While the AIM index has had a torrid year, there are reasons for optimism, said Anna Macdonald, one of the fund managers of the Amati AIM IHT Portfolio Service.
A total return of -31.5% last year was the worst decline since the global financial crisis, and as the Amati AIM fund invests in companies quoted on the junior market that it believes will qualify for business property relief, it also had a difficult year, with the model portfolio down 26.3%.
"AIM has over the last few years become the home of media, e-commerce and technology stocks, many of which had a torrid year with weakening end markets and plummeting investor patience," said Macdonald in a note published by Amati.
Reasons for optimism are based on the fact that over the very long term, smaller companies deliver significant outperformance, outpacing inflation, bonds and larger companies – though these returns come with a higher risk profile and higher volatility.
With the same team managing the AIM portfolio as Amati's UK smaller companies fund and Amati AIM VCT, Macdonald said this "gives us an excellent breadth of coverage across all the market sectors, and a deep understanding of how our IHT portfolio selections stack up against the wider UK market".
Small caps often have an edge as management teams include founders that have spotted a niche in an industry they understand upside down and inside out.
"They explore that niche – perhaps first in the UK and then if successful they can start to sell overseas as well. Even if that niche is in a sector that isn’t growing much, the company hopefully is able to gain market share through its superior service or pricing."
The long-term performance of smaller companies led Amati to reflect on the longest-standing holdings in the portfolio, some of which holdings were in the initial portfolio at the launch of the service.
Macdonald's note highlights portfolio holdings Youngs, Gamma Communications, Judges Scientific and Brooks Macdonald as "exceptional companies" that remain in IHT portfolios "because they continue to exhibit the positive attributes which we believe will deliver for shareholders".
"Our service is actively managed, and the portfolio is a focussed one, with a stock selection process targeted on our three key themes – Family Management and ownership, Established Technology and Durable/Defensive businesses. Position sizes considered with each company needing to deserve its place within the portfolio."