AIM market

I recently shifted my investment strategy to focus on UK growth stocks in the search for higher returns than that on offer in the FTSE 100. As a result, this has lead my research into the FTSE AIM index, which is a market for smaller growth companies to raise capital to fund expansion.

The AIM index provides a great alternative to the FTSE 100 for portfolio selection and offers a host of benefits for new investors.

SOURCE OF GROWTH

The FTSE AIM 100 is full of great stocks, including names such as Fevertree, Boohoo Group PLC, and my previously discussed AB Dynamics. Such stocks have produced stunning returns over the years such as a 1500% return since 2015 for AB Dynamics and over 1300% return for Fevertree within the same time period.

It is important to understand though that due to such great returns there is the potential for equally large downside. For example, the recent collapse of Burford Capital which dropped over 60% in one week. This is why I would suggest that AIM stocks make up part of a diversified portfolio between lower-risk stocks such as FTSE 100 giants like Experian, which can deliver sustainable returns.

COVERAGE

The reason why companies offer such great growth opportunities is that they are not very well covered by brokers versus large market cap stocks. This can be a great source of opportunity but also very challenging. As a private investor, it’s unlikely you will have the same access as a professional would when making an investment decision, such as the ability to have meetings with management.

Therefore it takes research into the company looking at valuation metrics such as cash generation, operating margin and details on management strategy in documents such as year-end reports. By analysing public information on the company and its relevant sector you can get a clearer understanding of the business itself.

By conducting analysis you can gain a better understanding of the fair value of the stock versus what is on offer in the current market. For example, by looking at a company’s valuation metrics and realising that a company with a higher share price in the same sector has similar metrics you can infer that the stock could potentially be undervalued.

TRANSACTION COSTS

Another benefit for new investors is the cost-saving when investing in AIM stocks. This is because the market does not impose a stamp duty of 0.5% on the buy-side of transactions. For example, on an investment of £1,000, you are avoiding a £5 stamp duty charge that would otherwise be paid when buying FTSE 100 stocks.

The several reasons that I have mentioned outline why I am increasingly shifting my focus towards growth AIM stocks in the search for superior returns. This can be particularly appealing to investors with a longer time horizon for investment returns who can, as a result, handle greater risk.

When looking at AIM stocks due to greater volatility it is important to research into the company, its sector and global macro-economic conditions that influence the business. By developing a better insight of the business proposition in the context of its competitors, and the challenges and opportunities that sector faces, you can more accurately forecast performance.

Due to higher levels of risk, it is good practice to balance your portfolio between more mature companies such as FTSE 100 constituents that provide relatively steady growth versus AIM stocks than have more volatile price fluctuations.