Aberforth Smaller Companies Ord

The management team of ASL have a value style of investing, meaning they look to buy undervalued companies and hold them as their share prices recover. This investment approach tends to do best in periods of high or rising interest rates, whilst potentially lagging in periods of low interest rates as was the case in the 2010s. However, over the long-term, the value investing approach has tended to deliver better returns than the wider market.

Whilst this style factor can influence performance, the stock focused approach means that correctly identifying stocks that see a recovery in their share price, and avoiding those that continue to be weak, will be the primary driver of whether or not the fund beats its comparators. One factor that can have an effect on performance, especially with this strategy is M&A . Takeover targets are often companies that have seen their valuations fall to levels whereby other strategic investors, such as private equity or rivals could look to capitalise. When bids come in, they are usually considerably above the prevailing share price, leading to a short-term positive impact on performance.

Another potential positive is dividends. Whilst not an explicit goal of the managers, ASL has a good track record of dividend payments over the years aided by the value style. Dividends have grown roughly in line with inflation over the long-term, with an average yield of around 3%. These can be an important contributor to total returns for shareholders.

This performance profile is evident in the past five-years of returns which we show below. This shows how the fund has performed versus the average of a group of investment trusts which invest in a similar area to ASL, therefore, we can make fair comparisons as a peer group. ASL initially struggled versus peers in 2020 when interest rates were reduced considerably, but performing much better since, aided by strong performance in 2023 and 2024 as M&A has become a major factor in the UK market.

The managers focus on stocks that are out-of-favour, often as a result of arguably temporary issues, and buy them in expectation of a recovery. When these get towards a level the managers deem a fair value, they will recycle the profits made back into another, overlooked stock trading at a depressed valuation. This approach is called value investing, and will result in a portfolio that often looks very different to the market as by nature the managers tend to buy companies when most others are ignoring them, This style is quite rare in smaller company investing, further adding to the likely differentiation.

The companies that make up the portfolio will vary depending on economic conditions, often being counter to what is in favour. For example, the managers have held several asset management stocks, despite concerns over weakness in the UK stock market and outflows, as well as fee pressure. Similarly, despite ongoing concerns about weak consumer spending, they have had a considerable allocation to consumer focussed stocks. This comes from their focus on cash-flows of a business which they believe is a better sign of strength, rather than focusing on the broader narrative that can affect sentiment. This approach has remained the same since the fund’s inception in 1990 and is designed to be repeatable and provide consistent returns over the long-term.

• Smaller companies can be more volatile than larger cap equivalents
• The fund has a strong bias to the value style of investing which can be out of favour at periods
• The potential for growth in the UK economy continues to be under pressure