Abrdn managers position funds for uncertain 2022

Abby Glennie

Managers of some of the most high profile investment trusts run by Edinburgh-based asset management giant Abrdn have published investment outlooks for their funds as stock pickers around the world prepare for a bumpy ride in the global markets of 2022.

Abrdn currently has assets under management and administration (AUMA) of about £542 billion.

Abby Glennie, investment director of the £750 million Abrdn UK Smaller Companies Trust plc, which looks to achieve long term capital growth by investment in UK quoted smaller companies, wrote: “Top-down, macroeconomic effects have driven the rotation away from quality-growth stocks rather than stock specific issues.

“Higher inflation, interest rate rises, political tensions and supply chain challenges have heightened investor uncertainty.

“Notwithstanding this, we have been encouraged by the strong earnings reported by holdings in the Trust, confirming that the sell-off in our quality-growth companies is inconsistent with the underlying trading and fundamentals of these businesses.

“It is encouraging that the Matrix scores (our proprietary screening tool) across the Trust have remained strong, supported by the underlying earnings strength and continued quality characteristics.

“The market rotation has driven the valuation differential between value and quality-growth companies to compress.

“Many cyclical-value stocks will also face stiff headwinds, including the possibility of further pandemic restrictions, inflationary pressures, rising interest rates, falling consumer disposable incomes and continued supply chain disruptions.

“In such a challenging environment, we believe quality-growth businesses should prove more robust, resilient and reliable.

“We hold companies with strong market positions and pricing power, with a better ability to pass on higher costs and protect margins.

“Such companies will have opportunities to gain market share.

“Though difficult to predict when this macro-driven value rally will end, historically they have typically lasted no more than six months.

“We continue to look through the top-down macroeconomic ‘noise’ by remaining focused on company reporting and fundamentals.”

Charles Luke, investment director of the £1.1 billion Murray Income Trust plc, which aims for high and growing income with capital growth, wrote: “Catalysed by hawkish signals from the Fed given concerns around the inflation outlook, real bond yields have risen since the start of the calendar year.

“Furthermore, worries have grown around the possibility of a Russian invasion of Ukraine.

“This has resulted in a sharp style rotation within the equity market favouring value at the expense of quality and growth companies which tend to have a longer duration of earnings while ‘concept’ stocks (mostly in the technology sector) with little or no cashflows have been particularly affected.

“Macro influences can have a salient impact on share prices in the short term but we are reminded of the saying attributed to the famous investor Benjamin Graham that ‘in the short run the market is a voting machine, but in the long run it is a weighing machine’ or in other words long term share price performance will reflect the fundamentals of the businesses that we invest in and that is certainly borne out empirically.

“Our baseline forecasts are for global growth to remain above trend in 2022, helped by a rebound from the Omicron headwind.

“For the UK, in particular, the backdrop is generally supportive with pent-up demand and a fast booster rollout, albeit the prospect of higher utility bills weighing on consumer disposable income and other less benign inflationary pressures are increasingly areas of concern.

“However, we take comfort that the valuations of UK-listed companies remain attractive on a relative basis and as such we think a fair proportion of the portfolio may be vulnerable to corporate activity.

“Moreover, the dividend yield of the UK market remains at an appealing premium to other regional equity markets let alone other asset classes.

“Furthermore, international investors remain underweight the UK providing a further underpin.

“Therefore, we feel very comfortable maintaining our long term focus on investments in high quality companies capable of sustainable earnings and dividend growth.”

Fran Radano, senior investment manager of the the £420 million North American Income Trust plc, which looks for leading US companies, picked for their higher income potential, said: “The US equity market got off to a rocky start in 2022 as investors became more concerned about inflation, looming interest rate hikes by the US Federal Reserve (Fed), corporate profitability headwinds, and geopolitical tensions.

“Consequently, investors have quickly reassessed their portfolio positioning, resulting in a general ‘risk-off’ environment to start the year.

“Inflation is at the heart of many investors’ concerns due to its impact on Fed policy and corporate outlooks.

“Coming out of the Covid-19 pandemic, demand for most goods and services surged thanks to the general reopening of economies globally, supplemented by healthy consumer spending following multiple rounds of stimulus.

“However, supplies of key raw materials remain limited because of Covid-19-induced supply-chain disruptions and/or capacity retirements implemented during the pandemic.

“This combination of strong consumer demand, restricted supply, and congested supply chains has pushed inflation to 30+-year highs.

“As a result, the Fed has no choice but tighten monetary policy through interest rate hikes and balance sheet reduction more quickly than originally expected.

“Investors historically have experienced anxiety during the early stages of a rate-hike cycle because of the potential for ‘over-tightening’ meaning that higher rates lead to slower economic growth and recession in a worst-case scenario.

“From our perspective, the market environment at the beginning of 2022 has been interesting, if not difficult to navigate, for equity investors.

“The sharp and swift rotation towards value-centric areas of the market and commodities in early January was unsurprising, in our opinion, given the markets’ recalibration to adjust for higher inflation and interest rates.

“In contrast, the last half of the month witnessed widespread and indiscriminate selling, which we haven’t experienced in recent times.”

Ben Ritchie, investment manager of the £450 million Dunedin Income Growth Investment Trust plc, which looks to select a diverse portfolio of high-quality UK and overseas companies to deliver a resilient quarterly income and long-term capital growth potential, wrote: “Our outlook remains somewhat cautious.

“Inflation is elevated and expectations around monetary tightening in the developed world are accelerating.

“At the same time rates of economic growth are slowing, fiscal support mechanisms are being withdrawn and corporate profits are being challenged by supply chain disruptions and higher costs.

“This potentially makes for a challenging environment for equities to navigate.

“On the other hand some of the moves in share prices in January have been quite dramatic, despite the modest change in the index overall, which may present further opportunities.

“Overall though we remain happy to keep a balance to our overall positioning giving ourselves the potential to perform in a range of market environments.

“If anything, our attention is now more firmly fixed on seeking to protect capital on the downside, while we continue to look to participate in any upside that may develop and at the same time focus on the companies that meet our sustainable and responsible investing criteria.”

Thomas Moore, investment manager of the Aberdeen Standard Equity Income Trust plc, which looks to provide shareholders with an above average income from their equity investment while also providing “real growth in capital and income,” wrote: “Our investment process, Focus on Change, seeks to identify stocks that are set to benefit from unrecognised positive change in their fundamentals.

“Markets can be irrational, especially during periods of macro disruption such as the Covid-19 pandemic.

“We have observed that the greatest abundance of opportunities can arise in the wake of a crisis, after which there can be long sweeps of more stable market conditions in which these mispriced opportunities can play out.

“We construct the portfolio using a high conviction, index-agnostic approach.

“This means that we ignore index weightings and invest in our best ideas where we see the greatest total return.

“We see a benefit to shareholders over time from investing in small and mid-cap stocks where inefficiencies are most prevalent, given the lack of research analysts covering these stocks.

“After a period of disruption caused by Covid-19, we are now seeing a return to stronger economic growth and higher inflation.

“This is transforming the backdrop against which we are investing; with bond yields rising, it is becoming clearer that new stocks and sectors are taking over market leadership.

“In order to be capable of pivoting successfully in these changing market conditions, it is essential to follow a process that is dynamic – constantly focusing on change in company fundamentals and investing right across the UK equity market.

“We are identifying companies with strong cash flows, driving growth in dividends.

“We have consciously positioned the portfolio in stocks and sectors that have the most attractive dividend growth, which is mainly in areas that are geared to the economic recovery.

“As we enter more inflationary conditions, we are finding companies that can help to protect against the rising cost of living.

“Higher inflation is a function of higher input prices, such as rising oil prices and commodity prices, higher interest rates and higher wages.

“We believe that there are certain sectors which will actually benefit from this environment, specifically financials and resources.”

About the Author

Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.