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Giles Hargreave: lessons I've learnt investing in AIM

The Alternative Investment Market (AIM) is 20 years' old this week. Veteran investor Giles Hargreave reflects on the highs and lows.

 
Giles Hargreave: lessons I've learnt investing in AIM

Giles Hargreave has been investing in smaller companies since the 1970s. As manager of the Marlborough Special Situations , Nano-Cap Growth and UK Micro Cap Growth funds, he has spent a lot of time investing in stocks on the Alternative Investment Market.

It is fitting the Alternative Investment Market, which is specifically designed for young, fast-growing companies, arrives at its 20th anniversary having demonstrated impressive growth in its own right.

In the two decades I have been investing on AIM, the number of companies listed has gone from just 10 to more than 1,000, with businesses attracted by a regulatory framework less prescriptive and costly than that of the main market.

In the early days, AIM had a reputation for highly speculative companies, and for share prices that soared and then plummeted with equal speed. This was particularly true during the tech boom of 1999-2002. Since then, AIM has built a reputation as an attractive marketplace for companies and investors, and a highly tax-efficient one. Qualifying shares listed on AIM are exempt from inheritance tax once they have been held for two years and AIM stocks have been allowed in ISAs since 2013.

Last year, investors were given a further incentive, with the abolition of stamp duty on purchases of AIM stocks. Inevitably this has led to greater demand for shares in quality companies, which works to the advantage of those investors who identify them early. New opportunities are constantly presenting themselves on AIM, because of the sheer number of companies listed. That said, in few arenas does caveat emptor (buyer beware) hold truer than AIM, or indeed, small cap stocks generally.

Smaller companies can be volatile, which is one of the reasons this area is well suited to collective vehicles. Investors taking this approach benefit from a diversified portfolio, which mitigates stock-specific risk, and from the expertise of a specialist investment team.

This is an under-researched area of the market, which means those with the necessary resources and experience have the opportunity to identify businesses with strong growth potential long before they appear on the radar of most other investors.

Start small and build

One of the first lessons anyone investing on AIM will learn is that no matter how good your research and how promising a company looks, there will always be stocks where things go badly wrong. For that reason, I am a strong believer in a broadly diversified portfolio: in our fund we hold more than 200 stocks. We start with a small position and then, as the company delivers on its promises, we build our holding. However, even our largest individual positions rarely represent as much as 2% of the fund.

When a company is successful and the share price is rising, by all means ‘average up’ by adding to your position. Do not, however, fall into the trap of buying more of a stock because the share price is falling.

This will mean the average price you have paid for the stock goes down, which may seem appealing. But you may also find yourself far more exposed than you would wish to a company that the market has turned against for very good reason.

Run winners, cut losers

One of the most important lessons I have learned is to be patient when a company is successful, and to let the share price run. It may double over the course of a year but if it is a good business, do not be tempted to snatch your profits.

Hold on and you may see the stock rise in value to many times what you paid. Look at Domino’s (DOM), the pizza chain. It listed on AIM at 50p in 1999. The company has done extremely well, moving up to the FTSE 250, and the share price is now around £8.

The flipside is to cut stocks that are losing you money. It is tempting to wait for the share price to recover. And sometimes that will happen, but all too often there is a very good reason why the price is falling. Cut your losses early and find a better opportunity.

Do not lose your money more than once

You may buy a stock and things go badly wrong for the company. The share price falls dramatically and the company comes to the market looking for fresh capital to bail it out.

It can be tempting, but in many cases it is the wrong thing to do. It is much better to use your capital to invest in a successful company with a rising share price.

It is also important to meet companies face-to-face. This is a valuable opportunity to cross-examine the management and to gauge their quality, which is particularly important in a small caps.

Over 20 years, my team and I have invested in many hundreds of companies on AIM. With hindsight, a few would have been better avoided, but these have been greatly outweighed by success stories that have rewarded investors handsomely.

With sensible regulation to root out those of dubious intent, without deterring young companies that will be the success stories of tomorrow, there is no reason why AIM cannot continue to build on its success over the next two decades.

My best AIM stock

Renew Holdings (RNWH) provides engineering support services for UK power stations, water and gas pipelines and rail and telecommunication networks. It is the largest mechanical and electrical contractor on the Sellafield nuclear site in Cumbria. We bought the stock in 2009 and since then it has gone up more than 10 times. Operating in a niche market, with quality management and a market cap of only around £200 million, we think Renew may have a lot further to go.

My worst AIM stock

We invested in a Chinese sportswear manufacturer called Naibu Global (NBUN) last year. Profits were good, it had plenty of cash and paid a decent dividend. The shares looked very cheap. Unfortunately the old adage about things that look too good to be true seems to have been borne out. The company ran into trouble and its shares were suspended in January. The directors in London have been unable to contact the executives in China and have asked that its quotation on AIM be cancelled.

4 comments so far. Why not have your say?

peter montgomery

Jun 17, 2015 at 17:26

Why make life so complicated?? Just invest where the founding families invest in well managed niche businesses without the fear of some guy (usually in China) running away with the cash.Conscious of IHT relief my 100 year old mother has built up a lovely nest egg in Nichols and Youngs,both held 20 years plus.Bet you I sleep easier than many.

It goes without saying that theres a reason so many 'funny' companies list on AIM.If I were looking for sound advice on both AIM and related smaller growth stocks John(Lord ) Lee of Trafford who contributes to the weekend FT,has a track record of making AND keeping money.And he has a coherent,precise investment rationale behind his portfolio,a feature sadly lacking in many discussions and articles that appear here(Dumb Investor take note)

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Chris Boxall

Jun 17, 2015 at 17:54

We are also firm believers in investing in business with significant family ownership such as James Halstead, Nichols and James Latham. However, we also adopt Giles' strategy of diversification, notably for our inheritance tax planning portfolios, although not to the same extent - 200 seems somewhat excessive and perhaps more a reflection of Giles' liquidity constraints when managing such a large pot of money - it's a very different proposition managing £1bn to £1m in a less liquid market.. The much improved quality of AIM over the past few years has been very welcome, with the out-of-favour (and more speculative) resource stocks being replaced by some quality businesses. In terms of investment success I suspect you could get far more impressive success stories talking to some of the smaller managers and private investors who were willing to commit to some real tiddlers and stick with them as they ran higher, unstrained by regulatory or liquidity constraints. Chris Boxall - Fundamental Asset Management

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Kenpen2

Jun 18, 2015 at 11:01

The few Funds I hold include 3 run by Giles Hargreave and they're all core holdings. For me he's one of the best and most consistent managers out there, seems a decent bloke too. I just hope he's not thinking of retiring any time soon !

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masud butt

Jan 12, 2016 at 13:15

Thanks chris. Can you please suggest any small Managers.

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