Cavendish Aim (GB00B0JX3Z52) is one of the few funds to invest exclusively in the Alternative Investment Market (Aim). Over one year it's the top performer out of 45 funds in the Investment Association UK Smaller Companies sector, and it is also within the top quartile over three. But with the uncertainties of the UK's exit from the European Union on the horizon, does its manager Paul Mumford see any difficulties arising?
"I don't think Brexit will affect my shares too much at all," he says. "The majority of companies listed on Aim are UK-based. It is doubtful whether many small-cap UK companies of the sort listed on Aim would contemplate listing in Paris or Frankfurt."
Aim attracts a unique pool of specialist investors, such as venture capital trusts (VCTs) and private investors seeking inheritance tax relief. This means it would be difficult for other European countries to replicate Aim.
"Aim-listed companies benefit from significantly lower running costs due to less stringent regulations, as well as cheaper corporate deals," he adds. "They also benefit from easy access to market makers and the ability to deal in English - the international business language."
The quality of companies on Aim has improved since the financial crisis of 2008-09 as weaker companies have been weeded out. And Aim-listed companies are often more nimble than larger companies when it comes to exploiting opportunities. For example, one of the fund's top 10 holdings, M&C Saatchi (SAA), took advantage of the global recession to expand its international offices. It took a short-term hit on profits, but expanding its network of global offices has helped it attract more international clients.
Mr Mumford looks for undervalued stocks, often taking a contrarian approach when selecting companies. He follows a bottom-up stockpicking method - picking companies according to their individual attributes rather than industry sector. One of the dangers of this method is a lack of diversification, as buying cheaper stocks means he often ends up weighted to the least fashionable areas of the market. He aims to counteract this risk by putting very little into each company - the fund currently has more than 70 holdings.
Although the fund's largest sector allocation is healthcare, which accounts for 21.2 per cent of assets, Mr Mumford tends to avoid biotech companies that focus exclusively on developing new drugs. "It takes a long time to get drugs through to market and it's very expensive," he explains.
He is also put off by the fact that many new drugs fail at the final phase three trial level, which typically involves randomised, double-blinded testing of the drugs on thousands of people.
But he does hold Ergomed (ERGO), which has a dual business model. It provides specialised services to pharmaceutical companies, and co-develops drugs with other pharma and biotech companies in exchange for a carried interest in revenues on the drugs produced.
Other healthcare holdings include Alliance Pharma (APH) and Clinigen (CLIN), which buy drugs from large pharmaceutical companies and sell them on to other providers; bandages and device supplier Advanced Medical Solutions (AMS) and dermatology products company Sinclair Pharma (SPH).
Mr Mumford typically only considers profitmaking companies, and says that the quality of Aim is such these days that there are enough quality, profitmaking companies to choose from. However, a notable exception is one of the fund's top 10 holdings, Surgical Innovations Group (SUN). The main reason for this, he says, is the company's good range of products - it specialises in designing and manufacturing products for use in minimally invasive surgery.
Another area Mr Mumford often avoids is overseas companies listed on Aim - he says it is often the case that these are unable to list on their home markets. But an exception is software quality company SQS (SQS) - the only German company currently with a primary listing on Aim. Mr Mumford says SQS listed on Aim as part of a wider strategy to expand its services worldwide.
Energy companies make up about 12 per cent of the portfolio, and the fund's recent performance has been helped by its oil and gas sector companies, which have risen on the back of higher oil prices.
The fund's second-largest holding, meanwhile, North Sea oil explorer Ithaca Energy (IAE), recently received a takeover offer from Israeli conglomerate Delek. But Mr Mumford does not believe the offer recognises Ithaca's potential to more than double its production from the Greater Stella Area. "Based on the current circumstances, the offer is fair," he says. "But there's tremendous long-term value in this company."
Mr Mumford is the fourth-largest shareholder in the company and intends to vote against the offer in the hope that he can retain his interest in Ithaca.
| Paul Mumford CV Paul Mumford is manager of the Cavendish Aim Opportunities (GB0032211103) and UK Select (GB00B57P3367) funds, and has worked at Cavendish Asset management since 1994. He has been a fund manager since 1988 when he joined Glenfriars. He has also worked as an analyst at Norris Oakley Brothers and at R Nivison. |
