This is AIM's year
The AIM market, now 25 years old, offers private investors a way into emerging growth companies along with significant tax incentives. In comparison to investing in unlisted companies, it provides a degree of governance standards as well as some liquidity. After a few tricky years, particularly around the Woodford debacle, AIM is coming into its own. 2020 saw a rise in aggregate market cap from £104bn to £131bn, and it is currently almost at £150bn. Moreover, in the year-to-date, there have already been 30 IPOs, which is more than in all of 2020. The former preponderance of mining stocks has diminished, from over 130 in 2015 to fewer than 100 in 2021 with AIM now working as a marketplace for investing in life sciences (£17bn value) and tech (£18bn), albeit the biggest companies are the fashion firms Asos and Boohoo.
LGB’s CEO Andrew Boyle commented: “The structure and functioning of the AIM market are much improved and are fit for its purpose of directing private capital to areas of the economy that can ensure a sustainable future. Technology is an obvious underweight. Many tech companies look first towards private equity. I would like to see that changed. This will require a culture in the market that encourages entrepreneurial endeavour and places less emphasis on exploiting the IHT and EIS tax breaks, although these will still be important. This is also a great opportunity for investors who are prepared to put capital at risk to do some broader good in supporting the UK economy while making money.”
You need a strategy, not a basket
When investing in any market, investors should have a strategy or framework that they can act consistently against. This allows them to create a sustainable portfolio throughout market and economic ups and downs and allows investors to ignore market noise. This is true for institutional investors as much as private investors. In many markets, it is sufficient to follow the market index as this provides a balanced exposure to business or economic sectors. However, in the case of AIM, the market and therefore the index is not representative of anything and indeed it has changed over time; therefore, an index approach to AIM does not make sense. We believe a thematic approach gives a stronger framework against which to invest.
LGB’s thematic filters
At LGB we have identified specific investment themes which we see as key areas for growth. Using this thematic approach allows investors to be at the forefront of technological developments, innovation, and changes in the structure of the economy and society. As AIM is a market for growth companies, it provides a good opportunity to invest in these key sectors.
Our top 2 themes for 2021
Future of Healthcare
The healthcare sector has witnessed decades of innovation and technological advancement with Big Pharma looking to biotech and smaller companies for new treatments and solutions in the fields of genomics, precision medicine, and tech-enabled procedures. The COVID-19 pandemic has accelerated the rate of innovation and is attracting record funding from investors. The pandemic has brought vaccine development out of the shadows and made it a priority area for governments and companies, which is not going to change. Drug discovery is being revolutionised by gene sequencing, which provides opportunities in personalised medicine. The increased use of technology, new imaging techniques, data, and artificial intelligence allows for more accurate diagnoses and treatment, whilst medical technology companies are creating promising opportunities for private capital in support of growing pressures on national healthcare systems.
There are many aspects to decarbonisation, from the energy system where the future is in wind farms and hydrogen generation, through to improving the efficiency and sustainability of food production and consumption and stopping it from contributing to carbon emissions. Long-term sectoral transformation is necessary to meet the UN sustainability goals combatting the climate crisis, and the fuel cell will clearly have a major role, both for hydrogen production and for electricity generation. Other transitional measures, such as wood pellet substitution for coal, will also play a part. Advances in cell-cultured meat and new sources of proteins are driven by increased consciousness of agriculture’s role in generating emissions, as well as ethical concerns about farming techniques. Moreover, the replacement of unsustainable plastics creates opportunities for biodegradable packaging in food and even compostable tree guards, and new environmentally friendly pest and fungal controls are being developed.
Structure your investments with a strong template
Once attractive themes have been identified, the next step is to establish an investment template or set of criteria that can be used to select individual investments. We believe that the most important of these criteria relate to the quality of management and the company's business model. LGB typically looks for companies that help their customers and business counterparties improve productivity. This means that these businesses do not need to build huge corporate infrastructures but can scale through the adoption of their IP and technology by other counterparties, for example through licensing.
Manage your portfolio risk
Share prices are very dependent on RNS’s as most investors are short focussed. The difficulty with that is that share prices are very volatile but the positive of this is that there is not much correlation between the stocks. It is important to keep a diversified exposure to different asset classes including international stock markets, bond markets, property, etc. The allocation will depend on your overall risk profile.
At LGB, we like to build portfolios of 10-15 AIM stocks and combine this with short-term high-yielding fixed income securities to reduce volatility, manage risk and improve liquidity. Our MTN programmes offer regular opportunities in secured fixed income securities often issued by AIM-quoted companies. The programmes are secured by way of either first lien or robust second lien with a security trustee to monitor financial and business performance, covenants, and collateral on behalf of investors, removing the need for individual monitoring and action. Combining investment in short-term debt with long-term equity positions is what we call our barbell approach.