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In this fund update, Senior Investment Analyst Joseph Hill shares our analysis on the manager, process, culture, ESG integration, cost and performance of the Abrdn UK Smaller Companies Growth Trust.
This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
15 September 2022
The abrdn UK Smaller Companies Growth Trust aims to grow an investment over the long-term by investing in the UK’s big companies of tomorrow. Smaller companies typically have more room to grow than larger ones, although they are more volatile and higher risk. This trust could add diversification to the UK portion of a more adventurous portfolio. The managers’ growth-focused investment style also means it could complement other trusts investing more in companies perceived to be undervalued. When investing in closed-ended funds you should be aware the trust can trade at a discount or premium to net asset value (NAV).
On 5 September 2022, it was announced that lead manager of the trust Harry Nimmo will retire from the investment industry at the end of 2022 after nearly four decades. We are disappointed to see Nimmo leave the industry as investors will no longer have access to an outstanding fund manager who has proved he is one of the best. That said, it’s natural to see fund managers eventually retire after such a long stint in the industry. In recent years, abrdn has communicated the evolution of Nimmo’s role to investors well. He’s gradually been reducing some responsibilities like people management, with succession planning in mind.
Abby Glennie, Deputy Head of Smaller Companies at abrdn, will become lead manager of the trust, and has been co-manager since November 2020. Glennie and Nimmo have worked together for many years and their investment philosophy is closely aligned. She started her career at Kames Capital before joining what was then Standard Life Investments in 2013. Most of her time has been spent analysing UK companies and in 2016 she joined the smaller companies team. Glennie has over 15 years of investment experience.
Glennie will be supported by Amanda Yeaman as deputy manager. She joined the business in 2019 and has over 11 years of investment experience.
The trust has a longstanding and consistent investment approach. The managers use a quantitative tool called ‘the matrix’ to help with the heavy lifting. It gives every company a score based on its quality, growth prospects and the momentum behind its earnings and share price. This enables the managers to exclude weaker companies like those that are loss-making or highly indebted. They like businesses that perform well throughout a market cycle, so they tend to avoid those with earnings that are tied to the fate of the wider economy.
This whittles a universe of approximately 700 companies down to a final shortlist of around 100 for the team to investigate and debate further. Companies in the trust are often still managed by their founders or led by a proven management team. They should also enjoy barriers to entry from competition, a sustainable business model and the ability to raise prices without significantly impacting demand. Meeting each company’s management team is another crucial part of the managers’ due diligence.
The final portfolio consists of 59 companies. The managers’ focus on momentum means they stay invested as companies grow. As a result, around 26% of the trust is invested in the FTSE 250 of medium-sized companies. Medium-sized companies are often seen as the UK stock market’s ‘sweet-spot’ – they have more growth potential than larger businesses but are lower risk than smaller ones as they are more mature. This doesn’t make them a sure thing of course.
Over the trust’s last financial year to the end of June 2022, the managers added nine new holdings to the trust, and sold out of 10. One company they added to the trust was veterinary practices and service business CVS where the managers are optimistic about the growth opportunity and the company’s ability to execute its strategy. One of the holdings that exited the trust was video games developer Sumo which was acquired by Tencent.
The trust also borrows money to invest with the intention of increasing returns (sometimes known as gearing) which increases risk. At the end of the trust’s last financial year in June 2022, gearing stood at 5.1%.
The managers believe that a change in sentiment amid the challenging market condition has contributed heavily to recent performance. They remain confident in the prospects of the companies they own in the trust and that their quality, growth and momentum focused investment process will be effective over the long term.
The trust was previously part of Standard Life plc, until the business merged with Aberdeen Asset Management in 2017 to create Standard Life Aberdeen plc. This later became Aberdeen Standard Investments and in July 2021, the company changed name once again to abrdn in order to simplify and unite under one single brand. While mergers have the potential for disruption, we think the smaller companies team, which also includes UK and European funds, were relatively unaffected. There’s a collegiate feel to the smaller companies team at abrdn. Members share research and ideas with each other, and work with one another to debate and challenge stock decisions.
The managers analyse environmental, social and governance (ESG) factors as part of their research process, seeing it as an important aspect of risk management and assessing a company’s quality. Although the managers’ process doesn’t specifically exclude any particular area it is well embedded in the investment process.
abrdn is a firm well known for its commitment to ESG. Responsible investing has been part of the business since it set up its Corporate Governance team in 1992. We’re pleased to see that abrdn’s commitment to ESG has filtered down to the fund level. abrdn fund managers generally see themselves as owners of businesses, not investors, and stewardship is an important part of their investment processes. The firm exercises all voting rights and engages with management to encourage best practice. ESG and stewardship factors are included in every stock research note and each firm receives an ESG score, based on its ESG credentials and its ability to manage ESG risks. All managers have access to a central ESG team, as well as specialist on-desk analysts.
The trust’s ongoing charge for the year ended 30 June 2022 was 0.82%, which is slightly lower than the previous year’s charge of 0.88%. If held in a SIPP or ISA the HL platform fee of 0.45% per annum (capped at £200 per annum for a SIPP and £45 for an ISA) also applies. Our platform fee doesn’t apply if held in a Fund and Share Account. Investors should refer to the latest annual reports and accounts and Key Information Document for details of the risks and charging structure.
Performance has been strong since Nimmo started managing the trust in 2003. Over this period, the trust’s share price has outperformed the AIC UK Smaller Companies sector average. Our analysis puts this down to Nimmo’s impressive stock picking. Past performance is not a guide to future returns.
Over the trust’s last financial year to the end of June 2022, its net asset value (NAV) fell by 27.25% and its share price fell by 34.33%*. This compares with a loss of 21.20% for the AIC UK Smaller Companies sector average over the same timeframe.
Smaller companies, which are typically more focused on the domestic UK economy, came under significant pressure from the start of 2022. Investors have had to deal with elevated inflation, rising interest rates and the disruption and challenges caused by Russia’s invasion of Ukraine. When inflation is high and interest rates are rising, demand can be hit, especially in consumer exposed sectors. With consumers battling higher living costs and a squeeze on their disposable incomes, these tend to be the first things to be cut back on.
Over the year, the biggest detractors from performance were telecommunications business Gamma Communications and electronic solutions company XP Power. Not all of the companies in the trust lost money over the year though. Telecommunications business Telecom Plus benefitted from the exit of low priced competitors from the industry. Self-storage business Safestore was also a strong performer and benefitted from solid consumer demand.
At the time of writing, the trust trades at a 14.86% discount to net asset value (NAV). The trust has long-term performance potential, but periods of volatility should be expected. Remember all investments fall as well as rise in value, so investors could get back less than they invest.
Past performance isn’t a guide to the future. Source: *Lipper IM to 31/08/2022.
Find out more about abrdn UK Smaller Companies Growth Trust including charges
View abrdn UK Smaller Companies Growth Trust Key Information Document
Our expert research team provide regular updates on a range of investment trusts.
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This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
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