Aberdeen Smaller Companies Income Trust (ASCI) offers investors a chance to access the growth potential of UK smaller companies, whilst enjoying a diversified source of income.
After Aberdeen Asset Management and Standard Life merged, the trust was overhauled by the former Standard Life UK smaller companies team in 2018. Abby Glennie took over the portfolio, incorporating the proprietary screening system (known as the Matrix) developed within Standard Life Investments prior to the merger.
As Abby only took over the portfolio in September 2018, it is still premature to fairly judge performance. However, the early signs are promising, and the process is based on the approach tried and tested over the long term by Standard Life Smaller Companies Trust (SLS). SLS is run by the renowned manager Harry Nimmo, who also supports Abby with the portfolio. Alongside capital growth, a key focus for the ASCI team is generating an income for investors, and the yield is currently 3.9%. The most recent full-year dividend was increased by 12.2% from the prior year, and was fully covered by reserves.
The discount narrowed over 2019, likely due to the strong performance relative to peers and continued attractive levels of income. However, the coronavirus pandemic has seen the discount slip to 25.2%.
The new team has brought a breath of fresh air to the trust (which was previously part of the Aberdeen stable) since taking over in 2018. We think the distinctive approach, using proprietary screens, allows Abby to be objective and have fewer external biases or influences impacting her investment decisions. The move to focussing on higher-quality companies could also benefit investors during the difficult environment caused by the coronavirus. Although to long-term investors of ASCI this is a totally new approach, it has been tried and tested on Harry Nimmo’s Standard Life Smaller Companies Trust (SLS).
Although similar in process, ASCI is different to SLS and the broader UK smaller companies sector in several ways. Firstly, with net assets of £60m the trust is considerably smaller than SLS (£467m) and the sector average (£257m), which allows the manager to be very nimble. Another key difference is ASCI’s focus on income. Currently the trust yields 3.9% on a historical basis, in comparison to a dividend yield of 2.6% for SLS and 3.8% for the broader sector.
2019 saw the discount narrow considerably as performance improved, although this has since reversed with concerns surrounding coronavirus and the associated economic slowdown. We think once the dust has settled, if the improvement in performance continues it should over the long term lead to a discount narrower than peers’. Despite the economic picture being exceptionally cloudy, the discount to NAV potentially offers an attractive entry point.
|Utilises the same approach as SLS, an approach which has an excellent track record for capital appreciation||At c. £65m in net assets, the trust will be too small for some wealth managers|
|Strong dividend growth and an attractive yield relative to peers||The OCF is above average, a result of the small size of the trust|
|A diversified income stream relative to other equity-income vehicles||The 7% gearing increases risks|