Aberdeen Smaller Companies Income Trust posts annual results for ‘extremely challenging year’

Aberdeen Smaller Companies Income Trust posts annual results for 'extremely challenging year'

The board of the Aberdeen Smaller Companies Income Trust, a fund managed by Aberdeen Standard Investments (ASI) has published its annual results for the year ended 31 December 2020 in what the firm has labelled an “extremely challenging year”.

The trust’s board said the £70 million trust had delivered a solid performance against its benchmark.

In the half-year to the end of June 2020, Aberdeen Smaller Companies Income Trust’s portfolio returned -15.1% versus the benchmark return of -25.0%, a pleasing performance across two very different quarters.

Through the period, and particularly in March where the harshest market impacts were felt, the company held up very well on a relative basis. For the second half of the year, the company gave up some of that performance gained in the earlier period, as its style was out of favour given the value rally late in the year.

The portfolio’s return for the year was -2.4% compared to a benchmark return of -4.3%, an outperformance of +1.9%.

The company’s Net Asset Value (NAV) total return for the financial year was -4.1%. Long term performance also remains very favourable over 3 and 5 year time periods, with 3 year NAV growth of +10.1% versus the composite benchmark of -2.9%, and 5 year NAV growth of 58.3% versus the composite benchmark of +26.3%.

The trust’s board said 2020 was a period of great uncertainty, when many quoted companies either cut or cancelled their dividends, which impacted the level of the Company’s income and the net revenue available for distribution as dividends.

However, as the board said it recognises the generation of income for its shareholders to be a key purpose of the company, with the use of its revenue reserves, which have been built up in recent years, the company has kept the dividend at similar levels to 2019 with the total dividend for the year being 8.24p (2019: 8.25p).

With the year-end share price at 313p, this gives a dividend yield of 2.6%. Over 3 and 5 years, the dividend has increased by 16.9% and 23.9% respectively compared to rises in CPI of 4.6% and 9.8%.

Furthermore, the revenue reserve account, which will represent 11.2p per share following payment of the fourth interim dividend, continues to provide the company with some flexibility in future years, should it encounter further challenges to income.

Abby Glennie, co-manager of Aberdeen Smaller Companies Income Trust, said: “Stock selection was a significant contributor to the outperformance of the Trust over 2020. We made no significant style changes throughout the pandemic, nor did we turnover the portfolio. We continued to follow our process. It was pleasing to see that the contributors in the first quarter remained so for the financial year reflecting our process to select quality names that can grow in all environments.

“We did not gain outperformance by owning names that were deemed simply to be lockdown winners, rather because we have exposure to high quality names in all sectors who could provide resilience and growth, and who we had held prior to Covid-19 for their fundamental attractions to our investment process. Many companies across the portfolio generated earnings for the year higher than initially expected by the market. These earnings upgrades were well rewarded with share price performance.

“The UK market, and even more so at the small end, contains a wide and diverse range of companies. Through our bottom up stock selection focus we identify businesses which have Quality, Growth and Momentum characteristics, with an income balance. These quality businesses, with healthy balance sheets, management teams with a strong pedigree, good corporate governance and strong competitive positions, have the ability to be resilient through more difficult periods, and even improve their positioning when peers may be struggling.

“We look to identify businesses which have many angles to their growth opportunities, giving them a greater ability to continue growth, whether it be through areas like complementary products and services, new geographies, or investment funded by the strength of their quality balance sheets.”

Amanda Yeaman, co-manager, Aberdeen Smaller Companies Income Trust, added: “Although the pandemic has made income generation in the form of dividends more difficult, we continue to follow our process and look for stocks that have a long-term track record of reliable dividend growth, and have been pleased with the improvement in dividends being paid through the second half of 2020. Our experience from this year is that our quality, growth, momentum process has served us well.

“For the majority of our holdings the crisis was not as bad as the worst expectations given the speed with which companies were able to adapt to changing circumstances, with much of the portfolio exposure in very resilient sectors. We were pleased with the underlying operational performance of the portfolio companies, and their ability and willingness to pay dividends.”

Robert Lister, chairman, Aberdeen Smaller Companies Income Trust, commented: “Markets continue to be uncertain, however, it has been pleasing to see the managers steer the Company through these turbulent times well and it will continue to follow its investment process, which has proved resilient through various economic cycles.

“Despite political and economic uncertainty, the investment process and focus on stock selection continues to guide the managers towards a portfolio of quality growth businesses, which can prove resilient in a variety of environments.”

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