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Fund Profile

Aberforth Split Level Income 27 May 2020


Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Aberforth Split Level Income. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

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Aberforth Split Level Income Trust (ASIT) aims to generate a high yield from a value investment strategy in UK small caps and from gearing taken through zero-dividend preference shares (ZDPs). The trust has a fixed life and is to be wound up in 2024. All income is distributed to ordinary shareholders.

On a historical basis, following the coronavirus crash the yield is extremely high, at 8.5%. However, as we discuss in the Dividend section, investee companies are having to cut their payouts because of the current crisis. Although the trust has some reserves the board could employ, this means there is a chance of a cut this year or next. Nevertheless, thanks to the gearing as well as the investment approach, the income potential is still high relative to peers.

Recent portfolio activity has been limited, with the managers confident the majority of their holdings can generate superior returns despite the crisis. However, they have been tilting the portfolio towards companies which should be better placed to maintain or resume dividend payouts thanks to the strength of their balance sheets and the nature of their businesses.

On a total-return basis, ASIT has suffered in the COVID-19 sell-off owing to its value strategy, and because of structural gearing. However, this gearing means it could outperform considerably in any rebound. The portfolio is overweight UK earnings, meaning that it is particularly exposed to a recovery at home.

ASIT trades on a 13.6% discount to NAV, close to the sector average of 11.5%. However, the discount has been volatile relative to peers, perhaps thanks to the gearing.

Analyst's View

ASIT could be an exciting, although potentially volatile, way to play a recovery in the UK. The high levels of gearing, overweight to UK earnings and extremely cheap portfolio offer the potential for high beta in any relief rally.

While the shape of the recovery is hard to forecast given the influence of medical and political matters, the managers tell us their base case is for a recovery to start towards the end of the year. We can see this being faster than expected if the medical data continues to improve and pressure from the backbenches grows when parliamentarians return to Westminster in June. However, there’s a chance of the government attempting to extend or reimpose lockdown restrictions.

Many will look to ASIT for yield first and foremost. In our view, a dividend cut is likely this year or next due to the fact that as a young trust, ASIT has only built up reserves of around 40% of last year’s final dividend. However, we would still expect the trust to offer a premium yield versus the equity income sector, thanks to the gearing and the low valuations on the market.

The fixed capital entitlement of the ZDPs reduces the potential capital growth for ordinary shareholders. However, as we discuss in the Gearing section, there is scope for highly attractive returns on quite conservative assumptions, and the fixed life means discount risk is eliminated for those who can hold to July 2024.

bull bear
High level of income despite cloudy future for UK dividends High levels of gearing could exacerbate losses in any further market fall
Extremely cheap portfolio could offer strong performance potential Dividend cut possible in short term
Fixed life limits discount risk Value strategy likely needs an improving economic environment to work best
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Fund History

07 May 2024 Thomas McMahon speaks on the Money Makers podcast
Thomas McMahon, Head of Investment Companies Research, appears on the Money Makers podcast to discuss three current themes in the investment trust sector: BCPT and commercial property, ASIT and split-level trusts, and the UK micro-cap sector...
29 Nov 2023 Fund Analysis
ASIT’s managers: Today’s investment opportunity is amongst the best in Aberforth’s 33 years…
09 Jun 2023 Fund Analysis
ASIT has the potential to deliver strong returns in its short remaining life…
06 Apr 2023 Fallen Kingdom?
Since the UK was described as a ‘Jurassic Park’ stock market, it has outperformed. Is this a new age for the stock market..?
18 Jan 2023 Fortune favours the brave
Our research suggests a recession has already been priced into small cap trusts, but risks abound...
14 Dec 2022 Fund Analysis
ASIT offers potentially exciting returns as its planned 1 July 2024 wind-up date approaches…
16 Jun 2022 Fund Analysis
ASIT offers potentially exciting returns as its July 2024 wind-up approaches…
17 Nov 2021 Fund Analysis
ASIT is well-positioned to perform exceptionally well in an economic recovery…
01 Jun 2021 Fund Analysis
ASIT’s portfolio remains highly geared to an UK economic recovery...
26 Nov 2020 Fund Analysis
ASIT’s high gearing and cyclical portfolio mean it could offer exceptional performance potential as the end of the pandemic becomes clearer…
25 Nov 2020 Britannia Redux?
UK equities have been despised for almost five years and could offer extreme rebound potential…
29 Jul 2020 To be, or not to be (geared), that is the question
Gearing is part of the toolkit that trusts use to outperform OEICs. But how is it best implemented?...
27 May 2020 Fund Analysis
ASIT’s gearing allows it to offer a very high yield and strong rebound potential…
12 Dec 2019 Fund Analysis
ASIT is a small-cap value trust, with a yield of 5%...
01 Aug 2019 Rethinking UK equity income
Despite being a popular allocation for investors, the UK Equity Income sector is currently plagued by the problem of concentration. Our analysis suggests smaller companies could be a strong alternative source of diversified income…
30 Apr 2019 Fund Analysis
ASLIT is a high yielding smaller companies fund with a disciplined value approach, offering a historic yield of 4.9%...
23 May 2018 Fund Analysis
A differentiated UK small cap income trust, heavily exposed to the domestic UK economy...
23 May 2018 Backing Blighty
We consider the outlook for UK equities as they endure their Brexit induced 'darkest hour'...
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