An update from managers Abby Glennie and Amanda Yeaman
In this podcast we are joined by Abby Glennie and Amanda Yeaman, co-managers of Aberdeen Smaller Companies Income Trust. Here they provide an update on the portfolio's positioning and discuss how the Trust has fared over the last six months. They also explore the outlook for smaller companies and income going forward.
Recorded on 7 May 2021.
Discrete performance (%)
Total return; NAV to NAV, net income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value.Source: Aberdeen Asset Managers Limited, Lipper and Morningstar. Past performance is not a guide to future results.
Cherry Reynard: Hello and welcome to the latest in the Aberdeen Standard Investment Trust podcast series, I'm Cherry Reynard. With me today are Abby Glennie and Amanda Yeaman, co-managers on the Aberdeen Standard Smaller Companies Income Trust. We'll be looking at how the portfolio is positioned and the outlook for smaller companies and income, welcome Abby and Amanda.
Abby if we could start with you, there's been a significant change in market mood over the last six months. Can you just give us a sort of high level idea of how the trust has fared in this environment?
Abby: Sure Cherry, so I mean the strong value rallies you know as we saw in particular in November and December and when we first got the vaccine news flow and then we saw again strongly in February - you know those have really been challenging for our style of investment. You know the market has really been buying companies that have been particularly challenged by lockdowns, new cyclical recovery names and also the market's been paying less attention to the balance sheet strengths you know because it's been trading more of a risk on fashion. And our portfolio was obviously focused on higher quality resilient companies and these are the type of names that we've really seen investors reduce exposure to over the last four or five months. We have seen the discount narrow a bit in recent times, but it does still sit at over a 10% discount.
Cherry: And what about the underlying sort of earnings performance of the individual companies in the portfolio - has that generally been strong?
Abby: Yeah it definitely has been, I think that's been the most reassuring thing for us. You know, we've just been through reporting season where we've had updates from most of our companies and we've been really pleased about how businesses are performing. We've seen a strong degree of beats to expectations and earnings upgrades and that's the real focus of our investment process.
You know our companies are doing well, though that isn't really a surprise to us, you know we're deliberately investing in resilient reliable businesses where our operations have been robust, and you know sometimes they've even improved over the last year. We look for growth in businesses where companies are able to pull on many levers for growth and so they aren't just relying on external macro factors.
There are of course a handful of names in the portfolio that have struggled given lockdown and perhaps an obvious example would be Hollywood Bowl, but when lockdowns end and they can trade again - and we're definitely getting there now - you know we are confident that their customer demand will return, the balance sheet will self-repair over time and they will continue to invest in operational improvements and new growth opportunities
Cherry: And Amanda turning to you, dividends were obviously something of a casualty of 2020 - have you seen them start to return this year?
Amanda: Yeah we have, although thanks to the quality dynamic of our process we've had exposure to a strong contingent of companies who've continued to pay dividends throughout the pandemic or reinstate them pretty quickly as soon as visibility returned. We've now only got a handful of companies who are yet to resume payments but we're confident that they will do so when they receive board approval at their next meeting and these are names who have reduced salaries and or headcounts during the pandemic and so sensitive about resuming paying dividends until salaries have been restored fully.
Cherry: Okay great, and on both earnings and dividends has there been a pattern to the type of companies that have done well or badly - I mean Abby mentioned Hollywood Bowl there. Are there others that have been particularly strong?
Amanda: Yeah well, those who, those names and sectors are functions who are deemed to be essential and so allowed to carry on trading obviously did better than those who were forced to close - so those in Travel, Leisure, Retail, Hospitality were harder hit than names in say Tech Pharma, Media, but we noticed another pattern actually. We noticed that smaller companies who were inherently more nimble managed to adapt and innovate much faster and they cope better than large caps.
Generally though we own the highest quality names across all sectors so even those in hardest hit sectors have shown real resilience thanks to strong balance sheets and strong management teams and we expect those to bounce back really sharply upon reopening.
Cherry: And have you made any major changes to the portfolio over the past six months?
Amanda: Yeah, we have, I mean we're never short of ideas. We've added a variety of names across all sectors and the past year certainly thrown up opportunities and there are a few examples where you know, conviction has increased as companies who have been our watch list have been really proven their resilience throughout lockdowns or those where the investment case has been accelerated and we're now really comfortable with the investment case longer term. We've spent lots of time speaking to management teams over the past year while we've been working from home and that's thrown up a number of new ideas too
Cherry: Okay thanks, Abby turning back to you - do you have a sense of how long the value rotation might endure?
Abby: Yeah I mean we're really hopeful that this is now over. March was a much more settled period and actually April has really not been driven by value, you know in fact almost the opposite - we feel like it's been driven back by that focus on earnings and reporting. And in April you know we have outperformed our benchmark strongly, particularly in smaller companies. We think that reporting season often brings investors’ attention back to the true underlying performance of companies and you know who can really be the larger companies of tomorrow. And a lot of lockdown losers as well have recovered chart play in share price terms but what's still lagging for many of them is their earnings recovery and we think many of these sort of most Covid challenged companies have actually reached a stage that their shares are pricing in - actually you know previous norms - and we think that's very much still to be proven. I think that easy money has been made in the value space in recent months and it'll be a lot more challenging for that type of investment or that stock from now just given what they're pricing in and you know for many of them the outlook and where their recovered norm is, might not be where it was previously pre-Covid.
Cherry: And are you making use of gearing in the portfolio today, I mean, and how does that compare relative to the Trust history?
Abby: Yeah, we do have some giving in the portfolio currently, we haven't adjusted that recently. Saying that you know, we are optimistic about smaller companies and you know driven by the past our view would be that smaller companies tend to lead that market recovery and you know that enthusiasm and more risk on trade tends to lead to smaller companies doing well coming out of these type of periods.
Cherry: Okay great and finally Amanda, can you talk a bit about how you're feeling about economic recovery - do you believe it's kind of well-established and the are you optimistic that in this environment companies in the portfolio can continue to make progress?
Amanda: Well, I feel a lot better about it given the success of the vaccination progress. So, I mean we've learned to live with the virus now so at the end of the first lock down, GDP was 25% below the pre-pandemic high and at the end of lockdown three it was 8% below the peak and there are similar stats for manufacturing and construction numbers too. So now activity is roughly where it was after the economy unlocked last year and the bulk of the damage has been seen in services hospitality, the Arts, but as last year's reopening shows these industries can bounce back really fast, so it's good that we've adapted better.
But the vaccine program is working and the economy should reopen fully. We're still worried about employment though, I mean these jobs figures are still muddied by furlough and I’m not sure we've seen the fallout from any workforce mobility associated with Brexit or in fact what happens with the acceleration of automation. Of course, there's a long way to go now before the economy is back at its peak but there is reason to be buoyant and optimistic. Households have got excess savings to burn and corporate cash revenues are at record highs, we've also seen real sharp upticks in business and consumer confidence too. But yeah, if we in short assume the worst and we get more variance or the regional tiers become ineffective then we've at least got a playbook of how to manage this now. So, I think the shape of the economy will be different as we recover from the pandemic and we adapt to leaving the EU but of course be better in some ways and worse in others. But this brings opportunities for smaller companies, so we are really optimistic that our holdings can continue to make progress. I mean like Abby says, we've been delighted with the strength of the recent reporting season where we're seeing real tangible evidence now that momentum has been carried on for our holdings in the portfolio, so I mean we'll highlight again part of our process requires us to identify names that can grow in all environments and our smaller companies have certainly been tested over the past year and really proven the strength of the business models and management teams.
Cherry: Great okay, thank you Abby and Amanda for those insights today and thank you to everyone for tuning in. You can find out more about the Trust at www.aberdeensmallercompanies.co.uk and please do look out for further updates.
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.