abrdn UK Smaller Companies Growth 20 May 2024
Disclaimer
Disclosure – Non-substantive Research
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour.
abrdn UK Smaller Companies Growth (AUSC) owns a portfolio of equities, which managers Abby Glennie and Amanda Yeaman identify by looking at three key factors: quality, growth and momentum. They are supported by the team’s in-house proprietary screening tool, Matrix, which is a multi-factor model that filters the universe by these factors, based on fundamental analysis (see Portfolio).
This approach gives the portfolio a strong growth bias, which has had an impact on Performance. Whilst this style bias has been positive since the trust’s launch, it has been a headwind in the past couple of years as higher inflation and interest rates have led to a value rally. However, the managers believe the outlook for their companies is improving, and that valuations are very compelling. In order to capture this, they have increased the Gearing of the trust to one of the highest levels in the past five years.
The trust has fallen to a wide Discount in the past two years as economic conditions have impacted the prospects for growth stocks and smaller companies. The board has been active with buybacks, with the aim of keeping the discount narrower than 8%.
One outcome of the widening discount and low valuations is an improved income picture for AUSC. Dividends have not traditionally been a major feature but have now grown to over 11p per share, representing a yield of c. 2.5% (see Dividend).
AUSC offers investors exposure to the lower end of the UK market-cap spectrum that is not readily available through passive investment. The managers’ focus on quality, growth and momentum factors has led to a portfolio with a strong bias to growth stocks, which has delivered periods of significant outperformance over the last 20 years. This has been driven by the trust’s repeatable process, which despite the retirement of the previous lead manager, we believe means investors can expect a consistent approach that provides exposure to the high-growth opportunities in the UK small-cap market.
Whilst the managers’ investment style has struggled in the short term, company valuations have arguably fallen accordingly. Furthermore, Abby and Amanda highlight that quality as an investment factor often performs best after value rallies end, a point that they argue we are close to, if not at. As such, they argue their companies are trading at compelling valuations just as the market is turning in their favour (see Performance).
What the team see as compelling valuations are arguably being reflected in the increased yield of the trust, which is currently 2.5%. This is generated by a portfolio of quality growth small-cap companies, meaning the dividend streams are likely to be significantly differentiated to other trusts that generate income and could be complementary to investors’ portfolios in our opinion (see Dividend).
The trust also is trading at a wide Discount versus its own history, which could prove an attractive entry point should the managers’ investment style return to favour.
Bull
- Consistent process that has delivered significant outperformance since inception
- Trust trades at a wide discount to NAV, with significant share buybacks
- Low valuations mean a higher yield, from differentiated sources to traditional UK equities
Bear
- Growth style has been a significant headwind for the past couple of years
- Trust has increased gearing, which can amplify risks, and is now at a relatively high interest rate
- Stocks may be held as they grow into large caps, leading to above average mid-cap exposure
Fund History
