abrdn Equity Income 27 January 2025

Thomas Moore, manager of abrdn Equity Income (AEI), employs an index-agnostic approach to investing in UK equities, aiming to deliver above-average and growing income to investors, alongside capital growth. His strategy centres on stock selection, targeting companies based on their individual merits and alignment with the trust’s objectives, rather than their weighting in an index. This flexible approach enables him to uncover value across the market, including opportunities in areas often overlooked by traditional equity income strategies.

Over the past year, Thomas has capitalised on market volatility by making a number of adjustments to the Portfolio on valuation grounds. This included investing in well-established, high-yielding large-cap names such as M&G and Imperial Brands, whilst also identifying compelling prospects in the small- and mid-cap space, adding Petershill and Galliford Try, which offer attractive yields and greater growth potential, to the portfolio.

Focussing on higher-yielding companies has allowed Thomas to maintain AEI’s competitive yield of 7.0%. This is a significant premium to the market and the second highest in the AIC UK equity income sector. In addition to yield, Thomas screens for companies with dividend growth potential, helping the trust maintain its consistent dividend growth record, despite difficult economic conditions, with 2024 marking the 24th consecutive year of dividend increases.

The market backdrop has not been supportive to the investment process – given the outperformance of larger-cap growth stocks – resulting in the trust underperforming its benchmark over a five-year period. However, the trust has seen a marked improvement in Performance over the past 12 months, delivering NAV total returns of 24.3%, outpacing the FTSE All-Share Index’s return of 17.6%. Outperformance stemmed from strong stock selection and heightened M&A activity. Defensive mega-cap names like Imperial Brands, which continues to thrive under new management, and financial holdings such as NatWest, Barclays, and HSBC, which benefitted from the ‘higher for longer’ interest rate environment, were key contributors to returns.

We think the UK market, despite recent challenges, presents an intriguing opportunity for investors, given the current divergence in equity valuations. The UK plays host to a range of well-established, operationally strong and attractively valued companies. The key is identifying undervalued opportunities with genuine upside potential.

Thomas brings years of UK market experience, with expertise in spotting valuation mispricings. His index-agnostic approach allows him to explore the entire market, beyond traditional equity income constraints, for attractively valued companies with latent recovery potential. AEI has faced headwinds over the past five years, as Thomas’s focus on smaller companies and more value-oriented stocks, which have been largely out of favour, led to underperformance versus the benchmark.

Encouragingly, AEI’s Performance has rebounded more recently, outperforming its benchmark as market conditions have turned more favourable for Thomas’s strategy. Easing UK-specific headwinds have triggered portfolio re-ratings, whilst historically low valuations for smaller companies – in cases due to prolonged economic pressures rather than weak fundamentals – have driven heightened M&A activity. Several smaller portfolio holdings have been sold at large premiums following private bids.

With a 7.0% yield, a premium to the market, and a 24-year track record of consistent dividend growth, we think AEI offers a compelling proposition for income-focussed investors seeking differentiated exposure to the UK. As interest rates fall and the appeal of high-yielding bonds and bank accounts diminishes, AEI could be a well-positioned destination for investors seeking higher-yielding opportunities with potential for capital growth.