Aberforth Split Level Income 16 June 2022
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Aberforth Split Level Income. 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.
To provide ordinary shareholders with a high level of income, with the potential for income and capital growth.
Aberforth Split Level Income
Chris Watt; Euan Macdonald; Peter Shaw; Jeremy Hall; Sam Ford; Rob Scott Moncrieff; Sonya Kim
Association of Investment Companies (AIC) Sector
UK Smaller Companies
12 Month Yield
Dividend Distribution Frequency
Latest Market Capitalisation
Latest Net Gearing (Cum Fair)
Latest Ongoing Charge Ex Perf Fee
(Discount)/ Premium (Cum Fair)
Daily Closing Price
Aberforth Split Level Income (ASIT) uses the advantages of the investment trust structure to create an unusual proposition which marries a high yield and a portfolio with the potential for strong capital growth. The fixed life provision means that there are potentially attractive returns on offer from the narrowing of the discount as the trust approaches its July 2024 wind-up and from dividends, even if there is no gain to the NAV.
The core of the proposition is a small-cap value portfolio. As we discuss under Portfolio, ASIT has one of the most pronounced value biases in its sector. While Aberforth are known for their disciplined value approach, the income mandate has led to this being pronounced in ASIT. This has helped performance as the reflationary rally has given way to a rate hiking cycle which has favoured value overgrowth.
Additionally, ASIT employs a high level of gearing through ZDPs. These do not receive a dividend, meaning ordinary shareholders receive a higher yield. Additionally, they allow for higher returns to ordinary shareholders than those gained on the portfolio.
Looking at published NAVs, we estimate the potential for a Dividend increase this year back to over 4p – we estimate a potential prospective dividend yield of 6.2%. Making some conservative assumptions about the potential for dividend growth in the remaining two years, and considering the current share price discount, we calculate there are potentially highly attractive returns from the dividends and discount narrowing alone of c. 20% before wind-up, even if there is no change in NAV from the current level. We discuss the details under Performance.
We believe it likely, from the difference in the ex- and cum-income NAVs, that ASIT will generate c. 4.5p of revenues in this financial year, enabling the divided to potentially return to its pre-pandemic trajectory. That would give an attractive prospective yield of close to 6%, which could make the portfolio highly attractive to income seekers. Moreover, if we are right, and if that dividend can be maintained, then a significant income return could be achieved over the next two years to be coupled with a narrowing discount. We estimate investors could generate a c. 20% return from the dividends and the discount narrowing (see Performance), with any NAV, gains a bonus.
ASIT’s portfolio does have a high beta element thanks to the gearing and thanks to the value strategy, which tends to bring with it some cyclicality. This means it could be vulnerable if the current sell-off in the market continues, which may be why the discount persists. That said, the value style looks likely to do better than growth in the near future, thanks to the rate hiking cycle underway in the US and UK.
- Strong performance potential in cyclical market rally, due to gearing and biases in portfolio
- Offers diversification by sector and market cap to the typical biases of income investors
- Fixed life and discount creates downside protection
- High levels of gearing could exacerbate losses in any further market fall
- Cyclicality of portfolio increases sensitivity to recession
- Market falls as the end of the trust’s life draws near could lead to return prospects turning negative