This article first appeared in FT Adviser.
Despite recent stock market jitters, the underlying picture for many UK smaller companies remains very promising indeed. What’s more, this area of the market offers investors a great way to tap into growing markets all around the globe.
Over the last couple of decades, ambitious companies on the Alternative Investment Market (AIM) have become increasingly successful on the global stage. This has led to a reduction in the share of revenues generated in the UK, and increased exposure to global opportunities.
To give you a flavour, the largest 20 companies on AIM now generate less than 40% of their combined earnings from the UK. AIM’s biggest company, online clothing retailer ASOS, is typical of a smaller company that’s grown by expanding internationally. ASOS now generates more than 60% of its revenues outside the UK. Moving into other territories has helped ASOS go from being a minnow 15 years ago to AIM’s biggest company.
The good news for today’s investors is that it’s not just the bigger players on AIM who are enjoying success in overseas markets. Companies that are still in the early part of their growth story are also spreading their wings. We see this first-hand in the FP Octopus UK Micro Cap Growth Fund. Looking at the Fund’s top ten holdings, a fifth of their sales come from the US. Less than half are generated in the UK.
Today’s technology means small, UK-based companies can establish a global presence much more easily than used to be the case, and at a much earlier stage. An example from our portfolio is York-based Gear4Music. The company, which sells musical instruments and equipment online, has now opened major distribution hubs in both Sweden and Germany.
There’s also been a marked increase in smaller companies making cross-border acquisitions. Several companies in our own portfolio have expanded their international footprint this way. Keyword Studios, a services platform for the video games industry, acquired two businesses from US-based Volt Information Sciences in October.
In the same month, translation and intellectual property services company RWS announced its acquisition of Czech translation services provider Moravia. Whilst in March last year Midwich, which provides services to the audio-visual industry, bought Spain’s Earpro, and more recently in September acquired a majority stake in Van Domborg in the Netherlands marking the group’s entry into the Benelux.
All these deals happened within the last twelve months. They will help UK shareholders benefit from growth in markets well beyond the UK’s shores.
The idea that the UK smaller companies sector is dominated by UK-focused companies is now very outdated. Perhaps that was the case 20 years ago. Today, though, the sector is far less reliant on the UK economy than it used to be.
For AIM investors, this is great news. It means they can invest in companies with huge growth potential, listed in London, without it having to be a bet on the broader fortunes of UK plc.
For journalists in their professional capacity only. The value of an investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest. The shares of the smaller companies we invest in could fall or rise in value more than shares listed on the main market of the London Stock Exchange. They may also be harder to sell. Personal opinions may change and should not be seen as advice or a recommendation. We do not offer investment or tax advice. Investors should read the product brochure before deciding to invest. This is available at octopusinvestments.com. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. We may record telephone calls to help improve our customer service. Issued: February 2018.
