The Abrdn UK Smaller Companies Trust plc has reported that its net asset value total return was 12.4% for the six months to December 31, 2021, while the share price total return was 10.1%.

This compares favourably with a total return of 3.1% for the company’s reference index the Numis Smaller Companies plus AIM (ex investment companies) Index.

The trust’s total assets rose 8.8% to £862.8 million.

The closed-end fund declared an interim dividend of 2.70p and said it expects to maintain the full year dividend at the same level as last year and to “start the process of replenishing revenue reserves” which have been depleted over the last two years.

The trust said that the five companies leading performance of the fund during the period were Safestore (+49.9%), Kainos (+31.5%), Future (+18.0%), Impax Asset Management (+31.4%) and Alpha Financial Markets (+35.2%).

The five worst performers were Gamma Communications (-16.9%), AO World (-58.0%), Victorian Plumbing (-66.4%), Gear4Music (-28.0%) and Games Workshop (-11.7%).

The trust sold its holdings in AO World and Victorian Plumbing.

“From a performance perspective, we appear to be continuing to ride a form of rollercoaster,” said Abrdn UK Smaller Companies Trust chair Liz Airey.

“In the year to 30 June 2021 the company underperformed the Reference Index by over 10%, while in the last six months the situation has reversed and the portfolio has outperformed by over 9%.

“Put together, the company has marginally outperformed the Reference Index over the 18 months.

“This supports the investment manager’s assertion that the investment process should outperform the Reference Index over longer term periods, even if there will be periods of underperformance.”

However, in her outlook, Airey cautioned: “The board has noted the fall in the share price and the NAV per share since the end of the period, each by more than 19%.

“This is evidence of the significant and severe rotation that we have seen in the market where investors have been moving out of quality and growth stocks and into value.

“This is an established phase in the market cycle and, while it makes for grim reading, the portfolio managers do not believe that they should try to become timing experts to try to time the change in market sentiment.

“Past experience leads them to conclude that this phase in the cycle should not be long lasting and that this will, over the longer term, come to be seen as a blip.

“The board understands the premise and supports the stance that the portfolio managers have taken and I hope that we will be able to confirm this to have been the case when we report on the full year results in the summer.”

Harry Nimmo and Abby Glennie, the investment managers of Abrdn UK Smaller Companies Growth Trust plc, said on the outlook:  “The world is splitting into two camps when it comes to the approach to the Omicron variant of the coronavirus.

“The UK, Europe and the US are tending to relax the rules on travel and quarantine.

“They take the view that it is futile to try and stand in the way of such a contagious disease and in any case vaccine levels are high and symptoms are generally modest.

“Others in the Far East, such as China, Japan and South Korea, are imposing draconian restrictions.

“The former has led to optimism on growth but accompanied by rising inflation and indeed actual or potential rate rises. In the Far East, the heavy restrictions mainly mean that growth will be subdued.

“Rising inflation is an issue for market levels and is likely to result in policy changes at central banks, making interest rate rises a racing certainty in the next few months.

“Economic growth has returned but it has been accompanied by major shortages and dislocations across many sectors.

“It is noticeable that most of the company’s retail holdings warned about the impact on earnings forecasts of disruption to supply chains. International logistics challenges and labour shortages across key sectors such as trucking are likely to remain for many months to come.

“The UK has the added disadvantage of the impact of Brexit.

“We are now through the first stage of the economic recovery and are in a somewhat dangerous stage in the cycle, as the market waits for interest rates to rise as inflation goes up.

“The holdings in the portfolio, apart from small pockets impacted by supply chain disruptions, are in good shape judging by the most recent results season.

“Their QGM (Quality, Growth and Momentum) characteristics indicate to us that they should be able to ride out choppy market conditions as the strong get stronger in each new economic cycle however, in the short term, if markets continue to focus on recovery sectors, performance could continue to be hit hard.

“The new issues market is quieter but there are still a number of interesting companies that might look to list if our meeting schedules are anything to go by.

“As we have said before, our process remains unchanged.

“Our emphasis on risk aversion, resilience, growth and momentum still feels right for the future over all time periods except the short term.

“Caution should be the watch-word however.

“Smaller company investing should be viewed as a long-term investment and we have no doubt that patient investors will be rewarded in the longer term.

“Our stable process has been seasoned by fully four economic cycles. We remain very optimistic about the future of the company in the long term.”