The impact of Brexit on UK smaller companies has not been as big as first feared with a number of opportunities being found in the more internationally-focused technology sector, according to veteran fund manager Paul Mumford.
Mumford, who launched the £65.7m four FE Crown-rated TM Cavendish AIM fund in 2005, said smaller companies have held up well in the aftermath of last year’s Brexit vote.
Indeed, the FTSE AIM All Share has outperformed the FTSE All Share index during 2017, returning 19.57 per cent compared with a 6.45 per cent gain for the large cap-dominated index.
Performance of indices YTD
Source: FE Analytics
Mumford said: “I think the main thing really is that we have got a lot stability here. I think Brexit has pushed the level of sterling down and made it more competitive overseas.
“Interest rates are still at quite a low level and will remain there for some time.”
Yet, risks still remain for investors at the small end of the market capitalisation scale.
“One big problem with smaller stocks and AIM stocks in particular has been at times of financial crisis because that is the time when banks pull the plug [on financing] and aren’t prepared to finance companies,” he said.
“Larger companies pull through whereas [with the] smaller ones the banks can allow go to bust because it’s not a material thing for them.”
Mumford added: “We have got this background but I think investors’ confidence has increased in the AIM market, particularly because the quality of AIM has improved quite a bit.
“There are far fewer of the them [AIM stocks] than at their peak of the market and the ones that are around are the ones that have survived.”
Mumford said the stocks that have survived have been picked up on by investors are now on institutions’ “radar screens”.
One particular area of the AIM market that Mumford is bullish about is the technology sector where he has seen an increasing number of opportunities.
“As far as technology area is concerned, obviously that is an area where you will get quite a lot of decent growth,” he said.
The fund’s top holding – representing 3.7 per cent of the portfolio – is technology firm IQE, the UK-headquartered semiconductor company which is a supplier to Apple for its upcoming iPhone X.
Another favourite is payment services provider Bango, a 2.8 per cent holding. Mumford (pictured) said the firm has attracted a number of big name clients and is starting to see that translate into solid profits. 
Also among the fund’s top 10 holdings is an international technical services provider to the video games industry.
Despite being bullish on the prospects for UK tech companies, Mumford said there are some stocks that he avoids.
“I have tended to avoid the ‘blue sky’ areas because I tend to find they have got hold of technology but not proven you can sell it,” he said.
However, he said while some ‘tenbaggers’ – stocks with the potential to grow to 10 times their purchase price – can be found in that area, he has to be careful to avoid “the ones that go belly up”.
While the sector represents 21.5 per cent of the fund’s holdings, Mumford said actual exposure to technology-related stocks is likely to be higher.
Mumford said there are a number of companies that don’t particularly fit into the categorisation, such as international advertising agency M&C Saatchi, where online advertising has become much more important.
Generally, the manager said the stock picking environment in the AIM space has improved after a period of concern over domestic-focused small companies following the referendum to exit the EU.
He said the AIM index has been home to several recent success stories such as online fashion retailer ASOS and Majestic Wines, which represent a “fair proportion” of the FTSE AIM All Share index.
“They are highly rated. The reason is that large funds are looking larger companies… [is because they are] relatively limited and therefore prices do get pushed out,” he said.
“If you go further down the market cap scale there are somewhat attractively rated shares.”
While the index has risen strongly over the past year, however, it is by no means overpriced, said Mumford.
“When I started the fund in 2005, I think the index was approaching 1,100 and now it’s just over 1,000,” he explained. “It’s gone backwards since 2005.”
He added: “The underlying climate for companies is there because of the situation in the UK: a reasonably strong economy low interest rates and banks being prepared to back.
“If the economy were to go in to a sharp reversal we would probably find more companies fall off because they are not being backed by financial institutions.”
However, Mumford said the outlook for the smaller end of the market cap spectrum remains positive.
“I feel that it’s quite an exciting time, really,” he said. “You don’t always get that sort of feeling.
“When the AIM was a less mature market, nobody wanted to buy AIM stock. But now with so many funds coming along and position building, it’s much different.”
Mumford’s TM Cavendish AIM fund is a top performer over several periods and has performed strongly against its sector peers, many of whom are focused at the higher end of the small-cap space.
The fund is top quartile over three years returning 66.17 per cent compared with a 47.54 per cent gain for the average IA UK Smaller Companies sector fund.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 0.85 per cent.
Mumford also manages the TM Cavendish Opportunities and TM Cavendish UK Select funds, which have risen by 30.87 per cent and 14.7 per cent respectively over three years.