In our recent webinar, we considered how AIM can help the LGPS to meet both Mansion House guidelines and investment pool transition objectives.
The UK government has moved to allow Alternative Investment Markets (AIM) listed companies under the unlisted equities umbrella for pension fund allocation. Comprised of c.700 UK companies, employing around 400,000 people and representing a broad range of industries and sectors, AIM generates annual revenues of £74 billion. This expanded remit for UK investment creates opportunities for Local Government Pension Scheme (LGPS) funds. However, skilled guidance is needed when investing in the London Stock Exchange sub-market, which allows smaller companies to float under a more flexible regulatory regime than is mandated on the main board.
In his Mansion House speech in July, UK Chancellor Jeremy Hunt set out plans to facilitate greater pension fund investment in key areas for economic growth. The goal is to unlock up to £75 billion in additional investment from defined contribution (DC) and LGPS funds. LGPS administrating authorities are simultaneously being encouraged to pool assets to improve economies of scale and increase their capacity to invest in infrastructure.
AIM stocks have a similar return profile to alternative assets, often with more liquidity than private markets. Via AIM, LGPS funds can build out an alternatives allocation while avoiding highly illiquid private markets.
AIM investments can also provide a stepping stone – or a final destination – for LGPS funds pooling alternative assets. The March 2025 deadline to complete pooling means schemes face being left holding large sums of cash while their pool searches for investments. The hit to performance could be significant.
However, these balances could be temporarily held in AIM assets employing a replication strategy. The pool could then decide to keep the AIM assets or sell them and move into private markets.
The Mansion House Compact led to nine of the UK's largest DC pension providers committing to allocate 5% of their default funds’ assets to unlisted equities by 2030. According to the Chancellor, if all DC funds follow suit, up to £50 billion could be allocated to high-growth companies by 2030. The reforms could also lead LGPS funds to double their private equity allocations to 10%, which could unlock a further £25 billion by 20301.
Downing has been managing AIM portfolios since March 2012 – recording growth of 141% compared to the benchmark of around 5%.2 The firm has £151 million of its £1.9 billion assets under management (AUM) invested in AIM.
“Downing’s growth reflects the fact we have a dedicated AIM-focused team, there are no other mandates to distract them,” says Judith MacKenzie, Head of Downing Fund Managers and Manager of the AIM IHT Service. “Our AIM business has returned c.8.5% compound over the past dozen years. But success requires being a diligent investor as AIM is not highly liquid. Before investing in a company, we look at the shareholder list to figure out where the liquidity is for the way in – and just as importantly, for the way out.”
Downing employs a value-focused strategy when investing in AIM, buying companies on slightly above average price-to-earnings multiples. Nick Hawthorn, Manager of the Downing AIM IHT and ISA portfolio service, says the goal is to exploit informational inefficiencies. “The further down the market cap curve you go, the fewer analysts there are looking at those businesses. Companies on AIM with market caps of £1 billion or more tend to be valued the highest – those will be on about 20-times earnings.
“The AIM top 50 are also expensive, on about 15-times earnings. We tend to focus outside of this part of the universe. That gives us access to 92% of the universe by company count and it means we can invest in new ideas at between 25% and 50% discount to the larger companies.
Many of these smaller, lower-valued companies can grow and this will be reflected in share prices. Downing reinvests the proceeds from these success stories, into fairer valued, promising AIM companies.
Downing’s investment in Tracsis about 12 years ago serves as a good example. When Downing first invested in the transport software and consultancy company, incubated at the University of Leeds, the share price was 48 pence. Today, its shares trade at over £9. Downing was one of the shareholders that engaged with the change of management and Board and gave guidance on long-term incentives through that period - therefore helped facilitate the building blocks for the company to grow successfully.
“We are stock pickers – we believe that is the only way to consistently outperform in the AIM market. A portfolio with around 30 holdings gives us a good mix of mature and liquid positions,” says Hawthorn.
Downing also runs over 600 portfolios for individuals in the UK. “With AIM, liquidity cannot be taken for granted. Investors in AIM need to have a long-term horizon but we can match a client’s liquidity requirements so long as we have clear idea of them,” says MacKenzie.
- Chancellor’s Mansion House Reforms to boost typical pension by over £1,000 a year - GOV.UK (www.gov.uk)
- Downing IHT portfolio service and FTSE AIMAll-Share total return as at 30 September 2023.
- This article has been prepared for retail and investment professionals only.
- We recommend investors seek professional advice before deciding to invest.
- This article has been approved and issued as a financial promotion under section 21 of the Financial Services and Markets Act 2000 by Downing LLP.
- Capital is at risk. The value of investments and any income derived may go down as well as up and investors may not get back the full amount invested.
- Any investment should only be made based on the information contained in the product literature available from Downing; your attention is drawn to the risk, fees and taxation factors contained therein.
- Past performance is not a reliable indicator of future performance.
- Investments in smaller companies quoted on the Alternative Investment Market (AIM) can be more volatile and less liquid than those in larger, more established companies listed on the London Stock Exchange.
- Any personal opinions expressed are the views of the fund manager at the time of publication and are subject to change and should not be interpreted as advice or a recommendation.
- Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference Number 545025). Registered in England No. OC341575. Registered Office: St Magnus House, 3 Lower Thames Street, London EC3R 6HD.