Aberforth Smaller Companies Trust: buying Britain on a triple discount

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On the basis of its three-year record, Aberforth Smaller Companies Trust (LSE: ASL) does not look interesting. The annualised investment return of 1.1% has been just ahead of the Deutsche Numis Smaller Companies index, but is behind over one year at -0.1%. The shares trade at a reasonable 8.6% discount to net asset value (NAV) and yield 3.6% but neither are at bargain levels.

However, from a longer-term perspective, ASL looks much more attractive. Annualised returns since launch in 1990 are 11.4%. The fund is relatively liquid, with assets of £1.2 billion, and it is the only UK smaller companies trust that is value-orientated but not activist.

Aberforth Smaller Companies Trust trades at a triple discount

ASL’s style has been very much out of favour, but that looks likely to change, and the fund’s strategy effectively trades at a triple discount. The UK market is cheap relative to the rest of the world. Small-cap companies are unusually cheap relative to large cap ones, and the Aberforth portfolio is cheap relative to the small-cap index, on under ten times earnings.

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Last year, it seemed that ASL’s fortunes had turned a corner, with the share price rising nearly 50% between October 2023 and July 2024. Yet by early 2025, nearly all that advance had been given back.

Now, the trend is upwards again – but will it last?

UK smaller companies are more dependent on the domestic economy than larger ones, so a low-growth outlook for the UK is no help. Still, half of mid caps’ revenues are estimated to derive from overseas against three-quarters for the FTSE 100. Gloom about the UK economy is reflected in the unpopularity of small-cap funds, but the correlation of small cap performance with that of the domestic economy is negligible.

ASL is run by Aberforth, an Edinburgh-based boutique with six partners and just under £2 billion under management, which invests only in UK smaller companies. In addition to ASL, the firm manages the smaller Aberforth Geared Value & Income Trust (LSE: AGVI), as well as an open-ended fund.

Aberforth advises investors to look through the lacklustre UK economic data to the prospect of a recovery in earnings, as exemplified by the turnaround after the early 1990s recession. Many firms have the potential to increase profits through higher margins. In addition, good businesses that mainly operate overseas are also lowly valued, the managers argue.

Note, too, that takeovers within the Deutsche Numis Smaller Companies index have been plentiful, with 41 in the period from the end of 2021 to autumn 2024 . The average premium of the offer price to the share price immediately before the bid was 49%.

Gearing up

Aberforth’s confidence is demonstrated by the use of borrowings to enhance performance, equivalent to 7% of net assets for ASL. In theory, buying AGVI should generate a higher return than ASL in a rising market. Its £86 million of net assets are enhanced by £42 million of zero-dividend preference shares to give a gearing ratio of nearly 50%. However, while AGVI shares trade on a 15% discount to NAV and are heavily owned by Aberforth’s partners, they are illiquid. That means they are best suited to those prepared to hold until wind-up in mid-2031.

Also, AVGI’s portfolio has tended to underperform ASL. While higher gearing enhances returns, underlying performance is less due to a focus on income (the dividend yield is likely to be more than 6%), so it won’t necessarily beat ASL during a UK market rally. There is some evidence of an improvement in the relative performance of the FTSE 100 with a very similar gain in sterling terms to the S&P 500 since the start of 2024. If this performance is to continue, it is highly likely to filter down to mid and small caps and to favour value over growth, as in the FTSE 100. If so, ASL’s period of disappointing performance will soon end.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.

After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.