abrdn Smaller Companies Income 02 December 2022

abrdn Smaller Companies Income Trust (LON:ASCI) is managed by Abby Glennie and Amanda Yeaman, who aim to generate capital growth and a sustainable and growing dividend from the UK small cap market. As discussed in Management, longstanding UK smaller companies’ veteran Harry Nimmo will retire at the end of 2022 which will see Abby taking the Investment Lead role on the smaller companies team, with Amanda taking the lead manager role on ASCI from the start of 2023.

Abby and Amanda’s process focusses on identifying high-quality companies that demonstrate positive earnings’ momentum and long-term growth potential. The pair are assisted by the quantitative proprietary Matrix tool, used to screen the universe before a deeper qualitative analysis is undertaken where the team can leverage the wider resources within abrdn, including abrdn’s UK equity team, for ASCI. The team also apply filters on the income-generating characteristics of the companies. ESG analysis is integrated throughout the investment process.

As discussed in Performance, although there have been some pockets of resilience in the portfolio, ASCI has been impacted by the broader market sell-off this year. This has been as a result of more challenging top-down economic conditions, which have impacted, particularly, smaller companies and quality growth-focussed strategies. This has impacted ASCI’s longer-term performance record against the benchmark and the global smaller companies’ peer group.

However, ASCI trades on a Discount of 17.4% at the time of writing which is significantly wider than the sector average of 10.3%. Combined with an attractive historic Dividend yield of 4.0%, as at 28/11/2022, which is the third highest in the sector, this may offer longer-term investors an opportune entry point should the stylistic headwinds subside.

We believe that ASCI can provide investors with a differentiated opportunity within the UK smaller companies’ sector by offering an exposure to long-term capital growth and an attractive relative dividend yield, compared to the broader smaller companies’ sector. The board has demonstrated it values maintaining a progressive dividend which it can supplement with the trust’s substantial revenue reserves, should income wane from underlying holdings.

We think the retirement of Harry Nimmo is unlikely to impact the underlying investment strategy since Abby and Amanda have worked closely with him for several years, with the process instilled throughout the smaller companies’ team. The pair have demonstrated an ability to maintain not only conviction in their winners, but also, with the help of the Matrix, a strong selling discipline regarding holdings that no longer fit those characteristics the managers seek.

Given that ASCI’s discount is wider than its five-year average, the sector’s average and also, to a greater extent, abrdn’s UK Smaller Companies Growth Trust (AUSC), which is also co-managed by Abby, this may provide investors with an attractive entry point. However, we would caution that it may take longer than expected initially for sentiment to improve and earnings to recover.