Acorn Income rethinks its future after difficult 2020

Acorn Income rethinks its future after difficult 2020 – Acorn Income Fund has published results for the year ended 31 December 2020. This was not a great period for this company which is geared by zero dividend preference shares and invests in a mix of UK small caps and high yielding securities. The NAV total return for the year was -17.1% and the share price return -14.0%. A fall in the value of the underlying portfolio of 10.8% was magnified by the structural gearing. Arguably, the trust should have done better in a year where small caps outperformed large caps. The return on the Small Cap ex investment companies index was +1.6%.

Acorn Income Fund dipped into reserves to increase the dividend by 10.6% to 23p (revenue was 13.75p per share). However, it may not be possible to sustain this. Revenue reserves at the start of the year stood at 21.6p per share representing approximately one year’s worth of dividend. Maintaining the dividend distribution throughout 2020 reduced reserves to 12.36p per share at 31 December 2020. The board says that has been pleased to see the recovery in earnings throughout the second half of the year. Nevertheless, although projections do show a recovery in revenues for 2021 and thereafter, the board believes that it is likely that a return to a sustainable and covered dividend will necessitate a lower dividend payment in future years.

Strategic Review

At the Annual General Meeting in August 2021, a discontinuation vote will be put to the shareholders and they will be asked to vote on whether they wish the company to continue for a further five years. At the same time the directors intend to put forward proposals, yet to be finalised, that may involve changes to investment policy, corporate structure, gearing and dividend yield. Shareholders will be able to consider whether they wish the company to continue for a further five years in the light of these changes. In preparing these proposals the board has been working with the company’s new broker (N+1 Singer) and has employed an external consultant to conduct a strategic review of the company.

This strategic review is predominantly focussing on the following areas:

• the investment management structure and investment objectives that will seek to address the discount, expand the investor base and facilitate the growth of the company over the coming years;
• the appropriate level of sustainable yield;
• gearing level together with the resultant impact on income yield; and
• form of gearing, if any, (i.e. ZDPs and/or bank debt) that is most appropriate in the current market environment.

At this time the review is still in active progress and the board will report to shareholders as soon as more detailed information is available.

As a consequence of the strategic review, there will inevitably be material changes to the formal structure of the relationship with the investment advisers and investment manager. To this end, the company has served protective notice to terminate the investment management agreement which has the effect of initiating the notice period required under the agreement. This action should not be interpreted as an indication that the current investment advisers will not be involved in the management of Acorn’s portfolio post the conclusion of the strategic review.

AIF : Acorn Income rethinks its future after difficult 2020