Investments

With the Aberforth Smaller Companies Trust, you can purchase Britain at a threefold reduction

By James Mackreides 16 Jun, 2025
With the Aberforth Smaller Companies Trust, you can purchase Britain at a threefold reduction
According to James Mackreides, the value-focused Aberforth Smaller Companies Trust should do well if UK stocks gain popularity again

Aberforth Smaller Companies Trust (LSE: ASL) doesn't seem intriguing based on its three-year history. For more than a year, the annualized investment return of 11% has lagged behind the Deutsche Numis Smaller Companies index, which is currently at -0.1%. The shares yield 30.6 percent and trade at a fair 80.6 percent discount to net asset value (NAV), but neither is at a discount to the market price.

But in the long run, ASL appears to be far more appealing. Since launch in 1990, annualized returns have been 11.4 percent. With assets of 12 billion, the fund is comparatively liquid and the only value-oriented, non-activist trust for smaller UK companies.

Trading at a triple discount is what Aberforth Smaller Companies Trust does.

The funds strategy essentially trades at a triple discount, and although ASL's style has been largely out of favor, that is expected to change. Comparing the UK market to the rest of the world, it is inexpensive. At less than ten times earnings, the Aberforth portfolio is inexpensive in comparison to the small-cap index, and small-cap companies are remarkably inexpensive when compared to large-cap ones.

With the share price increasing by almost 50% between October 2023 and July 2024, it appeared that ASL's fortunes had improved last year. However, by the beginning of 2025, almost all of that progress had been refunded.

Now that the trend is back on the rise, will it continue?

A low growth outlook for the UK is not helpful because smaller businesses in the country are more reliant on the domestic economy than larger ones. However, it is estimated that abroad accounts for half of mid-cap revenues, compared to three-quarters for the FTSE 100. Although small-cap funds are unpopular, there is little correlation between their performance and that of the domestic economy. This is a reflection of the gloomy state of the UK economy.

Aberforth, an Edinburgh-based boutique with six partners and just under £2 billion in management, is in charge of ASL. It exclusively makes investments in smaller UK businesses. Apart from ASL, the company also oversees an open-ended fund and the smaller Aberforth Geared Value and Income Trust (LSE: AGVI).

Aberforth suggests that investors look past the subpar UK economic data to the possibility of an earnings recovery, which is exemplified by the recovery following the recession in the early 1990s. Many businesses could boost their profits by increasing their margins. Furthermore, the managers contend that good companies that primarily conduct business abroad are also undervalued.

It should be noted that there have been a lot of takeovers within the Deutsche Numis Smaller Companies index, with 41 occurring between the end of 2021 and the fall of 2024. The average premium between the offer price and the share price just prior to the bid was 49%.

Getting ready.

This confidence is reflected in Aberforth's use of borrowings to improve performance, which amounts to 7% of ASL's net assets. In a rising market, purchasing AGVI should, in theory, yield a larger return than purchasing ASL. When 42 million zero-dividend preference shares are added to its 86 million net assets, the gearing ratio approaches 50%. Even though Aberforth's partners own a sizable portion of AGVI shares, which trade at a 15% discount to NAV, they lack liquidity. Thus, those who are ready to wait until wind-up in mid-2031 are the best candidates for them.

Additionally, AVGI's portfolio has historically performed worse than ASL's. Although greater gearing increases returns, a focus on income (the dividend yield is probably more than 6%) results in lower underlying performance, so it won't always outperform ASL during a UK market rally. With a gain in sterling that is very comparable to the S&P 500's since the beginning of 2024, there is some indication that the FTSE 100's relative performance has improved. As with the FTSE 100, if this trend continues, it is very likely to trickle down to mid and small caps and prioritize value over growth. If so, ASL's run of underwhelming results will soon come to an end.