Recent stock market volatility has been a reminder of the periodic price swings that come with owning equities. But so far it hasn’t been all bad. Look beyond index price charts and you’ll find that even at the traditionally sensitive small-cap end of the market, some stock prices have held up well. Often they were the higher quality, strong momentum stocks that are associated with the market’s best known growth investors.
Putting volatility into perspective
There has been a lively debate over the past week about how investors should interpret the recent bout of market volatility. In one exchange, a journalist suggested that investors should “stay alert after the mini-crash”. But that was batted away by a fund manager who said a decline of -9.7% on the S&P 500 was “hardly a ‘mini-crash’." In fact, the investor (James O’Shaughnessy) argued that the real anomaly was the relentless, low volatility uptrend in U.S. markets last year. He said what we’d just witnessed was really just “par for the course”.
To be fair, UK markets didn’t give us quite the same sort of smooth, decent double-digit gains as the S&P 500 and Nasdaq last year. But one exception was the 25 percent return from the Alternative Investment Market. The smaller company growth market had an excellent run in 2017, helped by some big gains from some of its biggest companies.
This was great news, of course, for investors wanting to take advantage of AIM’s attractive tax status. Not only can most of its smaller, high growth companies be added to ISAs, but most (not all) can be passed on free of inheritance tax, subject to certain rules.
The downside of all this is that AIM companies have often tended to be sold-off quite aggressively in a downturn. That’s why small-cap investing generally comes with a warning to ensure adequate diversification. Since the start of February, the index has fallen by a modest 4.5 percent overall - but many stocks have actually held up well. So what were they?
Small-cap growth strategies
There are numerous investment strategies that have proven to be effective in a small-cap market like AIM. Stockopedia’s Paul Scott and Graham Neary have shown just how profitable the market can be. Other high profile small cap investors and fund managers over the years include the likes of Mark Slater (and his late father, Jim), Gervais Williams,…
