abrdn Diversified Income & Growth 21 March 2023
Disclaimer
This is a non-independent marketing communication commissioned by abrdn. 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.
After the date of this report, the company entered managed wind-down, following the approval by shareholders of proposals published on RNS here.
Aberdeen Diversified Income and Growth (LON:ADIG) owns a multi-asset portfolio which is designed to generate a dependable and consistent income as well as capital growth. Following a strategic review in Q4 2020, abrdn’s head of Private Market Solutions, Nalaka De Silva, took over as lead portfolio manager as private assets became the core focus of the investment strategy, and this currently makes up over 50% of the asset allocation, as discussed in Portfolio.
Tail-end effects of the pandemic, a shift in macroeconomic conditions, and elevated geopolitical tensions have meant Nalaka has maintained a more defensive stance in recent months. He has continued to rebalance out of riskier positions in the listed equities allocation into assets that can provide more sustainable cash flows and inflation protection. This includes a significant allocation to real assets and infrastructure, in addition to sources of income that are less correlated to the cyclicality of equity markets. Investing in funds as well as directly in assets helps maintain diversification and reduce concentration risks to leave ADIG less exposed to short-term market noise. Additionally, Nalaka has been building up cash in recent months to be able to take advantage of opportunities as they arise. This has all contributed to attractive risk/return characteristics in recent months (see Performance).
ADIG offers a high Dividend yield of over 6.7% on its share price. Despite this and the strong recent performance, ADIG continues to trade at a wide Discount, which at the time of writing is 26.3%. The board is no longer targeting a 5% discount, which increases the potential for discount volatility in future. It does however mean that Nalaka will have even more cash available to invest into new opportunities as they arise.
As the Portfolio reaches its long-term target private markets’ allocation, we believe ADIG can offer investors a valuable form of diversification through exposures to areas of the market not typically accessible to private investors. Given the trust’s high allocation to private markets, real assets, and infrastructure investments, we think ADIG is more likely to suit investors with a long-time horizon that will allow the investment cases to play out.
In the short term, the significant cash weighting Nalaka has built up should allow the team to act quickly should further opportunities present themselves. This cash could be put to work in pursuit of capital growth or indeed of income, building on the very high Dividend yield ADIG offers, which at 6.7% compares favourably to that available on equities. For example, the UK equity income sector’s average yield is just 4.5%.
We think the wide Discount of 26.3% reflects the fact that it has taken time for the new strategy to cement itself. This may provide investors with an opportune entry point if the portfolio can build up a good medium-term track record under the new strategy, building on what have been credible short-term results.
Bull
- Offers access to a deep pool of private assets through a manager with specialist knowledge
- Very attractive dividend yield backed up by revenue reserves if not fully covered
- Defensive strategy positioned to protect in a high inflationary environment
Bear
- Performance may lag during periods of equity market strength
- No discount control mechanism may lead to discount volatility
- High OCF compared to peers
Fund History
