Holly Cook: Welcome to the Morningstar series, “Why Should I Invest With You?” I’m Holly Cook, and joining me today is Gervais Williams. He is Manager of the Miton UK Smaller Companies Fund.
Gervais, thanks very much for joining me today.
So, you just published a book, which has got a rather interesting title that I think will raise a bit of controversy, and you’re saying why you believe AIM will be one of the world’s best markets after the credit boom. Now if we look at the AIM markets, obviously they haven’t done particularly well for multiple years and this year in particular, down something like 14%, I think. What is fueling this idea, this belief that you have that AIM is going to be the best world market?
Gervais Williams: Yes. It is very interesting because I think what we’re looking at here is that the market trends have changed. We have seen that the fundamentally economic trends have been changing anyway. Whereas world growth was very buoyant up to recently, most recently the headlines now have very much been of world growth stalling.
And I think that’s leading to big companies really struggling to get top-line growth, struggling to get dividend growth, and of course, small companies won’t find it easy, but they find it easier – they can buck the economic trend. And it’s the availability of smallness in the AIM market, which I think is going to come to dominate and as that does so investment flows into the small companies, being illiquid are going to drive this market up considerably over future years.
Cook: So you are not saying that this is going to be a short-term rebound. You do think this will be a long lasting story of growth.
Williams: Yes. I mean we are talking about a super cycle, something which lasts decades and which will actually lead to substantial investment in this area. So institutions typically have very little invested in small-micro – I am not talking about small-mid, I am talking about small-micro where they probably have 1% or near 0%.
If you go back to the Seventies and the Sixties when the market was very tough and the economy was not much better, they had 10% or 15% in the very smallest companies and that’s because they can buck the economic trend, they can grow dividends and it’s that rising divided flow which is going to become amazingly pushy in terms of driving these markets high.
Cook: So do you believe that sort of today’s AIMs stocks will be tomorrow’s large-caps as it were?
Williams: Yes, certainly. I think we have got to be very clear though. A lot of the companies which are sort of one-off stocks, which are hoping to get lucky on commodity prices or perhaps solving cancer, there is a place for those, but actually the real driver of this return is going to be the everyday businesses doing everyday sales and manufacturing or parts and services driving out that cash flow, driving out the ability to pay dividends and driving out that opportunity for shareholders to make a compounded return with income growing.
Cook: And this is an area that traditionally does inherently have an awful lot of risk. It’s a volatile area of the market. Are there any particular characteristics that you would look for when looking for an AIM stock that you think is going to be able to deliver those sort of returns?
Williams: Yes. I mean individual share prices are quite volatile. You are absolutely right. And that’s because they don’t tend to trade so much. They are small. They are illiquid. But of course what you do have at this end of the market is they have very strong balance sheets, net cash or very modest net debt.
They have got ability to withstand uncertainly in a way that perhaps some of the very largest companies with a lot of corporate debt are probably a little bit vulnerable.
So actually if you can get individual companies which have lot of assets, tangible assets, cash, lots of sales, which can then get more commercial and producing a better return out of those, you can see these companies really growing considerably over time and actually in a risk-adjusted basis, I think the portfolio of these kind of companies is actually going to come out, is actually ready to be low risk compared with the return you get.
Cook: So let me try to pin you down on timeframes. So looking back, I think you were saying that from sort of the Nineties that we haven’t really seen a lot of awful growth in this area as a whole, but you are now saying you believe this is going to be a particularly strong market.
I mean over what sort of time frame, three, five, 10 years – what sort of horizon do you think an AIM investor needs to have?
Williams: I mean if we look back over the last 20, 25 years, I mean AIM stocks have grown. Big companies, small companies, international companies, emerging market companies, there has been growth universally. It has not been difficult to find growth.
But actually what we’re really saying is that returns have not been distinctive because growth has been so plentiful. It’s the fact that small companies have the distinctive advantage of being able to grow when large companies don’t grow, when the economy is flat. That is the distinct feature which is going to become more prominent now.
So looking at the time frame, I think it is already started. I mean if you look at actually the AIM market over the last 18 months, it has risen, not as well as the small cap market, but it is on its way. It is being dominated by companies moving the other way. Some of the commodity and mining stocks have come down in the short term. They’re becoming less important as a percentage.
The new companies come into market are decent income generators, growing businesses, more everyday aspects of the business, so that’s already happened. It will be a zig and zag on the way up.
But actually if you look at dividend growth coming from the bottom end of the market, it is superior to the main market now. That was the defining feature in the Seventies and the Sixties and that is why they outperformed on average at the bottom end around 4% per year for over two decades. So time frame, I don’t think you need to wait. It’s time to get in now.
Cook: Well, thank you Gervais, very much for your summary of insights there. I will be reading the book to find out more.
Williams: Thank you very much.
Cook: For Morningstar, I’m Holly Cook. Thanks for watching.
