THE ALTERNATIVE Investment Market (AIM) played to some of the stereotypical views about its history during 2018.

In performance terms, it morphed from being the strongest segment of the UK stock market in late summer, to the weakest by the close of the year, falling by more than 20 per cent in a savage fourth-quarter sell-off. Some corporate news was equally sobering.

Albeit in a difficult consumer environment, the sudden demise of Conviviality, the discount drinks retailer, and the more recent fraud inflicted on Patisserie Valerie, the cake retail chain, are incidents that have shocked investors.

However, these features should be balanced against the fact that 2018 was also a year in which the main UK market showed significant fourth-quarter volatility and mid-cap construction contractor Carillion collapsed.

In fact, 2018 has masked some positive recent trends for AIM. Preconceptions about this market include the view that it is immature and over populated with early-stage companies that rack up losses while paying no dividends.

While there are still many constituents that fit this profile, the number of companies on AIM has in fact fallen from a peak of nearly 1,700 in 2007 to just over 900 today, at the same time as the average market capitalisation has nearly doubled from £65 million to £120m.

Indeed, the largest stocks on AIM now include nine companies capitalised at more than £1 billion, including litigation finance specialist Burford Capital (£3.4bn), drinks mixer supplier Fevertree (£3.4bn), biotech antibody developer Abcam (£2.9bn) and online fashion retailer ASOS (£3.0bn).

A combination of Darwinian survival, where the weakest and smallest continue to exit AIM, plus tax breaks that encourage large and successful companies to remain on AIM instead of moving up to the main list, is contributing to an ongoing maturing of the market’s constituents.

This process has been highlighted in research carried out by Professors Dimson, Marsh and Evans from the London Business School, as part of their annual review of the Numis Smaller Companies Indices.

They have produced data evidencing an increasing proportion of profitable and dividend-paying AIM companies over the last 10 years. Using proportions weighted by market capitalisation, there are clear trends towards larger, better-quality AIM companies over the period. Allied to this, they have calculated the average number of years AIM companies have remained on the market following their initial public offering, with the research showing that the average has risen from around four years in 2008 to 13 years now.

Other indications of a maturing of AIM include statistics such as 35 per cent of companies having their main operations overseas, with 24% incorporated outside the UK. Furthermore, according to independent research provider Hardman, analyst coverage of AIM stocks by brokers has increased in the period since EU regulation MiFID II was introduced at the start of 2018, while coverage of main market stocks has declined. A greater propensity for AIM companies to be involved in fundraising activity probably explains the growing broker attention, with corporate fees more lucrative than share-dealing commissions.

Early 2019 has seen AIM recover more than half its losses from the end of last year. While all areas of the UK stock market have enjoyed a rebound, AIM has been among the strongest. Indeed, its 50 largest stocks are the best-performing segment by some margin. These gains provide some support for the old investment maxim that time in the market is more important than timing the market.

While maturing nicely, AIM will continue to suffer from illiquid share dealing, corporate failure, governance weakness, and a surfeit of early-stage companies over promising and under delivering on their growth plans.

Despite that, it remains a highly diverse, but relatively under researched and under owned, growth company universe. It is this market inefficiency that provides the stock-picking opportunities for active fund managers and private investors alike.

David Stevenson is a fund manager at Amati Global Investors.