Aberforth Smaller Companies 09 June 2023

Aberforth Smaller Companies Trust's (LON:ASL) six-strong management team are specialists in UK small-cap value. The well-resourced team employ a disciplined valuation approach, with a philosophy that aims to identify good companies that are cheaply valued. The portfolio is constructed with a stock selection focus, looking at individual companies purely on their own merits, and for those with robust business models and which are cash-generative, but are trading at cyclically-low valuations, often as a result of their earnings trading at cyclical lows. The managers will look to hold these companies until the share price recovers, at which point they will sell and recycle the money into newer, better value ideas (see Portfolio).

The recent Performance has been good and this has contributed to both short and long-term performance figures looking very attractive versus the benchmark. Whilst the stock selection impact is a long-term driver of returns, the tailwind recently provided by the market rotation to the value style of investing has been a strong contributor. The managers’ valuation discipline has made the trust the most stylistically-tilted to value in its sector.

Despite their recent strong performance, the managers believe there are still many attractive value opportunities in UK small caps and they are aiming to capitalise on this through Gearing, for just the fourth time in the trust’s 32-year history. They point out the UK is cheap versus international markets, small caps are cheap versus large caps, and the ASL portfolio is cheap versus its index, all of which add up to an attractive opportunity. They argue a recent pickup in M&A activity shows professional investors are beginning to recognise this and could be a catalyst for a recovery. Despite this, ASL is trading at a double-digit Discount.

We believe ASL offers investors sector-leading value exposure from an experienced team with a strong track record in the space. Despite the obvious style bias, the managers have generated outperformance in periods when their style hasn’t been in favour, which we believe demonstrates strong stock selection capabilities. Even so, value has been a tailwind for the past few years, which the managers have capitalised on, delivering strong Performance. They argue this tailwind could continue, as high interest rates are set to be an investment consideration for some time.

Despite the recent strong performance, ASL’s shares are trading at a Discount that is one standard deviation wider than their five-year average. For long-term investors, we believe this could provide a value opportunity on its own, but when combined with the potential for a recovery in the UK, spurred on by the recent uptick in M&A activity, it may appear particularly interesting.

We believe the fact the managers are employing Gearing for just the fourth time in 32 years demonstrates the managers’ confidence, and they point to relative valuations as a reason for this. With the UK, small-cap and their portfolio all showing as cheap versus their equivalents, we believe that the portfolio is certainly competitively placed on a valuation basis.