abrdn UK Smaller Companies Growth Trust — End of an era but successful strategy remains

abrdn UK Smaller Companies Growth Trust (LSE: AUSC)

Currency in GBP

Last close As at 25/01/2023

GBP4.62

3.00 (0.65%)

Market capitalisation

GBP421m

abrdn UK Smaller Companies Growth Trust — End of an era but successful strategy remains

abrdn UK Smaller Companies Growth Trust (AUSC) is managed by Harry Nimmo (since September 2003), who has announced his retirement at the end of 2022, and Abby Glennie (since November 2020). Glennie will become lead manager supported by existing team member Amanda Yeaman. There will be no change to the successful long-term process where stocks are screened using the proprietary Matrix, seeking companies that fulfil the managers’ strict quality, growth and momentum criteria. AUSC has experienced a period of relative underperformance in recent months as investors have favoured cyclical and value stocks rather than growth businesses. However, the managers are confident that, during a recession and beyond, AUSC’s shareholders will benefit from the quality attributes of the trust’s investee companies.

Melanie Jenner

Written by

Mel Jenner

Director, Investment Trusts

abrdn UK Smaller Companies Growth Trust

End of an era but successful strategy remains

Investment trusts
UK smaller companies

25 October 2022

Price

402p

Market cap

£371m

AUM

£456m

NAV*

463.6p

Discount to NAV

13.3%

*Including income. At 20 October 2022.

Yield

2.0%

Ordinary shares in issue

92.4m

Code/ISIN

AUSC/GB0002959582

Primary exchange

LSE

AIC sector

UK Smaller Companies

Financial year end

30 June

52-week high/low

776.0p

395.0p

NAV* high/low

825.9p

447.1p

*Including income.

Net gearing*

1.6%

*At 14 October 2022.

Fund objective

abrdn UK Smaller Companies Growth Trust aims to achieve long-term capital growth through investment in a diversified portfolio consisting of UK-quoted smaller companies. Performance is measured against the Numis Smaller Companies plus AIM ex-Investment Companies Index (the reference index).

Bull points

Long-term record of strong absolute and relative performance.

Proprietary investment process driven by the Matrix.

Over the long term, shares of smaller companies tend to perform relatively better than those of larger businesses.

Bear points

Relative performance struggles during the early stage of an economic cycle.

Modest dividend yield, given focus on capital growth rather than income.

UK market may remain out of favour with global investors.

Analyst

Mel Jenner

+44 (0)20 3077 5700

abrdn UK Smaller Companies Growth Trust is a research client of Edison Investment Research Limited

abrdn UK Smaller Companies Growth Trust (AUSC) is managed by Harry Nimmo (since September 2003), who has announced his retirement at the end of 2022, and Abby Glennie (since November 2020). Glennie will become lead manager supported by existing team member Amanda Yeaman. There will be no change to the successful long-term process where stocks are screened using the proprietary Matrix, seeking companies that fulfil the managers’ strict quality, growth and momentum criteria. AUSC has experienced a period of relative underperformance in recent months as investors have favoured cyclical and value stocks rather than growth businesses. However, the managers are confident that, during a recession and beyond, AUSC’s shareholders will benefit from the quality attributes of the trust’s investee companies.

Shorter-term volatility but long-term NAV outperformance versus the reference index

Source: Refinitiv, Edison Investment Research

The analyst’s view

Rising inflation has negatively affected AUSC’s recent performance as investors have moved away from growth stocks. The managers highlight that the fund also underperformed its reference index in the COVID-19 recovery period, following the end of the global financial crisis and during the recovery following the bursting of the dotcom bubble. However, they expect the trust’s relative performance to recover once recession hits, while given the volatile nature of small-cap investing, it is very important to have a long-term perspective. AUSC’s strategy has been successful over multiple market cycles. Over the last decade, it has generated absolute NAV and share price total returns of 8.9% pa and 7.5% pa respectively and its NAV has outperformed its reference index over the last five and 10 years.

Discount much wider than historical averages

In an environment of heightened risk aversion, AUSC is trading at a 13.3% discount to cum-income NAV, which is meaningfully wider than the 10.1%, 7.3%, 6.7% and 5.6% average discounts over the last one, three, five and 10 years respectively. This provides plenty of scope for a higher valuation if the trust can build on its long-term record of outperformance. The board actively repurchases AUSC’s shares seeking a maximum 8% discount in normal market conditions.

Market outlook: Opportunity after relative weakness

While outperforming over the long term, the shares of UK small-cap companies have significantly lagged the performance of the broad UK market since Q421 (Exhibit 1, left-hand side). This may provide an opportunity for long-term investors who are prepared to weather periods of higher volatility in small-cap stocks as, in general, smaller businesses have superior growth prospects compared with their larger peers. Investor risk aversion is currently high, which is unsurprising given the difficult macroeconomic backdrop, characterised by rising inflation, exacerbated by the war in Ukraine, and higher interest rates that are piling more pressure on already-stretched consumer budgets. The recent UK political upheavals have also been unhelpful with regards to both consumer and business confidence.

The current uncertain environment is reflected in UK company valuations, which have been out of favour with global investors since the Brexit vote in 2016 (Exhibit 1, right-hand side). The Datastream UK index is trading on a modest 9.3x forward P/E multiple, which is a 30.1% discount to the Datastream World index and considerably wider than the 12.0% average discount over the last decade (range of a 3.1% premium to a 30.1% discount).

Exhibit 1: Market performance and valuation

Performance of UK indices (last 10 years)

Valuation of UK equities (Datastream indices, last 10 years)

Source: Refinitiv, Edison Investment Research. Note: AUSC’s reference index is the Numis Smaller Companies plus AIM ex-Investment Companies Index (Numis Smaller Companies ex-Investment Companies Index to 31 December 2017). Data at 21 October 2022.

The fund managers: Harry Nimmo and Abby Glennie

The managers’ view: Confidence in long-term strategy

Harry Nimmo and Abby Glennie have a high degree of confidence in the quality, growth and momentum approach of investing in UK small-cap companies, noting that while there have been periods of volatility, the strategy has been very rewarding for AUSC’s shareholders with significant long-term outperformance versus the index, the broader UK market and the trust’s peers. According to the managers, the Matrix screening process has changed very little over the last 19 years, and valuation is a secondary consideration as ‘cheap stocks tend to be cheap for a reason’.

They explain that 2022 has seen a flip from growth to value stock market leadership and some high-quality growth companies have become so inexpensive that they are now classed by some investors as value stocks. Nimmo and Glennie say that it has been disappointing that there has been a lack of interest in quality factors this year, especially given the consensus view that we are heading into a recession. While the oil & gas and mining sectors are seeing positive earnings estimate revisions, the managers comment that in ‘small-cap land’ these companies are not steady cash generators as they are often single-project businesses, so are inherently risky. Nimmo and Glennie suggest that during the 2007–09 global financial crisis, investors did indeed care about quality and earnings momentum factors but their behaviour in H122 was ‘irrational’; as an example, Watches of Switzerland issued a series of positive trading statements, but its shares derated due to widespread concern about consumer discretionary stocks. However, they note that investors’ behaviour has been more ‘rational’ so far in H222.

Nimmo suggests that people should have at least a five- to 10-year time horizon when investing in UK small-cap stocks and according to the manager the average annual total return over the long term is more than 10%. It is a volatile sector, ‘so hang in there and be ready to get involved when the market reassesses the outlook’, he opines. Nimmo suggests that the bottom of the UK market is likely to be when we are at the worst point of economic pain and small-cap stocks are starting to outperform the broader market. The manager says that the UK has been out of favour with global investors since the Brexit vote. However, investors should remember that the UK stock market is not representative of the UK economy, as 45% of the revenues of UK-listed companies are generated overseas. Nimmo comments that JTC Group (funds administration) and Kainos Group (multi-utility services provider) are examples of successful businesses that are expanding overseas, while YouGov (market research and data analytics) is a global leader listed in the UK. He says that AUSC’s portfolio is a balance of domestic and international operations.

Current portfolio positioning

At end-August 2022, AUSC’s top 10 positions made up 33.8% of the fund, which was modestly more concentrated than 32.5% a year earlier; four positions were common to both periods. Nimmo reports that the fund’s top 10 holdings have an average current-year earnings growth of c 10%. Six have a recent trend of higher earnings and four are flat, while nine pay a dividend. However, the manager cautions that ‘things are getting tougher across a range of sectors, and there are new and evolving headwinds’.

Exhibit 2: Top 10 holdings (at 31 August 2022)

Company

Sector

Portfolio weight %

31 August 2022

31 August 2021*

Kainos Group

Software and computer services

4.5

4.7

Safestore Holdings

Real estate investment trust

4.2

2.8

Telecom Plus

Telecom service provider

3.9

N/A

Alpha Financial Markets

Industrial support services

3.9

N/A

Hilton Food Group

Food producers

3.3

2.6

JTC Group

Investment banking and broking services

2.9

N/A

4imprint Group

Media

2.8

N/A

discoverIE Group

Technology hardware and equipment

2.8

N/A

Mortgage Advice Bureau

Finance and credit services

2.8

2.5

Ergomed

Pharmaceuticals and biotechnology

2.7

N/A

Top 10 (% of portfolio)

33.8

32.5

Source: AUSC, Edison Investment Research. Note *N/A where not in end-August 2021 top 10.

While the market has been volatile, reflecting its long-term approach, AUSC’s recent portfolio turnover is not dissimilar from the c 15% per year long-term average. There is a relatively new position in Serica Energy, a highly profitable North Sea gas producer with 35–40% cash on its balance sheet. According to Nimmo, the company has a solid dividend yield and a good Matrix score. Gas prices are currently elevated and the manager expects robust demand for several years; he considers the company to be undervalued. Paragon Banking Group has been added to AUSC’s portfolio, despite having experienced operational issues in past economic cycles. The company provides buy-to-let mortgages but has diversified its businesses and sources of funding. Its margins are expanding due to the lag between raising loan rates and deposit rates. Nimmo suggests that Paragon is a ‘very different company now’ with an attractive valuation (c 7% dividend yield and c 5x forward P/E multiple). There is a new position in Coats Group, which is the world’s largest manufacturer and distributor of sewing thread and supplies, and the second-largest manufacturer of zips and fasteners. The company has an innovative product offering in sustainable threads, as well as pricing power and levers to pull to maintain margins.

Complete sales from the fund include companies with poor Matrix scores or that have grown too large such as Diploma and IntegraFin, while Gear4music was sold after a profit warning. Hotel Chocolat Group was recently divested following the news of its strategic review.

Recent portfolio top-ups include: Marlowe (a UK leader in business-critical services and software); Alpha Financial Networks (an example of a strong UK business that can be expanded overseas); Marshalls (a provider of hard landscaping products that has a 60% market share and is a quasi-monopoly); CVS Group (a veterinary services business that recently reported strong results); Telecom Plus (which is benefiting from the demise of alternative energy providers); and 4imprint Group (its North American business is very resilient, where it is the leader in a very fragmented market).

Nimmo explains that AUSC had too much exposure to alternative asset managers following a strong 2019–21, so the positions in Impax Asset Management and Liontrust Asset Management were reduced. Other partial sales in the portfolio include consumer discretionary stocks Future, Team17 Group and Motorpoint Group.

AUSC’s breakdown by sector and market cap is shown below in Exhibit 3. We are unable to provide a year-on-year comparison of AUSC’s sector exposure as the classifications have changed within the last 12 months.

Exhibit 3: Portfolio sector (left) and market cap (right) exposure (at 31 August 2022)

Source: AUSC, Edison Investment Research. Note: Excludes cash.

Exhibit 3: Portfolio sector (left) and market cap (right) exposure (at 31 August 2022)

Source: AUSC, Edison Investment Research. Note: Excludes cash.

Performance: Going through a tricky period

Exhibit 4: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

Index*
(%)

CBOE UK Smaller Cos (%)

CBOE UK All Companies (%)

30/09/18

14.3

13.7

2.5

1.4

5.9

30/09/19

(5.3)

(2.2)

(7.3)

(7.3)

2.7

30/09/20

11.7

11.1

(2.8)

(13.8)

(17.9)

30/09/21

40.6

37.8

45.7

73.6

28.5

30/09/22

(44.1)

(39.3)

(26.9)

(16.2)

(3.4)

Source: Refinitiv. Note: All % on a total return basis in pounds sterling. *Index is Numis Smaller Cos plus AIM ex-Investment Companies (Numis Smaller Cos ex-Investment Companies to 31 December 2017).

Exhibit 5: Investment trust performance to 30 September 2022

Price, NAV and index total return performance, one-year rebased

Price, NAV and index total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised. Index is Numis Smaller Cos plus AIM ex-Investment Companies (Numis Smaller Cos ex-Investment Companies to 31 December 2017).

In FY22 (ending 30 June), AUSC’s NAV and share price total returns of -27.3% and -34.3% respectively lagged the reference index’s -19.0% total return. The largest positive contributors to AUSC’s relative performance were: Telecom Plus (+118bp); Safestore Holdings (+90bp); Alpha Financial Markets (+77bp); Clipper Logistics (+51bp); and Hilton Food Group (+40bp). Conversely, the largest detractors were: Gamma Communications (-102bp); XP Power (-94bp); Future (-90bp); Impax Asset Management (-82bp); and GB Group (-80bp).

Exhibit 6: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to index*

(8.7)

(3.6)

(16.2)

(23.5)

(15.2)

(3.3)

4.0

NAV relative to index*

(4.4)

(4.5)

(14.3)

(16.9)

(10.2)

5.2

17.8

Price relative to Numis Smaller Cos plus AIM ex-ICs

(8.7)

(3.6)

(16.2)

(23.5)

(15.2)

(3.8)

12.2

NAV relative to Numis Smaller Cos plus AIM ex-ICs

(4.4)

(4.5)

(14.3)

(16.9)

(10.2)

4.7

27.1

Price relative to CBOE UK Smaller Companies

(8.2)

(7.4)

(19.3)

(33.3)

(30.1)

(19.5)

(30.8)

NAV relative to CBOE UK Smaller Companies

(3.9)

(8.3)

(17.4)

(27.6)

(25.9)

(12.4)

(21.7)

Price relative to CBOE UK All Companies

(10.6)

(7.2)

(25.8)

(42.1)

(13.8)

(14.2)

14.8

NAV relative to CBOE UK All Companies

(6.3)

(8.2)

(24.1)

(37.1)

(8.7)

(6.6)

30.0

Source: Refinitiv, Edison Investment Research. Note: Data to end-September 2022. Geometric calculation. *Index is Numis Smaller Cos plus AIM ex-Investment Companies (Numis Smaller Cos ex-Investment Companies to 31 December 2017).

AUSC’s relative performance is shown in Exhibit 6. Unfortunately, a tough period over the last six months has negatively affected the trust’s longer-term performance. Its NAV is ahead of the reference index over the last five and 10 years, but lags over the other periods shown. Over the last decade, AUSC’s performance is notably ahead of the broad UK market.

Exhibit 7: NAV total return performance relative to index over three years

Source: Refinitiv, Edison Investment Research

Peer group comparison

In Exhibit 8, we show the 16 members of the AIC UK Smaller Companies sector with market caps above £50m. AUSC is differentiated by its use of the Matrix proprietary screening tool and disciplined focus on stocks that satisfy its quality, growth and momentum criteria. The trust’s performance has been negatively affected by the market rotation away from growth stocks and its NAV total returns rank 15th and 13th in the selected peer group over the last one and three years respectively. AUSC ranks ninth out of 15 funds over the last five years and eighth out of 13 funds over the last decade. On 21 October 2022, the trust’s discount was lower than average in a group where only one fund was trading at a premium. It has a competitive ongoing charge, a below-average level of gearing and, unsurprisingly given its focus on capital growth, a below-average dividend yield.

Exhibit 8: Selected peer group at 21 October 2022*

% unless stated

Market cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount (cum-fair)

Ongoing charge

Perf.
fee

Net gearing

Dividend yield (%)

abrdn UK Smaller Cos Growth

371.5

(41.0)

(10.5)

(1.7)

123.5

(12.4)

0.8

No

103

2.0

Aberforth Smaller Companies

957.9

(21.8)

(1.6)

(2.9)

107.3

(14.7)

0.8

No

109

3.1

Aberforth Split Level Income

109.4

(25.4)

(12.3)

(18.2)

(14.1)

1.2

No

145

7.5

BlackRock Smaller Companies

592.8

(36.4)

(2.3)

1.9

157.3

(15.0)

0.7

No

100

2.9

BlackRock Throgmorton Trust

518.9

(42.8)

(4.8)

7.4

163.0

(5.6)

0.6

Yes

105

2.0

Crystal Amber

82.4

1.7

(27.2)

(16.6)

71.6

(28.1)

2.1

Yes

100

20.2

Henderson Smaller Companies

524.4

(39.7)

(9.9)

(8.5)

123.0

(12.2)

0.4

Yes

114

3.4

Invesco Perpetual UK Smaller

131.8

(31.8)

(6.4)

2.5

138.7

(15.3)

0.9

No

100

2.3

JPMorgan UK Smaller Companies

190.1

(34.6)

11.8

23.5

158.2

(15.6)

1.0

No

110

2.8

Marwyn Value Investors

56.0

(3.1)

11.5

(17.1)

9.5

(39.9)

2.4

No

100

9.0

Miton UK Microcap

56.3

(33.2)

32.1

0.6

(7.8)

1.4

No

100

0.3

Montanaro UK Smaller Companies

165.7

(37.0)

(10.6)

(11.9)

49.2

(4.5)

0.8

No

105

6.5

Odyssean Investment Trust

161.1

(6.1)

43.3

2.8

1.5

Yes

100

0.0

Oryx International Growth

132.3

(27.3)

29.7

53.9

321.4

(30.7)

1.5

No

100

0.0

Rights & Issues Investment Trust

118.1

(24.8)

8.6

(1.6)

202.1

(14.5)

0.4

No

100

1.8

Strategic Equity Capital

139.2

(16.7)

11.0

8.6

158.1

(7.6)

1.1

Yes

100

0.8

Simple average

269.2

(26.3)

3.9

1.3

137.1

(14.7)

1.1

106

4.0

Rank (out of 16 funds)

5

15

13

9

8

7

7

7

11

Source: Morningstar, Edison Investment Research. Note: *Performance at 21 October 2022 based on ex-par NAV. TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

Dividends

AUSC pays semi-annual dividends in April and October. The board aims to pay out around a third of the total annual distribution as the interim dividend with around two-thirds as the final dividend. In FY22 the trust’s revenue return was 9.07p per share, which was a 41.1% increase compared with 6.43p per share in FY21. This was the highest ever generated, exceeding 8.80p per share in FY19. Share repurchases contributed 0.26p per share (2.9%) but investment income of £11.1m was also £1.1m higher than £10.0m in FY19. Special dividends made up less than 1.5% of AUSC’s income in FY22.

Having been held steady at 7.70p per share for the last three years, the board has proposed an annual dividend of 8.10p per share in respect of FY22, a 5.2% year-on-year increase. The manager reports that during COVID-19, 45% of portfolio companies cut their dividends but most of them have subsequently returned and some firms have increased their distributions. Around £1.1m was added to the trust’s revenue reserve (c £8.8m at end-FY22 and equivalent to c 4.0p per share after the payment of the final dividend). Given the challenging outcome for the UK economy, the board is mindful not to increase AUSC’s annual dividend to an unsustainable level.

Based on its current share price, the trust offers a 2.0% dividend yield.

Exhibit 9: Dividend history since FY17

Source: Bloomberg, Edison Investment Research

Discount: Scope for a higher valuation

AUSC is trading at a 13.3% discount to cum-income NAV, which is significantly wider than the 5.6% to 10.1% range of average discounts over the last one, three, five and 10 years. There is scope for a higher valuation if the trust returns to its long-term trend of outperformance or if investors become less risk averse. AUSC’s board employs a discount control mechanism, targeting a maximum 8.0% share price discount to cum-income NAV in normal market conditions. Renewed annually, it has the authority to repurchase up to 14.99% of the trust’s share capital. During FY22, c 4.7m representing c 4.7% of the share base were bought back at a cost of c £29.7m at a weighted average discount of 9.1%; this added 2.9p per share to the trust’s NAV. AUSC also has a discretionary tender mechanism in place, although none has been undertaken since June 2015, as share buybacks are the primary method to manage the trust’s discount.

Exhibit 10: Discount over three years (%)

Exhibit 11: Buybacks and issuance

Source: Refinitiv, Edison Investment Research

Source: Morningstar, Edison Investment Research

Exhibit 10: Discount over three years (%)

Source: Refinitiv, Edison Investment Research

Exhibit 11: Buybacks and issuance

Source: Morningstar, Edison Investment Research

Fund profile: High-conviction UK small-cap equities

Launched in August 1993, AUSC is quoted on the Main Market of the London Stock Exchange. Since 1 September 2003, the trust has been managed by Harry Nimmo at abrdn. He aims to generate long-term capital growth from a diversified portfolio of UK smaller companies. On 5 September 2022, it was announced that Nimmo would be retiring on 31 December 2022. Abby Glennie will become AUSC’s lead manager having been co-manager since 17 November 2020; she will be supported by Amanda Yeaman as deputy manager. The board stresses that a change in personnel will not lead to a change in investment process.

AUSC’s portfolio is made up of 50–60 of the managers’ highest-conviction investment ideas. The trust’s performance is measured against the Numis Smaller Companies plus AIM ex-Investment Companies Index (the Numis Smaller Companies ex-Investment Companies Index before 1 January 2018). To mitigate risk, at the time of purchase, AUSC may hold no more than 5% of total assets in a single position, no more than 5% in companies with a market cap below £50m and the managers tend not to invest in ‘blue sky’ (not yet profitable) companies, although up to 5% is permitted. Up to 50% of the portfolio may be invested in companies that are constituents of the broad AIM index. The managers may vary the trust’s level of gearing between a net cash position of 5% and net gearing of 25% of NAV (at the time of drawdown). At 14 October 2022, net gearing was 1.6%. To provide some context, over the last decade, the financial year-end position has ranged from 4.6% net cash to 8.8% net gearing.

AUSC started life as Edinburgh Smaller Companies in 1993, with Standard Life Investments (now abrdn) assuming management in 2003. The trust merged with Gartmore Smaller Companies Trust in 2009 and with Dunedin Smaller Companies Investment Trust in October 2018. With effect from 25 October 2021, the trust’s name was changed, following shareholder approval, from Standard Life UK Smaller Companies Trust (ticker: SLS) to abrdn UK Smaller Companies Growth Trust. The board deemed that the addition of ‘growth’ better reflects what the trust is seeking to achieve.

Investment process: Using the proprietary Matrix

The managers follow seven principles for successful small-cap investing:

Focus on quality to enhance return and reduce risk – factors include the strength of a company’s relationship with its customers, the existence of long-term contracts and an element of pricing power. Firms with high or unsustainable levels of debt are generally avoided.

Look for sustainable growth – portfolio companies often provide niche products or services.

Momentum – run your winners and cut losers.

Concentrate your efforts – use of the proprietary screening tool known as the Matrix helps identify suitable candidates for inclusion in the portfolio and reduces the risk that time is spent on stocks that do not meet the required criteria.

Invest for the long term – identify the great companies of tomorrow and hold them for the long term, which helps to maximise returns and reduce trading costs.

Management quality – high ownership and involvement by founders and CEOs with long tenures are viewed positively.

Valuation aware – this is a secondary consideration.

Nimmo and Glennie aim to generate long-term capital growth from a diversified portfolio of smaller-cap UK equities. They use the Matrix, which is a screening tool based on a series of 12 quality, growth, momentum and valuation factors including forecast earnings and dividend growth, earnings revisions, share price momentum, balance sheet strength and the level of directors’ dealing, to whittle down the investible universe of around 500 stocks to around 100 that are deemed worthy of further consideration. The most important factor, at c 40% of the Matrix weighting, is earnings revision momentum because back-testing shows this is the most predictive measure of future share price performance. Stocks are assigned a Matrix score between +40 and -40, with those between +10 and +40 deemed potential buy candidates and those between -10 and -40 potential sells. Companies considered for inclusion in AUSC’s portfolio are subject to further in-depth analysis and meeting company managements is an integral part of the research process. In keeping with other abrdn investment teams, the managers have a strong focus on a company’s ESG credentials.

Given the managers’ long-term perspective, the average holding period for AUSC’s investments is around six years, implying an average annual portfolio turnover of around 15%; although some names have been in the fund for more than a decade. Positions may be trimmed or sold if there is a deterioration in the Matrix score, the original investment thesis no longer holds true, they have grown to more than 5% of the portfolio, or there is a higher-conviction name identified. The disciplined investment process has been employed since abrdn took over management of the fund in 2003 and has delivered creditable performance through economic and market cycles.

AUSC’s approach to ESG

abrdn has more than 800 investment professionals, including c 50 ESG specialists around the world. It encourages companies in which it invests to adhere to best practice in the areas of ESG stewardship. abrdn believes this can be achieved by entering into a dialogue with company management to encourage them, where necessary, to improve their corporate standards, transparency and accountability. By making ESG central to its investment capabilities, abrdn seeks to deliver robust outcomes as well as actively contributing to a fairer, more sustainable world. It considers ESG factors are financially material and affect corporate performance; companies that have higher standards tend to outperform those that do not.

The managers explain that for AUSC, ESG is really embedded at the core of the research process and is an important aspect of the focus on quality and the lower-risk approach. There is an ESG specialist on abrdn’s small-cap desk, and the managers also work closely with abrdn’s large and knowledgeable central ESG investment team. Nimmo and Glennie regularly engage with company management teams, including on ESG aspects. They say that it is important to highlight a couple of nuances for smaller companies. While external ESG data are used, it is not an ideal process because many of the companies are not covered at all, or are covered badly, providing a real opportunity for the managers to add value by conducting ESG fundamental research themselves. Also, smaller companies often have limited internal resources to focus on ESG, so many are keen to engage with the managers, who are able to help advise them and encourage them towards those ESG aspects required by shareholders.

Gearing

AUSC has a £65m unsecured loan agreement with Royal Bank of Scotland International, maturing on 31 October 2022, made up of a five-year, fixed-rate term loan of £25m at 2.349%, and a £40m revolving credit facility (currently £15m is drawn), priced off SONIA. The board is currently considering refinancing options. At 14 October 2022, AUSC had net gearing of 1.6%.

Fees and charges

AUSC has a tiered management fee structure: 0.85% per year up to £250m of the trust’s NAV; 0.65% per year between £250m and £550m; and 0.55% per year above £550m. Along with the investment management fee, abrdn also receives a fixed secretarial and administration fee of £75k pa plus VAT and a separate fee for the provision of promotional activities for AUSC (£246k in FY22 compared with £150k in FY21). The trust’s ongoing charges ratio (OCR) of 0.82% in FY22 was 6bp lower year-on-year and was the lowest in the company’s lifetime. The FY22 decline was largely due to a higher average NAV than in FY21, and the board expects a higher OCR in FY23.

Capital structure

AUSC is a conventional investment trust with one class of share; there are 92.4m ordinary shares in issue, with 11.8m held in treasury. Its average daily trading volume over the last 12 months is c 155k shares.

Exhibit 12: Major shareholders

Exhibit 13: Average daily volume

Source: abrdn. Note: At 30 September 2022.

Source: Refinitiv. Note: 12 months to 21 October 2022.

Exhibit 12: Major shareholders

Source: abrdn. Note: At 30 September 2022.

Exhibit 13: Average daily volume

Source: Refinitiv. Note: 12 months to 21 October 2022.

The board

The board has had consistent membership since 2019 but its composition is regularly reviewed to ensure it has the right balance of skills, experience and diversity. AUSC’s board has participated in the Board Apprentice programme, which is dedicated to increasing diversity by increasing the pool of board-ready candidates. Jessica Norell Neeson is shadowing the board for a 12-month period from May 2022; she will attend all of AUSC’s board and committee meetings and will take part in discussions when invited to do so (the role is unremunerated).

Exhibit 14: AUSC’s board of directors

Board member

Date of appointment

Remuneration in FY22

Shareholdings at end-FY22

Liz Airey (chairman since 1 April 2020)

21 August 2019

£37,400

40,000

Caroline Ramsay

22 August 2016

£29,700

4,545

Tim Scholefield

20 February 2017

£27,000

5,964

Ashton Bradbury

2 July 2018

£25,300

10,000

Alexa Henderson

8 October 2018

£25,300

4,391

Source: AUSC

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This report has been commissioned by abrdn UK Smaller Companies Growth Trust and prepared and issued by Edison, in consideration of a fee payable by abrdn UK Smaller Companies Growth Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by abrdn UK Smaller Companies Growth Trust and prepared and issued by Edison, in consideration of a fee payable by abrdn UK Smaller Companies Growth Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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