Although many UK businesses have one nervous eye firmly on the Budget in less than two weeks’ time, fund managers at Abrdn believe the case for investing in some of the country’s smaller listed companies remains robust.
Despite strong indications that Chancellor Rachel Reeves will hit UK businesses with higher National Insurance Contribution charges on October 30 – and also remove some of the anti-inheritance tax advantages associated with investing in companies listed on AIM (the Alternative Investment Market) – Abrdn argues that shares in many UK smaller companies represent outstanding value for money.
In other words, they are cheap as proverbial chips.
It’s a view expounded by Abby Glennie who, with colleague Amanda Yeaman, manages the stock market-listed Abrdn UK Smaller Companies Growth Trust.
‘Yes, there’s an air of uncertainty out there at the moment,’ says Glennie, ‘and you can never rule out Black Swan events disrupting markets.
‘But the economic growth data for the UK is okay, inflation is down to 1.7 per cent and savings levels are high. Add in the fact that shares in many UK smaller companies are attractively priced, and you have a rather compelling investment case.’
The trust, with a market capitalisation of £360 million, is currently invested in 48 companies. Most are listed on the Deutsche Numis Smaller Companies plus AIM Index – comprising some 1,400 companies with market capitalisations ranging up to £1.7 billion.
When picking from such a diverse index, Glennie and Yeaman look for growth, quality, and momentum.
‘We want to buy companies that will become the large companies of tomorrow,’ Glennie says. ‘That means sustainable earnings and profits growth, year in and year out. This growth needs to be supported by quality management and reliable revenue generation. The final piece of the jigsaw is earnings momentum that continually exceeds market expectations.’
The managers are assisted in their stock selection, portfolio weightings and deselection by an in-house stock screening tool called ‘Matrix’. This ranks every company listed in the DNSC plus AIM Index using 12 separate data feeds – all measures of a company’s growth potential, ‘quality’ and earnings momentum.
‘It helps us come up with new investment ideas,’ Glennie adds. ‘It also provides information about the stocks we hold in the trust.
‘Of course, we don’t blindly follow it, and we sometimes invest in companies which Matrix scores poorly, but it’s a key part of our investment process. ‘It sits beside our work as managers, which is to glean information from the companies we want to invest in or are already stakeholders in – and the analysts we speak to.’
The trust will not invest in companies with market capitalisations below £200 million, nor does it tend to invest more than 4.5 per cent of the trust’s assets in one company.
Its performance numbers are better on a relative basis over the short-term than they are over longer periods. So, one year returns of 29 per cent compare with an average for its peer group of 21 per cent. Over the past three years, losses of 26 per cent compare with a peer group average loss of 8 per cent.
Glennie says the trust’s focus on growth stocks within the UK smaller companies universe meant it suffered in 2022 as interest rates and inflation rose.
The trust’s annual charges total 0.92 per cent and the stock market identification code and market ticket are respectively 0295958 and AUSC.
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