The London Stock Exchange's Aim market, designed for smaller and growing companies, is currently experiencing a downturn. The FTSE Aim 100 index, which tracks the performance of the largest companies on the market, stands at approximately 3,650. This marks a notable decline from its peak of nearly 6,550 in September 2021.
Over the past decade, Aim has delivered near-zero returns, in contrast to the FTSE All-Share index's 60% gain over the same period. The number of businesses listed on Aim has also fallen substantially, from around 1,700 in 2007 to just over 600 today.
Factors contributing to this underperformance include a challenging UK macro environment with elevated inflation, depressed domestic demand, and political instability. Smaller companies, often with less international exposure, are more susceptible to these domestic pressures. Additionally, the sector's bias towards growth stocks has been affected by rising interest rates, which have climbed from near zero five years ago to above 5%.
A significant impact has also come from the government's 2024 budget, which reduced the value of Business Property Relief (BPR) for Aim investors. BPR, a tax incentive for investing in small businesses, previously meant no inheritance tax (IHT) on qualifying Aim shares held for two years. Since April, BPR has been cut from 100% to 50%, meaning Aim shares bequeathed to heirs could now incur an IHT charge at a rate of 20% if the estate exceeds the £325,000 threshold. This change applies to both new and existing Aim investments, leading some investors to sell off holdings.
Hargreaves Lansdown analysis indicates that funds investing in UK small caps have seen withdrawals of £6.1 billion, with most of this capital moving overseas. Investors in specialist Aim portfolio services have sold approximately £170 million worth of shares this year, representing about 10% of the total assets in these services.