Aberdeen Smaller Companies Income reports that its NAV was up 8.2% in total return terms for the year, lagging the performance of its benchmark, the Small Cap ex-investment companies index, which rose by 12.5%. The Directors are disappointed that the discount widened over the course of the year and was 22.1% at the year end. The Board has declared four interim dividends during the year ended 31 December 2016 making a total dividend of 6.85p, an increase of 3% from the 6.65p paid last year.
The manager’s report says that the fund’s focus on quality companies means that the portfolio tends to have a skew to what would be regarded as more defensive sectors. They say that this means that they do sometimes lag very strong market rebounds, especially those characterised by sharp recoveries in cyclically depressed sectors. In early 2016 a number of mining and oil and gas stocks rallied strongly on the back of improving commodity prices. These companies are often single commodity in nature, more exploration than production led – and therefore with less durable cash flows – and often operating in areas of the world that they would deem to carry significantly higher operational and political risk. For those reasons they tend not to pass their quality hurdles and they struggle to justify owning them with a long-term buy and hold philosophy in mind. In the immediate aftermath of Brexit they recovered some lost performance. The portfolio has less exposure to domestically focused general retailers, travel & leisure and real estate businesses, all sectors that witnessed a period of acute weakness following the event. Unfortunately in the final quarter they again lost some ground suffering from a rotation into more cyclical areas of the market precipitated by the election of seemingly “pro-growth” Donald Trump as the President of the United States.
Stock selection was also partly to blame for the Trust’s underperformance this year. They say that the majority of their companies continue to deliver good earnings growth but a few witnessed more difficult trading over the course of the year and their share prices suffered as a result. Mothercare, Interserve and Devro all had particularly difficult years.
ASCI : Aberdeen Smaller Companies High Income says markets were against them in 2016