Wider discount mars an otherwise good year for ASCI – abrdn Smaller Companies Income (ASCI) had a good 2021, delivering an NAV return of 30.4%, well-ahead of the 21.9% return generated by the Numis Smaller Companies ex Investment Companies Index. Unfortunately, the discount widened from 10.3% to 15.3% and shareholders ended up with a return of 22.9% – good but not as good as it should have been.
The company’s revenue per share staged a strong recovery – rising from 5.60p to 9.69p. This allowed directors to hike the dividend from 8.24p to 8.85p while rebuilding revenue reserves.
Drivers of returns – an extract from the manager’s report
“Stock selection was a significant contributor to the outperformance of the Company over 2021. Earnings seasons have brought positive updates from the names held in the Company’s portfolio and share prices have responded accordingly. Encouragingly, balance sheets are healthy and there is dividend growth coming through. Accordingly, your Manager believes that the dividend situation across the portfolio is now normalising.
Financials Liontrust and Tatton Asset Management were top contributors over the year having enjoyed sustained net inflows throughout 2021. Both companies are focused on the UK intermediary community as their core audience (IFAs, wealth managers) but the real point of differentiation is the simplicity and consistency of their investment management processes. Specifically, Liontrust delivered sustained net inflows in the period, with 21% growth in headline Assets under Management (“AuM”). The fund management process is clear and well-articulated, giving advisers confidence in the fundamental strength of stock selection and portfolio management discipline. It finished the year with the acquisition of institutional asset manager Majedie which boosted AuM further, and provides institutional growth opportunities. Liontrust’s AuM is now in excess of £40 billion having delivered consistent organic growth on a diverse range of funds (equities, fixed income, multi-asset) and is increasingly diversified, having completed selective and accretive bolt-on acquisitions.
Tatton Asset Management has maintained impressive net inflows, benefiting from reduced social distancing restrictions which has allowed them to resume more meaningful face-to-face marketing, including the return of its annual conference. It has a clear portfolio asset allocation, with a number of variants (both risk rated and specialist – like ethical) which allows the solution to be tailored, aided by an attractive pricing position. The company’s AuM has now broken the £11 billion mark driven by sustained monthly inflows. This has been complemented by the acquisition of the Verbatim funds, adding further AuM and also bringing a strategic partnership with Fintel. Tatton Asset Management has a broad reach providing discretionary fund management services to over 700 firms acting for in excess of 80,000 underlying investment accounts, a number which is continually growing.
Morgan Sindall added value following a number of upgrades to earnings guidance for the year in spite of widespread inflation in the supply chain and shortages of materials and labour. The UK construction business is benefiting from structural growth in infrastructure from increased investment, and heightened demand to help companies adapt offices to future ways of working. Forward visibility continues to strengthen and recent margin improvement reflected the continued focus on long-term relationships, operational delivery, and strong risk management. Your Manager remains confident in the growth potential on offer alongside the company’s attractive yield.
It is unusual to be writing about Games Workshop as a detractor from performance for the year. In fact the company had an exceptional year in terms of sales demand, demonstrating excellent performance given that the comparative period last year included the successful launch of Warhammer 40,000 and pent-up demand after the Pandemic. Although all these numbers are promising, there were a number of headwinds in relation to pressures on freight costs and currency exchange rates. Supply chain constraints meant the company had to delay releases of new products. The company’s stores and those of the trade accounts were impacted by government restrictions on opening and operating. This materially impacted sales in the channel as well as the ability to offer introductory games. Sales to Europe were impacted by the UK leaving the EU (“Brexit”) and the company had to give refunds when delivery was impacted. Nevertheless the company made a confident outlook statement, with the focus on growing sales, given the planned increases in manufacturing and distribution capacity. This provided some insight into the company’s thoughts on the sustainability of potential demand. Despite the share price weakness, your Manager believes that there has been no change in the long term investment case, namely that the niche category Games Workshop operates in will continue to thrive, their competitive position within this category remains strong and multiple longer term opportunities are available to the group. Without global supply issues your Manager is confident that the quality of the business and the top line growth opportunity will continue to provide strong earnings growth in coming years, which in turn will drive dividend growth.
There was a disappointing update from Seraphine shortly after its flotation, namely a warning on supply chain challenges. During their second quarter, supply constraints impacted availability which, in turn, weighed on new customer acquisition. This diluted marketing spend and led to fewer new customers which subsequently challenged revenues. The shares responded negatively to the downgrades to earnings. The update was reflective of some of the post-Pandemic supply chain difficulties facing the sector during the middle of the year; these were more challenging for smaller brands and retailers to mitigate. The company’s update in December was encouraging, indicating that revenue growth had re-accelerated due to stock levels recovering and marketing spend being redirected (with customer acquisition costs returning to historic levels). There was also progress in the US with the Zalando partnership progressing well and a new agreement in place with Next. This encouraging update, suggested that the second quarter was abnormal and the business is getting back on track to delivering on its growth agenda.
Synthomer is a chemicals business that had a super normal year thanks to the Pandemic-related increase in demand for nitrile which is used in the production of latex gloves. Towards the end of the year there were some management changes and the unknown around the normalisation of demand for nitrile following the peak-of-cycle profitability, which weighed on the shares. Looking forward, the business is in a strong position. Management are confident that the benefits of the recent acquisitions of Eastman Chemical, an adhesive technology business, together with investment in new capacity, further efficiency measures and a proven strategy will underpin future growth. The balance sheet remains strong and flexible to support the group’s dividend.
Fixed Income Portfolio
Fixed income markets endured a more challenging period in 2021 as government bond yields rose in response to stronger inflation data in many jurisdictions. Having expected to be more transitory in nature the prolonged impact of the Pandemic and the support being provided to economies have ultimately had a dramatic impact on prices and the data is now forcing policymakers into a more hawkish response. Policy rates did rise modestly in the UK at the end of 2021 and are expected to be raised again in the coming months, both in the UK and further afield. The impact of policy action, despite the recognition that inflation is largely caused by supply side issues, has pushed yields higher. Credit spreads remain relatively tight when compared to historical levels although further moves from government bonds could easily lead to a re-pricing of these markets and some volatility was noted in markets during the final quarter of the year.
Throughout most of the year, demand for investment grade credit was robust with investors being attracted by the positive yields on offer. As a result, the asset class outperformed government markets despite some volatility. Lower quality areas of the market performed better than higher quality credit, largely as a result of the higher yields on offer although weakness was notable in sectors such as energy, basic materials and technology.
The Company’s exposure to fixed income is largely in shorter dated BBB rated areas of the market. Outcomes over the year were mixed, with a perpetual issue from Barclays being the stand out performer with a positive return of +3.7%, while a corporate hybrid issue from National Grid performed relatively poorly, driven by the challenges facing the domestic gas industry. This bond delivered a small negative return of approximately -1.5%. Bonds issued by Heathrow, the UK airport operator delivered a positive return of +0.64% and continues to look good value.
As yields rise in the UK your Manager anticipate[s] that more opportunities will arise for the Company to take advantage of. Credit spreads have remained reasonably firm and any weakness in that market will be considered a buying opportunity. The Company’s exposure to Scottish and Southern energy via a corporate hybrid will be replaced during 2022 as the bond is expected to be called by the issuer.”
ASCI : Wider discount mars an otherwise good year for ASCI