He said: "Throughout the second half of last year and particularly the fourth quarter, the share prices of many AIM companies rose, but crucially the profit forecasts rose by a greater amount."
"As such, valuations remain extremely attractive, as prices only increased by a fraction of the earnings forecast. A lot of people argue that investors looking to invest in AIM companies have already missed the boat, but that’s rubbish; if anything, the ratings of shares are cheaper now than they were before the outperformance."
Although UK equities performed relatively well in 2010, the profits made by the AIM market were more significant. As Financial Express data shows, the FTSE AIM index has substantially outperformed the FTSE All Share and even the FTSE Small Cap Index in the last twelve months, with returns exceeding 40 per cent.
Source: Financial Express Analytics
Buchanan believes that this outperformance is set to continue at least into the medium term.
"The number of quality, well run small cap companies that are raising enough money for VCT investment is continually increasing. We also anticipate M&A activity to play a big part next year, which will have obvious benefits,” he added.
Manager of Close Special Situations Deryck Noble-Nesbitt said he was surprised at how well micro companies performed in 2010.
He said: "The performance of the Small Cap Index has been pretty good in the last year or so, but the returns made in the AIM market have been quite astonishing."
"Without question, there is better value at the smaller end of the UK Smaller Companies sector at the moment."
Although Noble-Nesbitt favours smaller market cap companies, he still prefers companies that are large enough to sit in the FSTE Small Cap Index.
"The fund can take a position in these micro companies, but the issue of liquidity still concerns us," he explained.
Buchanan remains bullish however. The manager's Octopus AIM VCT range has recently announced a new issue, which hopes to raise £20m by the end of 2011.
New legislation prevents new AIM focused VCTs from being launched into the UK retail market, but this loophole allows the manager to offer new shares to investors, and benefit from the growing demand for these products.
"If you want small cap exposure, why not have it in a VCT? The advantages of income tax relief and capital free gains are obvious," he said.
"The biggest problem with VCTs is the difficulty of getting your money out. But unlike many of the products out there, Octopus AIM VCT has a buy back policy. We give investors the opportunity to buy back shares at a 10 per cent discount weekly."
According to Financial Express data, the Octopus AIM VCT has returned 1.93 per cent in the last five years, outperforming its VCT AIM Quoted sector by more than 33 per cent.
Source: Financial Express Analytics