Aberdeen Smaller Companies Income

ASCI has outperformed over the current managers’ tenure…

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Aberdeen Smaller Companies Income

Aberdeen Smaller Companies Income (ASCI) trust aims to provide a high and growing dividend as well as capital growth by investing in UK small- and mid-caps. Managed by Abby Glennie and Amanda Yeaman, who draw on the resources of the wider Aberdeen Standard Investments’ (ASI) UK equity team, ASCI’s portfolio is comprised of companies which the managers believe are compelling long-term growth stories exhibiting operational momentum.

As discussed under Portfolio, ASCI is constructed utilising a mixture of quantitative and qualitative inputs. Abby and Amanda note that recent reporting updates from their holdings show increasingly optimistic signs, with companies beating expectations and upgrading their earnings outlooks.

The team also note the extensive ESG input to the investment process is helping them identify where growth opportunities are sustainable, and which areas are experiencing operational momentum. To further aid in this research, they have added an on-desk ESG analyst to the team over the past 12 months.

Abby and Amanda report that all constituent companies are now paying a dividend, despite the challenges that the uncertain macroeconomic backdrop of 2020 posed for revenue generation. ASCI currently has an historic yield of c. 2.4% (as at 07/06/2021); as discussed under Dividend, this is notably higher than the average from the AIC UK small-cap sector.

The dividend yield received by new shareholders at present is further boosted by the trust trading at a Discount of c. 12.8%, substantially wider than that seen across the sector as a whole. As we discuss under Performance, this is despite ASCI outperforming over Abby’s tenure (with NAV total returns of c. 35.8% against a sector average of c. 25.3%).

Kepler View

ASCI’s wide discount continues to look like a potential opportunity to us, and for this reason we continue to include ASCI in our Discounted Opportunities Portfolio. If the trust can resume the outperformance seen over the current management team’s tenure (and we think the pick-up in performance from the most recent reporting season offers encouragement in this regard), then we believe the market may well re-evaluate this trust and this could potentially drive a further boost to returns from discount narrowing.

Retaining substantial revenue reserves, ASCI’s dividend looks to us well placed to ride out any continued challenges to revenue generation from the uncertain macroeconomic backdrop. However, with all constituent companies now paying a dividend and the managers reporting strong operational updates from numerous holdings, we think this may in any event prove unnecessary. For income investors, whilst a headline historic yield of 2.4% may hold relatively limited attractions in an absolute sense, the relative yield premium to the small-cap sector and the potential to grow this further may change perceptions (as well as small- and mid-caps often having endogenous drivers of growth, and thus potentially offering diversification of revenue generation in a balanced portfolio). Although the dividend in FY 2020 was marginally lower, this cut seems to have been undertaken to ensure greater certainty of future income growth. With a wide discount further boosting the effective yield received by new buyers, we think this could be an attractive entry point.

bull bear
Team's approach has long-term track record of success Small level of assets may deter institutional investors (and prolong wide discount)
Yield premium to sector with a dividend that looks well supported by revenue reserves Gearing can exacerbate downside (as well as amplify upside)
Discount is wide relative to peers and a potential opportunity
Likely to lag in strong reflationary cyclical rallies, such as that seen in Q4 2020
Callum Stokeld
Callum joined Kepler as an investment trust analyst in July 2019. Prior to this he worked as a senior investment analyst on a range of multi-manager, multi-asset portfolios, having previously worked at IFA firms in roles focused on oversight of fund selection and asset allocation. He graduated from the University of Glasgow with an honours degree in Law.

Fund History

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