£450m Abrdn UK Smaller Cos fund trails index again

Abby Glennie

The £450 million Abrdn UK Smaller Companies Growth Trust plc announced that it extended its period of underperformance against its benchmark on both a net asset value (NAV) and share price basis in the year to June 30, 2023.

The net asset value total return for the fund was -7.4%, while the share price total return was -6.8%. By comparison, the UK smaller companies sector as represented by the Numis Smaller Companies plus AIM Index delivered a total return of -2.8%.

Nonetheless, total dividends for the year from the trust will amount to 11p per share, an increase of 35.8%.

The fund is run by Abrdn investment managers Abby Glennie and Amanda Yeaman.

The fund’s largest investments at June 30 included 4imprint, Bytes Technology, discoveryIE, Games Workshop, JTC, Alpha Financial Markets, Diploma, Hill & Smith, CVS and Ergomed.

The investment trust’s chair Liz Airey wrote that the drivers of current underperformance “are primarily a confluence of external events” and include conditions that “reflect the weak UK economy, rising inflation and the sequential increases in interest rates we are experiencing as well as the political turbulence.”

Airey said these events “have created a difficult macro environment for investing in small companies generally, but particularly for the manager’s investment style, which focuses on Quality, Growth and Momentum factors — and we believe does so to a greater extent than any of the peer group companies in the sector.”

Investment managers Glennie and Yeaman wrote that the five leading positive contributors to relative performance during the year were the shares of 4imprint (+106%), Games Workshop (+60%), Diploma (+33%), Kainos (+ 11%) and discoverIE (27%).

The five worst contributors to relative performance during the year were were the shares of Focusrite (-57%), Hilton Food (-38%), Future (-60%), Mortgage Advice Bureau (-33%) and Marshalls (-46%).

The managers wrote: “We initiated positions in some holdings which have been held historically in the portfolio. Ricardo has transformed its business, now positioned as a leader in environmental and engineering consultancy; working with governments, agencies and corporates to implement sustainability agendas and strategies.

“Paragon Banking is a specialist lender, with a focus on buy-to-let markets in the UK. The business has demonstrated strong credit quality through the years, and with a strong retail funding model and capital support, it continues to take market share as a specialist, particularly in the professional landlord arena.

“Smart Metering Systems has two key divisions; household smart meters which provide long term visible and inflation linked revenue streams, along with the new exposure to battery storage in grid networks – an attractive return and growth exposure for the business.

“FDM Group is a specialist at recruiting, training and deploying IT and business professionals, operating globally.

“Craneware is a technology specialist operating in the US healthcare market, focused on financial and operational optimisation for hospitals.

“Coats is a global leader in thread production, with exposure to apparel, footwear and specialty markets. One key growth area for its business is its leading position in sustainable thread, a product increasingly in demand as industries move towards more sustainable production.

“Alpha Group (previously called Alpha FX) is another business which has expanded into interesting adjacent markets; now half fintech, half consultancy. Whilst its FX (foreign exchange) risk management business for corporates has gone from strength to strength, it has also expanded into banking solutions for alternative asset managers, and the corporate services and fund administration companies that support them.

“Spirent is a leading provider of automated testing and assurance solutions for networks, security and positioning.

“Key tops up in the period included the position in Volution (leading supplier of ventilation products, with global exposure), CVS (vet practices across the UK), and Serica Energy (North Sea gas and oil producer).

“We also added to 4imprint (US promotional products), Games Workshop (hobby business with Warhammer IP), YouGov (data services business for market research), Gamma Communications (telecommunication and services provider for businesses), Midwich (audio visual value added reseller), Treatt (natural flavours and fragrances), and Tatton Asset Management (a leading provider to the UK’s IFA community, including through strong growth in its MPS (managed portfolio services) offering).

“Key reductions to positions were in companies across a range of sectors. We trimmed the position in Kainos where the valuation of the business left demanding earnings upgrades required, and the environment has got tougher in some areas such as the NHS.

“Watches of Switzerland showed resilient demand and order books, but some weakness in its jewellery exposure, and we were conscious that the market was looking to derate this business given consumer concern. We also reduced the holding in Alpha Financial Markets but remain very positive on the outlook and growth of this business.

“GB Group was challenged by earnings downgrades from the normalisation in cryptocurrency markets. Telecom Plus is a resilient revenue stream business, but its valuation had increased considerably prior to the period, and some market headwinds were increasing.

“We controlled the position size in Diploma, which continued to deliver strong results, but whose market capitalisation is now quite large. Real Estate was a sector where we trimmed holdings in Safestore and Sirius Real Estate, with the macro environment more challenging, particularly with higher interest rates.

“We exited a number of positions over the period, where we no longer felt a high level of conviction in the investment cases.

“Watkin Jones suffered from the mini budget crisis, which highlighted the lumpiness of the business and the potential macro driven risks.

“Hotel Chocolat struggled as consumer weakness in the UK, combined with continued Covid disruption in its new market of Japan, meant the revenue weakness drove earnings downgrades, all at the same time as capacity expansion across the manufacturing base.

“That consumer weakness was a concern across a few of the exits; Moonpig where we felt it made the likelihood of increasing the gift attach rate to orders harder to progress, Gear4Music which had benefitted a lot from the shift to ecommerce during Covid, which was then normalising, Inspecs where we had started to see discretionary spend cause weakness in the demand for glasses, and Jet2 where the cost-of-living crisis presented challenges to the security of demand and the ability to pass on inflationary cost pressures.

“Molten Ventures struggled with its share price falling, reflecting the concern of investors that the pricing of private assets falling given market conditions wasn’t being reflected in the listed market. In the case of Gooch and Housego, supply chain and inflationary pressures were challenging, as well as the need to invest in the business, driving earnings downgrades.

“With Big Yellow we felt the environment for the business was more challenging, combined with the pressures from higher interest rates.

“Alliance Pharma’s shares were challenged by Covid-related Chinese issues, as well as a historic investigation into the CEO. Lastly, we exited the holding in Intermediate Capital, a company which has done very well for the portfolio over the years but is really now a large company, where the macro environment presented some challenges.”