Time to AIM for better returns?
David Prosser explains why the alternative investment market may be about to turn a corner.
The Alternative Investment Market, London’s junior stock exchange, has hardly covered itself in glory so far this year. The FTSE AIM 100 Index of shares in its leading companies rose about 1.5% over the first eight months of 2026 while the FTSE 100 index of the UK’s largest companies managed almost 9% over the same period. Still, whisper it quietly; some experts believe better times are ahead.
“There is a disconnect right now that I don’t think is being fully appreciated; the fundamentals of many AIM companies remain strong, but market sentiment has not caught up,” argued Judith MacKenzie, Head of Downing Fund Managers, in an article just published in Professional Adviser. “When that gap opens, it can create opportunity.”
They point to positives including the growing maturity of AIM-listed companies, which now tend to be much larger and more profitable than in the past, the greater resilience of many of these companies, and the exit of weaker businesses from the market.
David Prosser
In truth, AIM’s disappointing year is hardly an outlier – the market’s returns over the past ten years have been more or less flat, and the AIM 100 Index currently stands just above half its peak of five years ago.
The malaise reflects a bunch of headwinds, including negative investor sentiment towards UK smaller companies in general, a shortage of new and interesting businesses raising money on the market, and concerns about governance. The decision of the incoming Labour government in 2024 to cut inheritance tax breaks for investors in AIM stocks didn’t help either.
So why do people like MacKenzie think AIM might be close to a turning point? They point to positives including the growing maturity of AIM-listed companies, which now tend to be much larger and more profitable than in the past, the greater resilience of many of these companies, and the exit of weaker businesses from the market.
Above all, however, the argument is that today’s valuations provide an opportunity – the chance to get into the market at prices that more than compensate for this additional risk.
There’s certainly no reason to think Labour’s tax changes are a death knell. Shares in qualifying companies still provide a generous slug of inheritance tax relief and AIM is one of the few places that families can still find estate planning opportunities. Indeed, the current level of valuations may pique the interest of advisers exploring IHT-friendly investments.
Still, amid these positives, it’s worth sounding two notes of caution. First, the problem with market sentiment is that while it might be misplaced, there can be no certainty about when it will shift. And second, AIM is very much a stock-picker’s market – the trick is to find the hidden gems rather than to buy the market as a whole.
For that reason, many investors come to AIM via a professionally managed collective fund rather than buying shares direct. The specialist managers running these funds offer expertise and experience in a market where analyst coverage is often meagre or non-existent; they’re often the only party investigating the merits of a particular business.
Investment trusts are a particularly good option for AIM exposure. Liquidity on this market can often be thin, making it difficult to buy or sell shares in large quantities or at speed. That can cause major problems for open-ended funds, which sometimes need to liquidate positions in order to meet investor redemptions.
One possibility is the UK Smaller Companies sector, where investment trusts often offer exposure to AIM companies alongside holdings in smaller companies listed on the Main Market. Examples include BlackRock Smaller Companies, Montanaro UK Smaller Companies and Onward Opportunities.
Another option is the venture capital trust (VCT) sector. VCTs are specialist funds offering a generous range of tax breaks to investors prepared to take a long-term view on early-stage companies – but many AIM stocks are qualifying VCT investments and a number of VCT managers specialise in this area of the market.
David Prosser
David is former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine. He writes regularly for the AIC.
