80% of close beacon fund's stocks are posting a profit
Aim stocks are being depressed due to investor wariness of what is considered a risky part of the market.
Andrew Buchanan, manager of the Close Beacon fund, said valuations in the Aim market have now been pared back as investors abandoned the index in droves following the tech collapse and have sought more liquid assets.
Before this small cap market can see any improvement investors are going to have to regain some faith in the market direction and move away from the concept that Aim is a pseudo-technology index, he said.
The £32m Close Beacon fund, which invests primarily in Aim stocks, is ranked 45 of 74 funds in the UK smaller companies sector over the three months to 27 August, posting negative returns of 19.5%. According to figures provided by Standard & Poor's, Close Beacon fell 1.4%, on a bid to offer basis, over three years to 27 August, ranking it 13 out of 66 funds.
What will lead to better fortunes for the Aim market?
We need a recovery in confidence. Share prices could go higher if there was more confidence about. I expect that good Aim companies will produce strong results ' it is very much a case of waiting and being patient.
After a period of time in which these companies have done well and are seen to be growing their business and profitability, investors will start looking more favourably at Aim stocks.
On the whole, many Aim companies are meeting their business plans and commercial expectations. I don't believe the market will remain inefficient and ignore the progress these sorts of companies are making forever.
I also believe increasingly that as individual investors come to appreciate the tax breaks on Aim, they will find there are some very attractive investment opportunities that are worth seriously considering.
Is finding stocks with ample liquidity an issue for you?
Liquidity comes and goes. Right now liquidity is not particularly good because of general apprehension in the market place. But these liquidity issues are not specific to Aim, they relate to all smaller companies. The smallest stock we have in the portfolio has a market cap of less than £5m.
Do you see the companies on Aim as very high risk?
I don't think of these companies as high risk. There are certainly some risks attached to Aim that don't apply to Marks & Spencer, for example. By this I mean management is obviously crucially dependent on fewer people and there isn't an enormous corporate infrastructure.
But they tend to be easier businesses to understand in terms of fewer products and fewer market places. This, of course, carries a risk, for example some have a crucial customer who may represent 25% of revenue. But if you select carefully and look at the fundamentals, they need not be regarded as high risk.
How often have the companies you hold gone bust?
I have only held three companies that have gone bust. The most recent was this year, Just Group, and the first was 1996 which was Catto Animation. These were not significant holdings in the portfolio.
How do you value companies?
The price/earnings ratio is one measure, but of course this is only applicable when the company is earning. In reality there are a variety of yardsticks, but no one single answer. It is much closer to the way a venture capitalist would value a business. This includes assessing the growth rate of the market they are addressing, levels of competition, financial structure of the company, its balance sheet and the margins it can earn on its products. This is then overlaid with whether we believe the management is capable of executing the plan that they have laid out.
Do you ever buy companies that are not earning profits?
Yes, but I would expect them to do so within a strict timetable. The majority are earning. I would say 80% are profitable and 20% are on the verge of profitability.
Beacon has made significant gains from companies on the threshold of profits. For example, a company may be three to six months from profitability, at a time when orders are growing substantially and some additional working capital is required. This is the point at which Beacon has made good returns in the past.
Do you look primarily for short or long-term opportunities?
My philosophy is to pick the right company, according to all the right criteria, and stick with an acorn until it turns into a sapling. This often means taking a three-year view. This means there is pretty low turnover in the portfolio. We do take profits from time to time, but it has to be fairly exceptional circumstances.
Do you try to balance out the portfolio in terms of sectors or themes?
The portfolio construction is simply down to stock selection. I do not make decisions on sectors, themes or anything else from a top down perspective.
Do you follow all Aim stocks?
There are about 640 stocks on Aim. I don't look at them all. It is difficult to imagine that I could. I'm always happy to see any company once if it is floating on Aim.
The type that I haven't seen a lot of are shell companies. I tend to avoid these as I don't know what I'm investing in. Typically, I'd meet with the management of 15 companies a week.
What are the most prominent sectors in the fund?
The largest sector is support services. Examples include MacLellan, the cleaning facilities management business, and Auto Indemnity the accident management group. We also have some software companies, for example Comino.
How much research support do you have and what else do you manage?
There is a team of us looking at companies. The other members are Kate Tidbury, and Freda Isingoma. We manage the Close Brothers Aim VCT, plus EIS funds, and the Close Accelerated Taper Relief fund.
Annuity market worth £4bn in 2017
For ‘distress’ caused
Oversees £30bn of advised and D2C assets
Less than a third of top paid employees are women
£1bn business since inception