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Fund Profile

Aberforth Split Level Income 17 November 2021


This is a non-independent marketing communication commissioned by Aberforth Partners LLP. 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) offers a high yield from UK small caps with a highly-geared approach which has generated exceptional returns in the reflationary recovery from the pandemic. ASIT is geared through zero dividend preference shares which do not receive a dividend, meaning ordinary shareholders receive a higher yield (see the Gearing section).

The historic yield is 3.3%, which is in line with the AIC UK Equity Income sector average and above the yield available on conventional small cap portfolios. The board cut the dividend in the financial year ending June 2021 in response to the pandemic, with some revenue reserves being deployed to lessen the impact on shareholder income. The managers report positive momentum in the income from portfolio companies and the trust has 0.71p of revenue reserves for use if needed (see the Dividend section).

The trust is managed with a disciplined value strategy by the seven-strong team at Aberforth Partners. Launched in 2017, this style bias was largely unhelpful until the arrival of vaccines in Q3 2020 led to strong Performance.

During the initial reflationary rally, ASIT’s discount narrowed significantly, contributing to strong shareholder returns. As value’s performance stalled over the summer, it has widened once again to c. 13%.

ASIT has a fixed life and will be wound up in June 2024. At this point ZDP holders will receive 127.25p a share and the rest of the assets will be returned to ordinary shareholders. This allows us to calculate prospective returns under different scenarios. As we discuss in the Performance section, shareholder returns could be very high under some quite modest assumptions, with the fixed life, the structure and the discount combining to provide some downside protection for shareholders.

Analyst's View

ASIT offers exciting total return potential as well as a decent yield, although it is likely to be a highly volatile performer. This is due to the high levels of structural debt and the cyclical bias in the portfolio which is present due to the value strategy and income mandate. This can be an extremely powerful combination when markets rally, as we saw over the past year, although were markets to sell off ASIT would likely sell off more. For income seekers, the yield is in line with that available on the average UK equity income trust which tends to be invested in more staid large caps with lower performance potential. ASIT thus offers good diversification of income for those who can stomach the volatility.

For those with an investment horizon as far out as June 2024, we think the current discount and the fixed life create an interesting opportunity. In the Performance section we present a table of returns under certain assumptions. Assuming modest capital and income growth, the returns for ordinary shareholders on wind up would be extremely attractive. Additionally, we note that for an investment in the shares (made at the end of October 2021) to be flat, i.e. for investors to get back their original investment alone, would require annualised losses of 1.7% on a total return basis.

Strong performance potential in cyclical market rally, due to gearing and biases in portfolio
High levels of gearing could exacerbate losses in any further market fall
Offers diversification by sector and market cap to the typical biases of income investors
Cyclicality of portfolio increases sensitivity to recession
Fixed life limits discount risk
Market falls as the end of the trust’s life draws near could lead to return prospects turning negative
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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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