Aberforth's value likely to endure

The trust has delivered the strongest net asset value (NAV) performance of any smaller companies investment trust over one year, and one of the best over three years, as well as being well ahead of its benchmark, the Numis Smaller Companies Index (excluding Investment Companies). Its share price beats the sector average over those periods and is well ahead of the benchmark.

And performance looks like it will continue to do well. Many of the companies the trust invests in are good dividend payers and, while their yields may be lower than those of large caps, dividend cover is higher and scope for dividend growth is generally better.

"Some might be tempted to switch out of value focus funds such as Aberforth Smaller Companies back to growth oriented funds such as (IC Top 100 Fund) Standard Life UK Smaller Companies (SLS) after Aberforth's recent spurt, but in Aberforth's view the value catch up is only just starting to play out and there will be plenty more relative performance gains to come," says Tom Tuite Dalton, an analyst at Oriel Securities. "Aberforth's data suggest that value should continue to outperform growth in 2014 and beyond. Valuations are seen as reasonable, new opportunities abound, and mergers and acquisitions activity has barely started. On a five-year view, it seems likely that the trust will provide solid absolute and relative performance."

Major drivers of performance so far this year have been holdings in CSR (CSR), JD Sports (JD.) and Thomas Cook (TCG).

Mr Tuite Dalton also likes Aberforth's forensic, analytical, bottom-up approach; the importance it attaches to balance sheet strength and how the managers buy on a low price to book value and sell on a high one. "The large size of the trust makes it an ideal core holding for UK small-cap exposure," he adds.

If there is a market fall Aberforth will not be immune but it is likely to fall less than a growth-oriented fund. "The portfolio price-earnings ratio is still on a 20 per cent discount to the benchmark, Numis Smaller Companies ex Investment Companies, as the managers have been taking profits in former value stocks now on high price-to-book values such as housebuilders, and switching into the new value, for example, resource stock Kenmare Resources (KMR)," explains Mr Tuite Dalton.

The trust faces a continuation vote in February but is expected to pass it.

Aberforth Smaller Companies is on a discount to NAV of 9.91 per cent, which is tighter than its 12-month average of 11.15 per cent, but it is still tighter than some of its peers such as IC Top 100 Funds Standard Life UK Smaller Companies, which is on a slight premium, or BlackRock Smaller Companies (BRSC) on 5.67 per cent.

Aberforth Smaller Companies' performance is not so strong over five years. But that was due to the trust experiencing a period of underperformance because over the five calendar years from 2007 to 2011 value shares within the Numis Smaller Companies Index, from which this trust picks its holdings, underperformed growth shares by 9.4 per cent a year.

And the trust offers something different to the other investment trusts in the UK smaller companies sector, as it focuses on value rather than growth: its managers buy shares in companies they calculate to be selling below their intrinsic value. This is determined through detailed financial and industrial analysis, combined with a valuation approach that focuses on both the stock market and corporate worth.

The trust also has a very reasonable ongoing charge of 0.81 per cent, so is still worth considering. Buy.

Source: Morningstar, *Aberforth.

Performance data as at 6 December 2012

TOP TEN HOLDINGS as at 30 November 2013

Sector breakdown