The launch of our campaign to improve the AIM market (so as to stop the abuses which have led to investor losses) received a lot of media coverage. As expected those who have profited from the cavalier approach to the listing of AIM companies and the “light touch” regulation were unhappy with some of our suggestions. But here is some analysis of the more reasoned comments published in the media:
- Removing risk might reduce returns. This argument is based on the financial theory that high risk investments generate higher returns and vice versa. This is based on an academic theory related to high beta stocks (using beta as a measure of risk) but in practice it may be bunk. To quote Dylan Gricce formerly of Societe Generale: “High risk offers high excitement, not high returns, because excitement is overvalued. In other words, the myth entices many more people to invest in higher-risk stocks. The higher demand drives up prices – and, in turn, drives down their profit potential”. That is surely what has been happening on AIM. It is of course true that those companies which are high risk investments may be valued more lowly and hence experienced investors, or those who can accept the higher risk, may profit in comparison with others. But that hardly seems relevant when AIM actually attracts many more private investors, who are often less experienced, than institutional ones and AIM companies are generally not lowly valued on a fundamental analysis. Their average p/e ratio is higher and the yield lower for AIM companies than for the FTSE All-Share which reinforces Mr Gricce’s point.
- That AIM does not need more regulation, or it would be expensive. ShareSoc’s proposals did not advocate substantial changes to regulation. Simply that those existing should be enforced and likewise the general laws on such matters as market abuse where the FCA have been very weak. We do not wish to impose higher costs on market participants, but it seems some commentators did not read the details of our document before jumping into words. The details are present in this note: www.sharesoc.org/Improving-the-AIM-Market.pdf and our proposals would of course be subject to detail scrutiny and consultation. Neither did we argue for “a corporate governance structure equivalent to a main market company” as one person alleged. We recognise that smaller companies need a simpler code. The QCA provide such a code for smaller companies and it is used by some, but many do not and hence have no principles to follow.
- The failure rate of AIM companies is low and therefore there is no need for change. The former statement is simply not true. The failures and number of withdrawals from the market are much higher than the main market and much higher than most investors expect.
- The impact of pre-pack administrations. One commentator on a blog mentioned the abusive use of pre-packs in AIM companies resulting in shareholders being wiped out. Despite being the owners of the business, and where other options might have been pursued, they are not consulted. A classic example of this was Torex Retail some ten years ago in which RBS was involved. See a recent ShareSoc blog here on this case, but there have been numerous other examples: www.sharesoc.org/blog/general-news/rbs-and-pre-packs/. The insolvency laws need changing to stop the abuses generated by pre-packs and AIM companies are particularly susceptible.
We are not suggesting that the AIM market be scrapped, or made unviable. It is possible to make money from investing in AIM companies and there are tax advantages from it being a market for “unlisted” shares (i.e. securities in a non-Government regulated market) but the current structure encourages abusive practices. Nor are we advocating a revolution – just some relatively simple changes that would avoid the unacceptable and unforeseeable risks that investors face. There is no reason why such changes would reduce the returns available to AIM market investors.
If you have not yet done so, please sign our petition to get some change which you can find at the bottom of this web page: www.sharesoc.org/campaigns/campaign-improve-aim-market/
Roger Lawson
In relation to the risk vs return debate, I am struck by the observation that market commentators seem to assume that ALL types of risks are acceptable on AIM – there seems to be no distinction between them.
I would argue that investors fully accept normal business risks when they make investments – eg: strength of the management team, market position of the company, its financial strength, threats from competition, attractiveness of the product/service…etc. All of these risks determine the ultimate long term performance of the company and we accept that smaller companies usually have more volatile outcomes than big ones.
But what we are complaining about (I assume) are the risks that investors should NOT be exposed to and that they find UNACCEPTABLE which are due in the main to the deliberate or downright fraudulent misrepresentation of the company’s position by its management and/or representatives. Maybe we just need to make this point again so that everyone out there gets it? I think the “beta” argument – whether it works or doesn’t and how AIM valuations and yields compare with other indices – seems somewhat tangential.