abrdn UK Smaller Companies Growth Trust: September 2023 Update

• The trust adopts a long-term approach with a focus on quality, growth and momentum
• abrdn have an established smaller companies franchise with a common process and collaborative team
• Long-term performance has been strong but has struggled over the past few years

How it fits in a portfolio

The abrdn UK Smaller Companies Growth Trust aims to grow an investment over the long term by investing in UK smaller companies listed on the stock exchange. Smaller companies typically have more room to grow than larger ones, although they are more volatile and higher risk.

This trust could be used alongside other UK trusts focused on larger companies as part of a globally diversified portfolio. The managers’ growth-focused investment style also means it could complement other more value focused trusts. When investing in closed-ended funds you should be aware the trust can trade at a discount or premium to net asset value (NAV).

Manager

After four decades in the industry, veteran investor and the trust’s long-term manager, Harry Nimmo retired from the industry at the end of 2022.

Abby Glennie, Deputy Head of Smaller Companies at abrdn, is now lead manager having been co-manager since November 2020. Glennie and Nimmo worked together for many years and their investment philosophy is closely aligned. She started her career at Kames Capital before joining what was then Standard Life Investments in 2013. Most of her time has been spent analysing UK companies and in 2016 she joined the smaller companies team.

Amanda Yeaman was appointed as deputy manager in January 2023 and joined the team in 2019. The duo also collectively manages the abrdn UK Smaller Companies fund and abrdn UK Mid Cap fund. Given the overlap in process and investable universe, we believe they can comfortably manage these responsibilities.

Process

The trust has a longstanding and consistent investment approach. The managers use a quantitative tool called ‘the matrix’ to help with the heavy lifting. It gives every company a score based on its quality, growth prospects and the momentum behind its earnings and share price. This enables the managers to exclude weaker companies like those that are loss-making or highly indebted. They like businesses that perform well throughout a market cycle, so they tend to avoid those with earnings that are tied to the fate of the wider economy.

This helps focus their efforts and filter out companies that don’t fit their criteria. The managers are then looking to invest in around 50 to 60 companies and hold them for the long term. Companies in the trust are often still managed by their founders or led by a proven management team. They should also enjoy barriers to entry from competition, a sustainable business model and the ability to raise prices without significantly impacting demand. Meeting each company’s management team is another crucial part of the managers’ due diligence.

The managers reflect their level of conviction in a company with the size of their investment. Sector wise, consumer discretionary, industrials and technology make up over 60% of the trust’s assets. The majority of the trust’s investments are in smaller companies, but the managers also invest in several medium sized companies that feature in the FTSE 250. They’ll continue to hold on to companies as they grow into larger ones if the investment case remains intact.

Over the trust’s most recent financial year to end of June 2023, the managers made several changes to the portfolio. They purchased eight new companies including environmental and engineering consultancy Ricardo and specialist lender, Paragon Banking. In contrast, they sold eleven, such as Watkin Jones, the real estate company and Hotel Chocolat.

The trust also borrows money to invest with the intention of increasing returns (known as gearing) which increases risk. At the end of the trust's last financial year in June 2023, gearing stood at 2.5% - down from 5.1% the year before.

Culture

The trust was previously part of Standard Life plc, until the business merged with Aberdeen Asset Management in 2017 to create Standard Life Aberdeen plc. This later became Aberdeen Standard Investments and in July 2021, the company changed name once again to abrdn in order to simplify and unite under one single brand.

There's a collegiate feel to the smaller companies team at abrdn. Each member provides input to the wider franchise, and they share their knowledge and experience to ensure their best ideas make it into the portfolios. They share research and ideas with each other, and work with one another to debate and challenge stock decisions.

ESG Integration

abrdn is a firm well known for its commitment to ESG. Responsible investing has been part of the business since it set up its Corporate Governance team in 1992 and launched its first ethical fund in 1994. We like that the firm’s policy positions on a range of divisive issues, from plastics and tobacco to palm oil and biodiversity, are easily available on their website. The firm also produces frequent ESG-related thought leadership articles, a podcast series and an annual Stewardship report.

We’re pleased to see that the firm’s commitment to ESG has filtered down to the fund level. abrdn fund managers generally see themselves as owners of businesses, not investors, and stewardship is an important part of their investment processes. The firm exercises all voting rights and engages with management to encourage best practice.

ESG and stewardship factors are included in every stock research note and each firm receives an ESG score, based on its ESG credentials and its ability to manage ESG risks. All managers have access to a central ESG team, as well as specialist on-desk analysts.

Cost

The trust's ongoing annual charge in the year to June 2023 was 0.95%. Investors should refer to the latest annual reports and accounts and Key Information Document for details of the risks and charging structure.

If held in a SIPP or ISA, the HL platform fee of 0.45% (capped at £200 for a SIPP and £45 for an ISA) per annum also applies. Our platform fee doesn’t apply if held in a Fund and Share Account.

As investment trusts trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges.

Performance

The abrdn UK Smaller Companies Growth trust has delivered strong returns to long-term shareholders. It’s important to be aware that the fund’s previous long-term manager Harry Nimmo was at the helm from 2003 until the end of 2022.

Over the trust’s past financial year to end of June 2023, it underperformed the AIC UK Smaller Companies sector average. Over this period, its NAV fell by 7.36%* versus a 0.37% increase for the AIC sector average. Its share price also fell by 6.79%. The trust’s growth style of investing has been out of favour recently with the market favouring value stocks, which typically perform better when interest rates rise. Some of the biggest detractors from performance over the period included audio company Focusrite, Hilton Food and Future, the media platform.

Rising interest rates and higher inflation have been a headwind for the trust’s investment style and although the share price has declined, the managers remain confident in the underlying performance and potential of many of their companies. For example, 4imprint, the promotional gifts company continued to exceed market expectations and expanded their market share. Other notable performers included Games Workshop, creator of the Warhammer franchise and Diploma, the industrials company.

Remember all investments fall as well as rise in value, so investors could get back less than they invest. The trust currently trades at a discount of 13.22%.

Annual Percentage Growth

Past performance is not a guide to the future. Source: *Lipper IM to 31/08/2023.

Find out more about abrdn UK Smaller Companies Growth Trust, including charges

View abrdn UK Smaller Companies Growth Trust Key Investor Information

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