Fund Profile

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 Trust (ASL) invests in UK small-caps with a disciplined value investment style. While its portfolio has been under pressure in 2020, the announcement of good results from a candidate vaccine in late October saw its NAV rally and share price rally even harder than the market, which the managers believe indicates strong rebound potential.

ASL has been managed to the same style since launch in 1990 and has outperformed the Numis Smaller Companies ex IT Index by over 1.5% p.a. since then according to Morningstar data (c. 56% cumulatively). With value falling out of favour in recent years, ASL’s returns have been positive but behind the index and ‘growthier’ peers.

In common with other value portfolios around the world ASL’s portfolio has a strong cyclical tilt, which means its companies have seen their earnings put under pressure by lockdowns and the accompanying recession. However, as we discuss in the Performance section, the Pfizer vaccine announcement saw a sharp pop of absolute and relative performance which may indicate the performance potential once the recovery comes. The discount has since halved to 6.3%.

ASL has only taken on significant gearing on three other occasions (see Gearing section) but, in response to the extreme valuations in the market and the portfolio, the managers have brought net gearing up to 7% and have the facilities to double this.

Aside from total-return potential, ASL is also in a strong position with regards to the dividend. The board entered the year with 2.4 times last year’s dividend in reserve and raised the interim pay out by 4% in July. The yield is 3%.

Analyst's View

We think it is highly significant that the investment team at Aberforth have taken on meaningful gearing in the aftermath of 2020’s market crash. This is a rare occurrence in ASL’s thirty-year history and has previously preceded strong market returns. We agree with the managers that a lot of the pieces are in place for a cyclical recovery in the UK once the pandemic has passed and Brexit has been resolved. While the immediate few months could see twists and turns in both matters, we think the sharp rally in recent weeks in value, in small-caps and in UK stocks as a whole shows that the elastic has been pulled taut and, as the managers put it, the risks to the upside have seldom been greater.

Notably, the rebound potential does not necessarily require a rebound of value vs growth. A rerating of the whole market to pre-COVID-19 valuations and a normalisation of earnings would do the trick, as we discuss in the Portfolio section. The potential for value to outperform growth is another potential tailwind for the coming years. We think it may require an initial cyclical recovery first in order to generate a rising interest rate environment - although there is the potential for high growth stocks to sell off on the anticipation of this given how far they have outperformed in recent years.

BULL BEAR
Cyclical bias to portfolio which could perform very strongly in a post-COVID-19 recovery Low-rate environment could be unhelpful for value in the medium term
Valuation of UK market and portfolio versus the market at extreme lows
There are risks to the UK from a bad Brexit and a relapse of the pandemic
Very high dividend reserves, with the dividend likely to be grown through the crisis
Gearing increases sensitivity to falling markets as well as rising markets
Continue to Portfolio

Fund History

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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