Aberforth Smaller Companies 28 June 2024
Disclaimer
This is a non-independent marketing communication commissioned by Aberforth Partners LLP. 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.
Aberforth Smaller Companies (ASL) has delivered another strong year of performance, significantly ahead of its index and peer group, with its value strategy showing its potential. A combination of strong fundamentals from the underlying portfolio and a high M&A hit rate has continued to have a significant impact on performance. This has also supported longer-term returns, with the trust now materially ahead of its comparators over five years.
Recent Portfolio changes have been driven by the managers’ ‘value roll’ approach, with a number of holdings hitting price targets, which have then been trimmed, and the capital recycled into new ideas, which the managers believe have greater upside. M&A has also been a significant feature for the trust and has led to a number of disposals.
Despite the strong performance, ASL continues to trade at a double-digit Discount that is in line with ASL’s own five-year average and that of the sector, despite the considerable outperformance. The board have been active with share buybacks year to date, which have been the tenth largest purchase in the portfolio in the period, at c. £3.2m.
ASL also has a strong Dividend track record, with 13 years of continuous growth in the ordinary dividend, which is well supported by extensive reserves. The trust often pays special dividends too. The current yield, based on the ordinary dividend, is c. 2.7%.
Strong recent Performance has shown the effectiveness of ASL’s strategy. The trust has significantly outperformed its comparators over the past year, particularly in 2024, with stock selection the primary driver behind this. The impressive hit rate the managers have had on M&A is the best example of this and has added significantly to performance. This has been further supported by the valuation discipline they have exercised on reallocating the capital, which we believe offers significant future potential.
Furthermore, ASL has also produced an impressive Dividend track record, despite this not being an explicit goal of the managers. The ordinary dividend has grown for 13 consecutive years and the trust has significant reserves to support this going forward. Not only that, but special dividends are also a regular feature, albeit not guaranteed. The ordinary dividend yield is c. 2.7%, though this has the potential to go higher, should dividends continue to grow or should the trust pay a special dividend again.
Despite all of this, the trust remains at a wide Discount, which we believe could offer a compelling entry point for long-term investors. The current discount remains wide, and, in our opinion, reflects more upon the negative sentiment towards UK smaller companies than the success of the strategy. Should this negativity subside, we believe the discount could narrow.
Bull
- Trust has delivered strong performance driven by good stock selection
- Growing dividend that is well supported by underlying revenue and reserves
- Trust is trading at a wide discount
Bear
- Reasonably unconcentrated portfolio means best ideas can be more diluted
- Trust is currently overweight cyclical industries, which could struggle in a downturn
- Trust has employed gearing, which can amplify losses as well as upside potential
Fund History
