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Narrowing discount boosts abrdn Equity Income

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In NAV terms, the 12 months ended 30 September 2023 were not great for abrdn Equity Income, which generated a return of 1.8%, lagging its All-Share Index benchmark by 12 percentage points. However, a narrowing discount rescued the situation somewhat, leaving shareholders with a return of 11.4% for the period. The chair’s statement notes that the main problem was the outperformance of very large stocks within the index over the period.

The dividend was increased for the 23rd consecutive year, albeit only marginally – an uplift of 0.4% to 22.8p. This dividend was covered by earnings of 23.4p but the revenue per share fell by 8.2% year-on-year.

The board says that it expects that, in the absence of any adverse circumstances, in the coming financial year the trust will extend its track record to 24 consecutive years of dividend growth by paying a dividend of at least 22.9 pence per share. [in real terms (adjusting for inflation), that could still mean that the dividend is shrinking]. The board says that it remains focused on improving performance and growing the dividend.

Buybacks shrank the fund and the ongoing charges ratio crept up to 0.94% from 0.91%. however, the management fee structure has been revised. The new agreement does away with the tiered fee structure of 0.65% on the first £175m of net assets and replaces it with a flat fee of 0.55% on net assets and took effect on 1 October 2023. Based on the net assets at the year-end of £149.9m, the change represents a reduction in the fee of 15.4%.

Extracts from the manager’s report

In summary, our NAV lagged the index for two key reasons.

First, market conditions were not supportive for the Fund’s positioning. The outperformance of a narrow range of large-cap stocks, linked to the strong US dollar and ongoing investor de-allocations from domestic UK stocks, was a key feature of the stock market during the period. This dragged on performance given the portfolio’s heavy weighting in small- and mid-cap stocks, itself a function of the index-agnostic approach that we use in constructing the portfolio. Our portfolio’s exposure to the FTSE 100 Index was 52.6% at the end of the period, whereas the FTSE 100 Index represented 84.4% of the total value of the FTSE All-Share Index.

Second, the portfolio suffered from some company-specific disappointments, mainly linked to the impact of falling commodity prices on some of our Energy holdings and the impact of higher interest rates on activity levels in some of our Financials and Consumer holdings.

Turning to specific stocks, the key drivers of our performance over the period are as follows:

–       Our Energy exposure detracted from performance at a time of falling energy prices due to a rebuilding in gas storage levels and reduced demand due to unseasonably mild winter weather. The weakest performers were Thungela Resources and Diversified Energy which reversed the gains they had made in the previous financial year. Both companies remain highly cash generative even at lower energy prices, providing significant portfolio income. Despite the benefit of our large holding in BP, this sector detracted around 4% of relative performance.

–       Within Financials, performance was hit by our holdings in CMC Markets, OSB Group and Vanquis, all of which struggled in an environment of rising interest rates, resulting in profit warnings. These negatives were only partially offset by contributions from International Personal Finance, Litigation Capital Management and Conduit, all of which delivered better than expected results. Overall, this sector detracted around 5% of relative performance.

–       Performance was varied within Consumer and Industrial sectors. Better than expected results from housebuilder Vistry and construction business Galliford Try and Tyman. The portfolio also benefited from its underweight in Consumer Staples, in particular not owning Unilever and Reckitt Benckiser, although this was offset by weak performance of Imperial Brands on concerns over the imposition of new tobacco restrictions. In aggregate, these sectors were neutral for performance.

–       The gearing position mildly detracted from performance as the interest rate on the gearing exceeded the portfolio return. We continue to believe that the gearing facility is in the best interests of shareholders given the benefit to the revenue account as the dividend yield of the portfolio still exceeds the interest rate being paid on the facility, as well as the potential benefit to the capital account over time.

AEI : Narrowing discount boosts abrdn Equity Income

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