ABRDN UK SMALLER COMPANIES GROWTH TRUST: The bargain fund hunting the big British companies of tomorrow

While many UK companies are keeping a nervous eye on the budget in less than a fortnight, fund managers at Abrdn believe the case for investing in some of the country’s smaller listed companies remains robust.

Despite strong indications that Chancellor Rachel Reeves will hit UK companies with higher National Insurance Contribution levies on October 30 – and will also remove some of the anti-inheritance tax benefits associated with investing in companies listed on the AIM (the alternative investment market) – Abrdn argues that shares in many smaller UK companies represent excellent value for money.

In other words, they’re cheap as proverbial chips.

It’s a vision set out by Abby Glennie, who runs the listed Abrdn UK Smaller Companies Growth Trust with colleague Amanda Yeaman.

“Yes, there is an atmosphere of uncertainty at the moment,” says Glennie, “and you can never rule out that Black Swan events will disrupt the markets.

‘But the economic growth data for Britain is okay, inflation is down to 1.7 percent and savings are high. Add to that the fact that shares in many smaller UK companies are attractively priced, and you have a pretty compelling investment case.”

The trust, which has a market capitalization of £360 million, is currently invested in 48 companies. Most are listed on the Deutsche Numis Smaller Companies plus AIM Index, which includes around 1,400 companies with market capitalizations up to £1.7 billion.

When choosing from such a diverse index, Glennie and Yeaman look at growth, quality and momentum.

“We want to buy companies that will become the big companies of tomorrow,” says Glennie. ‘That means sustainable earnings and profit growth, year in, year out. This growth must be supported by quality management and reliable revenue generation. The final piece of the puzzle is earnings momentum consistently exceeding market expectations.”

The managers are assisted in their stock selection, portfolio weightings and deselection by an internal stock screening tool called ‘Matrix’. This ranks every company included in the DNSC plus AIM Index using twelve separate data feeds – all measures of a company’s growth potential, ‘quality’ and earnings momentum.

“It helps us come up with new investment ideas,” Glennie adds. ‘It also provides information about the shares we hold in the trust.

‘We obviously do not follow it blindly and sometimes invest in companies where Matrix scores poorly, but it is an important part of our investment process. ‘It’s in addition to our work as managers, which is to gather information from the companies we want to invest in or are already stakeholders in – and the analysts we speak to.’

The trust will not invest in companies with a market capitalization of less than £200 million, nor does it tend to invest more than 4.5 percent of the trust’s assets in any one company.

On a relative basis, the performance figures are better in the short term than in the longer term. The return over one year of 29 percent can therefore be compared with an average of 21 percent for the comparable group. Over the past three years, losses amounted to 26 percent, compared to an average peer group loss of 8 percent.

Glennie says the trust’s focus on growth stocks within the UK universe of smaller companies meant it would suffer from rising interest rates and inflation in 2022.

The trust’s annual fees total 0.92 percent and its exchange identification code and market ticket are 0295958 and AUSC, respectively.