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5. Uncovering Trusts – abrdn UK Smaller Companies Growth Trust
48 Plays7 months ago
Today Milosz dives into abrdn UK Smaller Companies Growth Trust and its high-conviction investment strategy driven by a proprietary Matrix screening tool. He outlines the manager’s seven principles for successful small-cap investing. He also discusses how the trust performed and its major portfolio activity recently. Finally, he explains the trust’s positioning amid attractive valuations of UK stocks.
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About ‘Uncovering Trusts’
'Uncovering Trusts': is a podcast run by Edison analysts released every two weeks. Subscribe to hear analyst interviews on how investment trusts maximise returns while managing risks for investors.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to the Podcast
00:00:09
Speaker
Welcome to Uncovering Trusts, a podcast by Edison Group, a content-led IR business integrating analyst content, digital targeting and investor engagement. Each episode will uncover the distinct features and the latest developments of a selected listed investment company. So tune in to find some interesting investment ideas and to stay on top of what is happening in the investment company sector.
Meet the Guest: Milos Pabst
00:00:32
Speaker
I'm your host, Suki Thompson, and today I'm joined by Milos Pabst, Director of Investment Trust Content at Edison Group, who will talk us through Aberdeen UK Smaller Company Growth Trust, TICCA AUSC. Milos, thanks for joining us today. Hi, Suki, thanks for having me.
Overview of Aberdeen UK Smaller Company Growth Trust
00:00:51
Speaker
Could you start by providing a high-level introduction to Aberdeen UK Smaller Companies Growth Trust for those listeners less familiar with the fund?
00:01:00
Speaker
Sure, the Aberdeen UK Smaller Companies Growth Trust was launched in August 1993 and is managed by Ebi Glany, who became lead manager at the beginning of 2023 following the retirement of industry veteran Harry Nimmo.
00:01:15
Speaker
She had been co-manager since November 2020. The trust deputy manager is Amanda Iman, who has 17 years of industry experience, five of which have been at Aberdeen. Ebi and Amanda aim to achieve long-term capital growth through investment in a diversified portfolio consisting of UK-quoted smaller companies.
Investment Strategy and Risk Mitigation
00:01:34
Speaker
There is no formal benchmark, but the trust performance is measured against the Deutsche Numi Smaller Companies plus AIMX Investment Companies Index, which is referred to as the reference index.
00:01:46
Speaker
Great, and can you highlight the important features of the fund? The trust portfolio is made up of 50 to 60 of the manager's highest conviction investment ideas. There are a range of parameters to mitigate risk, including a maximum 5% of total assets in a single holding. Gearing is permitted in the range of 5% net cash position to net gearing of 25% of NAV, although I would note that net gearing is generally in a single digit range.
00:02:16
Speaker
Great, I believe there is a clearly defined investment strategy. Please can you explain the manager's investment approach?
00:02:24
Speaker
Yes, sure, that's correct. IBM has employed a proprietary matrix streaming tool which has been successfully employed since 1997 across multiple business cycles and reflects quality, growth, and momentum-based factor analysis. Quality highlights companies that have pricing power, resilient and visible earnings streams, and strong balance sheets.
00:02:48
Speaker
Growth identifies businesses that can grow over the long term through economic cycles, while momentum signals those companies with an ability to meet or beat consensus expectations. Here, it is worth keeping in mind that companies meeting the matrix's quality, growth and momentum criteria will change over the course of the business cycle. The managers also follow seven principles for successful small cap investing.
00:03:15
Speaker
Firstly, a focus on quality to enhance return and reduce risk. Factors which are considered here include strong financials, the strength of a company's relationship with its customers, and an element of pricing power. Secondly, the managers look for sustainable growth, so companies that can deliver consistent year-on-year earnings growth. The third principle is momentum, which means running your winners and cut your losers.
00:03:39
Speaker
The manager's concentrator falls by deploying the matrix, which helps identify suitable portfolio companies and reduces the risk of spending time on stocks that do not meet the required criteria.
Performance and Market Challenges
00:03:51
Speaker
They invest for the long-term, so they aim to identify the great companies of tomorrow and hold them for the long-term, which helps to maximize returns and reduce trading costs. The managers also put emphasis on the quality of management, high ownership and involvement by founders and CEOs with long 10% are viewed positively. And finally, they aim to be, well, valuation aware. Company valuations are embedded within the matrix and the decision-making process, though they are not a primary focus.
00:04:22
Speaker
Having covered the investment approach, could you run us through the trust performance? Absolutely. Most importantly, the trust has a long-term record of outperformance versus the reference index I've discussed a moment ago. However, the trust gave back a significant amount of relative performance in 2022 as rapidly rising interest rates in response to higher inflation
00:04:44
Speaker
led to devaluation of growth stocks. The trust performance has improved in recent months, as investors are once more focusing more on the fundamentals of individual companies, rather than the macroeconomic environment. At the end of February 2024, the trusts now was ahead of its reference index over the last one and five years, and remains considerably ahead over the last decade.
00:05:11
Speaker
So having covered the manager's strategy and the trust performance, could you provide some examples of portfolio activity?
Portfolio Changes and Sector Exposure
00:05:20
Speaker
Sure. For instance, last November, the managers initiated three new positions. Premier Foods has a portfolio of well-known brands, including OXO, Shire Woods, Home Pride, Engine Light, and Mr. Kipling. Over the last five years, the company has reduced debt, resolved expansion issues, and generated consistent growth from its brands. Premier Foods has a strong record of innovation and execution with growth opportunities, both domestically and overseas.
00:05:47
Speaker
The second new position is Cameron Group, a defense business with robust cash conversion and a high-quality order book due to strong long-term customer relationships. And finally, the trust invested in the workware supplier Johnson Service Group, which has higher organic growth and margins than it appears, and its competitive gap is widening due to the company's successful investment strategy.
00:06:10
Speaker
Moving on to some disposals, the holding in XP power, a provider of power supply solutions, was sold in October 2023 following the company's profit warning and dividend suspension. A high level of debt amid difficult trading conditions required an equity raise, and the company subsequently issued another weak trading statement.
00:06:32
Speaker
Then the video games company Team 17 group was sold last November following a profit warning as well, while the following month saw the sale of the position in the technology consulted FDM group following a disappointing meeting with the company's management team where it seemed unclear about the reasons for a difficult 2023 trading environment. Can we now focus in on more details about the trust portfolio structure?
00:06:58
Speaker
Yeah, so the trust top 10 holdings tend to make up, well, around 35% of the fund and these companies operate in a wide range of businesses. To illustrate this, at the end of January 2024, the top three holdings were Hill & Smith Holdings, which is an industrial metals and mining company.
00:07:16
Speaker
Then the media business for imprint group and BIPES technology group, which provides software and computer services. In terms of sector exposure, industrious was the largest, making up around a quarter of the fund, followed by consumer discretionary and financials, which were both around 18%. Although the managers aim to generate capital growth, how about the trust dividend?
00:07:40
Speaker
The trust pays semi-annual dividends in April and October. The board aims to pay out around a third of the total annual distribution as the interim dividend, with around two thirds as the final dividend. In FY23, following two years of depressed income because of COVID, there was a healthy increase in revenue earnings due to both higher ordinary and special dividends received,
00:08:04
Speaker
along with a material increase in interest income as cash balances delivered a meaningful return for the first time since 2008. As a result, the board was able to increase the trust annual dividend by 35.8%. Over the last five years, the trust dividend has compounded at an annual rate of 9.5%.
Why Invest in UK Smaller Companies?
00:08:23
Speaker
Great, so to wrap up, why should investors consider the trust?
00:08:30
Speaker
Well, the UK stock market has been obviously out of favor with global investors for a long time, meaning that domestic company valuations, particularly those of smaller companies, are looking very attractive in both absolute and relative terms. I would note that small cap stocks typically outperform their large cap brethren over the long term, but have lacked in the last couple of years during a period of heightened risk aversion, suggesting a potential good entry point to this asset class.
00:08:57
Speaker
AB and Amanda have adhered to their discipline investment approach through a difficult macroeconomic backdrop and the trust's relative performance is improving helped by using the matrix. This proprietary screening tool allows them to be nimble in identifying potential new attractive investments and highlighting portfolio companies with deteriorating scores that require further investigation.
00:09:19
Speaker
The managers say that there is a wealth of opportunities available in their investible universe, meaning there is no healthy competition for capital within the portfolio. Many portfolio names have positive earnings estimates revisions, which suggests a robust operating environment, and this is confirmed in meetings with companies.
00:09:38
Speaker
Fantastic. I think you've given us a very thorough rundown on what the trust has to offer.
Conclusion and Further Resources
00:09:44
Speaker
And for those listeners who would like to find out more about the trust, you can visit Edison's website and search Aberdeen UK Smaller Companies Growth Trusts. You've been listening to Uncovering Trusts, a podcast by Edison Group. If you want to find out more, visit our website. Thank you.