Fund Research

Aberforth Split Level Income Trust

23 May 2018 View latest version

Aberforth Partners LLP is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should be considered as factual information only and not an indication as to the desirability or appropriateness of investing in the security discussed.

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Aberforth Split Level Income Trust (ASLIT) was launched on 3 July 2017 as a successor to the fixed life Aberforth Geared Income Trust (AGIT), which had a similar split-capital structure and a clear income mandate. As a result of the income bias, the portfolio has a slightly different flavour to big sister Aberforth Smaller Companies Trust (ASCOT), with 12 stocks owned that ASCOT does not, but also not holding the 29 stocks in ASCOT’s portfolio that do not have a significant dividend yield.

The companies that the managers are currently finding most attractive from a valuation basis are those that have a heavy UK domestic bias. As such, at an underlying sales level (as at January 2018) only 35% of sales for ASLIT’s companies come from overseas, compared to the Numis index of 38% and ASCOT’s more internationally balanced 46%. By comparison, large caps (as represented by the FTSE 100) have overseas sales of 75%.

Value as an investment style has been out of fashion for nearly a decade now. According to Morningstar data, ASLIT has the largest weighting to value of all of the AIC and IA UK Smaller Companies sectors, at 65% of NAV. This compares to the average (for the closed- and open-ended UK smaller companies sectors) excluding Aberforth vehicles of 16.8%.

All this leads to a portfolio that is highly differentiated to its peers in both the closed- and open-ended sectors. We calculate (using Morningstar data) that ASLIT’s average crossover with peers in the AIC UK smaller companies peer group is just 9.1%. ASLIT potentially offers significant diversification benefits.

Longer term, Aberforth has a very strong track record. However, owing to its clear value bias it has underperformed peers and the Numis Smaller Companies Index over the past decade. Since launch ASLIT has outperformed the Numis smaller companies index, but (perhaps of more relevance to the discount) the trust has underperformed peers. Of note however, is the recent strong relative performance, with the trust starting to eat back some of the relative underperformance.

We understand that the portfolio yield is currently 4.4%, which compares to ASCOT’s 3.1%. At ASLIT's launch (July 2017), the ordinary shares were offered on a prospective yield of 4%, and the company will be reporting on how the first year has gone at the end of July. However, the difference between the company’s cum- and ex-income NAVs and the dividend so far paid (the company pays two dividends per year) reveals that earnings have so far been in the order of 4.5p per share, considerably ahead of the 4p target at launch.

The ordinary shares, being 23% geared through Zero Dividend Preference (ZDP) shares, have considerably higher gearing than most peers, most of which do not have any gearing at all. As well as capital gearing (which brings risks as well as opportunities), the ZDPs also enable higher distributable income.

ASLIT’s share price rating has struggled somewhat since launch, and the shares currently trade at a discount of 7.2%. By comparison ASCOT trades on a wider discount of c.11.5%.

 

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Fund History: Aberforth Split Level Income Trust

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