Strong year for the Aberforth Smaller Companies Trust

The small-cap value oriented investment trust has benefitted from the rotation in favour of cyclicals, yet the shares are still available at a wider than normal discount to NAV of 12%.

Value stocks had lagged behind their growth counterparts for more than a decade, but the development of the first successful Covid vaccine in November 2020 prompted a significant shift into these ‘old world’ businesses as economies were able to get going again. Aberforth Smaller Companies (LON: ASL) has been one of the biggest beneficiaries with an NAV total return of 32.5% in 2021 after an awful 2020.

The numbers were also good relative to its Numis Smaller Companies benchmark that produced a healthy gain of 21.9% over the same period. This double digit outperformance was partly driven by the value tilt and partly by the exposure to the smaller end of the small-cap universe that had the best performance versus the FTSE 250 mid-caps since 1999.

Another positive factor was the focus on domestically oriented companies − 58% of the portfolio versus 51% in the benchmark – which contributed more of the outperformance. The same positioning has also helped in the more difficult markets experienced in the year to date with the NAV down 2.9% on a total return basis compared with a 6.1% fall for the index.

The underlying portfolio

At the end of December the ten largest holdings accounted for just over a quarter of the assets with the positions including: UK newspaper publisher, Reach; the commercial vehicle rental company Redde Northgate; consumer credit provider Provident Financial; plus recruitment agency Robert Walters. The largest sector weightings were industrials at 33%, consumer discretionary 29% and financials 17%.

It is no surprise that the cheap valuations led to a surge of M&A activity in 2021, with six companies out of the 77 within the portfolio – roughly eight percent by number − being subject to takeover bids. Activity was similarly elevated in the wider small cap universe with 25 bids in the 337 stock Numis Smaller Companies index, the highest level since 2015.

The board of directors has declared a final dividend of 24.25p, taking the total for the year to 35.2p, a 5.7% increase on 2020 and equivalent to a 2.5% yield. Dividends were fully covered by earnings and after the final distribution has been paid the trust will have revenue reserves of 59p per share, equivalent to 1.7 years’ worth of dividends.

Positive outlook

Aberforth’s managers expect the inflationary pressures to continue throughout 2022, particularly in the oil and gas sector that they believe has suffered from historic underinvestment. In their opinion the wider market valuations don’t fully reflect the inflationary outlook, which would suggest that the value tilt should continue to outperform.

Numis think that it could be an interesting time to take a look at Aberforth after its long period in the doldrums given that the portfolio remains true to its value style. They point out that it could be a beneficiary of the current inflationary environment and the potential for the UK to come out of the current wave of Covid-19 relatively early.

Aberforth Smaller Companies shares are currently trading on a 12% discount to NAV, which is marginally wider than the 12 month average of ten percent, so there is plenty of scope for it to narrow if the fund continues to perform well. The directors have an active share buyback programme in operation to limit any further downside risk.