The reflationary rally since the announcement of successful vaccine trial results has been fantastic for value managers, and Aberforth Smaller Companies (ASL) has taken full advantage. As we discuss under Performance, the trust has generated strong returns over the past year, versus both the Numis Smaller Companies ex IT benchmark and against the UK small-cap sector.
Consequently, the discount narrowed significantly in Q4 2020, the trust trading close to par in December and again in April 2021. However, as growth has outperformed value slightly since the summer, ASL’s Discount has widened out to the low double digits.
ASL is run to a disciplined value strategy, increasingly hard to find after a long period of growth outperformance. The seven-member management team look to identify strong companies that have fallen out of favour and invest until their valuations revert. As we discuss in Portfolio, this leads to a contrarian element to the style which can lead to periods of underperformance before sentiment changes.
Thanks to the strong performance of many companies in the portfolio, turnover has been high by recent standards as the managers sell companies into strength and recycle into new opportunities. They are still seeing opportunities in companies geared to the reopening of the economy as well as more stock-specific stories. Gearing remains in place, reflecting the managers’ belief in the value in their portfolio.
The trust’s objective is to maximise total return, but a consequence of investing for value is the managers are led to companies with a higher yield than average. The board has a progressive dividend policy with extensive reserves and has managed to maintain the payout even through the pandemic. The historic yield is 2.0%.
ASL’s strong recent results show how powerful a value strategy can be when sentiment shifts in its favour. It is true that the extreme outperformance of the past year is unlikely to be repeatable, starting at a point with an extreme divergence between the valuations of and sentiments towards growth and value stocks. However, with central banks widely expected to raise rates steadily in the coming years, the environment looks to be significantly better for value as a style than it was prior to the pandemic. In the short term, the widening discount seems to be profit-taking from extreme levels, and in our view, could provide a good entry point.
Notably, the UK remains cheap compared to its peers, and the high levels of M&A indicate institutional investors see the value. From such low valuations, the market looks like a good place to have exposure in the medium to long-term, although we acknowledge short-term risks from the re-emergence of Brexit-related disputes.
|Disciplined value strategy that has outperformed over long run
||Strong style bias can lead to periods of underperformance
|Wide discount could prove good entry point
||Cyclicality of portfolio would increase sensitivity if market falters
|Consistent approach should lead to more stable diversification benefits in a portfolio
||Gearing increases sensitivity to falling markets as well as rising markets