Aberdeen Standard Equity Income 05 March 2020

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/co-manages the open-ended Standard Life UK Equity Unconstrained Fund and the ASI Income Focus Fund. ASEI holds companies where the manager believes the market has not correctly understood (and valued) the changing operational dynamics of the underlying business.

The manager adopts an all-cap approach, holding a substantial proportion of assets in small- and mid-cap companies; ASEI’s closed-ended structure allows Thomas to hold greater exposure to less liquid smaller companies, compared with his OEIC product. Portfolio construction is unconstrained by benchmark weightings, and driven by bottom-up stock analysis.

ASEI has now raised its dividend every year for the past 19 years (each year since launch). The present yield of c. 5.1% (as of 14/02/2020) represents a sizeable premium to the wider market and a yield premium to the trust’s own history under Thomas’s tenure, and is now at around its highest level since 2009. The board has announced it intends to increase the dividend by at least 4.4% over 2020 to a minimum of 21.4 pence per share.

ASEI currently has net gearing of c. 13% in place; this is a function of the stock-specific opportunities Thomas and the team have presently identified. Long-term returns have exceeded the benchmark, but performance more recently has been challenging; however, this is not surprising given the wider market environment. This has likely contributed to the discount widening to c. 7.8% (as of 27/02/2020), which we discuss in more detail in the Discount section.

ASEI offers what we view as an attractive, above-market level of yield and a strong record of dividend growth, further supported by ample revenue reserves which should support further income growth in a UK market where benchmark-level payout ratios are elevated. Recent performance has been challenging, but this is unsurprising given the unusually high level of underperformance of value factors and headwinds from the wider macro environment. Rising global growth and/or inflation expectations would likely prove beneficial to ASEI’s relative performance.

Whilst the board has historically been relatively non-interventionist with regards to the discount, this has largely been because ASEI has not generally traded at either a wide discount to NAV, or at a wider discount than the broader peer group. However, the board has intervened and utilised the buyback facility previously in 2017 and 2019, and may do so again if the discount level widens further from current levels.

The portfolio itself trades at a higher valuation discount to the benchmark than has ordinarily been the case. In our view this, the wide discount and the high yield on a portfolio and trust level indicate a potentially interesting entry point. We note that gearing has been increased in recent years. This provides a further boost to the income, with the cost of borrowing lower than the income currently available from the companies it is invested in.