Hargreave Hale's unloved small-cap income picks

Hallett, a former Wealth Manager cover star, looks for stocks that have low volatility to AIM market risk, which are also unfashionable.

He says secular growth will not be offset by an economic downturn and therefore looks for businesses that are naturally defensive – for example, pawnbrokers, basic food producers or gambling companies.

He looks for companies that have displayed an ability to grow through difficult periods, such as 2000-02 and 2007–09

Opposite are three companies he believes are doing something special, which enables them to take market share from weaker rivals in difficult times. They do this by having a better product, better balance sheet, better management or all three.

Hallett says: ‘Every chief executive will say they have a superior business model. However, only a few continue to raise expectations through an economic downturn. Therefore, look at their track record.’

Hallett began working on the AIM market shortly after its launch in 1995, developing Singer & Friedlander’s sector specialism and running £25 million in institutional small cap money before joining Hargreave Hale in 2005.

In addition to Stellar Asset Management’s IHT service, he works alongside Citywire A-rated Giles Hargreave on the Marlborough Special Situations, UK Leading Companies and UK Micro Cap Growth unit trusts.

Over the five years to April 2011, the Hargreave Hale AIM IHT portfolio returned 42% versus the FTSE AIM All-Share loss of more than 20%.

The service typically invests in businesses with a £100 million plus capitalisation and a relatively mature dividend stream.

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