What is driving AIM’s outperformance?

The AIM index is up 30% since 1st April i.e. Q2 2020. Maybe this is not surprising when you consider that it fell by 29% in Q1 and, as has been widely reported in the mainstream press, markets have rebounded.

However, when you compare to the UK main markets, AIM has massively outperformed in Q2 with the FTSE 100 and FTSE All-Share up c10% and 11% respectively. And, it’s not if the main markets didn’t fall as much in the first quarter. The 100 was down 25% and the All-Share 26%.

So what is driving AIM?

Well, it is probably a number of factors.

Firstly, it has been well documented for some time that the FTSE 100 is full of pretty dull and uninspiring companies and that can partly explain why it has also underperformed the S&P500. The UK blue-chips did benefit last year from a weakening pound as overseas investors bought cheaper assets and yield. With Sterling still relatively weak, it appears that no longer remains an attraction.

However, that aside it is more likely that the dominance of a few underlying companies is distorting the index and this has always been the problem of using AIM as a comparative index.

There were 831 companies listed on AIM at the end of May 2020, with the combined market capitalisation of the market c£95.3bn. There were 17 companies individually valued at more than £1bn, which between them represented 34% of the total market capitalisation.

With AIM being a weighted index, i.e. the return of the index is based on a weighted return by market capitalisation, rather than each company being weighted equally as the US Dow Jones is for example, it is fair to say that those 18 companies will really move the needle.

And if we look into some of those companies, you will see the influence they have.

Probably two of the most well known companies listed on AIM are online clothing retailers Boohoo and ASOS. Boohoo, with a market cap of c£5bn is comfortably the largest company on AIM by value, being £1.5bn more than the next on the list, Abcam.

Combined, these companies represent over 8% of the index. When you consider that ASOS is up 177% in this quarter alone and Boohoo 115%, returning to pre -lockdown levels, you can see the influence they are having on the index as a whole. ITM Power, another £1bn+ company is also up over 100% quarter to date.

Unless you are holding these companies in your portfolio, it is very likely that your AIM portfolio is going to be significantly underperforming the AIM index.

So although the AIM index has been a better indicator for AIM portfolios in recent years, it goes to show that it can be misleading in extraordinary times.

You can find out more about Fundamental’s high performing AIM portfolio service, including the latest fact sheet for May, from the link here.