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31. Uncovering Trusts – abrdn UK Smaller Companies Growth Trust (AUSC) – Delving into the trust’s triple discount
108 Plays1 month ago
In this episode, our director of content, investment trusts Milosz Papst provides a recap of the seven investment principles and proprietary Matrix used by the trust’s managers. He discusses the three growth buckets within the trust’s portfolio: resilient UK-only businesses, leading global businesses and companies growing via international expansion. He highlights that, at the current valuation levels, investors are only paying a modest premium to gain exposure to high-quality UK small-cap growth stocks despite a difficult, low growth economic environment. He also comments on the trust’s long-term record of outperformance versus its reference index and peers, as well as its more recent returns. Finally, he talks about the triple discount arising from low UK valuations vs other geographies, low UK small-cap valuations vs UK large-cap stocks, as well as the discount to NAV at which the trust’s shares currently trade.
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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 Uncovering Trusts
00:00:06
Speaker
Welcome to Uncovering Trusts, a podcast by the Edison Group, content-led IR business integrating analyst content, digital targeting and investor engagement. Each episode will uncover the distinct features and latest developments of a selected listed investment company.
00:00:23
Speaker
So tune in to find interesting investment ideas and to stay on top of what's happening in the investment companies sector.
Interview with Milos Pabst
00:00:29
Speaker
I'm your host, Will Manuel, and today I'm joined by Milos Pabst, Director of Investment Trust Content at the Edison Group.
00:00:36
Speaker
And today he'll talk about the Aberdeen UK Smaller Companies Growth Trust, whose ticker is AUSC. Milos, thanks for joining us today. Hi Will, thanks for having me.
00:00:48
Speaker
Great. So it's now more than a year since we last featured this trust in our podcast. So can we just start with a brief introduction?
Overview of AUSC Trust
00:00:56
Speaker
Yes, sure. i' Launched in August 1993, Aberdeen UK Smaller Companies Growth Trust has two managers, Abbie Glaney and Amanda Yeeman, who form part of a wider, small and mid-cap equity team at Aberdeen.
00:01:10
Speaker
This structure allows them to gain valuable perspectives from managers investing overseas, which is important as in aggregate around half of UK smaller company revenues are generated outside of the UK.
00:01:21
Speaker
The managers generally invest in companies with a minimum £250 million pound market cap, so as you can see, they are not seeking micro-cap businesses. Ebi and Amanda aim to generate long-term capital growth from a diversified portfolio of around 45 to 50 companies.
00:01:36
Speaker
And while there is no former benchmark, performance is measured against the Deutsche NUMIs Smaller Companies plus AIMx Investment Companies Index. Okay, so as a refresher, um let's focus on the manager's investment philosophy and process because i as i understand it, it's a very important part of the story.
Investment Approach for AUSC
00:01:55
Speaker
Yes, of course. So the overall investment approach, which has proved successful over multiple business cycles, is based on quality, growth and momentum factors, with the managers following seven principles for investing in small cap UK stocks.
00:02:09
Speaker
Number one, focus on quality in order to enhance returns and reduce risk. Two, look for sustainable growth by seeing companies that can deliver consistent year-on-year earnings growth, regardless of the economic backdrop.
00:02:22
Speaker
Three, momentum, which means running the winning names and cutting the losing positions. Number four, concentrate the research efforts. I will talk more about this in a moment. Five, invest for the long term, which is essentially an early buying into the great companies of tomorrow.
00:02:39
Speaker
Six, seek companies with high quality management teams that tend to have long tenures and may be found the lead. And lastly, number seven, be e valuation aware, but this should not be a primary focus.
00:02:51
Speaker
In terms of executing the strategy, the managers use the matrix, which is a proprietary screening tool and an integral part of the investment process. It has 12 performance indicators, including earnings growth, share price momentum, valuation, and earnings revisions, which is the most important factor with the highest weighting.
Portfolio Structure and Holdings
00:03:08
Speaker
Now, the matrix can identify a short list of companies that warrant further analysis, either as initiations or tops so top-ups or as reductions or complete disposals. and Importantly, the matrix focuses on, well, focuses the manager's research force, thereby reducing the time spent on stocks that, well, do not meet the required criteria.
00:03:28
Speaker
It also removes any behavioral but biases. Right. Thank you. So um this feeds in nicely to discussion about the trust portfolio. ah Can you give us an idea about its structure and some of its holdings?
00:03:41
Speaker
Yes, sure. um Abby recently noted that although u k economic growth forecasts are lackluster, the Trust's portfolio earnings are currently forecast to grow by 16% this year.
00:03:53
Speaker
She divided the fund into three growth buckets. The first being resilient UK-only businesses, including investment platform AJ Bell, food producer Crancwick, and Telecom Plus, which provides utility services under the utility warehouse name.
00:04:08
Speaker
Secondly, there are leading global businesses that are based in the UK, such as Thread Manufacturer Coats Group, Bloomsbury Publishing, whose slate includes the Harry Potter books, and Ashtead Group, which is a machinery rental business.
00:04:20
Speaker
The third category is growth via international expansion, including Hilton Food Group, Premier Foods, which has a large portfolio of well-known brands, and Breeden, which is an aggregates company that has recently made a major acquisition in the US.
00:04:36
Speaker
Now, if you look at the Trust's top 10 holdings, they make up around 35% the portfolio. These names cover a wide range of growing businesses, and nearly all these companies are meeting or beating consensus earnings estimates.
00:04:51
Speaker
Crimeswick is one of the top 10 holdings. Its senior management team has a combined 100 plus years of experience. The company has a 36 year record of consecutively higher annual dividends, is growing earnings at around 20% per year and has a robust balance sheet.
00:05:07
Speaker
Okay, that sounds good. um What about the trust valuation? Yeah, so this is an interesting one.
Trust Valuation and Dividends
00:05:13
Speaker
Over the last 20 years, the trust has traded at a forward PE multiple premium to the reference index, ranging from two points during the global financial crisis to 14 points during the global pandemic.
00:05:26
Speaker
It is currently towards the lower end of the historical range, meaning that investors are only paying a modest premium to gain exposure to high quality UK small cap growth stocks, despite a difficult low growth economic environment.
00:05:40
Speaker
um Although the trust focuses on capital growth, I would note its dividends. um Semi-annual dividends are paid in April and October with around a third of the total annual distribution as the interim dividend and around two thirds as the final dividends.
00:05:55
Speaker
So the current yield is around 2.4%. Okay. you please provide us with an update on the trust's performance?
AUSC Performance Review
00:06:04
Speaker
ah Yes, with pleasure. While the trust has a long-term record of outperformance versus its reference index and peers, it tends to perform better when share prices respond to company fundamentals, when stock markets are challenged, all during periods of low growth.
00:06:20
Speaker
The Aberdeen UK Smaller Company's Growth Trust had a tough period of performance versus the reference in index in 2022 as rapidly rising interest rates in response to higher inflation ah led to a devaluation of growth stocks.
00:06:35
Speaker
um Relative performance was well unremarkable in 2023, but in 2024, the Trust solidly outperformed as investors paid more attention to company fundamentals.
00:06:47
Speaker
Now looking at peer performance, the Trust is one of 11 funds in the AIC UK small companies sector with a market cap above £100 million, pounds and it is encouraging to see that its NAV total return and ranks second over the last 12 months.
00:07:01
Speaker
Interesting. Right. um So we've discussed the trust in some detail. And maybe now if we could sort of zoom out a bit, because, you know, there's a lot of volatility around in global markets.
00:07:11
Speaker
It'd be interesting to understand where UK small cap stocks fit into that bigger picture.
Market Trends and UK Small Caps
00:07:17
Speaker
Yes, of course. Now, stock market leaders do not retain their positions forever.
00:07:23
Speaker
The US s market has been, as we all know, the only game in town for several years, and this was accentuated over the last two years by the outsized performance of the magnificent seven large-cap tech stocks, which, of course, were seen as beneficiaries of the growth in AI.
00:07:38
Speaker
During this time there was well very little investor appetite for small cap stocks, especially in the UK. um But things have changed this year with President Trump's widespread introduction of tariffs and other policy uncertainty.
00:07:51
Speaker
So now the UK stock market is outperforming the US year to date as funds are starting to flow out of the US and into other regions, including the UK. So far, in the UK, large cap stocks are performing better than small cap stocks. ah But if there is increased demand for UK stocks, it seems likely that there will be a trickle down effect into small cap stocks.
00:08:12
Speaker
There is also a potential catalyst from the pension reform as the government appears to be taking more interest in the very low yeah UK pension fund allocations to domestic equities. and If this situation was to change, it could be very supportive for the performance of UK stocks.
00:08:28
Speaker
Okay, that's an interesting way to wrap up our discussion on Aberdeen UK Smaller Companies Growth Trust. Are there any further comments you'd like to make?
Value in UK Small Caps
00:08:37
Speaker
Yeah, thank you. Just a couple of points. Our listeners should remember that over the long term, small cap stocks have outperformed those of larger companies as they tend to have superior growth profiles.
00:08:48
Speaker
More specifically, as there appears to be more interest in the UK market, now may be maybe an opportune time to consider an allocation to UK small cap equities. ah In very simple terms, according to Aberdeen, looking across the globe, UK small caps is the least expensive asset class versus its 10-year history.
00:09:06
Speaker
So if one was to consider this trust as a good example, um the trust comes with a triple discount. Firstly, the UK market is inexpensive versus other geographies. Secondly, UK small cap stocks are inexpensive versus UK large cap stocks.
00:09:21
Speaker
And thirdly, the trust is trading at a discount to NAV. ah Surely that is worth a look. ah It certainly is. So um thanks again,
Closing Remarks
00:09:30
Speaker
Milos. You've been listening to Uncovering Trusts, a podcast by the Edison Group.
00:09:35
Speaker
If you want to find out more about Aberdeen UK, smaller companies, growth trust and other investment companies we cover, please visit www.edisongroup.com. Thank you.