How the junior London stock market has beaten the FTSE in 2020

Illo

Investors in the Alternative Investment Market have made money this year despite the plight of British companies, but should investors buy into London's junior market?

The FTSE All Share, a barometer for British stocks, has lost 20pc this year while those companies quoted on Aim have made a small profit of 0.2pc. Around 75 companies on Aim have doubled in value so far in 2020, while just eight companies listed on the main London market have done so.

London’s main market is dominated by oil giants, banks and mining stocks. While the latter have performed well this year, the former have struggled as the oil price and interest rates have dropped during the pandemic.

Conversely, the Aim is largely dominated by technology and healthcare companies, which have led the way during the pandemic.

Paul Jourdan of Amati, the asset manager, said: “This reflects a pandemic-driven shift in sentiment among investors, who continue to favour companies exposed to newer growth areas, such as healthcare, technology, data communications, and other aspects of the online economy, which are expected to dominate into the future.”

A further factor is that Aim companies are not heavily traded and barely feature in index funds, so they have not been at the brunt of the sharp ebbs and flows seen in markets during the first half of the year, when investors panic sold in late February and March.

Returns from these companies could be even higher, but have been hit as investor concerns about the near-term outlook for the British economy have weighed on the market, he added.

However, he warned that this can also reverse quickly. In America, the technology-heavy Nasdaq index dropped 10pc in four trading days earlier this month as investors grew worried that the valuations of some companies had risen too fast.

“A lot of this trend is momentum driven, and the recent volatility in America shows the dangers of a change in direction,” Mr Jourdan said.

Despite this, investors should have some exposure to the junior market, according to Jason Hollands of Tilney, a fund shop.

“These days most British smaller companies funds invest across both Aim and the main market so you don’t need to seek out an Aim-only,” he said

The £1.1bn Liontrust UK Smaller Companies fund is 74pc invested in Aim stocks, while the £240m Tellworth UK Smaller Companies fund is 57pc invested in Aim companies.

For investors that want to invest solely in Aim, a venture capital trust makes sense, he said. Amati Aim, Hargreave Hale Aim and the Octopus Aim VCTs are all raising funds.

Lee Wild of investment shop Interactive Investor said investors interested in buying individual companies should look at Novacyt, Synairgen, Avacta and Byotrol, which are all quoted on the junior market and are involved in the fight against coronavirus.

Although a lot of this potentially good news is already priced in, "the longer the crisis rumbles on, the greater the opportunity for these companies," Mr Wild said.