Aberforth Smaller Companies Trust (ASL)£13.12
Gain to date: 5.5%

We said to invest in Aberforth Smaller Companies Trust (ASL) on 22 July 2022 because of its value-focused credentials and the fact you could effectively buy its portfolio for 12.5% less than the market value of its holdings.

With a lot of the macroeconomic bad news already priced into markets we could see the potential upside for a skilled stock picker focused on small caps.

WHAT’S HAPPENED SINCE WE SAID TO BUY?

Value stocks have continued to benefit from the tailwind of rising interest rates and investors are slowly regaining interest in a select number of smaller companies. The shares have risen 13.8% over the last three months.

Meanwhile, the trust’s discount to NAV has narrowed to 10.9%. Although it is not deemed an income fund, it has a 2.7% trailing yield and potential to achieve real growth in dividend income.

Research group Kepler believes the board will be able to increase the pay-out again this year, adding to ‘already substantial’ reserves. Investment trusts can dip into revenue reserves during hard times to maintain dividend payments.

In addition, the board has been actively buying back shares at a discount to NAV. So far in the current financial year the company has bought £32 million worth of shares at an average discount of 14% according to Kepler.

WHAT SHOULD INVESTORS DO NOW?

With inflation proving sticky, interest rates seem unlikely to fall anytime time soon, providing a continued tailwind for value managers.

Analysis completed by Aberforth’s managers show current share prices in the portfolio already discount a UK recession. While there is always room for sentiment to fall further the chances of absolute and relative outperformance remain favourable. Continued narrowing of the trust’s discount to NAV provides further support for the shares, which continue to look attractive.

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