UK SMALLER BUSINESS GROWTH TRUST ABRDN: The bargain fund targeting the big UK businesses of tomorrow

Although many UK companies have one eye on the Budget in less than two weeks’ time, fund managers at Abrdn believe the case for investing in some of the country’s smaller listed companies remains strong.

Despite strong indications that Chancellor Rachel Reeves will hit UK companies with higher national insurance contribution charges on October 30 – and will also remove some of the anti-inheritance tax advantages associated with investing in companies that listed on AIM (the Alternative Investment Market) – Abrdn argues that Shares in many smaller UK companies represent excellent value for money.

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

It is a view put forward by Abby Glennie who, with her colleague Amanda Yeaman, runs the stock market-listed Abrdn UK Smaller Companies Growth Trust.

“Yes, there is an air of uncertainty right now,” says Glennie, “and you can never rule out Black Swan events disrupting the markets.”

‘But UK economic growth data is good, inflation is down to 1.7 per cent and savings levels are high. Add to this the fact that shares in many smaller UK companies are attractively priced, and you have a pretty compelling investment case.’

The trust, with a market capitalization of £360m, is currently invested in 48 companies. Most are listed on the Deutsche Numis Smaller Companies plus AIM index, which comprises around 1,400 companies with market capitalizations ranging up to £1.7bn.

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

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

The managers are assisted by an internal stock selection tool called ‘Matrix’ for stock selection, portfolio weighting and deselection. This ranks all companies listed in the DNSC plus AIM index using 12 independent data sources – all measures of a company’s growth potential, “quality” and earnings momentum.

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

‘Of course, we don’t follow it blindly and sometimes invest in companies that get bad Matrix scores, but it is a key part of our investment process. “It is placed next to our job as managers, which consists of collecting information from the companies in which we want to invest or in which we are already shareholders and from the analysts with whom we speak.”

The trust will not invest in companies with market capitalizations of less than £200 million, nor does it tend to invest more than 4.5 per cent of the trust’s assets in a single company.

Their performance figures are better in relative terms in the short term than over longer periods. Therefore, one-year returns of 29 percent compare with a peer group average of 21 percent. Over the past three years, losses were 26 percent compared to an average loss of 8 percent for a similar group.

Glennie says the trust’s focus on growth stocks within the UK universe of smaller companies meant it suffered in 2022 as interest rates and inflation rose.

The trust’s annual charges are 0.92 percent and the stock market identification code and market ticket are, respectively, 0295958 and AUSC.