The fact smaller companies tend to deliver better share-price growth in the long term than do blue chips has always struck me as interesting.
It makes buying up smaller-sized companies seem like a no-brainer for the long-term investor.
This is my penultimate column as a financial journalist and if I could go back a decade, I would focus much more on smaller equities.
The trade-offs, of course, are heightened volatility, scarcer liquidity, and the greater risk of individual failures. But the rewards can be excellent.
Of the four Investment Association sectors for funds that buy ‘smaller companies’, three have delivered returns that rank them in the top six of all sectors for the past 10 years.
European Smaller Companies funds gained 183 per cent on average, according to data from FE Analytics, coming second only to the 236 per cent from China/Greater China funds.
So if smaller shares almost always do well, what went wrong with Aim?
The Alternative Investment Market – a smaller substitute to the London Stock Exchange’s ‘main market’ – was set up in 1995 for brand new companies to offer shares to the public.
But this month Aim ‘celebrated’ its 20-year anniversary by being 24 per cent below its starting level.
“The market as a whole has been a graveyard of failed ambition,” said Hargreaves Lansdown in research timed to coincide with the milestone.
Hargreaves’ view is that Aim is simply not a market investors can buy en masse over long periods and expect to benefit from, as they might if they bought into main-market sectors.
Instead, one has to fish out the best opportunities – but, of course, there is the risk you end up with lemons.
Nevertheless, I wonder if it might be time for investors to move on and start to consider Aim on its modern-day merits.
Research from Charles Stanley last week cited the failure of many technology companies around the turn of the millennium as a contributor to Aim’s woes, as well as the frequent failures of speculative oil and mining stocks.
Charles Stanley suggests investors should place their trust in fund managers to select Aim shares, and I agree this is probably one area where fund managers clearly add value for investors.
One investor in particular – Neil Woodford – is clearly doing this already. There will more than likely be numerous Aim shares in his new Patient Capital investment trust.
Other big Aim backers include the talented Giles Hargreave and Gervais Williams.
Cavendish’s Paul Mumford runs an Aim fund that has gained 62 per cent since launch in October 2005, significantly better than the wider market’s 21 per cent loss.
That’s my one to watch for the next 10 years.
John Kenchington is editor of Investment Adviser
