Aberdeen Smaller Companies Income 25 September 2019
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Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by abrdn Smaller Companies Income. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Aberdeen Smaller Companies Income (ASCI) is one of the few small-cap trusts to offer a significant income to investors as well as the growth potential in small caps.
Following the merger of Standard Life and Aberdeen, the trust was taken over by the Standard Life Smaller Companies team in September 2018, since when Abby Glennie, one of the two UK Small Cap managers at Standard Life, has overhauled the approach, bringing it in line with the highly successful Standard Life UK Smaller Companies Trust, with an added income remit.
Over the past few months the team have sold their holdings in preference shares and increased their exposure to growth equities. This has helped performance, which has been strong relative to peers since the team took over. Over the period, starting September 2018, the trust has delivered NAV total returns of -1.2%, in comparison to the Numis SC Plus AIM Ex IT returns of -8.4% and the AIC and IA peer groups returns of -6.5% and -7.9%. This outperformance was partly due to the trust’s strong protection of capital during the correction late in 2018, but also due to the particularly strong rally between January and April.
The process centres around the proprietary screening system (aka The Matrix), developed within SLI prior to the merger. The Matrix helps the team decipher among companies in the universe, looking at multiple financial metrics to come to a final score. Particularly noteworthy is the reduced emphasis on valuation metrics relative to peers, as the team believe that these can be deceptive in the smaller company space.
Alongside capital appreciation, a key focus for the team is generating an income for investors, and the yield is 2.8%. The most recent full year dividend increased by 4.2% from the prior year, and was fully covered by reserves.
Because of the strong performance relative to peers, and continued attractive levels of income, the discount has narrowed over 2019. However, the trust is still on one of the wider discounts in the sector, currently sitting at 13.6%.
As we noted in our recent article 'Rethinking UK Equity Income', UK equity income trusts are highly concentrated in a few big names, which we think is a potential cause for concern for income-seeking investors. Just eight companies make up over the 50% of the yield of the FTSE 100, according to Bloomberg figures, many of which have quite uncertain futures. Although ASCI does yield less than many of the large cap equity income trusts, the yield of 2.8% is potentially interesting, particularly given the prospects for dividend growth, we believe. We think ASCI offers income seekers an attractive opportunity to get a diversifying source of dividends from a smaller companies portfolio with good growth potential.
Furthermore, the company has performed strongly relative to peers since the new team took over and, once sentiment towards markets settles, we believe the discount will narrow given the reputation of the SLI management team of which Abby is a part.
| bull | bear |
| Strong start relative to peers in performance terms and an outstanding long-term track record | At c. £65m in net assets, the trust will be too small for some wealth managers |
| A highly attractive discount | Sentiment towards the UK remains poor |
| The trust offers diversification to income-seekers, with relatively few small cap trusts offering a decent yield | The OCF is above average given the small size of the trust |
Fund History
