AIM Small to grow large?
The recent change to ISA rules to allow shares in AIM has sparked renewed interest in this lightly regulated market. Some are hoping it’ll drive this volatile market higher. For interested investors we look at the options to exploit AIM via investment trusts.
Eligibility for inclusion in ISA’s only took effect from August 5th. For much of August City folk are on leave to exotic locations such as the South of France, Casablanca, Motherwell etc (okay only kidding about Motherwell), trading is light and so it is really too soon to see what the result of the experiment will be.
Of course investors have always been able to invest in AIM stocks in their ISA by proxy of an investment trust or other type of fund but the change in the rules allow inclusion of AIM stocks in ISA wrappers, including the small amount of investment trusts listed on AIM.
The Government made to move in the hope it would increase funding for UK focused smaller companies. There is a perception that at this end of the market the businesses tend to either cater for the domestic economy, or are manufacturers employing people in factories here, as opposed to the larger companies that make up the FTSE 350, whose economic interests might lie overseas.
For investors looking to take advantage of the market there are no investment trusts that invest solely in AIM companies, but several invest some of their cash on AIM and there’s a group of specialist trusts that are listed on AIM themselves.
Aim was set up in 1995 as a market focused on growth companies and as a replacement to an earlier version that was seen to have failed. Since launch over 3,000 companies have joined the market, though only 1,086 remain today according to London Stock Exchange data, and of those 229 are based overseas.
The market includes larger growth businesses such as Asos, the biggest at £3.9 billion, but in total 6 businesses are worth over £1 billion with a few more not far behind. The market capitalisation of the top 20 listed stocks was almost £19.5 billion as of the end of last month.
Over the past 12 months till August 29 2013, the market is up 10.1%, and over 5 years it’s down -5.84% and over 10 years its up +3.26%. So not a great advert. By way of comparison the FTSE All-Share index over the same time horizons is up +14.09, +22.21% and +63.82% respectively.
This masks some fantastic performance though by businesses such as Asos that we all know about but also more recent listings such as WANDisco, & Smart Metering, or longer established players such as Iomart, the Scottish Cloud computing business that started out in the Dotcom era as an ISP, or wine retailer Majestic Warehouse & brewer Young & Co, all of whom have doubled, tripled, quadrupled or more in size.
AIM also has more than its fair share of family controlled companies. This a type of stock that many investors follow because of its perceived qualities of steady longterm growth. The driving force in their choice of AIM is inheritance tax, being Aim listed qualifies the companies for business property tax relief, which means the family holding can be passed through the generations in a tax-efficient manner.
The AIM market is viewed by some managers as a stock pickers dream. This is because it is under researched by analysts with many companies receiving coverage by only one analyst, usually their house broker who may be perceived to have a vested interest.
Edison who provide research paid for by the business they write about, are producing an increasing amount of information on AIM stocks, which is available free to investors. Whilst small company investors such as Paul Scott shares his insights on Stockopedia, his blog and on Twitter .
Investment Trusts that invest in AIM
Diversified Income Trust (LON:DIVI) Manager Gervaise Williams believes smaller dividend paying companies with strong balance sheets have up until recently been ignored by the market and that they are about to enter a multiyear bull market. Read our full research on this trust which recently joined or Buy List.
Artemis Alpha (LON:ATS) whilst this is not a smaller companies focused trust Manager John Dodd has a high allocation to energy stocks, many of which are on AIM. He has a good long-term track record and his portfolio has a strong growth bent. He has a substantial personal holding in the trust himself.
The following trust have varying levels of exposure to AIM companies though mostly under 10%:
Aberforth Smaller Companies (LON:ASL)
BlackRock Smaller Companies (LON:BRSC)
Standard Life UK Smaller Companies (LON:SLS)
Strategic Equity Capital (LON:SEC)
Investment Trusts on AIM
Whilst there are a number of investment trusts or investment companies on AIM they are all of a specialist nature, and might not appeal much to cautious investors, and they certainly need to be thoroughly researched before committing.
They include GLI Finance, formerly Greenwich Loan Income fund, a specialist loan provider we’re previously covered in some detail and which you can read here and here and the company is currently on our Buy List.
We’ve picked out two other investment companies on AIM which might be of interest to some investors. One is a high dividend payer and the other has the potential for high growth.
Japan Residential Investment Company (LON:JRIC)
JRIC owns flats and properties in Japan’s major cities. It offers exposure to a defensive rental income stream from a high quality residential portfolio benefiting from a recovery in capital values (+3.9% over 12 months), and driven by a resurgent Japanese REIT market.
JRIC is trading at its estimated NAV (net asset value) and offers a 5.7% dividend yield, which compares to a 27% premium (and 4.3% dividend yield) for Japanese listed peers. This is despite the fact that JRIC has a similar institutional quality portfolio with a high occupancy of 95.8%.
You can read our previous research on JRIC here.
Oakley Capital (LON:OCL)
Oakley Capital is a mid-market private equity fund which invests in the UK and Western Europe. Nicole Kwan, an analyst at Liberum Capital described them as “One of the best performing listed private equity companies in its universe, very consistent and strong NAV growth of over 90% since launch 5 years ago”.
Oakley was founded and is still run by Peter Dubens along with a carefully assembled team. They are turnaround specialists with a great deal of proprietary dealflow. For example he ran and sold Pipex Communications Plc for £370m. He also ran 365 Media group which he sold to Sky for £106m
The last two assets sold within Oakley in the past year were at a 21% and 14% uplift to listed value.
Examples of current underlying portfolio companies: Verivox (Germany’s 2nd largest online price comparison site) and Intergenia (Web hosting business). Both of these performing extremely well and held very conservatively in the book.
Oakley also own 50% of Time Out, which with a strong global brand, they have invested in transforming it from a print publishing business into a worldwide digital and transactional online platform. The local content they’re creating is likely to be valuable to the likes to Google and Yahoo
Liberum see strong upside to valuations of the remaining portfolio assets and given the scope for material realisations to occur in 2014, the current discount to June 2013 estimated NAV of 24% is far too wide.
Other investment companies listed on AIM include:
Aurora Russia, All Asia Asset Capital, India Capital Growth Fund , Cambria Africa plc, Juridica Investments.