Aberforth Smaller Companies Trust (ASL) had a difficult period of performance between 2009 and 2011, underperforming for three consecutive years. However, performance has picked up strongly over the past two years, and the trust did particularly well in 2013, as we reported in December.
The trust is one of the best performers in its peer group over one and three years.
- Discount widest for a year
- Value companies attractive
- Low ongoing charge
- Downside mitigation potential
- Can lag growth-orientated peers
The trust's value investing style differentiates it from other smaller companies investment trusts. Its managers buy shares in companies they calculate to be below their intrinsic value determined through detailed financial and industrial analysis, combined with a valuation approach that focuses on both the stock market and corporate worth.
As a consequence of improved performance, its discount to net asset value (NAV) reached levels as high as 1.75 per cent earlier this year, in contrast to the 10 per cent level it traded at in December.
More recently, however, there has been a rotation in performance as larger companies have started to outperform smaller ones, and over the last three months the trust's share price fell 8 per cent, although this is slightly better than its sector average, and not reflective of its NAV return, which was only down 3 per cent. As a result, the trust's discount has moved out to 11.79 per cent, in contrast to its 12-month average of 8.28 per cent.
But analysts at Investec say that while value style investing switched to a tail-wind in 2013 and the US has seen a rotation from growth to value, this has not yet happened in UK markets. "We believe that Aberforth Smaller Companies represents an excellent opportunity to enter a niche area through a vehicle with a strong long-term track record and consistent management team," they add.
Aberforth Smaller Companies' managers believe that although growth-orientated companies are trading at increasingly high multiples, value companies remain attractive. They have recently added to their existing position in airline Flybe (FLYB) for reasons including confidence in its management. The trust currently has 98 holdings, more than usual, because it has recently invested in small caps, with recent purchases including Games Workshop (GAW), FirstGroup (FGP) and Micro Focus (MCRO).
The trust's managers have reduced expensive shares such as housebuilders, for example with the sale of Redrow (RDW).
Analysts at Winterflood also like the trust's experienced management team and recently pointed out that it is the largest and most liquid UK small-cap investment trust with assets of £1.16bn. They said it also pays decent dividends - the trust has one of the higher yields in its sector of 2.25 per cent - and its board remains committed to a progressive dividend policy.
Aberforth Smaller Companies also has a very reasonable ongoing charge of 0.79 per cent.
Because the trust's managers take a value investing approach it has periods of underperformance when it lags growth-orientated peers. If there is a market fall the trust will not be immune, but it is likely to fall less than its growth-oriented peers. Examples include the technology, media and telecoms bubble, and last month when the trust underperformed its benchmark because of its value style and overexposure to the smaller constituents in the Numis Smaller Companies Index.
However, prospects for value shares look good, the trust's historic record remains intact and it provides access to a style of investing that is different to other smaller companies funds. So, while Aberforth Smaller Companies is on its widest discount for around a year, now might be a window of opportunity. Buy.
ABERFORTH SMALLER COMPANIES TRUST (ASL) | |||
PRICE: | 1,046p | GEARING: | 103% |
AIC SECTOR: | UK Smaller Companies | NAV: | 1,182.87p |
FUND TYPE: | Investment trust | PRICE DISCOUNT TO NAV: | 11.79% |
MARKET CAP: | £997.52m | YIELD: | 2.25% |
No OF HOLDINGS: | 98* | ONGOING CHARGE: | 0.79% |
SET-UP DATE: | 10 December 1990 | MORE DETAILS: | aberforth.co.uk |
Source: Morningstar & *Aberforth Partners, as at 1 July 2014.
1-year cumulative share price return (%) | 3-year cumulative share price return (%) | 5-year cumulative share price return (%) | |
Aberforth Smaller Companies ord | 29.74 | 68.45 | 159.95 |
AIC Sector UK Smaller Companies | 22.30 | 51.01 | 204.65 |
Numis Smaller Companies Ex Investment Companies TR GBP | 19.74 | 55.13 | 160.95 |
Source: Morningstar, as at 27 June 2014
TOP 10 HOLDINGS as at 31 May 2014
Holding | % |
JD Sports Fashion | 3.4 |
QinetiQ | 2.8 |
FirstGroup | 2.6 |
RPC | 2.6 |
Vesuvius | 2.6 |
Flybe | 2.5 |
St Modwen Properties | 2.4 |
Spirit Pub Company | 2.3 |
e2v technologies | 2.3 |
Shanks | 2.3 |
Sector breakdown
Sector | % |
Industrials | 32 |
Consumer services | 24 |
Financials | 16 |
Technology | 10 |
Consumer goods | 6 |
Oil & gas | 6 |
Basic materials | 3 |
Health care | 2 |
Telecommunications | 1 |