AIM Industry Report 2017/18

52 53 market and would be more mature. AMS: This is something we’ve looked at quite hard. For us, because historically we have only had an EIS service, the crowding comes at the new issue stage where people are desperate to get the EIS qualifying shares. The greater concern from some is that certain stocks are owned in very large proportions by inheritance tax qualifying funds, or services. But I don’t think that it’s quite as marked as people believe. A lot of these companies are quite large and they’re fairly liquid. But we frankly haven’t had a down- draught in the market since this has happened, so I think it’s quite dangerous to say I don’t have any concerns about a bubble. I think there will be a bubble in some stocks. I just think it might be a market-wide thing, not just AIM, frankly. JW: I don’t regard this as a huge issue, if there is a possible bubble in some stocks then you just don’t buy those stocks - there’s no obligation to do that. BR products have come along and that money has come into the AIM market and it certainly has some effect, but I wouldn’t want to call it a bubble. Most of the money that is in AIM services is invested by stock pickers and they’re hopefully doing that on the basis that they want to deliver good investment returns. So, that’s not being done solely to achieve BR, so you’re not getting people who are just buying stuff because it’s BR qualifying, they’re buying it because they think that it’s going to deliver a good return to investors. With us, every client gets the same 21 stocks and in the same proportions because those are the 21 best investment ideas that we have. And the other thing to bear in mind is, if you look at the AIM market by comparison with, for example, the FTSE, we don’t really have index tracking funds on the AIM market. They take up a big chunk of the FTSE, and we don’t have those. So, my feeling is that, having some good long-term capital that actually wants to buy these companies and hold them for very long periods of time, is actually I think quite a useful thing to have in a market. WHAT DO YOU THINK ARE THE IMPLICATIONS OF BREXIT ON THE AIM MARKET? JG: I think that anyone that gives you a definitive prediction on how things will pan out should certainly be viewed with a healthy amount of scepticism. I don’t think change is necessarily a bad thing although it does pose some obvious risks and challenges, but this is nothing new in the business world. It’s reassuring that over the last few years the best and most dynamic smaller companies have shown their ability to adapt and grow through what has been quite a challenging and uncertain period since the financial crisis, and I think that will continue regardless of the uncertainty closer to home. In the short term of course, I think an extended period of uncertainty is unhelpful and will inevitably weigh on consumer confidence, business investment decisions and investor sentiment. We’ve seen some evidence of that over the last six months or so and obviously these factors do leave the more domestically- focused smaller companies exposed to a greater level of volatility. But let’s not forget there does remain a reasonable part of the AIM market that derives a lot of its earnings from overseas, and who are currently getting quite a decent benefit from Sterling’s devaluation. Psigma’s approach has always been to try to identify good quality businesses that have a long-term structural growth story – so companies that are not just relying on an economic tailwind to drive profitability. I think it will be more important over the coming years to differentiate between those businesses that have done well because of the buoyant economy and those where the fundamental profit drivers remain more entrenched. SP: At present, we have seen two main impacts of the Brexit referendum on AIM. Firstly, as Jon has mentioned, the depreciation in the pound has helped exporters and overseas earners, whilst hurting those companies that rely on imports, who have seen their costs increase. Secondly, the real wage decreases caused by this imported inflation have caused a consumer slowdown, notably impacting retailers and those companies exposed to RMI spend. Going forward, the uncertainty created by negotiations will have an impact on investment decisions, but it must be remembered that AIM is a very diverse market with companies operating in a vast array of industries and geographies, so the impact will be very different across the market. SB: I think we’ve seen the Treasury make some progress in this regard, getting AIM and the EIS and VCT reliefs out of the state aid issues that the EU keeps complaining about. Hopefully there will be some consistency in the legislation and some broadening of the scope of companies that qualify for those reliefs. On the down side you might see less international businesses floating on AIM. That’s a good thing and a bad thing; on the positive side, there have been a lot of bad international businesses float on AIM over time. But on the down side, it does impact our ability to diversify the portfolios further, and having some geographic spread to what we do is an additional risk mitigator if you can invest in the right kind of businesses. JW: To be honest, the impact is very much dependent on firstly the nature of the Brexit you achieve, so hard or soft; and also, the reaction of both government regulation to it, and of the consumers and companies, both in the run-up to Brexit and after it. The fears about Brexit and the drop in the pound have created, on both the main market and on AIM, some pretty wide dispersions in value. So, companies with large foreign sales or lots of exports have generally performed pretty well and are on fairly full valuations. That doesn’t mean you can’t find value, but it is harder to find value there. But, in the long term I think the UK’s going to thrive outside the EU. It does depend on the regulatory response and if we can take advantage of the benefits of being outside the EU in terms of deregulation and in terms of our tax system and how we invest as a country, and that more than offsets a negative loss from having a single market and a customs union, then it’s possible that we’ll do well. But I think there’ll be a bumpy road as we get there. SD: I think that yes, Brexit will be interesting for the AIM market. Obviously, the FTSE 100 has had a huge pickup because of the one-off benefit of the depreciation of Sterling. The FTSE 250 is closer and comparable to AIM in that it’s a lot more domestic- focused, although there are companies on AIM which export, there are a lot of companies like Asos and Boohoo at the top where their earnings must be 90% domestic UK. Young’s Brewery will be 100% domestic UK. So, depending on the business model of the company within AIM, it will either be positive or negative in terms of Brexit. I don’t see a proliferation of German, French, Spanish, Italian companies on AIM. You do see Chinese, Indian, possibly North American companies even on AIM, so I don’t think Brexit per se would stop someone looking to quote their business there. All told, it’s probably slightly more negative than positive just because more AIM companies than not have a Sterling domestic orientation to their business. But we wait and see like everybody else. AMS: I think the AIM market is a pretty domestic market, and I can’t see any rationale for Brexit really having too much negative implication for the AIM stocks from the point of view of investment. As far as the general economy’s concerned, smaller companies and the implication of Brexit for smaller companies trading within Europe is yet to be proved and it might make life very difficult for some of those businesses. The one thing one would be concerned about is the pharmaceutical market, where it might make it more difficult for some of those high-tech companies to take advantage of European grants and funds which they’ve certainly been taking advantage of to some extent. But, I actually don’t think that the implications are as acute perhaps for the AIM market as they are for the main market. I think the impact on the AIM market will be more something which hits investor confidence in financial markets generally rather than for AIM. MS: Difficult to say what the implications on the AIM market will be as we still have little clarity on what agreements we will end up with. We have spoken to the management of all our portfolio companies over the last 12 months and the subject of Brexit has inevitably come up. Overall, the positive response we have had is that many of the companies we invest in are just getting on with their business. Their growth and development is often much more powerful than any likely impact of Brexit. WITH NASDAQ NORTH FIRST BECOMING A DIRECT COMPETITOR OF THE AIM MARKET AND LSE’S REVIEW OF AIM RULES UNDERWAY, ARE YOU CONCERNED ABOUT THE MARKET’S PROSPECTS? LISA BEST ANDREW MARTIN SMITH SHARON PRIEST SAM BARTON MATT STRACHAN JUSTIN WAINE JON GOULD STEPHEN DANIELS “Overall, the positive response we have had is that many of the companies we invest in are just getting on with their business. Their growth and development is often much more powerful than any likely impact of Brexit.” — MATT STRACHAN, THORNTONS INVESTMENTS “I think the government is well aware that the AIM market and areas around BPR and also EIS and VCT are very important in terms of generating not just growth in small companies but the long-term sort of patient capital that these companies require to carry on growing.” — JUSTIN WAINE, PUMA INVESTMENTS “Having some geographic spread to what we do is an additional risk mitigator if you can invest in the right kind of businesses.” — SAM BARTON, CLOSE BROTHERS INVESTMENTS