The New Frontier for Small-Caps

The U.K.'s AIM steals the show from New York, and a mutual fund gets in on the act.
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No stock market anywhere is more controversial than London's AIM.

Bulgarian property trusts. West African uranium prospectors. Chinese orange growers. Ventures to put Bangladeshi TV online. Everyone with a tale, it seems, is coming to London to raise money on the AlternativeInvestment Market. The light regulations make it a home for smaller and more speculative companies.

And so it has its critics -- powerful ones, speaking in rising volume.


Securities & Exchange Commissioner

Roel Campos slammed AIM late last week as "a casino" where many listed companies "can't even meet the standards of our over-the-counter or pink sheet situations." That follows similar remarks in Davos, Switzerland, recently by

New York Stock Exchange

Chief Executive John Thain, who said that AIM's easy regulations were threatening the financial reputation of London itself. Other critics note that over half the companies that have gone public on AIM in the last three years have lost value.


Maybe these Wall Street honchos really are concerned for the well-being of the Europeans who invest in AIM-listed companies. Or maybe they're worried because AIM is taking a lot of business from New York.

Hmmm. What do you think?

While the Sarbanes-Oxley corporate governance reforms have closed U.S. public markets to a lot of small company stocks worldwide, AIM's lighter touch has drawn them in. And, of course, it's been a huge boon to London -- and also to a mutual fund that seeks to play on AIM's success.

For the inside track on the market, I talked to Guy Feld, a London investment pro I have known for nearly a decade. Feld works for Hargreave Hale, a British investment firm that dates back to 1896, andspecializes in AIM stocks and smaller companies.

Among his roles, he is co-manager of $300 million

Marlborough Special Situations

mutual fund and the newer $100 million

Marlborough U.K. Micro Cap Growth


"AIM is now the de facto market for small companies," Feld says. "It's stolen the show from New York. Sarbanes-Oxley has killed off the junior market in the U.S." He adds: "Yes, there's plenty of dross on AIM, and it's quite possible to lose a lot of money. That's why we run a diversified portfolio. We're paid to use our skills to pick the wheat from the chaff -- and there's plenty of wheat."

Examples? Feld cites

Manpower Software

, which helps big organizations track and manage personnel. Customers include Britain's Territorial Army -- the equivalent of the National Guard -- and a small but growing number of hospitals and health authorities. The shares have rocketed 400% since Feld's fund began buying them three years ago.

Then there's


, which helps manufacturers tag and track their products in the growing battle against counterfeiting. The shares have doubled in a year. Web content manager Mediasurface has also more than doubled since going public in the fall of 2004. And Hong Kong-based biometrics company RC Group, whose software can unlock your computer when the camera recognizes your face, has seen its share price treble in a year.

The bottom line? The Marlborough U.K. Micro Cap Growth fund, which is almost entirely AIM-focused, has nearly doubled its investors' money since its launch in 2004.

This is what risk capital means: No risk, no reward. A market where share prices routinely treble or collapse in the space of a year is one where you need to be on your toes. But that's the only way ordinary investors can get access to potentially high-flying stocks.

The market doesn't just help the British economy by generating business in the financial district, either, Feld says. "The other thing AIM has done is that it has proven to be a very effective source of risk capital for people who are creating jobs," he notes. Many of the listed companies are British. "And I think the share prices that have been destroyed have been destroyed correctly. The market has reallocated capital to more-productive companies."

That's what we used to call capitalism.

In keeping with TSC's editorial policy, Brett Arends doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Arends takes a critical look inside mutual funds and the personal finance industry in a twice-weekly column that ranges from investment advice for the general reader to the industry's latest scoop. Prior to joining in 2006, he worked for more than two years at the Boston Herald, where he revived the paper's well-known 'On State Street' finance column and was part of a team that won two SABEW awards in 2005. He had previously written for the Daily Telegraph and Daily Mail newspapers in London, the magazine Private Eye, and for Global Agenda, the official magazine of the World Economic Summit in Davos, Switzerland. Arends has also written a book on sports 'futures' betting.