Given the events of the last few days, the Fund’s gentle outperformance against its UK All Companies benchmark in September doesn’t merit any further commentary. The market correction over this week has seen a particularly severe sell-off in AIM stocks, in a market risk-off response to tightening US monetary policy, exacerbated by concerns about potential changes to IHT relief in the forthcoming budget, and in global industrials as investors take fright over the potential impact from Trump’s trade war with China. With its growth mandate the Fund has a heavy AIM weighting largely to get exposure to technology stocks with their structural growth dynamics, which are for the most part listed on the junior market. So far, the sell-off has been fairly indiscriminate with AIM stocks in general being perceived as high risk even if they have strong balance sheets and high levels of revenue visibility and whatever their sector, with economically less correlated stocks being under the cosh just as much as more economically sensitive ones.
One area where we feel AIM is particularly exposed is in the very highly valued momentum stocks in the Index. Throughout the Fund’s life but particularly over this summer, a key theme for us as managers has been to keep the Fund’s average forward PE valuation in check by selling down the most highly rated stocks and finding more attractively priced alternatives from our screened investable universe. This process continued through September with the Fund exiting Games Workshop, after a sustained period of outperformance, and reducing its holdings in RWS, Ideagen, Tatton, and Iomart. On the buy tack, we added to several of our more lowly rated holdings and started to buy back into three of the Fund’s previous holdings, which had de-rated significantly recently, namely Restore, IQE and Hill & Smith. The overall effect of these actions has meant that even before the correction the Fund was trading towards the bottom end of the average forward PER valuation it has traded on since launch. The subsequent sell-off, particularly in AIM stocks, means that the valuation is now at its lowest since launch.
From a company news perspective, our holdings which updated the market in September all reported in line or positive news. Whilst we saw a slightly higher number of warnings than usual in the first half of the year, the Fund has so far come through the autumn reporting season pretty much unscathed, with only one warning from Amino Technologies in October caused by the impact of the trade tariffs on customer ordering patterns. Consequently, trading updates have had a minimal impact on the performance of our AIM holdings, the fall has been down mainly to perceived risk. From our point of view the quality of a business is demonstrated by its market position, margins, balance sheet and ability to turn profit into cash not its Market Index. We screen our portfolio holdings for these qualities and base our investment decisions on them. We cannot be sure how long the sell-off in AIM stocks will go on for, but for a growth fund we feel that valuations are now presenting compelling value.