Aberforth Smaller Companies 23 December 2024

Aberforth Smaller Companies’ (ASL) six-strong management have overseen another period of outperformance in 2024, adding alpha on top of a wider market recovery. This has been supported by the managers’ focus on valuations, looking to identify otherwise solid firms trading at temporarily depressed valuations and holding these through to a recovery.

One dynamic that has influenced the portfolio in 2024 has been the differing performance of firms that earn the majority of their revenues domestically or overseas. Domestic firms enjoyed a re-rating in the first half of 2024 as interest rate cuts supported confidence of a spending recovery and eventually improved profitability. However, in part due to the impact of a stronger currency, overseas earners are slightly behind in this recovery cycle. The managers’ value-orientated and cash-focussed approach has identified holdings from both areas (see Portfolio).

Meanwhile, the trust has continued to benefit from the ongoing M&A boom, which has helped realise value in several names and supported Performance. Furthermore, several stocks have achieved the managers’ price targets and have been trimmed, allowing the managers to take profits and exercise their ‘value roll’ approach by recycling these into the wide array of good value opportunities they have identified in the market.

Whilst the first half of 2024 was strong, a slight pullback in the UK in the third quarter has also seen ASL’s Discount widen out, it having initially narrowed on recovery hopes. As such, the current level is back in line with its own five-year average.

Aberforth’s slightly contrarian way of looking at the UK market has often identified themes that other investors overlook, and the changes to the portfolio in 2024 appear to be no different, following the identification of the interesting dynamic between domestic and overseas earning firms. This has helped contribute to a differentiated Portfolio with exposures shareholders are unlikely to have elsewhere, which has not only created a trust that offers attractive characteristics as part of a broader portfolio, but has also produced another period of good alpha generation from the small-cap market.

We believe the UK has undergone a quiet recovery this year, with the market having delivered double-digit returns, though this has been arguably overlooked following substantial returns in other markets and negative headlines. The managers highlight this performance pattern looks similar to that of the early 90s, which, should such a pattern be repeated, could make 2025 a very positive year for the market. Considering the very depressed valuations, and Aberforth’s historic track record in identifying companies that are capable of recovering from these, we believe the trust could be well placed to capture any next phase of a recovery (see Performance).

This opportunity could potentially be enhanced significantly by the trust’s current Discount. Having narrowed in 2024’s first-half rally, the discount has widened again to double digits, approximately in line with the five-year average. We believe this discount doesn’t reflect the impressive alpha generation of the strategy, nor the upside potential that an upswing in the market cycle would bring.