Investment Opportunity: Britain on a Triple Discount Through Aberforth Smaller Companies Trust,allowing you to acquire British businesses at reduced prices threefold.
Spicing Up the Smaller Company Party: A Look at Aberforth Smaller Companies Trust
Update: The Aberforth Smaller Companies Trust (LSE: ASL) has had a controversial run, with its three-year record showing a mediocre annualized return of 1.1%, barely edging out the Deutsche Numis Smaller Companies index. However, the shares currently trade at a reasonable 8.6% discount to net asset value (NAV) and boast a 3.6% yield, though neither figure qualifies as a steal.
On the brighter side, ASL has delivered an impressive 11.4% annualized return since its 1990 inception, marking it as a long-term investment opportunity. The fund's liquidity, with assets totaling £1.2 billion, sets it apart, making it one of the few UK-focused, value-oriented, yet non-activist smaller companies trusts.
Triple Whammy Discount Awaits
Despite being out of favor, ASL's style is poised for a comeback. The UK market is pricing itself lower than the rest of the world, while small-cap companies are unusually cheap in comparison to their large-cap counterparts. ASL's portfolio, undervalued at under ten times earnings, capitalizes on this inexpensive small-cap sector.
The unpleasantness surrounding the UK's economic outlook is unwarranted, according to Aberforth managers. The potential for profit recovery through increased earnings is promising, even following the early 1990s recession. Aberforth points out that many companies have the capability to boost margins, and those with revenues generated primarily abroad are undervalued.
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Investment Opportunities in the Making
ASL experienced a potential reversal of fortune in late 2023 to mid-2024, with the share price soaring nearly 50%. Unfortunately, by early 2025, most of those gains had evaporated. Now, an upward trend seems to be resuming, but will it persist?
UK smaller companies are dependent on the domestic economy but can still garner half of their revenues from overseas. While a sluggish UK growth outlook may not be helpful, the correlation between small-cap performance and domestic economy is insignificant.
ASL is managed by Aberforth, an Edinburgh-based firm with six partners and £2 billion in assets under management. In addition to ASL, it manages the Aberforth Geared Value & Income Trust (LSE: AGVI), as well as an open-ended fund. Aberforth encourages investors to focus on earnings recovery, citing previous instances like the early 1990s recession. They maintain that good businesses, both domestic and international, are currently undervalued.
Notably, takeover activity in the small-cap sector has been high, with 41 deals in the period from late 2021 to autumn 2024. The average premium paid in these transactions was an impressive 49%.
Debt-Inspired Ambition
Aberforth's confidence in ASL is reflected in the fund's use of leverage, equivalent to 7% of net assets. This strategy may generate higher returns on AGVI, with a £86 million net asset base supplemented by £42 million of zero-dividend preference shares, resulting in a gearing ratio of nearly 50%. However, AGVI shares trade at a 15% discount to NAV and are fairly illiquid, making them best suited for patient investors willing to hold until the fund's wind-up in mid-2031.
Interestingly, AGVI's portfolio has historically underperformed ASL. While higher gearing can boost returns, its focus on income may yield a dividend greater than 6%, ensuring it may not outpace ASL's gains during a UK-market rally. Nonetheless, there is some evidence that a recovery in the FTSE 100's performance relative to the S&P 500 since early 2024 could trickle down to mid and small-cap companies, and favor value over growth. If this trend continues, ASL's streak of disappointing performance might be coming to an end.
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- Personal Finance Insights: In light of ASL's potential recovery and recent news about takeover activity in the small-cap sector, it might be beneficial for investors to keep a close eye on personal finance news related to UK-focused, value-oriented smaller companies trusts, such as Aberforth Smaller Companies Trust (LSE: ASL).
- Investment Opportunities: For those interested in investing, understanding the trends in the small-cap sector and the potential gains from value-oriented trusts like ASL could prove useful. Staying informed about finance news, especially regarding Aberforth's other funds like the Aberforth Geared Value & Income Trust (LSE: AGVI), could help investors make informed decisions about their personal finance and business investments.
