The Alternative Investment Market (AIM) of the London Stock Exchange (LSE) is a great place for investors to find bargains and mispriced securities. A lot of the companies have market caps too small for brokers or institutions to care about, which means small investors like us are left to competed with only each other. UK investors can also enjoy tax free returns since AIM shares became ISA eligible. But it doesn’t come without its risks: stocks are illiquid with large bid/ask spreads, regulation is more relaxed than the main market and the stock prices are very volatile.
But the final ‘risk’ is also an opportunity. One of my most successful investments of 2013 was Craven House Capital (AIM:CRV), which rose 73% in the final half of the year, and is up another 29% already this year. It is a tiny investment trust listed on AIM with huge volatility (it rose 150% in a single day last year) which gave me an opportunity to buy it at a fraction of its value.
Investment Trusts themselves are interesting investments, because they act as a sort of leveraged play on the market when you buy them at a discount to Net Asset Value.
Lets take 2008 as an example, stocks crashed around 40% and if you had simply bought an index tracker in 2009 you would have done very well for yourself. The S&P 500 went from 800 to now over 1800 i.e. £100 would have grown to £225.
But at the same time, Investment Trusts were selling at enormous discounts of 30-40% to their already depressed net asset values. This was purely due to investors fear and panic selling. These holdings have recovered as the market has and in addition those discounts have narrowed, or even become a premium. If you bought one IT at a 40% discount at the time, and its NAV followed the market up, then you would now have £375, a lot more than £225. Not only that but you would have been taking less risk as the discount is a margin of safety protecting against future declines.
Of course those days are gone, or so you may think – 2008 only happens once a decade if you’re lucky. But there are often sub-sections of the market that are depressed in terms of pricing. For example, currently gold miners are one of those and last year it was oil and gas companies.
For this reason I have decided to go hunting for bargains in Investment Trusts on the AIM market, to both take advantage of volatility, and also find some distressed sectors and hopefully get a leveraged benefit from a turn in investor sentiment.
I was inspired by Wexboy’s Great Irish Share Valuation Project (if you haven’t checked it out I highly recommend it) to cover all the trusts I could find on AIM, and force myself to value them even if I usually would just pass on them. I think this will help me improve as an investor and I will call it the AIM IT Project.
You may wonder why I need to research Investment Trusts in detail as they aren’t usually difficult to value. But smaller ITs on AIM often have illiquid assets held on the balance sheet at cost and it doesn’t always reflect their true value. This can create huge opportunities for mis-pricing.
In anticipation of this new project I have created two new pages on the website, which list all the Investment Trusts on the LSE main market and AIM along with their Price/NAV ratios.
> Main Market <
> Alternative Investment Market (AIM) <
These pages can also be accessed through the Resources menu at the top in future. I will update them as regularly as possible.
I can already see a couple of ITs I hold in the list but am excited by some of the steep discounts apparent in others. I will be working my way down the list over the next few weeks/months, much like Wexboy did with Irish shares, and hope to find some great recommendations for my readers.