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Fund Profile

Aberforth Split Level Income 09 June 2023

Disclaimer

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.

Overview
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Overview

Aberforth Split Level Income Trust (LON:ASIT) has just over one year remaining until its planned wind-up date. By our estimates, the current share price is implying a total return of c. 17.4% for shareholders over that period, assuming there is no change in the portfolio value (see Performance and Dividend for the reasoning). This is thanks to the high income generated for ordinary shareholders, through the use of zero dividend preference shares (ZDPs), which don’t receive dividends but have a fixed capital entitlement on wind-up.

As well as boosting the income to ordinary shareholders, the ZDPs mean the portfolio is highly geared, so changes in portfolio value are magnified. Gearing allows the managers, a team of six at Aberforth Partners, to invest more than the ordinary share capital into what they view as undervalued UK small caps. This strategy has worked well since the reflationary rally in late 2020, the portfolio outperforming the Numis Smaller Companies ex IT Index benchmark since then.

Nevertheless, the portfolio is still cheap by historical standards, while UK small caps are cheap versus UK large caps, and UK large caps are cheap versus their international peers. It all creates an intriguing set-up, with a recent uptick in M&A activity, led by private equity, possibly indicating that sentiment towards the UK is shifting. Recent upgrades to GDP forecasts by the IMF and the Bank of England bring optimism that the earnings of UK companies may hold up better than previously feared, and perhaps better than that implied in current share prices.

The managers will continue to explore options with shareholders and the board for wind-up on 1 July 2024, whereby shareholders will have the option to either realise or continue their investments.

Analyst's View

The high income which looks deliverable from the current portfolio has effectively created a cushion for an investment in ASIT during its last planned 13 months before wind-up. We think the potential returns look attractive over such a short period of time, although the gearing does mean that in the event of a sell-off over the next year, investors could receive a low or even negative return. Nonetheless, we think the current pricing is attractive for those who want to be invested in the current market.

While risks abound, there are two factors which make us positive on ASIT over the next year. The first is the value in the portfolio. ASIT is cheap versus the small-cap market, even compared to history. Meanwhile, UK small caps are cheap compared to UK large caps, and UK large caps are cheap compared to international peers. As such, there is a lot of value in the portfolio, in our view, even after a strong two years of relative performance. The second factor is the economic environment. It is looking increasingly likely that the UK will escape recession and may see reasonable economic growth this year. This would create favourable conditions for earnings growth and, if the cheap valuations referred to above reflect fears of a recession, then there is clearly scope for a rerating. Meanwhile, the more stable political environment we seem to be enjoying – with the decline of nationalists and there being two relatively centrist main party leaders in the UK parliament – may encourage investment in the UK stock market from overseas.

Bull

  • 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 create downside protection

Bear

  • 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
Continue to Portfolio

Fund History

29 Nov 2023 Fund Analysis
ASIT’s managers: Today’s investment opportunity is amongst the best in Aberforth’s 33 years…
09 Jun 2023 Fund Analysis
ASIT has the potential to deliver strong returns in its short remaining life…
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...
14 Dec 2022 Fund Analysis
ASIT offers potentially exciting returns as its planned 1 July 2024 wind-up date approaches…
16 Jun 2022 Fund Analysis
ASIT offers potentially exciting returns as its July 2024 wind-up approaches…
17 Nov 2021 Fund Analysis
ASIT is well-positioned to perform exceptionally well in an economic recovery…
01 Jun 2021 Fund Analysis
ASIT’s portfolio remains highly geared to an UK economic recovery...
26 Nov 2020 Fund Analysis
ASIT’s high gearing and cyclical portfolio mean it could offer exceptional performance potential as the end of the pandemic becomes clearer…
25 Nov 2020 Britannia Redux?
UK equities have been despised for almost five years and could offer extreme rebound potential…
29 Jul 2020 To be, or not to be (geared), that is the question
Gearing is part of the toolkit that trusts use to outperform OEICs. But how is it best implemented?...
27 May 2020 Fund Analysis
ASIT’s gearing allows it to offer a very high yield and strong rebound potential…
12 Dec 2019 Fund Analysis
ASIT is a small-cap value trust, with a yield of 5%...
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
ASLIT is a high yielding smaller companies fund with a disciplined value approach, offering a historic yield of 4.9%...
23 May 2018 Fund Analysis
A differentiated UK small cap income trust, heavily exposed to the domestic UK economy...
23 May 2018 Backing Blighty
We consider the outlook for UK equities as they endure their Brexit induced 'darkest hour'...
View all

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