abrdn Smaller Companies Income trust suffers ‘disappointing’ first half of 2022

In what Kershaw described as “a tough year for smaller companies,” the trust’s net asset value declined 30%, according to its first-half 2022 results, while its benchmark, the Numis Smaller Companies ex Inv Trust Index, lost 20.2% during the period. .

In the 12 months to June 2022, the company’s share price and NAV fell 21.3% and 24.4%, respectively, while its benchmark index gained 17.2%.

The trust discount stood at 15.7% at the end of June, compared to 15.3% in December 2021, while its leverage stood at 4.8%, three percentage points higher than in the previous reporting period.

“The first half of 2022 was a relentlessly poor half for global stock markets buoyed by the conflict in Ukraine, ongoing fears about high inflation and the risk of a global recession,” Kershaw said.

“This has resulted in a severe rotation from ‘growth’ stocks to ‘value’ stocks; an environment in which its quality, growth and manager drive (“QGM”) process has not been favored.”

However, he noted that while the company’s share price has underperformed for the first six months, “the quality approach inherent in the investment manager’s investment process means that the companies they invest in are resilient and capable of withstanding the current environment.

“Retailers Seraphine and Halfords detracted from performance in the period. Retail has had a torrid start to the year on fears of a consumer meltdown and there have been industry-wide markdowns,” said co-directors Amanda Yeaman and Abby Glennie.

Over the reporting period, the trust reduced the portfolio’s overall exposure to the retail sector as consumers face an erosion of purchasing power, “meaning retailer margins will bear some of the pain,” the managers said.

“While the Company’s retail portfolio companies are structural growth stocks that offer market share gains, attractive return on capital employed, excellent cash conversion, lower operating leverage/lower downgrade risk, and attractive prospects for long-term growth, we consider it prudent to reduce exposure to the sector in this environment”.

Despite the trust’s poor performance, the board announced dividends of 2.40 pence each per share for the first and second quarters of 2022, up from last year’s figures of 11.6%.

“Investors have endured a volatile first half of the year, however UK dividends delivered a strong performance. After a strong first quarter, the second quarter did not disappoint. Total dividend payout was up 38% year-on-year , reaching £37bn, according to dividend monitor Link,” Kershaw said.

The trust reported that the mining, banking and oil sectors, all of which are dominated by large-cap companies, accounted for three-quarters of the year-on-year increase in the second quarter. Mining was the largest contributor, thanks to favorable cyclical fluctuations and rising mining profits.

Despite the increase in dividends, the trust’s investment manager expects more headwinds to emerge in 2023, with a recession restricting the ability and willingness of many companies to increase dividends as earnings come under pressure and balance sheets come under increased scrutiny.

In the first week of September, the trust announced that Amanda Yeaman, who has been a co-portfolio manager for the company with Abby Glennie since November 2020, will become a senior manager from January 2023.

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