Aberforth Smaller Companies Trust (LSE: ASL) has encountered a challenging investment landscape in recent years. Despite featuring an annualized return of 1.1% over a three-year span—slightly surpassing the Deutsche Numis Smaller Companies Index—the trust has struggled to maintain momentum, evidenced by its -0.1% return over the previous year. The trust’s shares are currently trading at an 8.6% discount to its net asset value (NAV) and offer a yield of 3.6%. While these figures seem reasonable, they do not present compelling investment opportunities.
Nonetheless, a broader review of the trust’s historical performance paints a more promising picture. Since its inception in 1990, the Aberforth Smaller Companies Trust has delivered a remarkable annualized return of 11.4%. The fund maintains a substantial asset base of £1.2 billion and positions itself uniquely as the only UK smaller companies trust focused on value investment without the activist component that characterizes many of its peers.
Aberforth’s strategy, characterized by a value-oriented approach, has faced considerable headwinds in recent years. However, analysts indicate a potential change in sentiment toward smaller company investments could be imminent, particularly given that the UK market is currently undervalued relative to its international counterparts. Additionally, smaller companies are presently trading at significantly lower valuation multiples compared to their larger counterparts. The trust itself trades on an earnings basis of less than ten times, further underscoring its value proposition against the backdrop of the small-cap index.
In November 2023, there were signs that ASL’s fortunes might be on the verge of a turnaround. The share price surged nearly 50% between October 2023 and July 2024, a sign of renewed investor interest. However, by early 2025, much of that gain had been surrendered, raising questions about the durability of such upward movements. Currently, a fresh upward trend seems to be emerging, but market observers remain cautious.
The reliance of UK smaller companies on the domestic economy may contribute to their vulnerability in a low-growth environment. While large-cap firms enjoy the advantage of diversified revenue streams—an estimated 75% of revenues for FTSE 100 companies come from international markets—smaller mid-cap companies derive only about 50% of their revenues from overseas markets. This dependency on the UK economic outlook likely explains the hesitance around investing in small-cap funds. However, experts point out that the correlation between small-cap performance and the domestic economic climate is often overstated, suggesting that other factors could drive performance in this sector.
At the helm of Aberforth Smaller Companies Trust is Aberforth Partners, a boutique investment firm based in Edinburgh. With six partners managing nearly £2 billion across various funds—including the smaller Aberforth Geared Value & Income Trust (LSE: AGVI) and an open-ended fund—the firm is firmly entrenched in the UK smaller companies investment landscape. Despite the current market challenges, Aberforth encourages investors to maintain a forward-looking perspective. They draw parallels with past economic recoveries, such as the rebound following the recession of the early 1990s, emphasizing that many smaller firms could enhance their profit margins in an improving economic climate. Furthermore, they highlight that numerous businesses primarily reliant on overseas markets are presently undervalued, presenting potentially attractive opportunities for discerning investors.
The environment for UK smaller companies could be shifting in favor of value investments. An increased number of takeovers within the Deutsche Numis Smaller Companies Index—41 occurrences from late 2021 to autumn 2024—suggests increased interest in this segment. Notably, the average premium on these bids has reached an impressive 49%, indicating that larger players may be ready to capitalize on perceived undervaluations in smaller firms.
Aberforth’s confidence in the potential for recovery is further underscored by its use of gearing, or borrowings, which stands at approximately 7% of ASL’s net assets. This strategic leverage allows the trust to potentially enhance returns, particularly in favorable market conditions. Aberforth Geared Value & Income Trust, which employs a more aggressive leverage strategy with net assets of £86 million and additional £42 million represented through zero-dividend preference shares, boasts a gearing ratio of nearly 50%. However, it is essential to note that AGVI shares currently trade at a 15% discount to NAV and exhibit lower liquidity, making them more suitable for long-term investors willing to endure potential illiquidity until the fund’s wind-up in mid-2031.
Yet, while gearing can enhance returns in an upward-trending market, it also exposes the fund to additional risk. Historically, AGVI’s performance has trended below that of ASL, suggesting that its focus on income generation—projected dividends exceeding 6%—may not always translate into superior capital appreciation compared to the growth-oriented ASL.
As the market landscape evolves, early indicators suggest a potential revitalization of the FTSE 100. Since the start of 2024, the largest UK companies have enjoyed comparable returns to the S&P 500, signaling a broader market recovery that may extend to mid- and small-cap sectors. If such trends continue, it is conceivable that the underperformance of Aberforth Smaller Companies Trust could be nearing an end, presenting new opportunities for investors looking for value amidst a challenging economic backdrop.
In conclusion, while Aberforth Smaller Companies Trust has faced recent challenges marked by underwhelming performance metrics and shifting market dynamics, a closer examination reveals a fund with significant long-term potential. With the apparent paradox of value opportunities in a fluctuating market, smart investors might find that patience and a discerning approach will yield favorable outcomes, particularly as the broader market begins to recover.