I took the time to read the Annual Report of Abrdn UK Smaller Companies Trust (AUSC) today. It makes for interesting reading for those of us who invest in small companies. The performance last year (to the end of June 2022) was dire. NAV Total Return down 27% and the share price even worse. This wiped out all the gains in the previous year.
This is the main explanation given by the Manager: “The period was a challenging one for performance for the Company, particularly during the second half of the financial year, with our style being out of favour in the market as “top down” global macro factors have taken the lead over “bottom up” stock picking. Smaller companies markets have been difficult, seeing dramatic falls during 2022 after having been relatively stable in the second half of 2021”.
Their best performing holdings were Telecom Plus (TEP), Safestore (SAFE) and Alpha Financial Markets (AFM) and I hold the first two directly also. But they have both fallen back sharply recently.
This is what they say about those two which is a good exposition of their merits:
“ · Telecom Plus 118bps* (shares +72%): supportive end market conditions given the exit of low-priced competitors from the industry, and the strong position the nPower contract has in Utility Warehouse’s pricing offering. Sales force fully engaged again post Covid-19. Strong cash generation and dividends. An investment case study for Telecom Plus is included on page 42.
· Safestore 90bps* (+12%): solid demand in the selfstorage industry with the constant of the 3Ds (divorce, death, dislocation). Rate increases and strong utilisation have ensured consistent earnings and dividend growth”.
One of the biggest fallers in the year was GB Group – down 52% which has been the subject of a takeover bid subsequent to the year end. They exited a number of holdings and it’s worth reading the Annual Report for details of the portfolio changes.
The company has no plans to change its investment style and processes and I agree with that although the company is surely going to come under pressure if underperformance continues (the discount to NAV is currently 15.6%).
Safestore is of course a property company although it does not just rent out space so should ideally be valued in a somewhat different way. But it has participated in the rout of property company prices which continued today. Safestore is also held in some property trusts which has compounded the problem.
There is an interesting article in this weeks Investor’s Chronicle headline “The Sorry State of the London Office Market”. It explains how landlords are concealing a surplus of space and declining rents by offering rent-free periods and other incentives. However average lease lengths have been falling and are now less than 7 years which is far cry from when I was looking for office space 20 years ago. The additional flexibility is surely to be welcomed.
This perceived poor market for offices in London seems to be affecting all property companies when they frequently have a very different customer bases. It’s a typical bear market in essence – the good is sold off with the bad.
But the market seems to be reaching a point in my view when it will be worth picking up the big fallers in property and small cap companies soon. Those sectors are irrationally out of favour. For example some small cap companies have a large proportion of US$ earnings so will benefit from the falling pound in due course.
A falling pound should stop the lunacy of importing apples from New Zealand which Sainsburys just delivered to our house in the peak of the English apple season. Making imports more expensive does have some benefits!
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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