AIM sell-off or buying opportunity?

Investors are running scared of the AIM market, which is down more than 9% since its May high – largely over concerns that Inheritance Tax Relief may be removed in the forthcoming budget. This would curtail new IHT investors in AIM and cause many existing investors to unwind their AIM portfolios, as AIM stocks would be seen by many as inappropriate in the absence of any tax incentive, argues James Baker, fund manager at Chelverton Asset Management.

Chelverton evaluates companies on their financial merits and prospects, rather than the market on which their shares happen to trade and sees this derating of and sell-off in AIM stocks as a buying opportunity, as the valuations become more attractive. James Baker, who this week celebrates 10 years at the helm of the top-performing MI Chelverton UK Equity Growth Fund, says that “if AIM IHT relief is not cancelled, one could expect to see the AIM market rally”, and that if it is scrapped there is likely to be “further technical weakness, making valuations even more compelling.”

Many AIM listed companies contemplating a move to the Main List

Noting that AIM IHT investors are typically risk averse, and that they have tended to focus on the larger and financially profitable, well financed stocks, Baker says that in his team’s discussions with management teams, they have found “many companies contemplating a move to the Main List in the event that IHT relief is withdrawn”, more so given that the listing requirements for the Main Market are being relaxed by the FCA.

A move to the Main List can result in a period of outperformance by companies’ shares as Index Funds, not present on the AIM market, build up their exposures. Recent examples of this phenomenon include Alpha Group International, which moved to the Main List in March, coinciding with a period of strong outperformance, and more recently Gamma Communications proposed move to the Main List. Alpha accompanied their announcement with a share buyback to help soak up any IHT portfolio outflows, and many of the AIM holdings in the MI Chelverton UK Equity Growth Fund have the balance sheet capacity to do something similar.

MI Chelverton UK Equity Growth Fund is No. 1 ranked UK Equity open-ended fund over 10 years
The Fund seeks to deliver long-term capital growth by investing in cash-generative small and mid-cap equities, which can grow faster than the wider market, whilst funding their own organic growth.

The £610m MI Chelverton UK Equity Growth Fund celebrates its 10th anniversary this week as the No.1 ranked UK Equity open-ended fund over the period. The Fund, managed by James Baker, Edward Booth, and Henry Botting, has returned 229% since launch (20 October 2014), notwithstanding a recent period of underperformance, reflecting in part its relatively high exposure to AIM stocks (Source – Chelverton Asset Management as at 21 October 2024).

The team last year took on the management of The Investment Company (‘TIC’), which invests in less liquid listed micro-cap opportunities. With an NAV of £7m, Chelverton is looking to grow its asset base, but only to a point where TIC’s performance can still derive benefit from its smaller market capitalisation holdings.

Investment process

The Chelverton team screen the market for cash generative stocks that can grow faster than the wider market, whilst funding their own organic growth – focusing on cash conversion, growth, leverage and the relationship between margins and capital intensity. Having identified companies with these characteristics, the team undertake a qualitative assessment, meeting management to assess a company’s market position, competitive advantage, their commitment to shareholder value and ESG engagement, and most importantly, the company’s revenue visibility.

Here the team favours companies such as software and media businesses with subscription revenues, companies where there is repeat demand for their essential products and services, and industrial companies making critical design win components.

Historical holdings reflecting this strategy include Ascential, a media conglomerate with numerous market leading events (including Cannes Lyons and Money2020), a subscription database for the fashion industry, and intelligence services enabling brands to maximise sales through online retail channels, and Ideagen, an acquisitive provider of essential Governance Risk and Compliance software to financial and industrial customers