19th November 2014
“Small is beautiful,” said E F Schumacher some four decades ago. That part of the environmentalist author’s thinking, although perhaps not the rest of it, has now been picked up by verteran fund manager Gervais Williams.
He’s written a small book called The Future is Small where he sets out to show “why AIM (alternative investment market) will be the world’s best market beyond the credit boom.”
It’s a tough call. AIM has been around for almost two decades during which time it has never seemed to have lived up to the hopes of its early promoters – and has endured more than its fair share of busts, bankruptcies and ballyhoo. And let’s not forget the downright scandals.
First he has to wean investors off the bigger is better and biggest is best mantra. It’s the macro version of Tesco’s shrinking customer base, and the need for it (and competitors) to scale down their real estate. He has to convince institutional investors to have a fresh look at small companies.
That won’t be easy. AIM-quoted companies are typically valued at £10m to £50m so they are off the research radar for increasingly globalised investment houses. Some have mandates which expressively forbid venturing into junior markets. And many benchmark results to an index, which either excludes micro companies or where their weighting is negligible.
His first argument – and this one has been put forward by penny stock and small company fans for generations – is that while the larger a company becomes, the mightier it is within its market, there is not much scope for increasing market share – again Tesco is confirmation of this. The “law of large numbers” suggests that as a company grows, the nearer it will be to the average.
This is a plus point for the safety first investor looking for the security blanket of regular dividends. But other large company traits such as increasing bureaucracy, a loss of vibrancy and eventual decline (Tesco, yet again) are less attractive. As Williams says “ant-sized companies appear entirely irrelevant to the gigantic scale of investment institutions.”
“But they are in for a shock,” he says, warming to his theme. “A sea change in attitudes towards genuinely small quoted companies is coming, and most, market participants are trend followers in the end.”
There are loads of statistics showing that small company investment returns more over time than the equities of big corporates. The growth potential of a small company depends more on the people running it and other company-specific factors than on the economy as a whole. So investors in micro-caps have no need to churn through often incomprehensible economic data and commentaries.
But they do need to do their homework – and plenty of it – in other directions. |One idea is that small companies failed to perform during the credit boom years so they are plenty out there which are now undervalued. And the subsequent out-performance could be most marked among the tiniest companies – those listed on AIM.
As an example of a tiny company, he cites Bloomsbury Publishing. Floated in 1994, raising £5.5m, it had the foresight (or luck!) to discover the Harry Potter phenomenon which, along with spin-offs, put the firm at the forefront of its market.
But is this such a great example? There is only one such publishing phenomenon in a generation. It’s share price stands at 164p – well above three years ago although a little below the start of this year – and under half its all time high of 388p in 2005.
Bloomsbury shows that getting out at the optimum moment is as important as getting in. Williams does however point out that Bloomsbury has been great for day one investors and a progressive dividend payer.
Individual investors and specialist funds should never overlook or discount AIM and other micro company shares. And no one can refute his optimism that a small company super-cycle is building up.
But the serious problem is the size of mainstream funds and mainstream investment firms. It’s all very well to find a tiddler company with wonderful prospects. The trick then is to invest in it in a way that’s meaningful.
A billion pound fund cannot take a stake in a £10m company, especially one where the majority of the shares are closely held. Until that problem is solved – not any time soon – small companies in general and AIM listed concerns in particular will be overlooked by most investors. Still, that means Williams and his small cap competitors can do well!