Eustace Santa Barbara: Investors can finally look beyond AIM-less speculation

Fitzcarraldo tells the epic story of an entrepreneur who wants to build an opera house in a remote town in Peru. His dream is to stage a performance by the great Italian tenor, Enrico Caruso.

In a bid to raise funds, our hero buys a seemingly inaccessible rubber plantation. He discovers he can reach it by sailing down one river and crossing by land to another – meaning his giant steamship must be hauled by rope over a hill separating two Amazon tributaries.

The movie’s director, Werner Herzog, decided to film this colossal undertaking for real. The resulting ordeal capped a famously troubled production and prompted him to scrawl in his diary: “I feel a kind of aimless gratitude for every nondescript day that passes without disaster.”¹

Investors in UK company shares may have felt like articulating a similar desperation in recent weeks. Those with shares in smaller companies were given particular reason for doubt and even despondency amid the frenzy of speculation leading up to Rachel Reeves’ first Budget.

The principal focus of angst was the AIM “junior” market. This is the home of hundreds of UK smaller companies, ranging from well-known names to businesses valued at less than £1 million.

With a multi-billion-pound “black hole” in the nation’s finances to fill, the Chancellor had been tipped to scrap the inheritance tax (IHT) relief available on AIM shares. It was claimed in some quarters that such a move could pose an existential threat to the market².

Instead, following calls to acknowledge smaller companies’ vital role in the economy, the relief was halved. Having seen its number of listings dip below 700 for the first time since 2001 just days earlier, AIM rallied in light of the news.

So how might investors view UK smaller companies now, with the post-Budget dust settling and conjecture replaced by something akin to clarity? Should they give Herzog-like thanks for small mercies or are there grounds for a more upbeat outlook?

Perhaps the first point to note is that the saga of the past few months has proved the old adage that markets hate uncertainty. Pre-Budget ambiguity was central to the snuffing out of AIM’s post-pandemic momentum.

A truly meaningful recovery remains elusive today. Progress is now being thwarted by suggestions that even the partial removal of IHT relief should compel investors to direct their attention elsewhere.

Yet such arguments suppose the prospect of a tax break is AIM’s sole or greatest attribute. At least in our experience, this is far from the case.

As fund managers specialising in this arena, we do not invest in UK smaller companies for tax purposes. We invest in them because we believe they can deliver excellent long-term growth.

Even if the Budget had removed IHT relief completely, as was widely feared, we would have continued to regard our holdings as strong businesses with solid prospects. We would also have hoped to see some quite remarkable buying opportunities.

By any measure, many UK smaller companies are still appealingly valued today. They are also consistently under-researched, which is why their attractions so frequently go unremarked by the broader investment community.

In addition, many of these businesses are at the cutting edge of innovation. Equipped with the financial backing required to unleash their full capabilities, they can demonstrate levels of ingenuity and agility sufficient to disrupt the status quo and drive positive progress.

Taking all this into account, we expect AIM to perform well now that the drama surrounding October 30 has finally passed. In tandem, we expect the sizeable discount that has developed of late to narrow.

This is not to imply for an instant that the Budget will go down in history as the catalyst for a sensational surge in investor interest. But it could represent a small yet significant step in the right direction – a useful reminder that this is a market that has much to offer.

Relatedly, we should not forget a genuine policy boost for UK smaller companies was always likely to be monetary rather than fiscal in nature. Further rate cuts can now deliver this, providing more evidence of the role AIM shares can play in sensibly diversified portfolios.

Much as a despairing Herzog wrote of his “aimless gratitude”, doomsayers predicted an AIM-less future. Both sentiments turned out to be unduly pessimistic.

Fitzcarraldo earned the Best Director award at the 1982 Cannes Film Festival, where it was also nominated for the Palme d’Or. And AIM is still with us, replete with pent-up potential. As they allegedly used to say in operatic circles: “It ain’t over till the fat lady sings.”

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^1.See Herzog, W: Conquest of the Useless: Reflections on the Making of Fitzcarraldo, 2009

^2.See, for example, Money Marketing: “Removing IHT break on AIM stocks ‘might make it unfit for purpose”, October 14 2024

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