Thrills, with a safety net

High-risk investment in AIM companies can be spread out to cushion any losses. Tony Lyons reports

Since its launch in June last year, the Alternative Investment Market (AIM) has proved a success. In the past 12 months, it has grown to more than 200 companies with a total market capitalisation in excess of pounds 4bn, raising more than pounds 400m from new issues. Many shares quoted on it have risen in value and some have more than doubled, while a small number have declined in price.

Companies launched on AIM have usually been small, often start-up businesses in areas of high technology. By their nature they are high risk. Investing in AIM stocks has been largely left to professional fund managers and more sophisticated investors, aware of the speculative nature of the companies.

Now smaller investors can minimise their risk but still invest in a portfolio of AIM stocks, by choosing from a handful of investment trust funds specialising in these fledgling firms. They spread the risk by offering a balanced portfolio of AIM and OFEX shares. OFEX, run by market makers Jenkins, is an exchange for companies that do not want to meet the listing requirements of the Stock Exchange or AIM, but still want their shares traded. Apart from two large firms, National Car Parks and Weetabix, and some soccer clubs, these are largely very small companies with a limited number of shareholders.

"It is better to go into AIM through an investment trust," says Mark Fiander, of the stockbrokers Capel Cure Myers. "AIM stocks are on a par with investing in Third World companies; definitely not for the more cautious investor."

This view is shared by Bill McCall, director of Tilney & Co, one of the largest independent private client brokers. "Investment trusts are a sensible way to invest in a high-risk market," he says, "as they allow a well-trained fund manager to make the decisions."

The pounds 22m Beacon fund, managed by Rutherford Investments, was launched two years ago to invest in stocks quoted under the Stock Exchange's old 4.2 rule, now replaced by AIM, and has invested in 40 stocks. It trades at around 111p, a near 15 per cent discount to its last published net asset value of 130p. The net asset value has appreciated by nearly 35 per cent since launch.

The AIM Trust managed by Baronsmead, part of lvory & Sime, was launched in May. Just over pounds 3m of the pounds 45m raised has been invested so far. The rest is earmarked for new issues. "I'm looking for stocks with high potential to grow profits, and which offer good value," says Bill Brown. Both of these trusts can be used in a PEP.

Other investment trusts, such as the AIM Distribution Trust managed by Johnson Fry, launched in the last six months, have been set up as venture capital trusts. Among other restrictions, it can invest only in companies that raise money on an AIM flotation. Investors who hold the trusts for five years get up-front income tax relief of 20 per cent on their investment and full capital gains tax relief, but cannot use it in a PEP.

The pounds 6m Gabriel Trust, whose shares presently trade at around 18p each, is different from the others in that it offers no tax advantages at all to investors. It transferred from OFEX to AIM in August, raising pounds l.5m of new money at the same time. It puts its money into companies planning to go public within a year of Gabriel taking a stake. "We are looking at companies before they are ready for AIM, where we can make the greatest capital gain," says David Pearl, a director.

Small companies continue to Join AIM at the rate of 10 a month. Many are "blue sky" companies, great ideas in areas such as biotechnology, computers, electronics, oil and minerals, but fledglings that have still to make profits.

There is little independent research into AIM companies and the funds carry out their own inquiries. Fund managers invest only after meeting the managers of the companies, and approving their plans.

This new range of investment funds should reduce the risk of investment in this speculative market, while giving investors the thrill of riding on the roller-coaster