Hargreave Hale’s Bedford: AIM better at handling big political scares

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Political risk has been a prominent theme within UK equity markets, with the outcomes of last year’s Scottish referendum and this year’s UK general election potentially shaping the outlook for certain industries, as well as having wider implications for our currency and UK debt markets. Broadly speaking, the election of a Conservative majority Government is seen as positive for those markets, as well as sectors such as banking, property and the utilities. An element of risk has fallen away. All the same, there remain a number of events, both domestic and overseas, that may weigh on UK equity markets within the next 12 months; most obviously the July budget, the autumn spending review and the EU referendum before 2017.

It is very hard to adjust valuation models to reflect low probability, high impact events, such as last year’s restructuring of pensions and annuities. Inevitably, we discuss these issues during weekly investment meetings and invariably reach the same conclusion: there is little we can do to hedge or protect the portfolios against such tail risks other than ensuring that we select good companies with good balance sheets and strong management teams.  

Fortunately, the Alternative Investment Market is home to more than 1,000 small companies, including many that are well insulated from potential shifts in public or fiscal policy. Many of them are young and dynamic, operating in emerging sectors or developing new technologies, with significant growth potential irrespective of the UK’s political landscape.

While small companies can offer excellent growth, when investing in them capital is inherently at more risk for a variety of reasons. Small companies may have less robust balance sheets, weaker cash flows, limited management resource and an over-reliance on a dominant customer. Shares of companies listed on AIM may suffer from periods of reduced liquidity and may be prone to higher levels of volatility.

But some great examples of AIM companies exist.

Science in Sport taps into a growing market through its sports hydration and nutrition products, which are widely used by elite athletes such as Sir Chris Hoy, Mark Cavendish and Helen Jenkins. It has a multi-channel retail offering that includes a strong presence on the high street, a wide range of specialist cycling stores and a developing e-commerce business. Sales have grown by 20 per cent in each of the past eight quarters and are expected to grow by a further 20 per cent to £9.6m in 2015. 

Quixant works with gaming machine manufacturers in a space where there are approximately eight million pay-to-play and slot machines globally. About 6 per cent of these are replaced each year, creating a market for around 480,000 machines annually. Through their expertise and early sight of new chip technology, Quixant allows manufacturers to shortcut their product development cycle, reduce cost and improve their return on capital. Revenues are forecast to grow by 18 per cent to $37m (£23.5m) in 2015 with profits before tax estimated at $8.5m.

Kalibrate provides technology-based price optimisation and planning solutions for the global fuel retail industry. It is deployed by hundreds of retailers across thousands of forecourts in 68 countries. Kalibrate is migrating its customer base away from software license sales and onto a subscription fee and managed services model. Revenues are expected to grow by 14 per cent to $33m this year, while 2015 profits before tax are forecast to be $3.5m.

Oliver Bedford, manager of the Hargreave Hale AIM VCTs.

 

Parties connected to the author are holders of shares in Quixant.