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There are upwards of 30 investment companies littered across the small cap market and Aim that are screaming out for investor attention.

Many are led by seasoned investment managers, some have a relatively mature portfolio of small company holdings and more than a handful are trading below their stated net asset values. A couple (see table) are so out of favour with the market that they trade below net cash levels.

This effectively means that the market values their equity investments at less than nothing, and takes a dim view of the value of the real money sat in their bank accounts.

The three-year bear market, the parlous state of the economy and the unpopularity of the small company shares in which these vehicles invest partly explains this situation. But other more subjective influences are still in play.

For instance, a spread of small cap investment companies, especially those on Aim, started out as incubators, focusing on fledgling internet, biotech and other technology companies.

While the incubator concept is out of favour, few of the listed investment companies have been rewarded for building up attractive holdings in a spread of ventures.

Another interesting point surrounds those that have floated since 2000 with a pile of cash to invest. These vehicles have been, by and large, very circumspect in relation to what they will back (in retrospect a sound policy, as prices have plummeted). This brings benefits though, as valuations are much lower now, leaving those with cash the opportunity to invest at attractive levels.

The net result is that, although some of these companies are not suited to all investors, many represent compelling investment opportunities.

Cash-rich concerns

A classic example is Nicholas Barham's Arlington, a company that had £14.5 million of net cash in September last year but a market capitalisation of only £13.8 million.

On top of the cash, it also holds 14 per cent of Eckoh Technologies and nine per cent of XKO. Both are techMARK-listed and the combined stakes are worth nearly £5.5 million.

Considering that £2 million of extra cash has been generated since September from investment sales and corporation tax rebates, there is undoubted value in the group.

Private equity buy-out group Inflexion has spent a lot of the £36 million raised on admission in April 2000, but still has a net £12.7 million left, compared to a market value of only £8.8 million. Joint chief executive Simon Turner says that 'we have gone through a quiet period, but things are starting to happen,' speaking of 'quite good progress' in the company's moves to build up its fund management arm.

Inflexion's existing portfolio is dominated by technology investments, though amongst its more recent actions is the purchase of a large slug of Nectar Taverns, a private group established to create a chain of unbranded pubs. Inflexion's net asset value, even after a £10.7 million write-down, is well below its market value.

Ever opportunistic, Shore Capital Trading took a nine per cent holding in the group in September 2002. We would recommend following them.

Galileo Innovation, a vehicle headed by the somewhat odd pairing of Lord Lamont (the ex-Chancellor) and Paul 'The Plumber' Davidson, has fallen 81 per cent from its original placing price. It now trades at half of both its NAV and net cash value, having failed to secure a flotation for three of its investments by the end of 2002, as it had hoped. But the impression is that the float pipeline has been delayed, not derailed.

Riskier propositions

While many investment companies have moved into the lower-risk 'development capital' arena, one Aim-listed venture remains unashamed about its focus on start-up companies.

Springboard makes investments in early-stage companies with management teams that are experienced in their chosen areas. Its tone has remained resolutely upbeat, with several of its investee companies close to profitability after little in the way of capital injection. The discount to net assets is also very steep, so it could be worth watching.

AxiomLab is a not dissimilar venture, though it has a somewhat more august board, including US Senator George Mitchell, the Northern Ireland peacemaker. The company is valued at £5.2 million, well below its net cash level at the end of December, and even further below NAV. This discount may be warranted though, as many of its 13 investments in the tech arena are struggling.

Galahad's asset backing

Galahad Capital, chaired by Mark Slater (the son of renowned asset-stripper Jim), was set up with the express purpose of investing in companies trading at a discount to net cash and assets, of which there are plenty around. It has built up a 14 per cent stake in cash-rich software provider Patsystems, having previously profited on the sale of its stake in TEAMtalk Media, a failed football website venture. Its policy offers plenty of potential for realising value from such ventures.

Athelney Trust – fully invested

One investment company that is fully invested is Athelney Trust which has placed almost all of its (albeit limited) cash reserves into a wide range of equities, most of them listed on the main market or Aim.

Against the prevailing trend, its historic performance has been good, with net asset value holding up reasonably well amidst the market turmoil.

Chief executive Robin Boyle did admit that '2002 was a rough, tough year', pointing out that Aim fell 33 per cent and the Small Cap index shed 25 per cent.

But Boyle says that Athelney's strategy remains simple: 'we invest in smaller companies that have been overlooked by bigger investors, those that for some reason have not caught the eye.' Taking around one per cent of the company, the amounts invested tend to be small, and activity has been minimal since the interim results were released in September. Investors would do well to wait for the upcoming finals before taking a punt on this one.

Looking slightly more attractive is Joe Bloggs founder Shami Ahmed's Legendary Investments, a retail and biotech investor with holdings in Ofex star Legends Surf Shops, High Street stalwart Moss Bros, and fellow Aim investment group BioProjects International, amongst other punts. But on a premium to last stated net asset value, a lot of optimism is built in to the market valuation.

Speculative prospects

At the more speculative end of the market, one venture that stands out is Flintstone Technologies, a group set up to commercialise technologies, principally coming out of the old Soviet Union. It trades at a premium to NAV, even after sharp share price falls, but has flagged up the upcoming Aim flotation of investee companies Biocote and Hardide, a move that should boost its NAV.

Of the investment groups focused in the risk-intense mining sector, Golden Prospect has been making some positive noises lately. It is also in a prime part of the market with the gold price being so high.

Run by ex-Financial Times and Sunday Telegraph journalist Malcolm Burne, GP calls itself 'a hybrid of a mining company and investment fund'. It has built up a portfolio of principally Australian mining hopefuls, some of which are also now listed on Aim (amongst them Centamin Egypt, Jubilee Platinum and Mano River Resources). Burne explains that 'we're here for asset accretion, and we're not here to sit on a big pile of cash', thereby highlighting the important corporate role that the company plays.

Resources entrepreneur Bruce Rowan is still a presence on the mining scene too, running a couple of small investment vehicles. The inappropriately-named Web Shareshop has stakes in Aim's Hidefield and Southern African Resources and Ofex's Franconia Minerals.

Meanwhile, Tiger Resource Finance, the former Minmet investment spin-off, had eight investments at the last count, with a leaning to gold and Canadian companies. Its portfolio also includes Aim's Cluff Mining and disappointing Aussie AuIron Energy though.