Over the six months ended 30 June 2016, Aberdeen Small Companies Income’s NAV was down 6.3% on a total return basis, underperforming its benchmark, the FTSE Small Cap ex-IT index, which was down 4.6% on the same basis. The equity portfolio contributed a return, relative to the index, of -1.0%, offset slightly by a positive return from the fixed income portfolio of corporate bonds, preference shares and convertibles. The split of assets at the end of June 2016 remains broadly unchanged since June 2015 with 85.6% in equities and 11.7% in fixed income assets, the remainder being held in cash. The Board has already announced increased first and second quarter dividends, each of 1.70p per share (2015 – both 1.65p).
The managers say a number of holdings released encouraging results over the period including BBA Aviation, Berendsen, Dechra Pharmaceuticals and Abcam. They say all have demonstrated resilient levels of growth and their strong market positions and pricing power have served them well. Unfortunately there were also disappointments and signs that slowing growth, increasing competition and fiercer pricing are beginning to bite for some. To pick out a few common themes, holdings with secondary and tertiary exposures to oil & gas continued to find life quite tough and elsewhere, some of the domestic UK retailers and services businesses have found trading somewhat more challenging.
Restaurant Group and Mothercare were two holdings that released weaker results in the period. The former was exited in early April, noting the unfavourable outlook for sales and profitability in an increasingly competitive market. Mothercare had a difficult trading statement in early May, with a material drop off in the fourth quarter driven by weakness in its International business. They think the issues here appear to be more transitory in nature, the group has a sensible programme to restructure its UK operations and its international business still offers exciting long term growth opportunities. Interserve was another weak performer. The company’s support services, equipment services and international construction are all trading in line but a contract in the UK construction business, specifically in the energy from waste sector, has been problematic. The rest of its UK construction division is dominated by building and fit out work, as opposed to infrastructure, and therefore tends to be less complex and lower risk. Post period end, the company said it would be exiting the energy from waste sector completely. This together with strong cash flow, reduced net debt and a small increase in the dividend saw the shares respond favourably.
A few of their UK property and financials stocks fared poorly in the week following Brexit – although most have gone on to recover much of that lost performance. There are undoubtedly concerns over future levels of demand for UK real estate assets and, in the financial sector, lower foreign direct investment, higher risk premia and question marks over London’s future status as Europe’s premier financial services hub have all led to heightened investor angst. They believe the market can also be quite undiscerning at times of uncertainty. A good example would be the weak performance of property company Savills post the vote. Ostensibly a heavily London exposed real estate agent, it has developed into far more of a global business in recent years with 700 offices worldwide and the majority of its revenues coming from outside the UK mostly in Asia Pacific and the United States. They believe the opportunities for this business are strong.
Some recent investments are making good progress in their respective end markets and their share prices have responded favourably. Smart Metering Systems, which develops and rents smart meters for UK utilities, has been successful in signing up new utility clients this year and Burford Capital, the litigation financing company, saw both its income and cash generation rise significantly from the prior year period. Both of these businesses were introduced in January.
The most recent introduction to the portfolio is Assura, a primary healthcare property group, with the vast majority of its surgeries let to GPs thereby creating an implicitly NHS/Government backed rental stream. It delivered a steady set of numbers in its most recent results with consistent rental growth and a pleasing increase in the dividend.
Within the fixed income portfolio they continue to run a strategy of investing in the short dated bonds of high quality well financed companies. Total returns from fixed income markets have been strong. Over the 6 months to 30 June 2016, 10 year gilt yields declined by 110 bps to 0.9% and longer dated bonds performed stronger still as the yield curve flattened significantly. Sterling corporate bonds spreads widened as risk sold off, with the result that credit underperformed UK gilts. Euro bond prices on the other hand have been supported by the European Central Bank’s corporate bond buying program. During the first half, they reinvested the maturing Stagecoach bond into Society of Lloyds 7.241% 2017. As credit spreads widened significantly in February, cash in the fund was used to purchase the HBOS 6.461% 2018/Perp. These investments were made at yields of 4.3% and 5.7% respectively.
ASCI : Aberdeen Small Companies Income just fails to keep pace with benchmark