The performance of firms such as Fever-Tree ought to encourage investors to see Aim as a source of success stories.
The launch of the Alternative Investment Market (Aim) in 1995 was one move in a long line of attempts to expand the number of listings in the UK of higher-growth, but higher-risk, smaller companies through light-touch regulation aimed at make listing both cheap and easy.
The early years were inauspicious as many fund managers regarded the market with suspicion, believing that it was dominated by smaller mining companies or low-quality, founder-dominated businesses. Several scandals did nothing to dispel such views.
However, over the past few years, there has been a renaissance in market acceptance, with Aim now seen as a clear home for investors and fund managers to find interesting growth companies.
There are now more than 950 listed stocks with an average market capitalisation of more than £100 million. Over the market's 22-year lifetime, £108 billion in funding has been raised. For private investors, there are added tax advantages of qualifying shares being free of inheritance tax (IHT).
IPOs lead the Aim renaissance
The renaissance has been led by a surge of IPOs. In recent years, management at high-quality smaller companies have been drawn to the flexibility and tax advantages that the market offers, particularly for owners with significant stakes.
However, many Aim success stories, such as online retailer Asos, have not graduated as expected up the main list, even when their market capitalisations would make them candidates to enter the FTSE 100.
Clearly, though, investing in Aim stock still requires a higher level of due diligence for investors compared with the main list. Corporate governance standards, for example, vary enormously. Avoiding investing in small mining companies, as we believe them to be speculations and not investments, can help to eliminate many of the lower-quality and risk businesses. Extensive due diligence through company visits and talking to competitors is vital.
Uncovering hidden gems
I believe that smaller companies offer substantial opportunities to gain alpha, given their often ‘undiscovered’ status and growth potential. Currently, around 19 per cent of the fund that I run is in Aim stocks, which is around 70 per cent of our total small capitalisation exposure. As well as success stories, including drinks maker Fever-Tree and software company Blue Prism, there are a number of other interesting stocks that we have recently taken positions in.
Marlowe, for example, is a £190 million business service company that is rapidly acquiring companies across a range of complementary critical testing services such as fire, security, water and air, which can be cross-sold to customers. A highly regarded management team is at the beginning of building a substantial business
Meanwhile, Globaldata is a £700 million provider of research and consulting solutions that is packaging its data to healthcare and consumer markets. It was founded and is majority owned by Mike Danson, who built up and sold Datamonitor to Informa for £500 million. Strong underlying market growth is being complimented by operational leverage as margins move to industry levels and by further acquisitions in adjacent verticals.
In neither case was there much research available on the relevant companies. Only by visiting them directly to talk to management and operational directors and undertaking significant due diligence could these interesting growth opportunities be unlocked as investments.
Greater reward means greater risk, but the potential of the Aim is now being realised.
Phil Harris is portfolio manager of the EdenTree UK Equity Growth Fund.