Near the end of August, I reported that AIM shares were significantly cheaper than the market as a whole. If you thought that might represent an opportunity to invest in AIM and outperform the market, then you were likely right!
I divided share performance for a certain threshold of market valuation in 3 buckets for RS6m: low (lowest-performing quintile). high (best-performing quintile), and mid (the other quintiles). RS6m seems rather exceptional, in that the lowest quintile did less than -3.74% relative performance, whereas the highest quintile did over 30.79%, relatively. I would have expected both figures to be lower.
Here is the distribution of companies performing in the low, mid and high quintiles:
low mid high FTSE 100 29 66 4 AIM 26 66 62 Others 69 239 58
As you can see, if you had invested int he FTSE100, your chances of scoring high were slim (~4%), whereas the chance of doing badly was rather high (~29%). You would have stood a much better chance by investing in AIM.
There’s a number of caveats in all this, as I don’t have a “point in time” database, so I can’t adjust for shares that went in or out of certain indices, but I suspect it’s a good first-order approximation.
In general, you would have performed better if you had avoided the Footsie, but would have performed best of all if you invested in AIM.
What is also worth mentioning is that I had previously reported that companies categorised as “others” were on similar valuations as the FTSE100. Yet, you stood a much better chance of outperforming (at around 16%, being 58/366).
This is interesting, and tends to confirm the hypothesis that investors are better off focussing on the non big-caps, as a general rule. The outperformance of AIM may just be due to a valuation anomaly that existed at the time. It would have been an identifiable, and therefore exploitable, anomaly, though.
So, perhaps investors would be best off investing in the cheapest segments of the market, but failing that, avoid the large caps (assuming they are not at a significant discount to the rest of the market). This does, no doubt, fit in with many people’s intuitions about the market.
It would be interesting to see how the dispersions varied over time, but alas, I don’t have access to that kind of data.
Update 19:19
Here is a list of median PEs by Index:
AIM 16.715 FLEDGLING 11.77 FTSE100 16.32 FTSE250 16.55 NONE 18.16 SMALLCAP 16.385
As you can see, the AIM index has caught up with the most of the other indices. The Fledgling index seems anomolously undervalued. Opportunity, maybe?
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