The likes of ASOS, Gulf Keystone Petroleum and Quindell are success stories that have gathered a lot of press and retail interest, which has propelled them to the top of the AIM 50.
However, Mumford says that the stocks don’t display the characteristics that he looks for in this part of the market and that there are better options further down the index.
“My hope is that in a year’s time, the top-five will be very different,” he said.
“Some of them could go for a full listing and some other companies will come on to the market, and some of the smaller companies will do well and grow.”
Mumford says that the removal of stamp duty on AIM shares in April could be very significant in attracting companies to the market from the main part of the FTSE.
This will make it even cheaper for companies to operate on AIM, which already offers a much more cost-effective method for them to take part in mergers and acquisitions.
ASOS
The largest stock on AIM is ASOS, with a market cap of £5.8bn. The stock exemplifies what retail investors hope to find in an AIM stock, having made original shareholders more than 61 times their money over the past decade, and even more since flotation.
Performance of stock vs indices over 10yrs
Source: FE Analytics
ASOS sells fashion lines online, both its own and those of high street rivals.
It started out copying the fashions of companies such as Top Shop and River Island. Mumford says that when he first spoke to the company he went back to River Island, a company he held elsewhere, and asked if it should be suing ASOS.
Mumford took out a position in the stock, but admits that he sold too early, worried about the valuation.
He got in on 30 times earnings, but the stock is now trading on a hefty 102 times earnings, with investors taking a bet on the company being able to repeat its success overseas.
Mumford says at these levels he is steering clear of the company.
“The reason they have been strong is the spectacular results they have been getting, but I wouldn’t have been buying at the current levels,” he said.
Tomorrow will see the IPO of boohoo.com, which will attempt to repeat the success of ASOS.
The company is valued at £560m for the offering, and the founding family owns 44 per cent of the stock.
Mumford says it is unlikely to do as well.
“It hasn’t got the same fashion offering that ASOS has got,” he said.
“Asking the girls in the office, a lot of them said it wasn’t really their cup of tea and ASOS has a better offering.”
“Having said that, it is priced on a very forward-looking rating and I’m sure it will do well on launch, but I prefer to take a longer-term view.”
One of the strong points of ASOS is that it sells other lines as well as its own.
Quindell
Quindell has a market cap of £2.1bn, making it the second-largest stock on AIM.
It is a software, consulting and outsourcing company that is popular among UK small cap managers.
It makes up 4.8 per cent of Gervais Williams' CF Miton UK Smaller Companies fund, and 4.3 per cent of Investec UK Smaller Companies. Eight other funds hold it in their top 10.
The company is another that has enjoyed recent stratospheric growth, rising 1,236.36 per cent since flotation in May 2011, according to FE Analytics data.
Performance of stock vs index since flotation
Source: FE Analytics
This is part of the problem, Mumford says, explaining that he doesn’t see enough growth left in it to justify him taking a position.
“When you are on the AIM index, you are looking for five or 10 baggers [stocks which grow by five or 10 times],” he said.
“This is harder for the bigger companies to do.”
“Smaller companies are more nimble and able to grow their profits and earnings.”
Other market participants are more bullish on the stock, however. Analysts from Cannacord Genuity have a buy-rating on the company, with a price target of 87p, representing more than 100 per cent upside to the current 38p price.
Quindell reported today that trading in the first quarter of 2014 was ahead of expectations, and it has gathered £350m in new business since the turn of the year.
Shares remain 13.5 per cent down from their peak in February, however.
Songbird Estates
Mumford says that he is sceptical about property companies listed on AIM and has always found better opportunities elsewhere.
Songbird Estates has yet to fully recover from the 2007 financial crisis, during which it lost more than 99 per cent of its value.
Performance of stock vs index over 7yrs
Source: FE Analytics
Share price performance has been much better of late, however, with the stock up 37.2 per cent over one year as property investment has come back into fashion.
Songbird Estates operates the Canary Wharf Group, which manages the property on the Wharf.
With both the financial services and property sectors doing well, investors may be tempted back in. It is trading on a P/E ratio of 132.3 times.
Gulf Keystone Petroleum
Gulf Keystone Petroleum owns oil-producing assets in the Kurdistan area of Iraq. Its market cap of £1.382bn makes it the fourth-largest stock on AIM.
Energy XXI, which focuses on the Gulf of Mexico shelf, is the fifth largest at £1.316bn.
The company receives a lot of press attention, not least because of its controversial chief executive Todd Kozel.
Oil and gas specialist John Dodd at Artemis told FE Trustnet last year that he was steering clear of the stock because of his distrust of Kozel, whose compensation packages have come into question in a period in which the stock has struggled.
Performance of stock vs indices over 3yrs
Source: FE Analytics
Mumford says that he focuses on the North Sea for oil and gas companies.
The danger of operating in areas such as Kurdistan makes it an extra risk he doesn’t like taking. The manager did buy into Gulf Sands Petroleum, which operates in Syria, and notes that he has been suffering thanks to the recent unrest there.
Gulf Keystone Petroleum is a loss-making company and so has no P/E ratio.
Monitise
The sixth-largest stock on AIM is £1.3bn Monitise, and this is one Mumford thinks is worth holding, even though it has also failed to turn a profit yet.
Monitise works in the area of mobile payments, providing companies with methods of receiving and transmitting revenues electronically.
Mumford bought it at 8p and it is now at 73p, meaning he has made a significant profit.
The stock is up 235.23 per cent over three years, according to our data.
Performance of stock vs indices over 3yrs
Source: FE Analytics
“I have held this one since it was spun out of Morse in the early days,” Mumford said.
“It was uncomfortable at the start because it was a loss-making company and I wasn’t sure where the mobile payment area was going to go.”
One negative, Mumford says, is that the company keeps on raising money, diluting shareholder positions.
However, he expects it to reveal profits in the near future and says it is well set for global expansion, having recently tied up with Visa.
The stock is planning to go on to the main market, according to the company’s management.
“In the UK it is profitable and it’s one that is quite attractive still,” Mumford said.
He notes that the AIM market has a very large American following, and US investors are more willing to buy stocks on higher valuations.
