Shares acknowledges there could be further volatility to come from small caps, an asset class hit by indiscriminate selling as investors fret over surging inflation, rising rates and a likely recession in 2023.

Yet with much bad news already priced in, taking advantage of the stock-picking skills of a proven small cap-focused fund manager could pay off for the patient investor.

We like Aberforth Smaller Companies (ASL), a value-focused investment trust trading at a wide 12.5% discount to net asset value (NAV). That represents a compelling entry point for investors, with a decent 2.8% yield offering additional downside protection.

ABOUT ABERFORTH SMALLER CO’S

Investment trust research firm Kepler points out that Aberforth Smaller Companies is ‘one of relatively few options for value investing in the UK small cap space’ and the trust has benefited since value staged a comeback.

Yes, it has suffered a negative one year 14.6% net asset value (NAV) total return amid the more recent small caps carnage, yet annualised NAV total returns over 10 years are a robust 10.25% and the trust is well positioned for a rising interest rate environment, since value has typically outperformed growth during previous hiking cycles.

The £1.1 billion cap is managed by a seven-strong team at value investor Aberforth.

It buys shares in companies it calculates are selling below their intrinsic value; the aim is to spot companies trading at low valuations, preferably when their earnings are at cyclical lows too, hold them until valuations reach fairer levels and then sell out.

‘Over the years this pragmatic approach has seen the team roll into and out of companies, building up knowledge and experience which can sometimes rival that of the companies’ management teams themselves,’ says Kepler.

INCOME ATTRACTIONS

The trust also aims to increase dividends in real terms and its value discipline leads the managers to stocks with higher than average yields. Aberforth Smaller Companies raised the dividend in 2020 and 2021, despite the impact of the Covid crisis on corporate payouts, and also sits on an extensive revenue reserve.

With the UK market still cheap compared with overseas peers, Aberforth Smaller Companies continues to benefit from takeover interest in portfolio companies, with the likes of FirstGroup (FGP), Go-Ahead (GOG), Rathbones (RAT) and Euromoney Institutional Investor (ERM) having received bids.

As of 30 June, the fund was diversified across 76 holdings.

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