Aberdeen Standard Equity Income Trust (ASEI) aims to provide shareholders with an above-average income and real (inflation-adjusted) growth in capital and income, through investment in a diversified portfolio of predominantly UK equities. ASEI is managed by Thomas Moore, who also manages the open-ended ASI UK Income Unconstrained Equity Fund and co-manages the ASI Income Focus Fund. The manager seeks to identify companies where change is not yet accurately reflected in the valuation.
ASEI is an all-cap portfolio, with a majority of the portfolio invested out with the FTSE 100. The closed-ended nature of ASEI affords Thomas a greater degree of flexibility to take and hold positions in less liquid (often smaller) companies, and by extension to deviate from the benchmark FTSE All-Share index without constraint.
As discussed under Dividend, ASEI has now raised its dividend every year for the previous 19 financial years, and appears likely to do so again when the board declares the final dividend for the financial year 2020. Having accrued substantial revenue reserves of 1.03x the current dividend, the board has significant flexibility to support further dividend growth going forward – even as index level dividends are likely to see significant impairments. The historic dividend yield is presently very high, at c. 7.8% (as at 09/10/2020).
The historic yield is further boosted by a Discount that has widened to c. 12.3%. This figure is noticeably wider than that seen in the wider peer group, but is likely in part a reflection of challenging conditions for performance in recent years. As discussed under Performance, we believe stylistic factors (specifically a value tilt) have proven a sharp headwind to relative returns.
Conditions have undoubtedly proven challenging for ASEI in recent years. Sharp dispersions in market pricing of solvency risks have driven even wider what the manager had already previously identified as near-unprecedentedly high valuation spreads between lowly and highly-valued market constituents. Reversion of this, and with it the likely relative fortunes of ASEI, continues to hinge on the shape of the economic recovery. A more rapid economic recovery than is currently anticipated could see insolvency concerns fall for many companies, and prove a tailwind to value stocks. However, a continuation of low-interest rate regimes (with the BoE reputedly considering negative interest rates) could feasibly extend value’s travails, particularly if the market belief shifts towards an assumption that the authorities are willing to hold ‘real’ rates negative for a protracted period.
Perhaps this explains why a shift higher in inflation expectations has not yet catalysed a significant value recovery? Yet ‘later’ does not equate to ‘never’, and the degree of value dispersion within the UK market highlighted by the manager remains compelling. If there is a rebound for value, then ASEI should be a beneficiary. In the near future the dividend is unlikely to be covered by income within ASEI, but there are substantial revenue reserves available to support the dividend which, yielding c. 7.8%, is very compelling. With a 19 year track record of dividend increases at stake, we expect the board’s dividend policy to remain supportive for the near term.
|Strong track record of dividend growth, backed by revenue reserves||Performance has remained challenging from a macro and stylistic perspective|
|Likely to perform strongly in a value recovery, and positioned for easing macro concerns||Gearing can exacerbate downside, as well as amplify upside|
|Discount is wide relative to peer group and ASEI's own history||Whilst discount is relatively wide there is little sign of narrowing as yet despite buybacks