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Aberdeen Standard Equity Income hit hard by COVID

Aberdeen Standard Equity Income Trust just missed the benchmark for the year

Aberdeen Standard Equity Income hit hard by COVID – Aberdeen Standard Equity Income reports an NAV return of -25.7% for the year ended 30 September 2020 and a share price return of -29.4%. These compare to a return on the All-Share of -16.6%. Revenue per share fell from 21.7p to 15.6p (dividends distributed by companies in the portfolio were £8.7m, 26% less than last year), leaving the 20.6p uncovered by earnings and requiring a transfer from revenue reserves. The dividend was 0.5% higher than the previous year.

Board review

The board conducted an intensive review of the management of the company and how a lasting recovery in its fortunes can be achieved. This review covered all the possible options available, ranging from carrying on to winding the company up. It was assisted in this review by stockbrokers, JPMorgan Cazenove, as well as by the manager, Aberdeen Standard Investments.

The review concluded that “…we should carry on with the existing policy and management arrangements, utilising the revenue reserves which have been built up over the company’s almost 29 year life to maintain the dividend at its current level, and indeed, by making marginal increases, continue the now twenty year record of nominal increases, until dividends can again be covered by annual earnings. We expect that this position can be reached without exhausting revenue reserves given the combination of dividend reinstatements and portfolio adjustments made by the manager designed to increase our revenues. If so, shareholders will have had an investment which has given them a yield of 6.9%, with the prospect of a rising dividend thereafter. In those circumstances, we would expect that the company’s shares would be trading at a significantly lower yield than today’s, with a corresponding uplift in the share price having occurred.”

The chairman points out the difficulty of canvassing shareholders’ opinion at this time and notes that he has received just two letters from shareholders over this period. He urges investors to write to him if they have strong views on the future direction of the company.

Extract from the manager’s report

Covid-19 was the dominant driver of the portfolio’s performance in the 12 month period. After outperforming in the quarter to December 2019, the portfolio underperformed materially in the quarter to March 2020 and then slightly outperformed the index in the six months to September 2020. The net result was a very poor outcome, which was entirely concentrated in a six week period between mid-February and late-March.

Covid-19 was a particularly challenging event for our Focus on Change investment process. Following the election euphoria of December 2019, we went into Covid-19 with too much exposure to economically-sensitive stocks and not enough exposure to defensive stocks and growth stocks. As a result, the portfolio’s performance deteriorated markedly in mid-February as the full consequences of the pandemic became apparent. We took decisive action early on, selling stocks with structural concerns and redeploying the proceeds of these sales into more robust companies with a better dividend outlook. However, our subsequent NAV recovery has been choppy as market leadership has been retained by highly-valued growth stocks which tend not to fit our investment process. We seek to identify companies whose change potential has not been priced in by the wider market. This process has struggled during the recent macro turmoil, as investors have been attracted to stocks with the most visible growth prospects, regardless of the extent to which this growth has been priced in. We believe that our investment process is set to work again, as it has in the past, and in the outlook section we outline the catalysts that we expect to drive an improvement in the Company’s performance.

The key drivers of our performance relative to the FTSE All-Share Index can be summarised as follows:

1. The gearing position, averaging 13% over the year, cost just over 3% of relative performance.

2. Heavy exposure to economically-sensitive sectors significantly detracted from performance. Consumer Discretionary was the single largest detractor to performance by sector, costing nearly 3% of relative performance. Our holdings in travel and leisure companies directly impacted by the lockdown, including TUI, Cineworld and National Express, hit performance particularly hard.

3. Insufficient exposure to defensive sectors also detracted from our performance as the recession took hold. Our underweight positions in Healthcare and Consumer Staples cost around 3% of relative performance, in particular not owning Unilever and Reckitt Benckiser and the underweight position in AstraZeneca.

4. Financials was by far the largest positive contributor to our relative performance. We benefited from strong stock selection, in particular CMC Markets which soared by +210% on persistent revenue upgrades and Hastings which increased by +28% after receiving a bid approach. Not owning mainstream banks such as Lloyds Banking Group also helped our relative performance.”

We thought it was also worth showing you this statement from Thomas Moore, the fund’s manager: “As ever, it is important to look forward and position the portfolio for what is to come, rather than what has just happened. Covid-19 caused the revenue account to take a hit but we have built up significant reserves thanks to the strength of our earnings growth in the past decade. We expect portfolio income to recover strongly in the coming months as we add to resilient income stocks and more of our holdings resume their dividend payments. We are focused on lifting the revenue account with a view to narrowing the gap between earnings and dividends. We have presented to the Board our plans on how we intend to do so. Given that market conditions have caused many robust higher yield stocks to trade at unusually low valuations, we are confident that that this will be possible while staying true to our Focus on Change investment process.

We see significant capital growth potential in the portfolio as the underlying strengths of our holdings become more fairly reflected in share prices. We have shown in the past that our investment process can be very powerful in delivering meaningful outperformance, particularly when investor sentiment stabilises in the wake of periods of macro turmoil. Having outperformed our peer group in five years out of seven under my tenure between FY12 and FY18, the past two years have been a deeply frustrating period for shareholders and I am absolutely determined to put this right.”

ASEI : Aberdeen Standard Equity Income hit hard by COVID

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