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Can small cap indices score a hat-trick?

by Robert St George on Jan 29, 2014 at 08:51

While 2013 was a good year for small caps in general, it was another in which AIM lagged. The FTSE AIM All Share returned 21.3%, fine in absolute terms but ‘disappointingly close’ to the FTSE All Share’s performance, according to Marsh and Dimson, and far below of that of the NSCI.

Since AIM’s launch in 1995 it has now lost 11%, or 0.7% per annum; the NSCI has returned 350%, or an annualised 9.4%.

This prolonged slump has traditionally been ascribed to AIM’s preponderance of resource stocks, which account for 34% of that index compared with 7.3% of the NSCI excluding investment trusts. This is borne out by 2013, when an index of AIM’s resource constituents lost 16.4% and the non-resource AIM index returned 39.6%.

Yet this year, Marsh and Dimson also considered a different explanation for AIM’s underperformance: that it suffers from losing its stars as they move to a main listing.

This proved not to be the case. Of the 104 AIM companies promoted since 1999, 12 more than doubled in value (of which four at least quintupled), 15 rose by between 50% and 100%, and 16 delivered returns that were positive but of less than 50%.

Those 43 were offset by the losers, however: 15 fell by up to 50%, 19 by between 50% and 90%, 14 by 90-99.9%, and 13 became valueless. In total, including the AIM alumni would have knocked 15% off the index’s returns through its life.

‘This exercise was slightly discouraging. We rather hoped it might improve the picture,’ Marsh admitted. ‘Small cap managers who complain about losing their star investments are not supported by the evidence.’

The rationale would be that size and value is a sounder investment basis than momentum.

As to AIM’s future, the professors supposed that its key attraction now is the sector differentiation it offers.

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