Aberdeen Smaller Companies (ASCI), which invests in UK smaller companies, has reported annual results to 31 December 2019. The company’s performance in NAV and share price terms, as well as that of its benchmark, is shown below:
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NAV total return |
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FTSE Small Cap ex Inv Trust Index total return |
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Share price total return |
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2019: +34.4% |
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2019: +17.7% |
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2019: +57.7% |
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2018: -14.6% |
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2018: -13.8% |
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2018: -20.2% |
Recapping on a strong 2019
ASCI’s management report provided the following the following review of the year:
There were many external uncertainties: Brexit, uncertainty in the UK Parliament, President Trump, and trade tensions between the US and China. Despite these, markets have remained resilient over the period. The general election outcome then provided a relief rally near the end of the year, with particular optimism being reflected in share prices of some of the more domestically exposed smaller companies. Entering the year, valuations on UK equities looked attractive relative to other geographies, but the political uncertainty continued to make investors cautious. Companies and consumers however showed signs of ploughing on with life, perhaps given Brexit fatigue after 3 years of waiting, and economic growth and company reporting remained very solid through 2019. We saw signs of Brexit related issues in the fourth quarter, in particular with increased profit warnings, many of which blamed “Brexit” and also more caution over delayed decision making in both public and private end markets.
It was evident in 2019 that the Smaller Companies universe lagged other categories through the year, with FTSE Small Cap ex IT index delivering a total return of 17.7%, lagging the FTSE 250 ex IT index with a return of 30.8%, and even the FTSE All Share index at 19.2%. The Numis Smaller Companies ex IT index returned 25.2%. This was influenced by the more domestic exposure within the small cap space, and investor sentiment towards the challenges those businesses are facing currently. We did see some relief on that with the general election, and strength in the small cap space, but ,as a whole, 2019 was a year where the strongest performing index was in the Mid Cap space which is more internationally exposed. Investors have looked overseas for areas of growth and resilience, and less volatility; with many believing the uncertainty of Brexit would have significantly negative impacts on UK businesses this year.
The UK market, and sometimes even more so at the small end, contains a wide and diverse range of companies. Through our bottom up stock selection focus we identify businesses which have quality, growth and momentum characteristics, with an income balance. The manager does not look to take macroeconomic calls or time the cycle, but focuses on identifying businesses which they believe have the levers and ability to grow in a sustainable manner, despite any external distractions the economy might experience. In difficult market environments and times when economic growth slows, quality is a characteristic they believe comes into even more focus. Quality businesses, with healthy balance sheets, management teams with a strong pedigree, good corporate governance and strong competitive positions, have the ability to be resilient through more difficult periods, and even improve their positioning when peers may be struggling.”
Outlook
On the company’s outlook, the management report added:
“We have enjoyed many years of strong economic growth and bull markets, and investors globally are aware that can’t last forever. We believe we are certainly nearer the next economic slowdown than the last one. Within the UK specifically, it is difficult to tell at this stage whether some of the areas of slowdown we saw in Q4 will continue throughout 2020, or were short term driven by the general election uncertainty.
Our investment process is focused on fundamental, bottom up, research. We are not taking portfolio decisions based on macroeconomic views. Stock analysis remains the key driver of our decision making process. Recent periods have given us confidence that this remains a long term driver of outperformance. Looking back to the 2016 Brexit vote, small caps were heavily de-rated in the aftermath panic. In hindsight this was an excellent buying opportunity as they have rallied strongly since. Companies have been resilient despite these external factors. We believe in our investment process. This process guides us to invest in companies which have strong management teams leading their strategies, which have a number of growth levers to pull, which can drive growth independent of external conditions and which are resilient and have strong financial positions. A critical part of our research is also analysing the environment, social and governance characteristics of businesses and looking for both risks and opportunities. We believe companies who can exhibit strong ESG credentials are higher quality, and lower risk investments.
The UK smaller companies universe remains a wide, diverse grouping of businesses and investment opportunities. Our process drives us towards investing in a range of different businesses, and both domestic and international exposures. The investment process followed by our team has been utilised for well over 20 years and tried and tested through various economic cycles. The ‘Matrix’ remains a core part of that process, and has provided a consistent backing through the years. This gives us confidence that despite what factors we may see externally, our process will focus us towards backing businesses which can drive sustained long-term outperformance across the portfolio.”
ASCI: Aberdeen Smaller Companies delivers a strong set of 2019 results