Star UK stock picker James Baker believes Alternative Investment Market stocks now represent 'compelling value' after last week's sell-off sent the UK's junior market, and his fund, tumbling.
Baker's £296 million Chelverton UK Equity Growth fund has more than doubled investors' money over four years, rising 105% since launch in October 2014, the best return of any fund in the UK All Companies sector.
But that return includes an 8% slide so far this month, as a number of AIM stocks suffered heavy falls.
'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,' said Baker in his latest update to investors.
'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.'
Baker suggested the strength of the sell-off in the AIM market had been 'exacerbated by concerns about potential changes to inheritance tax in the forthcoming budget'.
The government’s Office of Tax Simplification is currently reviewing the complexity of inheritance tax rules that could result in stocks listed on AIM losing their inheritance tax exemption.
Currently, some AIM shares benefit from ‘business property tax relief’ that means they are inheritance tax free if they are held for at least two years and at death.
Some experts, including the Association of Accounting Technicians, have called for the exemption from inheritance tax to be scrapped as business property relief was originally introduced in 1976 to allow family businesses to be passed on in death without the need to sell assets to pay tax charged.
The outcome of the review was due pre-Budget but the OTS is now expected to feed its plans into the Budget on 29 October.
Among the worst hit AIM stocks last week were some of the 'darlings' of the market that have gained a strong following from fund managers due to their prospects of strong growth, like Keywords Studios (KWS), Blue Prism (PRSMB), Fever-Tree (FEVR) and Burford Capital (BURF).
Baker acknowledged the potential vulnerabilities for 'very highly valued momentum stock' on AIM index, and said he had been acting to keep the valuation of the funds' stocks in check by 'selling down the most highly rated stocks and finding more attractively priced alernatives'.
This process has extended beyond just AIM stocks, with the manager selling FTSE 250 stock Games Workshop (GAW), previously the fund's largest holding and a top performer, with the shares up 360% since the start of 2017.
Alongside that sale, the manager last month reduced his holdings in intellectual property business RWS (RWS), compliance software firm Ideagen (IDEA), Tatton Asset Management (TAM), and Iomart (IOM), which specialises in cloud computing.
Baker added to 'several of our more lowly-rated' stocks, and bought back into three companies the fund had previously held, after the shares derated.
‘The overall effect… has meant that even before the correction the fund was trading towards the bottom end of the average forward price/earnings ratio valuation it has traded on since launch,’ said Baker.
‘The subsequent sell-off, particularly in AIM stocks, means that the valuation is now at its lowest since launch.’