Aberforth Smaller Companies (ASL) invests in UK small-caps. First listed in 1990, the trust utilises a team-based approach and places heavy emphasis on bottom-up stock selection using a disciplined value investment strategy. Whilst the composition of the team has changed since 1990, with all founding members having now departed, this process has remained consistent.
As we discuss in performance, since launch ASL has outperformed the benchmark index by c. 2% p.a. The past five years have proven more challenging as value style indices lagged but recent returns have been strong, boosted by the strong rally in value and cyclicals following the announcements around the successful developments of COVID-19 vaccines.
Despite this very significant rally in ASL’s NAV in recent months, the managers note that they still observe significant value opportunities within their market and portfolio, as discussed under portfolio. They have continued to operate a ‘value roll’, selling down positions that have rerated higher and moving into more lowly valued opportunities. However, the extreme value dispersions within the market and highly depressed valuations on many constituent stocks towards the end of 2020 have meant that in many instances the managers continue to observe substantial upside from positions despite very significant share price rallies.
For the fourth time in ASL’s history the managers introduced gearing in 2020, and this remains in place. As discussed in gearing, this was in response to the extremely negative valuations they were observing over much of 2020. They retain further capacity to expand gearing, and continue to look for opportunities where further deployment may be appropriate.
With shares unable to keep up with the NAV rally, the discount has widened again in recent months and now stands at c. 7.8% (as at 14/05/2021).
The pick-up in recent returns will have been gratifying for shareholders, especially given the sheer rapidity of the advances made. Whilst the circumstances which caused this particular rally (a wholesale re-evaluation of the timescale to reopen economies and normalise societal conditions) are unlikely to be repeated within any reasonable timescale, we think the degree of outperformance achieved shows the convexity that value strategies can offer, after an extended market environment where they have fallen out of investing fashion. That this outperformance has come at a time when many of the most popular ‘core’ equity strategies have struggled on a relative basis perhaps emphasises this. The decision to deploy gearing in 2020 was well-founded with the benefit of hindsight, and we note that the portfolio remains at a sizeable and attractive valuation discount to the broader investment universe (which itself looks attractive on a valuation basis).
With a deep team operating in a thinly covered universe, we remain confident in the managers’ ability to uncover undervalued opportunities. An understanding of the cyclical nature of some businesses and a willingness to look through any short-term travails seem like traits likely to enjoy ample opportunities for demonstration in the coming months and years, given the fractious economic and market backdrop that remains in place in the UK and globally. With highly liquid shares trading at a substantial discount (itself inflating the yield received by income investors relative to the yield to NAV), we think this remains an interesting potential entry point for long-term investors.
|Disciplined investment process with significant management experience behind it
||Falling bond yields/growth expectations/ inflation rates could prove a headwind
|Portfolio retains substantial upside to managers’ estimation of fair-value
||Gearing can exacerbate downside (as well as amplify upside)
|High dividend reserves should continue to offer ongoing support to dividend growth
||Likely to remain vulnerable to UK domestic economic disappointment