Financial Times: TMT boom behind step up to respectability: “But the recent history of some corporations - think Shell, Marks and Spencer and Hollinger - shows only how things should not be done.” (ShellNews.net)

By David Blackwell

Published: September 6 2004

Aim has proved so successful that it is now seen as an extension of the main market.

But it has not always been so respectable. Andrew Buchanan, of Close Beacon Investment Trust, reminds me that this newspaper illustrated an early report on Aim with a cartoon of a cowboy on a bucking bronco. You had to be a bit of a maverick to back it.

Mr Buchanan is celebrating his 10th anniversary as the fund manager of the Beacon Investment Trust. That makes the fund a year older than Aim itself, and it claims to have been one of the driving forces behind the creation of the junior market following the stock exchange's abolition of rule 4.2.

The fund was set up to invest in the successor markets to rule 4.2, including Ofex and Easdaq. But a look at the fund's top holding at the end of each year of its existence reflects the history of Aim.

In the beginning the top holding was Weetabix, the cereal company then listed on Ofex. But from 1996 all the top holdings have been listed on Aim. Dawson Holdings, the newspaper distribution group, was followed by Country Gardens, the garden centre company since taken over by Wyevale. At a time when many market professionals were doubtful that Aim would survive, the fund was investing in companies with a history, assets, good cash generation and often a dividend.

As the technology, media and telecommunications - or TMT - boom got under way, the top holding was in Zergo, the software encryption and security company that became Baltimore and briefly moved into the FTSE 100 in 2000. In 1999, it was NMT, which made syringes with retractable needles and was one of the surprisingly few Scottish companies to list on Aim. It was clever medical technology at the height of the Aids scare, but failed to take off.

JSB, the web filtering company now known as SurfControl, topped the bill in 2000, but in 2001 the end of the TMT boom saw a return to basics, with Enterprise, the facilities management group, as lead holding. For the next two years it was Auto Indemnity, which provides cars on credit to the innocent victims of road accidents.

But the largest holding at the end of June this year was International Greetings, the greetings card and wrapping paper company with a history, assets, cash generation and a dividend.

It can be argued that the TMT boom was the making of Aim because it forced the institutions to look at the companies flocking to join. Other junior markets wanted to join the party, but made the mistake of focusing on a narrow sector.

Easdaq and Germany's Neuer Markt did not survive, but the broad spread of companies on Aim gave investors somewhere to turn - and the institutions have not gone away.

Over 10 years the Beacon fund has returned 144 per cent compared with 89.5 per cent for the FTSE All-share index. Its accounts for the year to June

30 show that the number of profitable companies in the portfolio of 52 was 36, up from 26 previously, and they are expected to report average earnings growth of 40 per cent this year. The number paying a dividend rose from 23 to 31.

The statistics back Mr Buchanan's optimism about the outlook for the UK's small companies. The economy is still growing, he says, and most small companies do not carry enough debt to be worried by further increases in interest rates. He also expects the new issues market to tick up over the next three months, although the market's appetite will not be as strong as in spring.

Code guide

The directors of small companies should be able to look up to the big boys to see how corporate affairs are managed. But the recent history of some corporations - think Shell, Marks and Spencer and Hollinger - shows only how things should not be done.

The Quoted Companies Alliance, which represents smaller quoted companies, has produced a guide that simplifies the Combined Code and clarifies the slightly less demanding requirements for companies outside the FTSE 350. The main difference is that smaller companies need to have only two non-executive directors, instead of one for every executive, as recommended by Higgs for the top 350 companies.

But, as the QCA guide points out, that does not mean that there is any room for complacency on smaller boards, which need to pursue sound governance just as much as large companies.

The success of the "comply or explain" principle depends on intelligent engagement between companies and shareholders. Aim companies are exempt from the code, but the QCA suggests compliance would be a valuable aspiration . . . "and we would urge them to use the principles of the code as goals to be achieved".

The guide has the backing of the ABI and NAPF, and costs £25. A little more than 100 copies have been sold - can investors assume that the remaining 1,500 companies with a quote have got corporate governance sussed? david.blackwell@ft.com