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One year ago Blackthorn Focus launched two new indices of AIM shares: GROWTHfocus and INCOMEfocus. My intention was to highlight AIM's most successful companies and examine the returns that could be earned investing in them.

Both were equal-weighted indices: the performance of each company had an equal effect on the index performance.

As I've long said, there are a considerable number of brilliant companies on AIM that can deliver returns whatever is going on in the wider business environment. These companies are not necessarily where you might expect to find them and are frequently old economy.

It is also a myth that you don't get dividends from AIM companies. I've written before about the highest yielding shares on AIM and the INCOMEfocus index features twenty AIM companies that have not cut their dividend for five years running (many have increased it year-on-year).

It is also the case that you don't need many stocks before you end up tracking the underlying index - very few companies are immune from general market gyrations.

As you can see from the chart below, both indices have comfortably outperformed AIM in the year since their inception.

David O'Hara                 

both indices have

comfortably

outperformed AIM

Troubles and Takeovers

The GROWTHfocus index was hit by troubles at Healthcare Locums while INCOMEfocus benefited especially from Pearson's takeover of Education Development International.

Since I started the indices I expect takeovers have been more prevalent than in the wider market. Shed Media, Datacash, Education Development International and Toluna have all fallen to buyers, delivering handsome returns along the way.

Readers should note that the outperformance of the INCOMEfocus index in particular would be even greater if it accounted for the payment of dividends from its constituent companies. A brief examination suggests the yield on the index is around 2%. A similar argument goes for GROWTHfocus, where income is delivered by some of the constituents.

AIM Index trounced

GROWTHfocus and INCOMEfocus thoroughly trounced the AIM All Share Index over the year but I'm reluctant to claim that they would in all market conditions. In the first three months of the analysis my indices trailed AIM. With such a high number of resource stocks on the junior index I expect a repeat of boom conditions in the sector could see AIM overtake the Blackthorn Focus indices.

Plenty of excellent investment opportunities can be identified starting from a list of successful AIM companies. I wasn't too familiar with First Derivatives before their name cropped up while compiling the indices but I liked the company's record and invested in their shares. The company has delivered excellent returns over the last couple of years and continues to increase its dividend. As their success has become more widely known, the bid-offer spread has come down dramatically, improving liquidity and attracting even more buyers.

To get into my indices, a company needs to have five years' successful trading behind it. Furthermore, for the indices to deliver outsized returns, the investment community needs to be willing to reward that success by paying for it. Those circumstances were painfully absent in 2009 and for much of 2010. We should be grateful the smallcap market woke up from the funk induced by the credit crunch and there remains a collection of great UK-listed smallcaps to invest in.

fallen to buyers, delivering handsome returns

excellent investment opportunities can

be identified

Written by David O'Hara

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