Tag: Abrdn UK Smaller Companies Growth Trust

Abrdn UK Smaller Companies Trust and Property Companies

red apples on tree
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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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Another Bad Day for Small Cap Shares

It looks like it’s going to be another bad day for small cap shares and even the FTSE-100 index is down by 2.8% at the time of writing – but that might have been affected by mega miner BHP going ex-dividend today.

This is what the Chairman of Abrdn UK Smaller Companies Growth Trust (AUSC) had to say in their half-yearly results statement this morning:

“The Board has noted the fall in the share price and the NAV per share since the end of the period, each by more than 19%. This is evidence of the significant and severe rotation that we have seen in the market where investors have been moving out of quality and growth stocks and into value. This is an established phase in the market cycle and, while it makes for grim reading, the Portfolio Managers do not believe that they should try to become timing experts to try to time the change in market sentiment. Past experience leads them to conclude that this phase in the cycle should not be long lasting and that this will, over the longer term, come to be seen as a blip. The Board understands the premise and supports the stance that the Portfolio Managers have taken and I hope that we will be able to confirm this to have been the case when we report on the full year results in the summer”.

They could be right and let us hope so as I hold some shares in the company although I was selling some of them late last year as it seemed that some of their holdings were becoming over-valued.

But some of the abrupt market falls on fears of war in the Ukraine are now providing some buying opportunities.

Anyone who has studied the complex political history of Ukraine will realise that it is rather simplistic for western powers to claim that Russia is simply invading the country in an aggressive show of military power. Ukraine has had close links with Russia since the time of the Cossacks in the 16th century. The Cossacks served Russia in the Napoleonic wars and in the first world war. Ukraine was part of the USSR from 1922 until its breakup in 1991 and a significant proportion of the population speak Russian in the Eastern side of the country.  

The notion that Ukraine is not a country in its own right, but a historical part of Russia as Putin has claimed, is not totally unrealistic or unreasonable. One can also understand that Russia might be concerned about the expansion of Nato to include Ukraine when Russia would prefer to have Ukraine as a “buffer” state on its borders.

Peace won’t break out until both sides choose to take less extreme stances in my view.

For those who wish to listen to some great music about the Cossacks from the film Taras Bulba, here is composer and conductor Franz Waxman in a recording: https://www.youtube.com/watch?v=CovY06K3NnY

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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