 Ima Jackson-Obot
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UK smaller companies are the most unloved stocks in the world, according to a new study by Abrdn.
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But despite the negativity, Abrdn which is being renamed Aberdeen said, there were still smaller companies that were “high quality, growing their earnings, and have good momentum behind them”.
Looking at the 12-month forward P/E ratio - a key metric investors use for valuing a stock or index - across major small and large cap indices, Abrdn found that UK smaller companies are currently trading at a discount of -23.4 per cent to their 10-year average (data up to 31 January 2025) - the widest of any major region.
The investment manager looked at the 12-month forward P/E ratio, which compares current share prices to estimated future earnings per share for the next year. It said a discount to historic levels suggested investors could now pay less to buy into the same earnings growth potential.
European small caps were second cheapest by historic standards (-19.8 per cent) followed by Chinese large caps (-11.5 per cent) and Japanese small caps (-8.8 per cent).
According to the report, the UK and Japan were the only markets where both small caps and large caps had 12-month forward P/E ratios that were below their 10-year average.
Smaller companies (small caps) globally were trading at a discount: -3.2 per cent compared to their 10-year average 12-month forward P/E ratio when looking at the MSCI All Country World Index (ACWI).
But, at -23.4 per cent, the discount for UK smaller companies was the biggest of any major index of small caps or large caps globally by a significant amount.
This was despite the fact that UK smaller companies were forecast to grow their earnings by 10 per cent over the next year.
Abby Glennie, co-manager of the Abrdn UK Smaller Companies Fund and the Abrdn UK Smaller Companies Growth Trust, said: “These discounts reflect the negative sentiment that we’ve seen towards UK smaller companies in recent times.
“True it’s been a tough period for the sector – with weaker performance and tightening regulation. But ultimately negative sentiment is just that – sentiment. When you look at the fundamentals, there are many brilliant smaller companies in the UK who are outperforming global and much larger rivals in terms of earnings growth.
“Investing in smaller companies can be volatile – but for those willing to take a long-term view, the current scale of discounts could present an attractive opportunity.”
The markets trading at the largest premiums to their averages over the past decade were Chinese small caps and US large caps (45.6 per cent and 29 per cent respectively).
In the US, this was likely down to high levels of investor confidence after a period of strong performance from American large caps. Chinese smaller companies were expensive versus historic levels because they had seen a material drop in earnings – therefore bringing down the E in the P/E ratio, Abrdn said.
Despite the negative sentiment towards UK smaller companies, Glennie said For investors looking for diversification, an exposure to small caps could be very helpful.
She added: “In recent years stock market performance has been dominated by the US and particularly the “Magnificent 7” tech companies. We see this reflected in the strong premium investors are willing to pay for US large caps – whose current 12-month forward P/E ratio is 29% higher than its 10-year average.
“However, there is increasing awareness that the narrowness of this outperformance is unhealthy and leaves the large cap benchmark subject to setback should any of these companies fail to deliver on investor expectations.
“Performance among smaller companies is highly variable – some will flop, while others will grow into industry titans. This is why we take an active approach to stock picking, focusing on our investment process of “quality, growth, momentum”.
“This means looking for smaller companies that are high quality, growing their earnings, and have good momentum behind them. Despite all the negative talk about the UK market, we are still finding plenty of exciting companies that fit this bill.” |
hTTps://www.trustintelligence.co.uk/articles/opinion-catalysts-for-a-small-cap-revival-mar-2025? |
What’s going on here - last 6 months aberforth is down 16% vs 3% in ftse 250? |
Final Results -
Net Asset Value per Ordinary Share Total Return: 12.1%
Ordinary Share Price Total Return: 10.7%
DNSCI (XIC) Total Return: 9.5%
Total ordinary dividends (excluding special dividend) for the year of 43.60p per share represents growth of 5.1% compared to last year’s 41.50p per share. In addition, a special dividend of 6.00p (last year: 9.00p) results in total dividends of 49.60p per share for the year.
Dividend Declaration -
The Board of Aberforth Smaller Companies Trust plc today announced a proposed final dividend of 30.00p per share, together with a special dividend of 6.00p per share, in respect of the year ended 31 December 2024.
Subject to shareholder approval at the AGM to be held on 6 March 2025, the dividends will be paid on 10 March 2025 to shareholders on the register at the close of business on 7 February 2025. The ex-dividend date is 6 February 2025. |
Kepler...One trust that has benefitted from the M&A rush has been Aberforth Smaller Companies (ASL). The six-strong management team have an enviable track record of takeouts, having captured over a third of all M&A activity in their benchmark, the Deutsche Numis UK Smaller Companies ex Investment Companies Index, plus TI Fluid Systems which was a top five position at the end of November. This is simply an outcome of their stock selection approach and strong focus on valuations, and not a goal despite the high hit rate. The managers also engage actively with buyers if they don't believe a bid reflects the real value of the firm, and have a good track record of improving outcomes for all shareholders.Whilst M&A has been a positive contributor to performance, the strong focus on valuations has been the primary driver, leading to outstanding performance over multiple time periods. The managers describe this as their 'value roll' approach, which has seen average portfolio sales of 10.1x EV/EBITDA, versus an average 8.3x for purchases. For context, the average sale for their takeovers has been 13.9x showing the value bid activity has added. As such, we believe ASL can continue to deliver outperformance should the return of inflows prove short-lived, though it would certainly prove a healthy tailwind to a trust that has outperformed notably in the c. three and a half years since the UK last saw net inflows. |
Closing all time high |
Yes excellent year Hats off to the managers here Always good to invest when they have so much skin in the game too ! |
Net Asset Value ("NAV") per Ordinary Share for the above company as at the close of business on 4 July 2024
Including ALL Revenue = 1,708.43p |
''Despite the recent good run in absolute terms, the managers still believe the market offers very compelling value opportunities. They note that valuations reflect poor sentiment, but fundamentals are nowhere near as bad as these falls would suggest, and therefore there is the potential for a significant rebound. To support this, the managers note that the UK is undervalued versus global markets, small-caps are undervalued versus large-caps and ASL is undervalued versus the benchmark. As such, they believe their portfolio is on an effective triple discount.'' |
Good mention....hTTps://www.ii.co.uk/analysis-commentary/trusts-offering-solution-declining-company-listings-ii532046?utm_source=newsletter&utm_medium=email&utm_campaign |
James Carthew: Sit on Aberforth’s income until the UK rerating arrives -
Annual results from Aberforth Smaller Companies underline anomaly of £1bn trust’s 12% discount with its holdings valued at under eight times earnings and paying good dividends... |
Updated top 10Wincanton Wilmington VesuviusMorgan Advanced MaterialsRedde Northgate FirstGroup International Personal Finance Just Group Mitchells & ButlersCentamin |
Monthly investment commentary: JanuaryThe UK stock market fell in January and trailed the gains made by other major international indices. The disinflationtrend continues, but CPI releasesin the month were not as low as hoped. As a result, expectations for the first roundof rate cuts from the Federal Reserve and Bank of England have been pushed further into the future. Within the UK,large caps performed slightly better than small caps and the growth style out?stripped value. The Fund was down by2.0%, in?line with the 2.0% decline of the benchmark DNSCI (XIC) and behind the FTSE All?Share's 1.3% fall.The leading positive contributor to performance was Wincanton, the logistics provider. It was subject to arecommended cash offer from a subsidiary of CMA CGM, the French shipping and logistics operator. CMC Markets,the financial derivatives dealer, performed strongly following the announcement of improved quarterly trading, ledby an increased contribution from its B2B and institutional business. Foxtons Group, the estate agent, was anothergood performer as it issued a positive trading update, which indicated 2023's earnings would come in ahead of priorexpectations.Losers in the month included Close Brothers, the banking and asset management business. The share price fell afterthe Financial Ombudsman decided against motor finance companies, which prompted a review by the FCA.Compensation or redress could affect the bank's earnings and capital base. Shares in Reach, the publisher, fell butthere was no company specific newsin the month. In the background, concernsremain about a sustained slowdownin advertising spending, while changes to Google's approach to third party cookies complicate how advertisersreached their intended audience. |
Peel Hunt- Similarly, ASL's price to earnings of 6.9 times is a near record low, reflecting its focus on the smaller company end of the UK, where the discount to global markets is particularly stark. Peel Hunt emphasised the portfolio has strong balance sheets, with under 20% holding net debt twice as high as pre-tax profits.The £1.3bn trust benefited from increased M&A in 2023, driving shareholder returns of 6%, ahead of its benchmark's 4%. While the shares trade at an 11% discount, Peel Hunt does not expect it to persist as international and domestic buyers realise the returns on offer at the small-cap end of the UK market. |
Tip Watch #2: Keep faith in my 2023 investment trust tips - they WILL come good
So says This is Money’s Jeff Prestridge. The commentator opens his above-titled article by highlighting how in 2023 “…equity investing…proved very much hit and miss…” Why? Because of “…a mish mash of factors – from uncertainty over the global economy to continued geopolitical tensions and a toxic mix of persistent inflation and high interest rates.” What’s more “The performance of investment trusts reflects this uncertain backdrop…of the 380 stock market-listed funds covered by the industry's trade body, the Association of Investment Companies, only 210 (55 per cent) have generated positive returns during 2023 – returns including both dividends and capital gains, but excluding investor costs. Factor those in and the number of positive returners reduces further…Of course, when five-year performance numbers are looked at, the picture changes. Far more funds (three quarters of them) have delivered positive returns.”
As for Prestridge’s 2023 tips: “This time last year, I assembled an investment trust portfolio that I thought could deliver spectacular returns. Not necessarily straightaway, but certainly over three to five years. The portfolio comprised ten trusts…investing in different parts of the world, some for growth, others for a mix of capital and income return…What linked these ten trusts a year ago was the fact that their share prices did not reflect the value of their underlying assets. They were sitting at big double-digit price discounts…My thesis was that these bargain prices would not last forever –resulting at some stage in a performance boost. I thought that maybe the discount propellant might kick in this year.” The ten trusts are listed below:
abrdn New India; Augmentum Fintech; Herald; Seraphim Space; Aberforth Smaller Cos.; Brunner; Invesco Asia; Schroder UK Mid Cap; Templeton Emerging Markets; and VinaCapital Vietnam Opportunity
The article continues: “So what's happened to these trusts over the year? Have they delivered the stellar returns I thought they were capable of? The answer is no. I know this because I invested £100 in each of these ten trusts at the start of the year via my stocks and shares Isa. Looking at my Isa yesterday, the collective value of these holdings was £845.32. Add in the dividend income I have received of £15.09, and my £1,000 investment is now worth £860.41. In percentage terms, that is a significant fall of 14 per cent.” Despite the disappointing performance, Prestridge is sticking to his guns: “…I still believe that this portfolio will prove itself in time. Tellingly…nine of these trusts still have share prices at a big discount to the value of their underlying assets. These discounts will disappear if market sentiment improves. Maybe that will happen next year, maybe not. But I will hold these ten trusts until they sparkle.” |
An improvement indeed Dave! |
The Net Asset Values ("NAVs") per Ordinary Share for the above company as at the
close of business on 19 December 2023 were:-
Excluding current year Revenue = 1,457.80p
Including ALL Revenue = 1,504.45p |
IC...This trust, which has assets worth over £1bn, invests in UK smaller companies and was trading at a 12.7 per cent discount to NAV as of 31 October. But my feeling is that UK equities trusts in general, especially small and mid-cap focused ones, look quite attractive. The valuations of Aberforth Smaller Companies’ holdings in particular look reasonable, as well as the trust being on a discount to NAV.
The underlying portfolio has a price/earnings ratio (PE) of about 7 times [in late October] and from that valuation the prospects for absolute gains are good. About half of its stocks have net cash on the balance sheet so they are not highly leveraged ‘zombie’ companies. Even if earnings don’t come through, the portfolio is still very inexpensively valued. And its managers have noticed a pick up in mergers and acquisitions – overseas investors buying UK smaller companies.
I hope that the Aberforth trust will outperform the FTSE All-Share index over the next three years, but in any case buying at about £11.44 [the price at the time of writing] will make you money eventually – if you are patient. The trust is more likely to go down than up in the next three months, and its managers take a value oriented approach so returns will either be at the top or bottom of its sector. Over the past decade this investment style has not done well but is a bit of a tailwind at the moment. And as interest rates peak out and inflation comes down, purchasing a well run portfolio should pay off even if we go into recession. |
27 Sep NAV Including ALL Revenue = 1,417.00p |
A 34% increase in a well covered dividend. Nice! |
Held up well, presumably all thanks to an overweight RPS position. Imo they need to cash in and start deploying the proceeds now. |
This is one of my favourite trusts. |
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