Fund Profile

Aberforth Split Level Income 01 June 2021


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.

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Aberforth Split Level Income (ASIT) invests in UK small-caps. Managed on a collegiate basis by the investment team at UK Small cap specialists Aberforth Partners, ASIT comprises a portfolio of UK smaller companies which the managers believe to be trading at substantial discounts to their fair-value.

A fixed-life trust due to be wound-up in July 2024, ASIT employs structural gearing through zero-dividend preference shares (ZDPs), as discussed under gearing. These afford the managers flexibility to continue to generate a high level of yield without having to compromise their investment process to exclude outstanding opportunities for capital growth.

Nonetheless, as we discuss under dividend, the current historic yield of c. 4.7% is likely to prove illusory given the sharp reduction in dividends from within the investable universe. ASIT’s board has guided dividends lower for the current financial year, and the first interim dividend was markedly lower than from the previous financial year. We would still, however, anticipate a greater level of yield from ASIT than from most UK small cap peers.

Recent returns in the post-vaccine rally have been strong, but since listing performance has been more challenging as value style indices have generally lagged. However, the fixed-life nature of the trust allows us to project what the returns to wind-up will be under a variety of assumptions, as we do in the performance section.

Despite the very significant rally in ASIT’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 which have rerated higher and moving into more lowly valued opportunities.

Analyst's View

Looking out to the wind-up date, the assumptions required to generate attractive annualised total returns over this period do not look overly challenging to us, though given the fixed wind-up date the potential impact of intra-market style cycles on NAV growth will remain of concern.

However, we note that ‘high yield’ factors as a strategy within the UK market has only in recent weeks begun to outperform, despite a broader ‘value’ rally. We think this may suggest that much of the initial value/cyclical rally from November was merely a readjustment of insolvency expectations from a market paranoid about indefinite lockdowns. The extremity of the valuation discount in ASIT’s portfolio in November suggests as much to us. If this is the case, we think the value rally may well have further to run as economies continue to reopen, spare capacity disappears, and inflationary pressure (led by policymakers determined to run the economy ‘hot’) emerge.

Income investors will likely be disappointed to see dividends guided lower for the current financial year, but the backdrop of mass dividend cuts does offer explanation for such a course. Similarly, the mass de-ratings in many companies’ valuations over 2020 should have given rise to a raft of opportunities for cycle-conscious value investors such as Aberforth, and we think that from a total-return perspective this should offer an attractive hunting ground for the managers. Even with the guidance lower, we would anticipate a premium level of yield from this point compared to the peer group average.

bull bear
Disciplined investment process with significant management experience behind it
Ultimate magnitude of dividend cut remains to be seen
Portfolio retains substantial upside to managers’ estimation of fair-value
Gearing can exacerbate downside (as well as amplify upside)
Fixed life limits discount risk
Fixed wind-up date offers NAV cyclicality risks
Continue to Portfolio

Fund History

07 May 2024 Thomas McMahon speaks on the Money Makers podcast
Thomas McMahon, Head of Investment Companies Research, appears on the Money Makers podcast to discuss three current themes in the investment trust sector: BCPT and commercial property, ASIT and split-level trusts, and the UK micro-cap sector...
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'...
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