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Not only are reputable institutional investors active on Aim, they actually hold one-third of all shares. Private investors should feel reassured. James Crux reports

Aim is easily the largest, most successful growth market in Europe. Indeed, apart from the Nasdaq in the United States, it's difficult to think of a more energetic, burgeoning market for early and growth-phase companies anywhere else in the world.

The secret of Aim's success is that it possesses the appropriate trading platform and the right regulatory environment for young ventures. Perhaps more importantly though, it puts its companies on the radar of institutional investors, the organisations that supply the life-blood of growth – hard cash.

This cash allows companies to expand organically, develop new products and/or make acquisitions – the kind of actions that will transform the business. This, as every private investor knows, is also the kind of activity that hoists small company shares ever higher.

What private investors – and those leading Aim companies – may not realise, however, is the extent of institutional involvement in Aim. The common perception in that there are only a limited number of dedicated funds on Aim, but this is not actually the case.

With the help of specialist mid- and small-cap broker Teather & Greenwood, Growth Company Investor has interrogated its comprehensive database of the shareholdings of all 702 Aim companies and discovered that institutions – dedicated Aim and SmallCap funds, venture capital trusts, pension funds, hedge funds, global organisations and bespoke investment funds – hold shares worth £4.46 billion (as at 15 August 2003). This means that institutions control around 35.2 per cent of the market in terms of value: more than one in three of every Aim share is held by an institution. Moreover, there are more than 900 institutions (as widely defined) active on the junior market.

Knowing which are the most active, how much they have invested and which areas they find most attractive is a very useful piece of investment knowledge.

The biggest investors – by number

In terms of the number of companies, ISIS Asset Management Group is the biggest investor in Aim (see table 1). It holds stakes of varying amounts in 73 companies worth £111.10 million through its array of investment funds, such as The Aim VCT, Baronsmead VCT and Active Capital Trust.

According to fund manager David Thorpe, ISIS – like many – adopts a case-by-case attitude to investing in the junior market. This has led to it holding stakes in a variety of sectors from cake maker Inter Link Foods to travel promotions business Landround.

Says Thorpe, 'we like service sectors like consumer, healthcare, media, IT and business services, and we like to invest over the medium term.'

Another feature of the ISIS approach, which, once again, it shares with almost all institutional investors, is the importance it places on management. In many cases, it's the quality of the management that sways the investment, rather than what is being produced.

ISIS also stays engaged with the company, as Thorpe comments: 'we want to have a good dialogue with the board on strategy, and we'll expect influence over the strategy.'

Other generalist fund managers such as AMVESCAP, Singer & Friedlander and Close Brothers also rank highly. AMVESCAP has a weighting towards engineering, mining and utility companies while Singer & Friedlander's eclectic mix of Aim possessions stretches from banking software play AFA Systems to garden centre operator Blooms of Bressingham. Close Brothers too has a wide and varied mix, although software and media companies feature prominently.

At number ten in Table 1 is Herald Investment, home of star fund manager Katie Potts. A preponderance of small software companies dominate the Herald Aim pot, although there is a sprinkling of media ventures.

The biggest investors – by value

Table 2 shows that the largest investor in terms of the value of its holdings is AMVESCAP Group. A large slug of that value pertains to utility company Northumbrian Water (which has since moved to the Full List of the London Stock Exchange). Other investments include accountancy practice play Numerica and telecommunications group Patientline.

Interestingly, the presence of fund management giants such as Fidelity, M&G and Schroder belies the myth that Aim vehicles cannot attract money from global players.

Just as intriguing though, is the presence of Artemis, not one of the biggest asset managers on the market but very much an influential player on Aim with 27 investments worth a total of £58 million. One of its main fund managers is John Dodd, whose UK Smaller Companies Fund is one of the best performing funds in its class over three years. Like many fund managers with a solid reputation, his presence on the shareholder register can often transform other investors' – and the markets' – perception of a business.

Sector focus

We have produced two different tables to show the sector breakdown of institutional holdings on Aim. Table 3 shows which particular sectors have attracted the most funds.

Mining dominates (and oil & gas is fifth), illustrating more than anything the capital requirements of companies in this sphere and the fact that Aim is home to so many small global players. Private investors who have backed many high-risk mining ventures should feel comforted by the extent of institutional activity.

After mining, real estate has attracted most cash, an indication perhaps that in the fragile financial climate of the past few years, institutions have sought to de-risk their portfolios by backing those companies with solid assets.

That said, the value of institutional investments in the support services field is nearly £0.5 billion while leisure (which includes those running pubs, clubs, hotels and health clubs) is another favoured destination for institutions with cash to invest.

Table 4 is perhaps more illuminating for investors who want a sector-based insight into the preferences of professional fund managers. It charts which sectors have the greatest number of individual institutional holdings.

Top of the pile is software, where 268 individual investments have been made by Aim's horde of institutional players. Companies in the media sphere are the next most popular management teams to be backed, having no less than 251 different funds pouring in their cash. With two other diverse sectors – support services and leisure – holding down top spots, the table once again underlines the fact that most fund managers take a company-specific view of Aim, and are not as risk averse as many would imagine.

A perfect example is Michael Cunningham from Rathbones, an operator of some of the most successful VCTs. Says Cunningham, 'I am not a prescriptive investor. [Those] who peruse this sector or that sector are restricting their choices. I rule nothing out and rule nothing in. Everything is judged on its own merits, not because the wider sector might currently be in vogue.'

Cash for development and expansion

The last two tables should provide a degree of reassurance to investors who have holdings in higher-risk businesses valued at less than £5 million (Table 5) and those with stakes in ventures valued at between £5 million and £10 million (Table 6). These are usually most in need of development and expansion capital, and the message seems to be that there are a lot of professional investors around willing to take on risk.

For instance, ISIS has holdings in 12 companies with a value of less than £5 million, the smallest of which is Advance Visual Communications, a struggling tech venture with a value of just £0.4 million (of course, given the vagaries of the market, the value is likely to have been much higher when ISIS invested).

Rathbones has 11 stakes in companies worth less than £5 million. Its least valuable holding is a £730,000 stake in Longmead, a financial services tiddler. Global behemoth Jupiter Asset Management is involved with seven companies worth less than £5 million.

In the £5-£10 million league, the usual suspects of ISIS, Singer & Friedlander, Artemis, Rathbones and Herald all predominate.

Unicorn Asset Management holds four stakes (and five in ventures below £5 million). This fund manager has an eclectic and opportunist approach to the Aim market, focusing on potential rather than size.

'Over the last 12 months we've focused on technology, which is a long-term growth area. We also like media, we're big buyers of recruiters, and we like the outsourcing theme in IT and healthcare,' says Unicorn's Sean O 'Flanagan.