Growth Rating 2026: Aberforth Smaller Companies

A highly disciplined process focussed on finding the best value opportunities amongst UK smaller companies…by Ryan Lightfoot-Aminoff

Overview

The recently refreshed six-strong Management team behind Aberforth Smaller Companies (ASL) employ a strong valuation discipline to select UK equities from the bottom 10% of the market-cap spectrum. The process has been in place since the trust’s inception in 1990 and looks to identify companies trading at depressed valuations as a result of temporary factors, but with solid underlying fundamentals, to then sell them as the shares recover.

In the past year, the managers have found several new opportunities in stocks formerly considered ‘growth darlings’, but have undergone a challenging period and seen sharp drop off in valuations, which the managers have capitalized on. Elsewhere, they have noted a technical factor in companies switching smaller company indices, which has refreshed their investible universe and offered several new opportunities (see Portfolio).

Enabling these additions has been the elevated level of portfolio turnover as a result of M&A. This has continued to be a factor in markets, with ASL capturing a high proportion of it, generating substantial returns for the trust (see Performance). Furthermore, the UK market has had something of a turnaround in the past year, albeit primarily focussed on larger companies so far. ASL’s managers have instead found the best valuation opportunities in the lower end of the market-cap spectrum, which has caused a near-term relative headwind.

However, they highlight this has led to a considerable value opportunity, especially within their portfolio, which the managers argue has a ‘triple discount’. One piece of evidence supporting this is dividends. At present, smaller companies are offering better dividend cover and yields than their larger-cap peers. Not only has this contributed to a strong Dividend picture for ASL, which has maintained or increased dividends in every year since inception, but it also indicates the level of valuation mismatch that exists, with smaller companies historically offering better growth potential.
 

Kepler View

In our view, the strong double-digit returns of the wider UK market of the past year have demonstrably shown that the fears that the country is uninvestible are untrue. However, whilst welcome, this rally hasn’t yet fully extended to the smaller companies index, especially the lower end, in which ASL is focussed. We believe that as investors rebuild confidence in the UK, this value opportunity lower down the market-cap spectrum will soon be recognized, and could make for very strong returns at this juncture (see Performance).

Arguably, ASL is very well placed to capture this due to its focus on the ‘smaller smalls’, driven by their valuation discipline, as well as their recent additions to stocks formerly considered growth darlings (see Portfolio). We believe this demonstrates that ASL is not just out-and-out value but offers a nuanced take on the multitude of value opportunities in the UK small-cap space, which could support returns going forward due to the blend of different drivers.

The potential is further enhanced by the trust’s Discount, in our view. Whilst this has narrowed slightly in the near term, it could still present at an attractive entry point, especially when considering the broader triple discount of the asset class, with the UK remaining undervalued versus the world, small caps discounted versus large, and ASL’s portfolio at a discount to the small-cap index.

Bull

• UK smaller companies remain deeply undervalued on a number of comparable metrics
• Trust has an impressive dividend track record with very strong reserves
• ASL shares trade at a discount to NAV, as well as the portfolio at a discount to the index

Bear

• Focus on liquidity premium could take a while to materialise
• Increase to gearing can exacerbate downside as well as upside potential
• M&A has been supporting performance, but cannot be relied upon

See the full research paper on Aberforth Smaller Companies here >
 

 

Disclaimer

 
This is a non-independent marketing communication commissioned by Aberforth Partners LLP. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

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