AIM's top stocks vs FTSE 100

Anyone with a short-term perspective may believe that AIM is lagging behind the FTSE 100 index. That may be true in the past few months, but a longer-term view shows just how much AIM has been outperforming its larger counterpart in recent years.

The FTSE 100 has risen by 12% over the past two months and reached a new high in May, although it has fallen back from the peak. To put this in perspective, two months ago the FTSE 100 index was at its lowest point since the end of 2016.

The blue-chip index, which since April has included former AIM company Melrose Industries  following its acquisition of GKN, has been trading in a fairly narrow range since the beginning of 2017. This contrasts with AIM's upward trend over the period and, if anything, the FTSE 100 still has some catching up to do.

While the FTSE 100 has grown by around twice the rate of AIM over the past two months it is still lagging behind over the year so far. In fact, the FTSE 100 is only slightly higher than at the beginning of the year. In contrast, the FTSE AIM All Share index is 3.6% higher this year and has significantly outperformed over longer time periods.

Source: interactive investor             Past performance is not a guide to future performance

The 47% increase since the beginning of 2016 is double that of the FTSE 100, and a 49% rise over the past five years is far better than the FTSE 100 improvement of 14%.

The FTSE AIM 100 index has done even better than AIM as a whole, and this trend is set to continue. So far this year it has risen by 5.4%. Over the past five years, the increase has been 71%. This outperformance by larger AIM companies appears to be a trend that will continue.

The competition

To put the performance of AIM in perspective, the S&P 500 has risen by 1.8% so far this year and 64% over five years. That is still impressive, but not as good as the AIM 100, although better than AIM as a whole.

The Brent crude oil price has risen by more than one-third so far this year, but it is still 23% lower than one year ago. The beginning of 2016 was just before the low for the oil price ,so it has more than doubled since then.

The gold price has barely changed so far this year, having had a good run last December. Five years ago the gold price was declining from its all-time peak of just over $1,800 per ounce in 2011.

Over five years, the gold price has fallen by a further 7.5%. Interestingly, the sterling equivalent of the gold price is slightly higher over five years. The gold price has risen by more than one-fifth since the beginning of 2016, because this was around the time that the price bottomed-out.

The Nationwide UK house price index has risen by 0.9% during 2018, while over five years it has risen by 28.6%. House prices have therefore outperformed the FTSE 100 but not kept pace with the AIM 100.

Of course, bitcoin has done much better than the stockmarket over the past five years and it is around 60 times the level it was back in May 2013. However, bitcoin is much more risky and volatile than even investment in AIM companies and it has halved in value since the beginning of 2018.

So far this year, 56 of the AIM 100 constituents are higher and the rest have a lower share price. Over longer periods not all of the current constituents were quoted for the full period. Out of the current constituents, 89 were quoted at the beginning of 2016 and 73 of those were risers over the period.

Only 66 were quoted five years ago and the share prices of 62 of them have risen. The two worst performers were oil companies Amerisur Resources and San Leon Energy.

The share prices of 33 of the 66 companies have risen in each of the three time periods, so there is a consistency of performance of a significant number of the companies.

Generally, the best performers are not necessarily the most high-profile of AIM companies. Mixer drinks supplier Fevertree Drinks is up by 396% since the beginning of 2016, but that just makes it the eighth best performer.

Online fashion retailer ASOS still has the largest weighting in the AIM indices. The share price has fallen this year and it is number 72 out of the AIM 100 in terms of performance, dragging the performance of the AIM 100.

ASOS is 67% higher over five years, but it is still 47th out of the 66 current constituents quoted over the period. Of course, ASOS had its significant outperformance in its first decade on AIM, which is prior to these periods.

Source: interactive investor        Past performance is not a guide to future performance

AIM's stars

The better performers will come as a surprise to many investors.

The best performer over five years is carpets and floorcoverings manufacturer Victoria, which does not fit into the image of high growth AIM company. New management is undertaking a buy and build strategy aimed at making Victoria one of the biggest floorcoverings companies in Europe, so that it is attractive to a bidder in the long-term.

The timescales chosen will always have a significant effect on which companies perform the best. An example is IG Design, which used to be known as International Greetings and is a former AIM company of the year. The share price is 1,170% higher over five years but it is not quite back to its all-time high in 2005.

Poor performance led to a slump in the share price of the gift wrap supplier and new management came in and turned around the business. The share price five years ago was not far above the all-time low 10 years ago.

Software company WANdisco has endured a rollercoaster ride with its share price in the six years it has been quoted. The WANdisco share price is more than five times the flotation price and, although it is slightly higher than five years ago, it is still one-third down on the high at the end of 2013.

Legal finance provider Burford Capital is one of the most consistent performers over the three time periods. It is in the top five for the two longer time periods and is still the eleventh best performer, with an increase of 34%, so far this year.

Source: interactive investor          Past performance is not a guide to future performance

Learning Technologies Group  is another company that has a consistently good share price record. The e-learning and training supplier reversed into In-Deed Online, the former online conveyancing business turned shell, in November 2013 - within the five-year period.

Hutchison China Meditech Ltd has done badly during 2018 but the long-term performance is impressive.

Less positively, the one constituent company where the share price has declined significantly in each of the three periods is Mulberry Group. The share price is more than one-quarter lower this year.

Not just resource stocks

A notable thing about the best five performers so far this year is that they include two resources companies - Hurricane Energy and Atalaya Mining. Griffin Mining Ltd  and Faroe Petroleum are also in the top ten. Griffin Mining and Hurricane Energy are in the top ten performers since 2016, but not in the top five.

There are no resources companies in the top ten performers over five years. In the past, the AIM 100 was dominated by resources companies, but the spread of companies and sectors has become broader and resources have been out of favour. The better performance of some resources companies this year suggests that they could be coming back into favour.

The one thing that should be noted when looking at the performance of the constituents of an index is that the list will be biased towards the better performers because the poor performers will probably end up dropping out and these lists are only based on the current constituents.

For example, Conviviality has disappeared and the financial collapse of the convenience stores retailer will not have helped the index performance this year.

Biopharmaceutical company Faron Pharmaceuticals Oy is likely to fall out of the AIM 100 following the disappointing phase III trial results of Traumakine in the treatment of ARDS (acute respiratory distress syndrome).

There is no approved pharma treatment for ARDS and there are 300,000 cases in the US and Europe each year. However, the results did not replicate the positive results of earlier stage trials. Faron is trying to ascertain why this is.

The Faron share price has fallen 85% so far this year with most of that happening during May. Faron has another potential drug but any prospects for that treatment have been buried under the negativity of investors about the Traumakine disappointment.

The next index changes are due to be announced next month. There will undoubtedly be changes in the FTSE 100 index constituents as well as AIM 100 constituents, but that will not in itself have a significant effect on the direction of each index. The FTSE 100 index may continue to outperform in the short-term but the AIM 100 is likely to continue to outperform over a longer timescale.