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Small is bountiful

I have often wondered why large-capitalisation stocks form the bulk of many a private individual’s portfolio and are what my mother means when she asks me: “What has the stockmarket done today?”

It would never do to disappoint my mother but the truth is that I do not follow large-capitalisation stocks in detail. The other end of the scale is better for wealth creation.

Look at the tax benefits available and you too might wonder why big companies are deemed a good thing. Should it not be the case that large stocks make up a proportion of a private individual’s portfolio while smaller companies make up the majority?

An IFA who telephoned me at home recently was sure that I had an inheritance tax problem which could be solved by investing in bonds and large-capital- isation stocks. I was deemed mad, I suspect, by respond- ing that I would solve the problem by investing in shares on the Alternative Investment Market.

The role of small company investment needs rethink- ing. In a low-interest-rate, low- inflation and possibly low-growth environment, investors should be seeking exceptions. With individuals having to take on more responsibility for their own retirement planning, shouldn’t small companies form the basis of their portfolio during their working years?

The Chancellor recognises the wealth creation that small companies can provide over the longer term and, via the enterprise investment scheme, has engineered an opportunity for individuals to become “business angels” and defer the payment of any tax on their gains.

Rather than invest in single companies, individual can also use venture capital trusts to buy into a portfolio of small companies, with the benefits of diversification and participation in the new issue market, which has become much more difficult in recent years.

Small companies are, of course, conventionally classified as risky. Yet when Marconi failed, or Enron or Railtrack, the damage to private savings, even via institutional funds, was substantial. It has been estimated that Marconi’s collapse cost that company’s small investors the equivalent of the smallest 1,200 or so quoted companies going bust simultaneously.

Interestingly, there are now over 1,200 companies traded on Aim, yet surprisingly few of its companies have gone bust. In fact, the industrial diversity of Aim means that a well chosen portfolio might be suitable for any investor.

Many small Aim comp- anies represent good long- term investment value. Specialists in Aim poten- tially find growth comp- anies early. Examples include Furlong Homes, until it was acquired and reappeared as Telford Homes, Mears, AI Claims Solutions, MacLellan and others sold successfully from our portfolios such as Minorplanet, Infobank, Range Cooker and Genus.

If, as I believe, Aim is where young companies grow up and develop, then, as A-Day approaches, there should be growing awareness of the virtues of small companies, of their potential capital growth and of the good they do the UK economy – as well as anyone’s pension arrangements.

The oft-quoted research by Dimson, Marsh and Staunton remains valid for longer-term investors. They concluded that 1 invested in the UK equity market in 1955 would have grown, with reinvested dividends, to a nominal value of 592 at the start of 2000.

In small-cap stocks, such an investment would have grown to 1,676.

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