came to market in the first quarter increased in value from their original offering price.
To be sure, not every new listing declined in value during its first year on Aim. But the data reveals that the odds are weighted against turning a profit, even if the company is part of a hot sector.
One possible reason is greed by the brokers who sponsor companies that are coming to market. Chart Breakout editor Quentin Lumsden observes that many new Aim companies are being floated with valuations that are unjustifiably high. This is good for the company being funded but bad for investors who purchase these shares.
The obvious conclusion: newly-listed Aim shares deserve greater scrutiny. Before investing in any company, a good starting point is to compare the price and performance of the target company against other established companies in that industry. This is good advice in general but especially important when it comes to new Aim listings.
If you are keen to acquire shares in a new listing, the data suggests that it often pays to wait a few months and buy on a dip that frequently occurs.
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