Aberforth Geared Value & Income 04 September 2024

Aberforth Geared Value & Income (AGVI) offers the potential for exceptional total returns and a high income thanks to its capital structure. The ordinary shares are highly geared by zero dividend preference shares (ZDPs), c. 37.5% at launch on a net asset basis. As well as bringing the potential to boost returns if markets rise over the trust’s seven-year fixed life, this gearing means ordinary shareholders can receive a high income, as all dividends are paid to ordinary shareholders. AGVI is the successor trust to Aberforth Split Level Income and was a rollover option taken by many shareholders in the latter.

The Portfolio is managed with the same, consistent value approach that Aberforth Partners have used on all their funds over the past few decades. They invest solely in UK small caps, defined as those in the Deutsche Numis Smaller Companies ex IT Index, and look for those trading below fair valuation, particularly if they are at the trough of earnings cycles too. Currently they are arguably spoiled for choice thanks to the exceptionally cheap valuations in the UK small-cap market. While the last three quarters have seen some signs of a shift in sentiment and valuations have risen slightly, the market remains highly attractively valued. Both the UK and small caps remain cheap factors, while AGVI’s portfolio is cheaper than the small-cap market. To this triple discount must be added the Discount of the share price to NAV that has opened up in line with the peer group.

AGVI’s planned wind-up date is 30/06/2031, at which point the ZDP holders will receive a fixed capital entitlement equivalent to an annualized return of 7%. The remainder of the assets will be attributable to ordinary shareholders. The dividends for the first year are expected to be in the range of 4p to 5p, and we think the indications are it could be towards the top of this range (see Dividend).

This looks like a great time to be taking exposure to UK small caps, and we think AGVI might be the vehicle that brings the highest performance potential if the market does well, in the investment trust sector anyway.

UK small caps look attractive because they are cheap, and also because it seems like we are at a turning point for sentiment. M&A has become a common event as overseas or strategic buyers circle undervalued businesses, while this year has seen a number of institutional investors upgrade UK equities. It seems that political stability, with a government with a healthy majority, and healthy economic growth have convinced investors the unarguably cheap valuations in the UK are not outweighed by the risks. Some concern about the economy remains, and we will have to see how it performs in the coming months, and whether interest rate cuts are deliverable. Nonetheless, we think that on a long-term view the market is extremely attractive.

AGVI is invested in the cheaper area of the UK, the small caps, meaning it offers additional performance potential if valuations mean-revert. Plus, it is heavily geared, which has obvious attractions in a rising market. In our view it could be an attractive option for an investor with a high conviction in a UK market recovery, as well as for those seeking a high income. As we discuss below in the Dividend section, we think the outlook is for the trust to deliver a very high yield from a sector that income investors often don’t have access to.