Below are the five key points of its investment story.
1. The trust focuses on capital growth from smaller-cap UK stocks.
abrdn UK Smaller Companies Growth Trust (AUSC) was launched in August 1993. Managers Abby Glennie and Amanda Yeaman aim to generate long-term capital growth from a diversified portfolio of UK smaller companies, which is made up of 50–60 of their highest conviction ideas. The trust’s performance is measured against the Deutsche Numis Smaller Companies plus AIM ex-Investment Companies Index.
2. AUSC’s managers follow seven principles for successful small-cap investing.
The managers believe that there are seven principles for successful small-cap investing. These are: one – focus on quality to enhance return and reduce risk; two – look for sustainable growth; three – keep the momentum going by running the winning positions and cutting the losers; four – concentrate your efforts on suitable companies identified by the Matrix, which is a proprietary screening tool at the heart of the investment process; five – invest for the long term; six – consider the quality of a company’s management team; and seven – be valuation aware, but this is not a primary focus.
3. There is a proprietary, clearly articulated investment process.
The Matrix screen has been employed since 1997 and reflects quality-, growth- and momentum-based factor analysis. ‘Quality’ highlights companies that have pricing power, resilient and visible earnings streams and strong balance sheets, ‘growth’ identifies businesses that can grow over the long term through economic cycles, while ‘momentum’ signals those companies with an ability to meet or beat consensus expectations. Companies that meet the Matrix’s quality, growth and momentum criteria will change over the course of the business cycle.
Given the managers’ long-term perspective, the average holding period for AUSC’s investments is around seven years, implying an average annual portfolio turnover of around 15%; although some names have been in the fund for more than a decade. Positions may be trimmed or sold if there is a deterioration in the Matrix score, the original investment thesis no longer holds true, they have grown to more than 5% of the portfolio or there is a higher-conviction name identified.
4. The trust has a long-term record of outperformance.
While AUSC’s performance in recent years has been disappointing as investors have focused on macroeconomic developments rather than company fundamentals, over the long term the use of the Matrix has delivered outperformance over multiple economic cycles. In particular, growth stocks have been out of favour in a period of elevated inflation and interest rates. Now inflation has moderated and there is the prospect of lower interest rates, this should be favourable for the performance of growth stocks. This could provide an extra kicker to the trust’s performance, along with the potential for continued positive stock selection. Upside/downside capture analysis suggests that AUSC will outperform to a larger degree when UK small-cap shares are rising than it will underperform during periods of UK small-cap weakness.
5. The trust pays regular semi-annual dividends.
The board aims to pay out around a third of the total annual distribution as the interim dividend, with around two-thirds as the final dividend. Revenue, from both ordinary and special dividends, has picked up nicely following two years of depressed income during the global pandemic. Although the primary focus is capital growth, the trust offers a dividend yield of around 2.5%.
