abrdn Diversified Income and Growth (ADIG) has endured a tough run over the last few years. The trust invests in a broad range of assets – a total of 130 investments at the end of September 2023, all of which are funds – that includes exposure to private assets (58.9% – which includes unlisted alternatives, private equity, private credit, real estate, infrastructure and natural resources), fixed income and credit (15.7% – global loans, asset backed lending and emerging and frontier market debt), and equities (26.3% – global equities, European green infrastructure, UK mid-cap and listed alternatives).
It bills itself as a dependable income strategy with capital upside, offering, on paper at least, exposure to a relatively unique combination of securities that should have relatively low correlations and provide a more stable return profile.
A one-stop shop
ADIG was originally constructed to give shareholders access to the kind of diversified portfolio held by large, sophisticated global managers, particularly given its exposure to a range of assets, including alternatives, which would not traditionally be available to private investors. Unfortunately, as yet this has not quite played out as planned, with performance trailing its own objective, broader market benchmarks and peer group averages both over the medium and longer term.
2017 revamp failed to inspire
Many years of poor performance as an equity income fund culminated in a restructure in 2017. This resulted in the company (then known as Blackrock Income Strategies), pivoting to a flexible investment mandate that targeted a balanced approach of both long-term capital and income returns. Unfortunately for its investors, this did little to change the fortunes of the fund as equity markets continued to be dominated by a progressively narrower cohort of growth stocks and its equity exposure did not reflect that.
Consequently, further changes were made in 2020, with the managers leaning even more into the unlisted space, targeting private equity and infrastructure in particular, and while these assets have helped generate steadier NAV returns over the last few years, the portfolio has struggled in an environment of rising interest rates.
Wrong place, wrong time, for a long-time, but could this now change?
All in all, it seems like the company has continually found itself stuck in no man’s land as a decade of falling inflation and central bank intervention crushed volatility and reduced markets to one massive momentum trade, removing almost all the benefits traditionally offered by structurally diverse funds such as ADIG.
Its foray into private assets has provided some optimism, with annualised NAV returns of 5.5% over the last three years. However, this has been depressed by the immense pressure of rising financing costs and the increasing attractiveness of risk-free government debt, both of which have weighed heavily on sentiment. Investors also seem to be prizing liquidity and, while all of ADIG’s flexible investment peers have seen their discounts widen, ADIG’s seems to have suffered disproportionately and now stands at just over 30%. This seems at odds with the quality of the underlying portfolio.
We believe that many of the sectors ADIG invests in are now dramatically oversold, particularly its private assets (we would highlight infrastructure and renewable infrastructure as well as private equity more broadly) which now make up almost 60% of the fund. While ADIG has a share register that is overwhelmingly made up of retail investors, we think that a combination of cheap underlyings and a substantial discount to NAV, could be very attractive and therefore leave it open to attack by an activist and so we are pleased to see that the board has been proactive and come up with plans to both address the discount and buy time for its assets to mature, which should reduce the risk of it being forced to sell assets at a substantial discount to their long-term value.
The company expects roughly a third of its portfolio to mature by the end of 2026, which we would expect will drive solid NAV returns over the next few years while the manager also remains confident in the opportunities that are presenting themselves given current market conditions, particularly as traditional providers of capital have stepped back in areas such as green infrastructure, which have the potential to generate Net IRRs of between 10-15%.
Bread today, cake tomorrow and maybe more cake from 2026?
The board recognises that allowing time for the portfolio to mature and for markets to settle extends the timeline for investors hoping to cash out of the fund, so its proposals include a number of measures to address this. First, it is providing shareholders with a special interim dividend of 1.65p (amounting to c.£5m in aggregate), funded by gains realised from the private markets portfolio over recent months. Second, it plans to make enhanced distributions, totalling between £30m and £35m to shareholders by the end of 2024, funded by both realised gains and surplus available cash. This will be achieved via a tender offer of between £25m and £30m, at an expected discount of about 15% to NAV, during 2024 – subject to the passing of the continuation vote at the AGM in February 2024. The tender offer proposal has something for everyone – shareholders that want to exit can get out at half of the current discount to NAV, while there will be a decent uplift from NAV accretion for those that are prepared to hang on. Finally, the board says that at the end of 2026 it will review the progress it has made in narrowing the discount and then consider its options which could include further enhanced distributions.
An increasingly attractive proposition?
Absent a bid close to NAV, these developments are probably the best outcome for shareholders, allowing recent investments to bed in, while providing an opportunity for sentiment towards diversified, multi asset portfolios like ADIG to improve. Somewhat ironically, as inflation and volatility have returned, and a reset of interest rates appears imminent, the benefits of such funds are becoming apparent once more, and companies able to generate capital growth and dependable income are likely to become increasingly attractive. While that may be little consolation to investors, it seems that the coming decade may be much more kind to diverse portfolios such as ADIG’s.
ADIG : The curious case of abrdn Diversified Income and Growth
reads well – thanks
Will the £30m tender offer increase the shares held in treasury by about 32m (assuming the 15% discount to n.a.v equates in February to 94p per share). If so, and with 35m shares currently held in treasury, what might the implications be for these shares accounting for 20% of the issued share capital? Presumably the stock will be less marketable, but will it improve dividend cover?
My guess is that, since there are no plans to re-expand, the board will cancel the treasury shares and any shares bought back. Yes this will have the effect of reducing liquidity in ADIG’s remaining shares. The implications for dividend cover are harder to fathom. My expectation is that income-providing investments in equities, bonds and cash deposits will fund the initial returns of cash and that could mean that there is less income available to fund future dividends.