Aberforth Smaller Companies, Henderson Smaller Companies and Acorn Income are some of the investment trusts that Numis analysts think could be worth considering by income investors following the recent underperformance of this part of the market.
Although the long-term growth potential of smaller companies is well known, they have lagged over the past year in 2016’s more challenging conditions. The UK’s vote to leave the European Union was especially problematic for the sector as investors focused their attentions on international-facing large-caps rather than smaller businesses that are more reliant on the domestic economy.
FE Analytics shows that the large-cap dominated FTSE All Share index has made an 11.76 per cent total return over the past 12 months, compared with a 7.19 per cent gain in the Numis Smaller Companies ex Investment Companies index. The average UK small-cap trust has fared even more poorly after making just 2.08 per cent over the year.
Performance of sector vs indices over 12 months
Source: FE Analytics
However, the underperformance of UK small-caps means some investors now believe the space looks more attractive. In the following article, the analysts at Numis highlight the three investment trusts they think should be considered by income investors.
First up is this £1.2bn investment trust, which has been managed by Alistair Whyte and Richard Newbery since 1990, with Andrew Bamford, Euan Macdonald and Keith Muir joining them later.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
The trust is differentiated from its peers by its strong value-based approach, which has served it well over the long term but led to its underperformance in more recent years.
Numis said: “Amongst the higher-yielding UK mid- and small-cap investment companies, we favour Aberforth Smaller Companies. It benefits from an experienced management team using a disciplined value approach and is the largest, and most liquid, UK smaller company investment company.”
The trust has grown its dividend for five years running, according to Numis data, and has lifted it by an average of 6.5 per cent over this period. Its last annual report shows the dividend is 1.35x covered and it has revenue reserves equivalent to 1.73 years of payouts.
Top holdings include bus & rail operator FirstGroup, metal flow engineer Vesuvius and home credit provider International Personal Finance.
Aberforth Smaller Companies has ongoing charges of 0.79 per cent, is trading on a 14.9 per cent discount to net asset value (NAV), is 2 per cent geared and yields 2.6 per cent, data from the Association of Investment Companies shows.
Numis also draws attention to Neil Hermon’s £455.7m investment trust as a potential core holding for income investors looking for UK small-cap exposure. As the below graph shows, it has performed strongly on a five-year view.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
“It has grown its dividend 25 per cent per annum on average over the last five years, and currently yields 2.5 per cent. Neil Hermon has a strong long-term track record with NAV total returns over the last 10 years of 165 per cent (10.0 per cent per annum) versus 123 per cent (8.4 per cent per annum) for the Numis Smaller Companies ex Investment Companies Index,” Numis said.
Hermon has a growth at a reasonable price approach and is a bottom-up stock picker, although he will pay some attention to macro factors when constructing his portfolio. This was recently illustrated by his decision to lower gearing ahead of the Brexit referendum.
The trust’s largest holdings are home builder Bellway (which is a FTSE 250 stock), United Arab Emirates healthcare chain and distribution business NMC Health and technology systems and component manufacturer e2v. It also has dividend cover of 1.06x and revenue reserves of 0.82 years.
Henderson Smaller Companies has ongoing charges of 0.44 per cent, is trading on a 15 per cent discount and is 8 per cent geared.
Acorn Income
Numis’ final UK small-cap trust for income investors is the £83.6m Acorn Income, which is managed by Unicorn’s Simon Moon and Fraser Mackersie running its equity portfolio and Premier’s Paul Smith looking after a fixed income sub-portfolio of between 20 and 30 per cent of assets.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
Numis said: “Whilst small, we believe Acorn Income is an interesting fund with a very strong long-term performance record. 77.5 per cent of assets invested in a small cap portfolio managed by Unicorn, with a focus on profitable companies with strong market positions, and 22.5 per cent in a fixed income portfolio.
“It has circa 50 per cent gearing through zero dividend preference shares, but returns have been less volatile than would be expected, due to the low beta nature of the equity portfolio and the exposure to fixed income.”
The trust has grown its dividend for two straight years with average five-year dividend growth standing at 16.6 per cent. Its dividend is 1.32x covered and it has revenue reserves equivalent to 0.54 years of payouts.
Its biggest weightings are to independent drinks distributor and Bargain Booze owner Conviviality Retail, retail and high-value logistics firm Clipper Logistics and cardboard, plastic and bespoke packaging manufacturer Macfarlane Group.
Acorn Income has a 70 per cent management fee and charges a performance fee. It is trading on a 7.2 per cent discount and yields 4.5 per cent.