AIM original reveals secret of success

Investment company Athelney Trust doesn't have a high profile but its record is far better than more well-known investment companies on the London market. It was one of the first 10 companies to join AIM back in June 1995 and, although it has moved to the Main Market since to enjoy the tax benefits of being a fully-listed investment company, it is the only one of the original 10 still quoted.

Robin Boyle has been managing Athelney since it was launched and he has managed to substantially outperform AIM and other smaller and larger company benchmarks during this time. One of the key reasons behind his success is that he "does not buy fashionable stuff". Instead, he seeks out lowly rated and unloved companies which have strong fundamentals and normally a good yield.

One of the problems with AIM has been that it has enjoyed short-term gains in fashionable sectors, such as technology and mining, but this has enabled lower quality companies to ride on the back of these waves and drag down the market when the bubble bursts. Many smaller company funds are chasing the next big thing rather than identifying solid businesses that can grow steadily.

Fundamentals important post-Brexit

The aftermath of the EU referendum has caused uncertainty and good old fashioned fundamentals are important in this kind of market. Boyle was negative about the referendum result saying in his June commentary on Athelney that it "was a disaster in both political and economic terms" but this will not stop him seeking out the opportunities that will arise from the fall out.

Athelney initially raised money at 50p a share in July 1994 and the shares were traded on rule 4.2, the then London Stock Exchange rule that enabled matched bargains trading in the shares of companies that did not have a full stockmarket quotation, before moving to AIM.

"I still have a lot of shareholders that came in on day one at 50p," Boyle says proudly.

Dividend growth for 13 years

Athelney is focused on growth companies with a market capitalisation of less than £300 million, but it also seeks to invest in companies that have solid balance sheets and pay dividends.

Boyle doesn't like having much cash, preferring to invest as quickly as is practicalThis income has enabled Athelney to pay dividends to its own shareholders. Since launch, 67.2p a share has been paid out in dividends so the original investors have got more than their initial investment back in dividends, while also enjoying impressive asset growth. That dividend has grown for 13 years in a row.

Since moving to the Main Market on 24 September 2008, Athelney has increased its net asset value (NAV) from 135.8p a share to 216.5p a share at the end of June 2016. The NAV was higher earlier in the year and, in April 2016, Athelney raised £407,000 (£390,000 net) at 233.2p a share.

Using cash wisely

Boyle had invested this cash prior to the result of the EU referendum. He does not like to have large amounts of cash on the balance sheet, preferring to invest as quickly as practical because he says that it is his job to find suitable investments so that the cash can start earning a return for shareholders.

No investment company is going to outperform by copying the market's sector allocations.He has put the cash to work from the launch of the company. Athelney started off with net assets of just under £1 million and it remains tiny compared to other fully listed investment companies with net assets of £4.67 million at the end of June 2016 - that was after the recent fundraising.

There are 80 companies in the portfolio and one-fifth of the assets are invested in companies quoted on AIM, although some investments, such as online gaming firm GVC, were in the portfolio when they were on AIM but have moved to the Main Market.

The record of NAV growth is impressive but any investment company is susceptible to the vagaries of the general market and particular sectors. No investment company is going to outperform by following the exact sector allocations of the market as a whole but sometimes the overweight sectors do not perform well for a period of time.

The NAV fell by 6% in June, mainly down to the significant investment in property-related businesses. Short-term selling by investors trying to liquidate investments put pressure on the share prices of many property businesses, but the underlying value remains the same.

Property focus

More than one-quarter of the portfolio is invested in commercial and residential property-related investment companies or businesses. The main focus is on companies that are predominantly invested outside of London in provincial markets where there is much greater value and higher yields on property purchases.

Boyle expects rate cuts and QE will make investors desperate for incomeHigher stamp duty is a negative for these companies and the 'leave' vote in the EU referendum led to selling by some investors and share prices slumped.

Picton Property Income is one of the largest holdings in the portfolio and it provides a good example of what has happened to these property investment companies in the past few weeks. At one point the share price fell to 57.5p, but this did not last long and it has recovered to 68.75p.

Picton invests in a combination of industrial, office and retail property. Industrial has been the focus of more recent investment and it is underweight in retail. Tenants are predominantly small businesses.

The NAV at the end of June 2016 was 77.4p a share, with occupancy rates for the properties of 96%. A debt refinancing should reduce interest costs and there are plenty of undrawn facilities that can be invested in opportunities brought up by the current conditions. The current dividend yield is 4.9%. Dividends are paid quarterly.

Lower for longer

Retail warehouses is a part of the property market liked by Robin Boyle. The fund manager believes that supermarkets will try to reduce costs by cutting the amount of warehouse space at the back of their stores and instead have 24 hour deliveries from regional warehouses. He is invested in Tritax Big Box and LondonMetric.

Boyle expects another dose of quantitative easing and a potential reduction in interest rates to zero will make many investors "more desperate in their search for income". These property investments will provide this income as will a number of other shares.

July was a much better month for Athelney; the NAV has recovered over 7%Speciality insurance firm Lancashire specialises in property, marine, aviation and energy sectors, as well as having a large Lloyd's-related business. Lancashire yields more than 8%.

The interim dividend was maintained even though pre-tax profit slipped from $37.1 million (£28.3 million) to $30.1 million. This is because the underwriting cycle is on a downward trajectory, and Lancashire's business areas are coming under pricing pressure, but it should be nearing the bottom.

The earnings and cash position are strong enough to maintain an annual dividend of around 65 cents a share even though profit is expected to decline over the next couple of years. There should be scope for dividend growth once the upturn in the underwriting cycle occurs.

Opportunities in uncertainty

Boyle believes that the uncertain markets will provide plenty of opportunities for interdealer broker Tullett Prebon. Volatility will be good news for the business because it will encourage trading. The prospective multiple is around 10 and the forecast yield is more than 5%.

This is an example of a company that is larger than the normal market cap limit of £300 million but Boyle believes larger companies can provide strong value in current markets.

There cannot be many more unloved businesses than newspaper publisher Trinity Mirror but Boyle believes in its underlying attractions. He admits that it has not paid off as yet because the share price continues to decline. A £10 million share buy-back has started and the yield is nearly 7%, but the earnings multiple is little more than two.

July has been a much better month for Athelney and the NAV has recovered by more than 7% so that it is back to around the placing price. The shares are attractive but liquidity is limited and there is a wide bid/offer spread of 170p/220p means that the underlying discount to NAV is not as great as the mid-price would suggest.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.