An update from your Manager - July 2020
In this update from investment manager Abby Glennie, she discusses the current environment for smaller companies, the feedback she is hearing from companies within the Trust's portfolio and her thoughts on what the future might hold.
Recorded on Thursday 30th July.
Transcript of audio recorded on Thursday 30th July
Podcasts from Aberdeen Standard Investment Trusts - invest in good company.
Interviewer: Hello and welcome to the latest in the Aberdeen Standard Investment Trusts podcast series. With me today is Abby Glennie manager on the Aberdeen Smaller Companies Income Trust. We'll be talking about how smaller company dividends have fared during a tough time for company payouts. Welcome, Abby.
Interviewer: Hi. The most recent statistics paint a difficult picture for dividends. UK dividends have fallen by more than half in the second quarter. How have companies in the Trust fared by comparison?
Abby: Yes, so I think the dividend environment has clearly been difficult for all types of companies and that’s been for a variety of reasons. So you know, some companies have actually had challenging operational periods, but some of even the best performing companies have this pressure let’s say of not paying dividends, either because they’ve taken part government schemes, so the furlough scheme or some of the other assistance schemes, or they’ve just felt a bit of pressure to be cautious and hold on to cash reserves because the high level of uncertainty. And you know, there was pressure that sort of if you had taken part in schemes, you shouldn’t really be paying out to shareholders at the time. And I also think there just became a very sort of general view in the market that because of the unusual situation we were in, it was okay not to pay dividends. So companies weren't really being punished for not paying dividends. Now actually, what we've seen across the portfolio is, because we invest in quality businesses they have been businesses with good balance sheets, and they've gone into this in strong positions. Actually a lot of them because of the sectors that they're in and the services that they provide, are actually very resilient throughout this. So right through this period, we saw a lot of stocks in the in the portfolio continue to expect to pay dividends. The thing we've been looking at more recently is that there were some that have surprised us by saying they weren't going to pay a dividend when we thought they were in a position to be able to. And what we've noticed in the past couple of months is that that's really coming back again. So companies who didn't pay before, actually, they're starting to pay dividends quicker than the market expected. Some of them are even making up for the dividends they didn't pay before. So I think overall, while we're definitely not going to be immune from this sort of lower income situation, and where earnings are lower, dividends are going to be lower. But actually, we've been very pleased by the sort of high proportion of stocks in the portfolio that will pay dividends this year.
Interviewer: Okay, and you mentioned that companies are giving a bit more clarity on the outlook. I mean, what feedback are you getting from companies - has that generally left you feeling more positive or negative?
Abby: Yes, so I think there’s still a huge amount of uncertainty in markets, and the degree of that really varies between different industries. So, for instance, if you're in travel and leisure at the moment, I think there's still a high degree of uncertainty. But other industries who have operated throughout this for them more settled environment. So for, like food producers or technology businesses, you know, I think they're in a position to actually feel more certain about their outlook. Some of these companies have even been seeing improving trading through this environment. I think the challenge for a lot of companies from here is that there's a lot of areas that are just outside of their control. So for example, government rate restrictions, and what are demand levels going to be like. But for me, the highest level of uncertainty is probably about unemployment levels, because we're just not really seeing evidence of that yet. Certainly people are still on the furlough scheme, and when I talk to companies, a lot of companies are talking about just not the need to take back everyone off furlough, because they’ve sort of learnt how to operate more efficiently, to be honest. So I think how the government unwinds that furlough scheme and how companies sort of adjust staffing levels, not for cost expenses but just to balance the demand path I think will be tricky. And the other thing that we're seeing is that, I think a lot of the, a lot of the recovery is really going to be about things like consumer confidence and unemployment levels. So in that way we think that the market outlook is much more about main street than it is about Wall Street.
Interviewer: Okay, and with that in mind, have you made any changes to the portfolio in recent months?
Abby: No, we really have made any changes recently. We added a few new stocks at the beginning of the COVID environment. We saw a few interesting investment ideas. We marginally increased our fixed income exposure you know for security of income. But actually, no, in the past few months, we haven't made any changes. I think we feel very comfortable with the positions we have, and how those companies are trading. And importantly as well, the performance of the Trust has been very strong this year so we're really continuing to run with those winners. And we're pleased, you know it's quite a busy reporting season again now, and we're very pleased with the positive reporting we’re seeing at our holdings. And importantly, as well as the sort of share price reaction to those. So even the sort of quality growth businesses which have held up well to this environment, when they are reporting good results, they are also again, seeing share price appreciation.
Interviewer: And, obviously markets have improved quite a long way, although it does seem to have been quite narrowly drawn. I mean, are there areas where you're still finding kind of good value?
Abby: Yes, I mean, because we haven’t been trading the portfolio kind of tells you that we still think there's value in the holdings that we have. So we think because of their operational performance, actually they continue to offer strong investment outcome. I mean, in tough environments, which I think is what we have for at least the rest of this year, probably going into next year easily. You know, I think investors will pay up for that quality growth, and certainly what we've been through the past few months, and just with the level of uncertainty we have in markets and we are going to have increasing unemployment, we're going to have tougher economic growth, how the government's going to pay back and fund all that they've done in recent months is hard to understand. So I just think in that environment, actually sort of resilience and quality and companies you can still grow irrelevant of, you know, all the headwinds against them. I think those become even more valuable businesses. And so when we think about valuation, you know, it's embedded within all of our investment decisions, but actually the value in terms of multiples on our businesses at the moment, even those which have re-rated, they're not at a level that puts us off being long term holders. I think we might see some short value rallies which tend to be bad for our investment process. We saw that in late May but really, I just don't think in this environment that those value rallies are going to stay.
Interviewer: Are there any kind of themes you’d highlight in the portfolio, or any sort of examples that highlight that?
Abby: Yes, I mean, so the themes are really outputs rather inputs of our process. For us it's much more about companies specifics and that bottom up stock analysis. I mean, we're pleased that even where we have exposure to more cyclical sectors, like for example electronics – you know, the names we hold within that very much focuses on those higher quality growth names, that have been resilient and performed well. I think also we’ve seen that through, we've got quite a few asset manager type related stocks that have traded well, so things like Liontrust, AJ Bell, Intermediate capital. But I mean, I guess the key theme in our portfolio is really an investment style which persists throughout. You know, we’re very true to that and we don't step away from that. So the real theme is about that quality and growth, that resilience.
Interviewer: And I mean, obviously there are still risks out there. Coronavirus hasn't gone away. We've seen, you know, a resurgence of the US-China poor relations. But I mean, does the price of smaller companies today reflect those risks do you think?
Abby: Yes, I mean, I think one of the challenges is that smaller companies often just get treated all with the same brush. So despite what resilience they might actually offer at an individual level, we see markets panic towards smaller companies. So we saw them trade off the most when we started this COVID-19 situation. It's the same as when we saw Brexit, back in 2016, when we saw that first trade up, everyone sort of rushes out of smaller companies because they have this risk perception. I think firstly, our investment process is set up to invest in smaller companies in a lower risk way. We do that through the quality focus. And actually, what I would say on an individual level is that often smaller companies can adapt more quickly, you know they're more nimble, and perhaps they play to market niches where they can still grow. And I think the easiest way for people to see examples of that actually is just to look at the businesses in their local community. And what many of them achieved during the lockdown situation. Now actually, a lot of them have thrived and you know it’s been much easier for those companies to adapt.
Interviewer: And just finally, there's been a lot of problems for traditional income funds with areas like banks and the oil majors hit quite hard. Do you think investors should be being more creative in the way they hunt for income, and in particular obviously, should that include a greater focus on smaller companies?
Abby: Yeah, so I mean, I guess what we've been pleased about is the resilience of many of the smaller companies. And, you know, I talked about their ability to actually continue to pay their dividends through the crisis or to return to them more quickly. And I think it'll be really interesting at the end of the year to look back at how smaller companies and income portfolios like this have held up relative to large cap. Because I think some investors will be quite surprised by that outcome. You know, within large cap in some of these sectors which the income funds rely on heavily have been some of the most challenged. Some of them are from pressure by their regulators to not pay any income. And a lot of them are big businesses, which are heavy users of government schemes, which also limits their ability to pay. So actually, you know, I feel like when, where we've positioned ourselves within the smaller companies with that quality resilient business, we sort of capture two elements – we’ve captured businesses with good balance sheets who have been in a strong position to pay. And we've also captured enough businesses in sectors who have traded well through this environment. They've also been in a position to pay. So I think, yeah, I think some people could be surprised at the end of this year.
Interviewer: Great, okay. Thank you so much Abby for those insights today and thank you to our listeners for tuning in. You can find out more about the trust at www.aberdeensmallercompanies.co.uk and please do look out for future episodes.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments of products mentioned herein, and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up, and investors make it back less than the amount invested. Past performance is not a guide to future returns, return projections are estimates and provide no guarantee of future results.
An update from your Manager - April 2020
In this podcast Abby Glennie, investment manager of the Aberdeen Smaller Companies Income Trust discusses how smaller companies have fared during the recent coronavirus uncertainty and how this Trust is positioned to prepare for the future.
Recorded on Tuesday 28 April 2020
Transcript of audio recorded on Tuesday 28th April 2020
Podcasts from Aberdeen Standard Investment Trusts - invest in good company.
Interviewer: Hello and welcome to the latest in our podcast series where we look at how the managers on the Aberdeen Standard Investment Trust range are handling these complex and unpredictable markets. Today we're talking to Abby Glennie manager of the Aberdeen Smaller Companies Income Trust. Welcome Abby. Could we start by looking at the impact of the measures to curb the spread of the virus on smaller companies? It seems to me that the market’s assumption is that smaller companies are particularly vulnerable, but are you seeing that reflected among the companies in your portfolio.
Abby: So I think the impacts really depend on the nature of the business and in particular what sector it's operating in. So some of the investments in the portfolio have seen operations which have been incredibly resilient. So, for instance, businesses like Assura, whereas others have been more heavily impacted by the lockdown. So an obvious example would be Hollywood Bowl. And I think the market sometimes has quite generalist views though that smaller companies get hit harder than large companies. And if we look at the market reaction in general, across five categories, we have seen that, and I think that’s actually quite unfair. Often we find smaller companies are more nimble, they can actually adapt their business models quicker and more efficiently than large companies. We can see even if everyone looks in their own lives, we can look at how SMEs in your local community have adjusted. And I think that's a good example of where small companies can be nimble. And the government schemes have been really critical in helping businesses to financially get through this lockdown and putting them in a position where, coming out of this, they can retain the staff employment levels that they need to be in a good position to start up again. The main thing for us would be, because of our quality focus, the portfolio went into this environment with a focus on resilient businesses. Companies with strong balance sheets, cash liquidity, and therefore actually, the level of financial distress that we've seen has been very limited across our companies. They might be small companies, big companies, it doesn't matter, it’s really been that quality focus. We have seen a small number of capital raising, either to get through this period without sort of market concerns about cash flow and liquidity, or actually for some of them, just in terms of being able to continue on their growth plans, post lockdown period.
Interviewer: Okay, and I mean, presumably, you're in regular contact with the companies in your portfolio. Is there a mood music to how they're feeling about this period and their sort of immediate future or is it so sector dependent that it's very difficult to kind of draw generalisations?
Abby: I think it is very sector dependent. But I think the key thing I would characterise is just levels of uncertainty. And because no one really knows when or how we're going to come out of it. And it does feel that that will be quite sector dependent. And in the past, I think we're week five or six now of working from home lockdown, we've had a huge number of meetings with companies that we invest in, and also a lot of interaction with sell-side analysts. And we have seen most companies utilising the government help schemes in some way. I would say in particular the furlough scheme. One side effect of the increased focus on cash liquidity and balance sheets and the support received by government is that we have seen a lot of dividend cancellations across the market. So to some extent, this has actually been irrelevant of the sector or the financial stability, there seems to just be an aspect whereby it’s unacceptable to pay dividends if you're going to ask the government for aid. If we think about sectors I mean, travel and leisure is probably obviously one of the most impacted sectors, those companies are seeing virtually 100% reduction in activity, meaning no revenue. We've got quite limited exposure here. One company is Hollywood Bowl, which we do have. It went into this with a very, very strong balance sheet but, they have done a small 5% equity raising and extended bank facilities. This means that you know, they're really well placed to get through what could be an extended lockdown for them and still be in a position to get back on the growth aspects coming out of this. I think sectors which have been more resilient have been technology where businesses have adapted well for work at home models. And in many cases, demand for their products and services has remained. Companies like Assura in the property space or Chesnara in insurance, revenue streams there really haven't been negatively impacted. So we're really pleased those types of companies can continue to pay dividends.
Interviewer: You mentioned that some companies you feel have been kind of unfairly treated by the market? Have you taken advantage of that? And indeed does the Investment Trust structure make it somewhat easier to do so? And if so, has that been kind of focused in any areas? Or is it perhaps too early to be making those sort of moves?
Abby: Yeah, so I mean, I mentioned earlier the breadth and depth of dividend cuts and cancellations. I mean, overall this has impacted across the board. Like I said it hasn't necessarily been sector specific because of that reliance on those government schemes. We have reshaped the portfolio a little bit. So we remain long term investors - we don't want to veer away from our quality growth momentum focus. But the hunt for income in this environment has definitely got a bit trickier. We went into this market with cash levels higher than usual in terms of providing some protection in tougher markets. So that means we've been able to increase exposure to some names which we've felt confident about in this environment. So for instance, Softcat is a value add IT re-seller. We’ve trimmed some businesses where we expect to see larger earnings decline and slower recoveries unfortunately. So things like Robert Walters workspace. And we have taken this opportunity as well to add new holdings to the fund where we feel optimistic about the quality growth momentum aspects, but also the income resilience. And so Primary Health Properties and Target Health REIT - both of those have been added where we think there's strong investment cases. The other thing we've been able to do is that, in this fund we have the ability to have fixed income exposure. And in this environment, we think there's a big income support for that, as well as these investments having their own structural investment cases. So we have been adding a handful of new holdings there, well diversified across sectors. I would say the other thing, I mean, you mentioned about the structure of the investment trust obviously. I mean, running closed-end vehicles here means that the manager doesn't have to focus on the risk of outflows, and you're thinking about cash to fund what those might be. Having said that, our corporate team, we really haven’t actually seen outflows which has been very pleasing. And I mean, I think the thing for clients about the investment trust space is that the market has obviously had a really sharp reaction. So we've seen that discount really widen out and investors who are willing to take a longer term view, hopefully, you know, at this sort of discount level we can provide an attractive entry point.
Interviewer: Okay. I know in previous discussions, you’ve talked about your matrix tool that helps shape your, your views. I wonder if you could just explain quickly what that is and what it's telling you today?
Abby: Sure, so the matrix is our stock screening tool. It's a core part of our process. And this is our internally developed tool that we've used for well over 20 years now within the team. It's really focused on looking at data which fits our quality growth momentum investment process and it helps us screen that wide addressable market that we have. Now, we do continue to use the matrix in this environment. But it’s fair to say that in times of sharp market correction, there's more uncertainty about forecasts in the market, and therefore some of the data that’s out there. So I think, you know, fundamental stock analysis and engaging with companies is really always core to any of our investment decisions. But I think at the moment that's become even more so. Within the matrix, the sort of quality factors, I think are increasingly important at the moment. The data for those is much more long term data. It doesn't have the same volatility. And so I think we feel very comfortable continuing to rely on that. And also, I think that in this sort of market environment, quality aspects will increasingly be well rewarded by shareholders.
Interviewer: Okay, it may, it may be too soon to consider recovery. But I guess gradually the picture does become clearer as more and more data points come into play? Do you have any sense of whether the companies in your portfolio will be able to pick up where they left off when the dust settles? And what sort of a recovery we might be looking at?
Abby: I mean, I think we feel confident that a lot of the companies we invest in will be in a strong position coming out of this. And, you know, especially financially balance sheet wise because of that quality focus. But I think when we think about areas like consumer confidence and economic growth, it just feels incredibly hard to judge at the moment. We could be faced with a long period of tough environments. A lot I think it is dependent on what happens with some of the government support schemes as well. So companies, for instance, are very dependent at the moment on that furlough scheme, and how the government tapers that off and helps companies to manage that sort of cash burn I guess, once they're getting up to full operations again, is going to be critical. I guess the other field of points I should probably mention on that would just be that, going into this we were already cautious that we've been in a very long bull market and 2019 definitely showed signs of slowing economic growth already. I think one of the things that have come to my attention increasingly in this environment is just the benefit of investing in what we believe are high quality management teams. We’ve seen that as we've been engaging with these companies through the past couple of months, and we've seen the strategies and leadership that they provided, you know, I think those high quality management teams are coming through on their own. So a good example, I said Hollywood Bowl did a capital raise. In that meeting we talked through a lot of the actions that they took both before and around the period of lockdown, which should mean that actually in terms of trading and operationally when they're permitted to reopen, they're in a very, very strong position to do.
Interviewer: How are you judging that ahead of time? Because, I mean, presumably, any kind of crisis, you're never quite sure how a management team will behave until they get there. But are you making sort of working assumptions based on a team's previous experience, whether they've delivered and that sort of thing?
Abby: Yeah, I mean, I think that management quality is always one of our key focuses. Investing in a high quality management team tends to be something that's easy to say you do, but actually, in practicality is much more challenging. We've got long relationships with a lot of these management teams and I think we're very lucky that we tend to meet all of our companies face to face. I mean, obviously, at the moment, face to face isn't really possible but we have built up relationships with them over the years. And a lot of these companies as well, you know, we will have owned in some portfolios for many, many years. So it's been an ongoing engagement, but has seen how those management teams have reacted I guess. I mean we have seen lots of different market environments. This is probably the sort of sharpest change anyone's ever seen, but we have experience on how that have handled different situations previously. And then I think at the moment, our engagement with them is sort of critical in terms of also, you know, the next step up of how quickly they can adapt business models. So I think that's going to teach us something as well going forward, you know, about the quality of different management teams.
Interviewer: And how are valuations looking today? I mean, quite often small caps have traded at a as a small discount to the large caps, but where does that large, mid, small, kind of relative valuation fall today?
Abby: Yeah, so if you think about the UK market as a whole lot at the moment, I mean, going into this, because of Brexit and political uncertainty, you know, UK equities as a whole hasn’t been a place that investors have been that optimistic or buoyant about in recent years, actually, in terms of inflows that we've seen to that area. Even though we've seen strong markets, actually, when we look at the relative valuations of UK equities, I think already compared to other regions, they were pretty attractive levels. And what we've seen in this environment is that, sort of all regions have been challenged by this COVID-19 situation. So, you know, we’re definitely not on our own here. But in that way, I think when we look at valuations now, compared to other markets, I think they look attractive, but the challenge is that the outlook for earnings is still very uncertain. But I think that's true across all regions. If we look at, and think about P/E (price to earnings) ratios of the market, unfortunately the one number that we really don't have certainty about is the earnings number. But we would encourage people to be long term investors. And, you know, historically, if you've been an investor in any of the portfolios within our team, we’ve shown that we really encourage you to not try and time the market and to be long term investors in our funds. And, I mean, if there's any insight that we have, I guess from the global financial crash would be that actually, that was a good entry point for a long term investor. So if you think that this environment is anything similar to that in terms of market correction, hopefully this is an attractive entry point.
Interviewer: Great. Okay. Thank you, Abby, for your time today and thank you to all our listeners for tuning in. You can find out more about the trust at www.aberdeensmallercompanies.co.uk. Please do join us for future podcasts.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments or products mentioned here in and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.
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