CAM AIM Portfolio Service
28 AUGUST 2019
An introduction – what we do, how we do it and why
AIM is the London Stock Exchange’s international market for smaller growing companies. Established in 1995, it allows smaller, growing corporates to list their shares and thereby access growth capital to fuel their ambitions and business plans. AIM’s more flexible regulatory system and associated lower listing costs make it a more viable environment for such companies.
Despite the focus on newer, young companies, there are also many businesses on AIM that are anything but new, or small for that matter. The market is home to many well-established businesses (in some cases companies that have been in existence for hundreds of years) as well as some real corporate giants with market capitalisations running into the many hundreds of millions of pounds and beyond to above the billion-pound mark.
It does remain a fact, however, that navigating this market requires real care, attention and lots of ‘leg work’ to avoid the multitude of small, speculative and ultimately unsuccessful outfits which arrive and depart the market on a regular basis. The downside to a lower regulatory hurdle requirement often means a higher corporate failure rate! This is best illustrated by the fact that AIM has underperformed all other major indices, by quite some amount, over the past decade.
Apart from the obvious wish to access exciting companies offering potential for good capital growth, one of the primary drivers for investors buying into AIM are the benefits certain constituents bring in terms of attracting ‘Business Relief’. Readers will, no doubt, be well aware of the facts around this feature but to summarise; where a company qualifies for Business Relief (and note, not all do) holdings in those companies do not form part of the investor’s taxable estate at death. Apart from being qualifying investments, the investor simply needs to have held the investment for at least 2 years and to still be invested at the date of death. The ability to reduce Inheritance Tax (IHT) is clearly a valuable one and the 2-year period is currently the quickest way available to move assets out of an IHT environment.
This tax benefit drives capital into the market, which in turn supports the growth and expansion of companies whilst providing investors a valuable potential tax relief by way of recompense for the enhanced risks they assume when committing such capital.
City Asset Management (CAM) have been managing segregated client portfolios invested in the AIM market for 15 years now. As such we are one of the longest established managers in what is an
increasingly crowded marketplace which has seen a lot of new arrivals over recent years. We have a proven process and a very strong track record of success. Over those 15 years, we have benefitted from having the same lead manager at the helm of our service and this provides a great deal of insight, experience and continuity of approach.
At its core, our approach concentrates on finding both quality and longevity in a market that is dominated by speculation, risk and unproven business models. We do this by focusing on our research.
The AIM market is fundamentally under researched and, as such, there are opportunities available for any investor who is willing to do their own work - as well as looking at reports and accounts, this will almost certainly include meeting management teams face to face and even perhaps visiting companies to assess what assets they own, where they are, what state of investment they are in and so on.
Here at CAM, we seek out companies that have as wide a ’moat’ or protection to their business model as possible. In practice, we are looking for companies that have repeatable, recurring revenue streams, where they are exposed to the maintenance spend of their customers rather than capital spend (customers can choose to delay capital spending at tough times, but they rarely cut maintenance spending so readily, given the more immediate impact on revenue and profits). If a corporate has a competitive advantage by way of physical assets it owns or intellectual property which makes it less likely that effective competition can easily appear, then we are further interested. Balance sheet strength, low borrowings, good margins and cash conversion are all on our ‘wish list’.
We only invest in companies that we feel we understand. This sounds obvious but it is easy to end up involved in very complex commercial and technical business areas where the investor just doesn’t have the knowledge to properly understand, judge and appraise what management are telling them. The biotechnology sector would be a good example here.
Our other ‘filters’ means we avoid any loss making, early stage, unproven or ‘blue sky’ companies. These simple rules see the current universe of around 800 companies on AIM quickly whittled down to less than 100 that we need to actively consider in any detail.
We like to invest and think like business owners, not stock market traders. We like management teams to be invested in their own stock and therefore have ‘skin in the game’. We seek out companies that are reliable, produce high quality, repeatable profits which are sustainable for many years to come. We approach any investment with the view that we would like to own the shares ‘forever’ and have no interest in trying to second guess the market and trade in and out of a stock. We will always pay close attention to the valuation we pay, however. There are many great companies available but at prices that are, in our opinion, unsustainable and so we prefer to bide our time until value emerges.
Alongside all of this, we have basic, common sense portfolio construction rules that ‘keep us honest’ - ensuring that we do not overly concentrate positions or get so attached to a particular stock that it comes to dominate returns (and hence increase the risk profile in a portfolio).
All of this results in a conservative approach to AIM and produces portfolios that we expect to have a ‘margin of safety’ in times of market corrections, which the market is often susceptible to. Our
approach also leads to relatively low portfolio turnover, and in turn therefore lower costs. It also allows our portfolios to ‘survive’ the occasions when we do get things wrong, which all managers will do but most are hesitant to admit to such fallibility!
One distinguishing feature of AIM is the market liquidity of its constituents, or rather the lack of it. Liquidity refers to the amount of a company’s shares that are regularly traded on the market and reflects the ability of investors to buy and sell. AIM can be a relatively illiquid market and so buying or selling in any volume is often challenging. The deployment of any meaningful capital (and any subsequent selling) requires a deep understanding of the market and considerable patience! Something that CAM’s managers have many years of experience of.
On the subject of liquidity, the relatively modest size of our assets under management (AUM) make us significantly nimbler within the market and presents us with a wider investment universe when compared to some of our much bigger competitors. One can imagine that a manager trying to look after half a billion pounds or more within the AIM market quickly finds that they own a large percentage of their most favoured stocks and in such a market that will mean they have great difficulty not only deploying new cash into their best ideas but also in selling whenever they wish to reduce or exit a position. We feel this is an important point, a key differentiator in the current market environment and one that should be considered when choosing a manager.
In conclusion, we believe that our long term record of focusing on quality, profitable companies and avoiding the distraction of the latest ‘new thing’ or speculative situation has resulted in a very pleasing return outcome for investors over the past 15 years and will continue to do so going forward. This approach, whilst seemingly obvious, appears to be so rarely taken by many competitors.
Matthew Groom
Investment Director
The information contained in the document is provided for professional investors and advisers for information purposes only and should not be communicated to any other person.
The value of your investments can fall and you may not get back the amount invested. Past performance is not a guide to future performance.
This notice cannot disclose all the risks associated with investments and investment services. Please see our website for more information and more detailed risk warnings.
The information within this document does not consider the specific investment objective or financial situation of any person. It is not a personal recommendation and should not be regarded as a solicitation or invitation to buy or sell any securities or instruments mentioned within it.
The AIM Portfolio service should be regarded as high-risk because AIM investments can fall or rise much more than larger companies shares that are listed on the main London Stock Exchange. The securities purchased within the AIM service can be illiquid and therefore it may be difficult to for us to sell them, or to achieve a fair price at certain times. Estate planning is complex and this investment is not suitable for all investors. It is important that potential investors understand the risks involved and that they take financial advice before investing in this service. We cannot guarantee that the investments we make will qualify for BR in every case in the future. HMRC only conduct the BR assessment after the death of the investor and only confirm whether the companies invested in qualify for BR at that time.
The levels, bases and reliefs from taxation are subject to change. The Financial Conduct Authority does not regulate tax advice, trusts or offshore investments.
Compliance code IL1238