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Gervais Williams: Why the AIM market is set to explode

24 November 2014

Miton’s Gervais Williams says some of the smallest quoted stocks on the UK market are set to be the best performers for income as well as growth.

By Daniel Lanyon,

Reporter, FE Trustnet

Small and micro-cap stocks are set for a prolonged period of outperformance over the medium term, according to Miton’s Gervais Williams.

 

This year smaller-cap stocks have had a relatively tough time with the FTSE 100 gaining more than the FTSE 250 while the FTSE Small Cap index has had a slight fall and the AIM index has plummeted.

 

According to FE Analytics, the FTSE 100 is up 3.40 per cent while the FTSE 250 is up just 0.87 per cent. The FTSE Small Cap index is broadly flat – down 0.17 per cent – but the AIM index has lost 14.1 per cent.

 

Performance of indices in 2014

   

Source: FE Analytics

 

But Williams says an outlook that suggests global economic growth will be stunted over the medium to longer term means rather than defensive mega caps, AIM stocks will hand more money back to investors in the form of both capital growth and dividends.

 

“We have been in a position where growth has been plentiful, a period where all assets, not just equities, have been going up enormously. Property, commodities and bonds, even fine wine, have soared and I think we have got used to that.”

 

“More recently, in spite of low interest rates, it is not having much effect on the real economy. World growth has stalled. We have seen Japan go back into recession and we know that Europe is on the edge of deflation. The US is growing but it is way below what you might have expected, which has led to interest rates being retained at levels.”

 

“The UK has done better but I think that is more to do with PPI payments of £24bn than it is to the strength of the UK economy, and now those payments are finishing or at least past their peak. Even China and the Asian markets have been pretty under pressure. We have been borrowing growth from the future and now it’s a period of payback.”

 

Williams says there is now a new period coming through where growth is likely to be slower for an extended period of time.

 

He says this means growth will not be universal with an even greater disparity being seen between small and large caps with returns on bigger companies coming under growing pressure.

 

“In recent years small and large caps have done okay but now we are getting to a period where world growth is slowing with lots of larger companies struggling to get earnings growth and struggling to pay dividends.” 

 

"Current bond yields at 3 per cent indicate we are in a low return environment and we have seen that with returns in the largest companies slowing from 6 to 3 per cent.”

 

“So, small companies are set to significantly outperform because not only are they set to grow faster because of their growth potential but also because they are in a position to start paying dividends at a faster rate.” 


 

Williams says about 40 per cent of income generated from the CF Miton UK Smaller Companies fund is now coming from AIM Shares.

 

“You get more performance because they are growing faster and have more capital appreciation but they also tend to have better balance sheets because they have net cash or modest net debt. All of this means dividend growth in larger companies is slowing and dividend growth in smaller companies is accelerating.”

 

Over the past seven years mid and small caps have been a lot stronger than in 2014 with the FTSE 250 gaining almost twice the FTSE 100 and FTSE Small Cap index up 10 percentage points more than the blue chip index.

 

However the AIM market, as a whole, has been similarly lacklustre and has lost more than 25 per cent.

 

Performance of indices over 7yrs

Source: FE Analytics

 

Williams attributes the AIM market’s difficult more recent period to the types of companies in the index, which he says is rapidly changing.

 

“There have recently been a lot of companies listed on the AIM market that have had, essentially, credit boom strategies. Technology, mineral or mining companies or oil & gas companies drilling for new resources. They have done well when commodities prices have been rising but now that they have peaked out and most of them have negative cash flow so over time they just run out of cash.”

 

“That has had a very significant hand on holding back returns on the AIM market. If you look at the kinds of companies that we invest in, which have much more regular businesses cash flow, they have done much better.”

 

“The mix in the AIM is changing and it is a bit difficult to see the effect because of other companies holding back the index. Some of the biggest names in the market such as Quindell and ASOS have seen very large de-ratings.”

 


 

The CF Miton Smaller Companies fund has been run by Williams, alongside Martin Turner, since its launch in December 2012.

 

It has returned 63.88 per cent since its launch while the average fund in the IMA UK Smaller Companies sector made 33.45 per cent. By comparison the FTSE All Share gained 22.42 per cent.

 

Performance of fund, sector and index since Dec 2012

Source: FE Analytics

 

This gives it the second best performance in the sector over this period, a percentage point behind the £420m R&M UK Equity Smaller Companies fund.

 

It has an ongoing charges figure [OCF] of 0.94 per cent.

 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.