David Stevenson - DirectorDavid Stevenson joined Amati in 2012. In 2005 he was a co-founding partner of investment boutique Cartesian Capital, which managed a range of retail and institutional UK equity funds in long only and long/short strategies. Prior to that he was Assistant Director at SVM, where he also managed equity products including the UK Opportunities small/midcap fund which was ranked top decile for the 5 year period from inception to 2005. David started his career at KPMG where he qualified as a Chartered Accountant. He latterly specialised in corporate finance, before moving into private equity with Dunedin Fund Managers. David has co-managed the TB Amati UK Smaller Companies Fund, Amati AIM VCT since 2012 and the Amati AIM IHT Portfolio Service since 2014.
The Maturing of AIM
Posted by David Stevenson on 05/Apr/2019
Some features of the Alternative Investment Market (“AIM”) in 2018 have played to the stereotypical views about its history. 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 more than 20% 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 which 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 the collapse of midcap construction contractor Carillion was equally noteworthy. 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 racking up losses and paying no dividends.
Whilst there are still many constituents which fit this profile, the number of companies on AIM has in fact fallen from a peak of nearly 1700 in 2007 to just over 900 today, at the same time as the average market capitalisation has nearly doubled from £65m to £120m (dropping back to £100m after the late 2018 sell-off). Indeed the largest stocks on AIM now include nine companies capitalised at more than £1bn, including litigation finance specialist Burford Capital (£3.9bn), drinks mixer supplier Fevertree (£3.0bn), biotech antibody developer Abcam (£2.7bn) and online fashion retailer ASOS (£2.6bn). A combination of Darwinian survival, where the weakest and smallest continue to exit AIM, plus the tax advantages (such as IHT and EIS/VCT reliefs) encouraging 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 in recent 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 across all AIM constituents the average number of years listed since IPO, which they term “seasoning”. This also shows a rising trend, from around 4 years in 2008 to 13 years now. Other indications of a maturing of AIM include statistics such as 35% 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. The TB Amati UK Smaller Companies fund has maintained significant exposure to AIM stocks for close to 20 years, and currently has a portfolio weighting of just under 50%, comprising companies with market capitalisations ranging from under £50m to several £bn. Notable performance contributors over the last five years (although some are no longer in the fund) have included biotech antibody and clinical diagnostics specialist Bioventix, Vet Services Consolidator CVS, utility meter installer and owner Smart Metering Systems, and Fevertree. Amati also manages the Amati AIM VCT which invests in early stage companies, and this can provide a pipeline of emerging growth ideas for its sister fund. The UK Smaller Companies fund currently has 11% of its portfolio in these “promoted” stocks.
Successes have included computer gaming outsourcer Keywords, visitor attraction software provider Accesso, regulated gaming hardware and software developer Quixant, and identity verification software company GB Group. Whilst maturing nicely, AIM will continue to suffer from illiquid share dealing, corporate failure, governance weakness, and a surfeit of early stage companies “overpromising and under delivering” on their growth plans.
It remains a highly diverse, but relatively under researched and under owned, growth company universe. It is this market inefficiency which provides the investment opportunities for active fund managers to stock pick with conviction.
Past performance is not a guide to future performance.Investment in smaller companies, in particular those quoted on the Alternative Investment Market (AIM), carries a higher risk than that of larger companies listed on the Main Market of the London Stock Exchange.