Turn to value with Aberforth Smaller Companies

During 2012, as well as benefiting from a rise in its index, the trust outperformed it both in terms of net asset value (NAV) and share price performance, in part helped by its focus on the smaller companies within its investment universe, the Numis Smaller Companies Index. While around 76 per cent of the value of this index is accounted for by FTSE 250 shares, Aberforth Smaller Companies only had 56 per cent of its assets in mid caps. The trust's managers select shares largely according to the attributes of individual companies rather than by sector or size, and this has led them to focus on the smaller end of Numis Smaller Companies Index because that is where they have found attractive valuations.

"There has been a notable improvement in performance over the last two years and we are hopeful that this may continue through 2013 and beyond," says Tom Tuite Dalton, an analyst at Oriel Securities. "In its final results for the year ending 31 December 2012, Aberforth Smaller Companies reported a NAV total return of 31.9 per cent, which compares favourably: the FTSE 100 returned 10 per cent and the Numis Smaller Companies Index returned 30 per cent. The odds appear stacked in favour of Aberforth Smaller Companies on valuation grounds."

If a re-rating of value shares occurs it is likely the trust will continue to do well, and its managers believe that despite a strong performance for the market last year some valuations are still attractive because investors have been avoiding the smaller companies in it.

Although Aberforth Smaller Companies is focused on smaller companies and total return, rather than income, it still offers a relatively attractive yield of 2.78 per cent, the second highest in the UK Smaller Companies trust sector. Total dividends of 22.25p a share in 2012 were a 7.2 per cent increase on what was paid in 2011, and the trust says it remains committed to a progressive dividend policy.

The trust also has a very reasonable ongoing charge of 0.81 per cent - one of the lowest in its sector.

There is no guarantee that value shares will continue to do well: the trust's chairman admits that while it is "encouraging that 2012 saw a shift in favour of both style and size, we have witnessed such periods before, only for them to fade and for larger growth leadership to resume. It would therefore be unwise to proclaim the return of value investing based solely upon the trends of any one calendar year."

And the trust may not continue to outperform its indices.

Its discount has also tightened to 12.41 per cent in contrast to its 12-month average of 14.79 per cent, so it is not such a bargain as a few months ago.

But with a management team that has performed strongly in the past and promising signs of a turnaround going forward, if you have a high-risk appetite and long-term time horizon, Aberforth Smaller Companies Trust could prove to be a profitable punt. Buy.

Source: Morningstar, *Aberforth

Morningstar as at 1 April 2013

TOP TEN HOLDINGS as at 28 February 2013

Sector breakdown