James Henderson, the manager of the 102 million GBP Henderson Opportunities Investment trust, is targeting UK small caps as his next investment, he said this is the ideal time to move as other investors steer clear over concerns with the Brexit situation.
The Brexit effect is the main reason why Mr. Henderson sees this as a time where sizable returns can be made in the UK small cap market.
“There are times when there is no value in UK small caps, and that is when we sell but is definitely value there now,” he said.
The FTSE AIM All-Share Index, consisting of all companies quoted on the Alternative Investment Market, has risen 28 per cent over the last 12 months.
In Mr. Henderson’s opinion, “it doesn’t matter to me whether the companies happen to be listed on the AIM market, or are small caps listed on the main market of the London Stock Exchange”.
A good chunk of Mr. Henderson’s portfolio is invested in shares listed on The Alternative Investment Market.
He said that there is a “popular belief” in the market that AIM shares only offer exposure only to the UK economy.
“investing in AIM can expose you to international as well as domestic end-markets, and a wide variety of niche sector specialisms”.
“Amid election and Brexit uncertainty some investors have been put-off small-caps, instead opting for the perceived safety of larger internationally exposed companies in the FTSE 100.
“Caution is fair. The necessary Brexit shock absorber of a weakened pound has served to import inflation and threaten domestic spending in the short-term, and clearly, business uncertainty surrounds negotiations with the EU and what this will mean for the UK economy.”
He continued: “Many of the UK’s youngest and brightest star companies start on AIM…due to its less onerous rules on listing.
“It comes with risks of course: lighter touch regulation; greater share price volatility; poor liquidity (the ease in which you can buy and sell shares in larger amounts); concentrated revenues on fewer product lines; concentrated end-markets for sale.
“But if you’re comfortable with taking a bit more risk, capital returns on AIM can be significantly greater than that of the larger FTSE100 listed stocks.”
He said it’s much easier for a small-cap to transform revenues of £10m into £100m, then it is for a larger firm to turn £1bn into £10bn.
“It is this potentially strong growth of earnings that translates into stellar share price returns.”
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