EquitiesFeb 6 2017

Sector’s quality firms aim high

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Sector’s quality firms aim high

Small- and mid-cap stocks have had a volatile year in the wake of the Brexit vote, but the Alternative Investment Market (Aim) has fared better than some might have expected.

For the 12 months to January 25 2017 the FTSE Aim All-Share index gained a respectable 29 per cent in sterling terms, data from FE Analytics shows. This compares favourably with the FTSE UK Small Cap index rise of 13.4 per cent. 

The top 100 companies in Aim, the FTSE Aim 100 index, performed even better with a gain of 30.1 per cent in the period, although the MSCI World Small Cap index recorded a 47 per cent rise, while the US Russell 2000 index climbed 58.5 per cent in sterling terms. 

As for market drivers behind Aim’s performance, Paul Mumford, manager of the Cavendish Opportunities, Aim and UK Select funds at Cavendish Asset Management, points out: “There are fewer companies listed on the market than there have been – the shakedown from the crash has weeded out a lot of the weaker participants. Due to this and improvements in corporate governance, the quality of the market is higher these days.” 

The quality of the Aim constituents appears to be a key factor to its performance, with Fundamental Asset Management (FAM) noting that while in November there was a “small net decline in the number of companies, we feel there was a net improvement in quality”. 

Research from the company shows six companies left Aim in November, but this was offset by four new arrivals. In December, the index saw five new additions while 16 companies left the market, mainly through takeovers. GW Pharmaceuticals, a biotech company with a market capitalisation of more than £2bn, delisted from Aim in favour of a single US listing on the Nasdaq index. 

Chris Boxall, co-founder of FAM, notes: “At the end of December 2016 there were 982 companies on Aim with the total market value £80.8bn. This compares with 993 companies on Aim at the end of November 2016 when the market value was £81.2bn.

“Aim is no longer the ‘Wild West’ market of old, where speculative resource stocks and unknown international companies proliferated. It is home to a large number of well-managed, dividend-yielding, predominantly UK-based businesses.”

Aim’s wide scope, which houses well-known brands such as Asos and Fever-Tree – with  a combined market cap of almost £6bn – shows why even though it may seem niche, performance has not been as badly hit as the wider small-cap indices. 

Looking ahead, Mr Mumford suggests the prospects for 2017 are “fairly favourable”. 

He explains: “Low interest rates combined with the beneficial effects of sterling’s fall should put a lot of these companies in a strong position for the year ahead. 

“Continued uncertainty over Brexit is the main potential headwind for the market. More positive developments on this front – co-operation with other countries and new deals – could equally provide a tailwind. The currency effect from sterling’s fall should also provide a tailwind. Other potential headwinds include a possible rise in the interest rate and creeping inflation,” he adds. 

While some investors may be put off by Aim’s wide scope, the lower levels of analysis and coverage of individual companies in the index could mean some hidden gems are waiting to be discovered. 

Nyree Stewart is features editor at Investment Adviser