Aberforth Smaller Companies Trust - update

UK smaller companies remain out of fashion. Rob Morgan looks at a possible way to take advantage.

This content is more than 6 months old now, please visit the news area of this site for more recent content

  1. Rob Morgan

For some time now investors have been avoiding the UK. Global asset allocators as well as domestic investors have been reducing their exposure, or steering clear altogether, owing to the uncertainty posed by seemingly endless Brexit negotiations.

Shorter term political wranglings rarely turn a good business into a bad one, though. Lots of companies are still doing well despite confidence being in short supply. UK equities generally trade at low levels in relation to their level of earnings and future growth potential, and this could signal an opportunity to take a different view from the consensus; one that is highly profitable in the longer term.

Negative news often presents the chance to pick up investment bargains, and in conducting our recent review of UK funds we found that most number of managers were particularly excited by the opportunities being presented, notably among more domestically-exposed stocks in the small and medium-sized parts of the market.

Against this backdrop, we believe Aberforth Smaller Companies Investment Trust could be of interest for contrarian investors seeking value. Aberforth is a privately owned, ‘boutique’ fund manager, that has specialised in UK smaller company investing for around 25 years. Their approach focuses on unearthing companies whose shares are at low valuations but whose longer term potential they believe has been misunderstood or underestimated by the market as a whole. Combined with meeting company management and understanding the industry environment, their process aims to uncover less fashionable businesses priced below what they consider to be ‘intrinsic’ value. The Trust’s portfolio is fairly diverse, typically representing at least 80 of the team’s ideas, and has a long holding period.

This style has been a headwind in recent years with investors prioritising ‘quality’ companies offering highly probable growth in earnings against a backdrop of low returns from other assets such as cash or bonds. This has been compounded, to a certain degree, by investors favouring overseas earning firms over those with an orientation towards the UK economy.  Despite this, the Trust has been able to keep up with its benchmark (the Numis Smaller Companies ex-IT index), and we retain confidence that the Trust could provide strong returns versus its peers going forward, as well as important diversification to the more growth-orientated funds that are more prevalent in the sector.

Looking forward, the managers are optimistic, notwithstanding the uncertainty surrounding the UK’s exit from the EU. They explain that balance sheets remain in robust shape and that an upturn in merger and acquisition activity looks likely given relatively low valuations, particularly for overseas buyers who can take advantage of sterling’s weakness. Travel agent Hogg Robinson’s purchase by American Express and electronics firm Laird’s takeover by a private equity firm are recent examples of portfolio holdings that have been subject to takeover activity.

The mangers also assert that many of their holdings have reported strong results despite economic uncertainty, including home furnishings retailer Dunelm, transport group Go-Ahead, metal flow engineer Vesuvius and RPS, an international consultancy firm. However, PR company Huntsworth and Restaurant Group have been less successful, the latter affected by the departure of the CEO, who championed a controversial acquisition of Asian restaurant chain Wagamama. As a whole, they believe companies in the portfolio appear to be very modestly-priced, even by their own standards of seeking out good value.

Within the UK Smaller Companies investment trust sector there continues to be fairly wide discounts available. This Trust is no exception with shares currently trading at a discount to net asset value of around 8%. The likely explanation is, of course, Brexit concerns. Small UK quoted companies are often more exposed to the UK’s domestic economy and could therefore be particulalry vulnerable to an acrimonious divorce, though it is worth noting that the discount has actually narrowed over the past year and was typically in double digits during 2017 and 2018.

Our view

The key attraction of this Trust is the team’s adherence to a disciplined, valuation-focused process and, as a result, its differentiated nature. While there are no guarantees that an improvement in sentiment towards UK smaller companies, or greater enthusiasm for value-orientated managers, will help propel the Trust’s performance on ‘both engines’, we retain confidence in Aberforth’s approach and talented team. It remains part of our Foundation Fundlist of preferred investments across the major sectors.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

More from author

  1. Rob Morgan

    Does your portfolio need a spring clean?

    Fund Research - 6th Apr 2019 08:24am

    Spring is a perfect time to take a fresh look at your investments. Rob Morgan looks a...

  2. Rob Morgan

    Investec Diversified Income – fund update

    Fund Research - 6th Apr 2019 08:24am

    Many investors want to generate consistent returns and a high income. This fund share...

  3. Rob Morgan

    Jupiter Absolute Return – fund update

    Fund Research - 6th Apr 2019 08:24am

    This fund offers lower volatility and little correlation to equity markets – but it w...

Most read articles

  1. Aberforth Smaller Companies Trust - update

    Does your portfolio need a spring clean?

    Fund Research - 6th Apr 2019 08:24am

    Spring is a perfect time to take a fresh look at your investments. Rob Morgan looks a...

  2. Aberforth Smaller Companies Trust - update

    Investec Diversified Income – fund update

    Fund Research - 6th Apr 2019 08:24am

    Many investors want to generate consistent returns and a high income. This fund share...

  3. Aberforth Smaller Companies Trust - update

    Jupiter Absolute Return – fund update

    Fund Research - 6th Apr 2019 08:24am

    This fund offers lower volatility and little correlation to equity markets – but it w...

Investment involves risk. You may get back less than invested.