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Fund Profile

Aberforth Smaller Companies 26 May 2021

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Aberforth Smaller Companies. 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.

Overview
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Overview

Aberforth Smaller Companies (ASL) invests in UK small-caps. First listed in 1990, the trust utilises a team-based approach and places heavy emphasis on bottom-up stock selection using a disciplined value investment strategy. Whilst the composition of the team has changed since 1990, with all founding members having now departed, this process has remained consistent.

As we discuss in performance, since launch ASL has outperformed the benchmark index by c. 2% p.a. The past five years have proven more challenging as value style indices lagged but recent returns have been strong, boosted by the strong rally in value and cyclicals following the announcements around the successful developments of COVID-19 vaccines.

Despite this very significant rally in ASL’s NAV in recent months, the managers note that they still observe significant value opportunities within their market and portfolio, as discussed under portfolio. They have continued to operate a ‘value roll’, selling down positions that have rerated higher and moving into more lowly valued opportunities. However, the extreme value dispersions within the market and highly depressed valuations on many constituent stocks towards the end of 2020 have meant that in many instances the managers continue to observe substantial upside from positions despite very significant share price rallies.

For the fourth time in ASL’s history the managers introduced gearing in 2020, and this remains in place. As discussed in gearing, this was in response to the extremely negative valuations they were observing over much of 2020. They retain further capacity to expand gearing, and continue to look for opportunities where further deployment may be appropriate.

With shares unable to keep up with the NAV rally, the discount has widened again in recent months and now stands at c. 7.8% (as at 14/05/2021).

Analyst's View

The pick-up in recent returns will have been gratifying for shareholders, especially given the sheer rapidity of the advances made. Whilst the circumstances which caused this particular rally (a wholesale re-evaluation of the timescale to reopen economies and normalise societal conditions) are unlikely to be repeated within any reasonable timescale, we think the degree of outperformance achieved shows the convexity that value strategies can offer, after an extended market environment where they have fallen out of investing fashion. That this outperformance has come at a time when many of the most popular ‘core’ equity strategies have struggled on a relative basis perhaps emphasises this. The decision to deploy gearing in 2020 was well-founded with the benefit of hindsight, and we note that the portfolio remains at a sizeable and attractive valuation discount to the broader investment universe (which itself looks attractive on a valuation basis).

With a deep team operating in a thinly covered universe, we remain confident in the managers’ ability to uncover undervalued opportunities. An understanding of the cyclical nature of some businesses and a willingness to look through any short-term travails seem like traits likely to enjoy ample opportunities for demonstration in the coming months and years, given the fractious economic and market backdrop that remains in place in the UK and globally. With highly liquid shares trading at a substantial discount (itself inflating the yield received by income investors relative to the yield to NAV), we think this remains an interesting potential entry point for long-term investors.

bull bear
Disciplined investment process with significant management experience behind it
Falling bond yields/growth expectations/ inflation rates could prove a headwind
Portfolio retains substantial upside to managers’ estimation of fair-value
Gearing can exacerbate downside (as well as amplify upside)
High dividend reserves should continue to offer ongoing support to dividend growth
Likely to remain vulnerable to UK domestic economic disappointment
Continue to Portfolio

Fund History

10 Apr 2024 Micro-managing
What opportunities exist in the smallest part of the UK market?
10 Jan 2024 Definitely maybe
Fund flows and discounts may shed some light on a once-in-a-generation opportunity…
13 Dec 2023 In-come all ye faithful
Equity income could be a beneficiary of the higher interest environment, with trusts a good way to capture it…
01 Dec 2023 Fund Analysis
ASL’s value approach is well placed to capture the potential of a new market era…
16 Aug 2023 Time to take the plunge
UK smaller companies have historically outperformed after every fall. Is this the moment to brave the uncertainty..?
09 Jun 2023 Fund Analysis
ASL’s value style has boosted performance, but valuations remain very low, and M&A could spark a further lift…
19 May 2023 More UK M&A
The bids keep coming, the valuations stay low…
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...
30 Nov 2022 Fund Analysis
ASL has outperformed since the vaccine rally, and its cheap portfolio valuations have historically led to strong returns…
10 Aug 2022 Get ‘em while they’re hot
Wide discounts in the UK Smaller Companies sector may present long term investors with good entry opportunities…
25 May 2022 Fund Analysis
ASL is benefitting from a market environment which favours value over growth…
11 May 2022 Catch a tiger by the tail
As inflation bites harder than it has for decades, we consider the best ways for investors to hang on to their capital...
27 Apr 2022 Finding value in a haystack
Non-income value strategies are becoming increasingly scarce, but the holdouts represent attractive near-term opportunities…
17 Nov 2021 Fund Analysis
ASL has had an excellent period of performance in the reflationary rally of the past year…
30 Jun 2021 Inflation – a real threat or hot air?
Two of our analysts ask whether recent high inflation numbers indicate something long-lasting and troubling is happening…
26 May 2021 Fund Analysis
Despite a strong rally, ASL’s portfolio retains significant upside to fair value...
24 Mar 2021 Shoot to Thrill: ISA targets for long term growth
We all intend to invest for the long-term but can often be distracted by the news...
10 Feb 2021 Eye of the Pfizer
Mining shares have rallied in recent months. With further potential, what impact could this have on the relative returns of active UK Small cap strategies...
26 Nov 2020 Fund Analysis
ASL offers exposure to a cyclical rebound post-vaccine from a deeply discounted portfolio…
25 Nov 2020 Britannia Redux?
UK equities have been despised for almost five years and could offer extreme rebound potential…
17 Sep 2020 Five small cap trusts on very wide discounts
The UK Smaller Companies Sector is battered and bruised, but bombed out valuations among trusts in the sector look interesting...
28 May 2020 Fund Analysis
ASL offers exciting return potential from its current extreme levels of valuation…
06 May 2020 The fight in the dog
We look at the characteristics which have separated the winners from the losers among small-cap trusts in the current crisis, with some surprising results...
15 Apr 2020 Hold fast
Investment trusts' revenue reserves could make them a vital stronghold for investors facing UK dividend cuts of as much as 47%....
03 Dec 2019 Fund Analysis
ASL’s portfolio is on a deep discount to the market, with signs of a turnaround in performance…
06 Nov 2019 Times are a changin'? The case for a value resurgence
We are in the midst of the longest period of value underperformance since the 1920s. Could we be approaching a change in environment?
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
Aberforth Smaller Companies (ASL) is the only UK smaller companies trust with an unambiguous value approach, barring its income-focused sister Aberforth Split Level Income...
27 Mar 2019 NEVeR MiND tHE B*LL*CKS
We cut through the histrionics and discover, with surprising results, what life has really been like for British investors since David Cameron put it to 'the people'....
19 Sep 2018 Artificial Alpha
While there are some signs that we may be finally seeing the froth come off the growth-led market, we think investors need to be highly selective in choosing value strategies...
27 Jun 2018 A winning combination
New research from Cass Business school helps explain why closed-ended funds have outperformed their open-ended peers in the major equity sectors since 2000...
19 Jun 2018 Fund Analysis
Aberforth Smaller Companies (ASCoT) is the only UK smaller companies trust with an unambiguous value approach...
19 Jun 2018 Pretty little things
Many smaller companies managers have been shifting into micro caps in 2018, should investors be following suit?
29 Jan 2018 What lies beneath
Following our research last year, we analyse the correlation between the performance of value stocks and bond yields and how many investors are unprepared for a change to the status quo...
29 Jan 2018 Fund Analysis
A value-focused UK small-cap portfolio run by one of the most experienced small-caps teams in the business...
25 Oct 2017 Patience is a virtue…
We analyse the outperformance of UK small-caps and why it has been so important to take a long-term view...
13 Sep 2017 Big Issue(rs)
We highlight the UK equity trusts that have issued and bought back the most shares over the course of 2017 so far and how these actions have affected shareholders...
12 Jun 2017 MAYDAY!
As the Conservative party founders, we examine the impact of last week’s disastrous election on trusts...
25 May 2017 An opportunity in UK small-caps?
We round up recent recommendations, results and analysis of the latest developments in the UK small-cap sector...
04 May 2017 Size matters
We highlight the potential liquidity and capacity constraints that could hinder open-ended UK smaller companies funds...
03 May 2017 Fund Analysis
A UK small-cap trust with strong value tilt, a highly experienced management team and a long track record of outperformance...
30 Jan 2017 Analyst roundup
An ‘excellent result’ for shareholders in Alliance Trust, and a mixed bag for Aberforth Smaller Companies...
26 Jan 2017 Value: The dawn of a new era?
Amid much speculation that the 'value' style of investing is making comeback, our research shows that the style has previously performed better during bond market sell-offs...
View all

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