abrdn UK Smaller Companies Growth Trust — New lead manager, same proprietary process

abrdn UK Smaller Companies Growth Trust (LSE: AUSC)

Last close As at 22/05/2024

GBP5.01

1.00 (0.20%)

Market capitalisation

GBP375m

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Research: Investment Companies

abrdn UK Smaller Companies Growth Trust — New lead manager, same proprietary process

abrdn UK Smaller Companies Growth Trust’s (AUSC’s) lead manager is Abby Glennie following the retirement of Harry Nimmo at the end of 2022. She had been the trust’s co-manager since mid-November 2020 and had worked closely with Nimmo since January 2016; Glennie manages the fund with investment director Amanda Yeaman. There is no change to the investment process, which has proved successful over multiple market cycles. Stocks are screened using the proprietary Matrix to highlight which companies fulfil the managers’ strict quality, growth and momentum criteria. They are confident that over the long term, investors will benefit from the high quality attributes of investee companies as they should have a greater ability to deliver against consensus earnings expectations, regardless of economic conditions.

Melanie Jenner

Written by

Mel Jenner

Director, Investment Trusts

Investment Companies

abrdn UK Smaller Companies Growth Trust

New lead manager, same proprietary process

Investment trusts
UK smaller companies

11 April 2023

Price

416.5p

Market cap

£374m

Total assets

£478m

NAV*

482.2p

Discount to NAV

13.6%

*Including income. At 5 April 2023.

Yield

2.0%

Ordinary shares in issue

89.7m

Code/ISIN

AUSC/GB0002959582

Primary exchange

LSE

AIC sector

UK Smaller Companies

Financial year end

30 June

52-week high/low

597.0p

395.0p

NAV* high/low

671.9p

447.1p

*Including income.

Net gearing*

2.9%

*At 31 March 2023.

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.

Consistent 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’s (AUSC’s) lead manager is Abby Glennie following the retirement of Harry Nimmo at the end of 2022. She had been the trust’s co-manager since mid-November 2020 and had worked closely with Nimmo since January 2016; Glennie manages the fund with investment director Amanda Yeaman. There is no change to the investment process, which has proved successful over multiple market cycles. Stocks are screened using the proprietary Matrix to highlight which companies fulfil the managers’ strict quality, growth and momentum criteria. They are confident that over the long term, investors will benefit from the highquality attributes of investee companies as they should have a greater ability to deliver against consensus earnings expectations, regardless of economic conditions.

Long-term NAV outperformance versus the reference index is tempered by shorter-term volatility

Source: Refinitiv, Edison Investment Research

The analyst’s view

UK equity valuations look very attractive on both an absolute and relative basis and small-cap shares have meaningfully underperformed the broader UK market since early 2022. During this period, AUSC’s NAV has lagged the trust’s reference index as investors have favoured value rather than growth stocks in an environment of higher inflation and rising interest rates. However, despite periods of relative underperformance, 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 8.0% pa and 6.9% pa, respectively, compared to 5.9% pa for the reference index.

Investor risk aversion reflected in wider discount

AUSC’s 13.6% discount is wider than its historical averages, which may provide an opportunity for new or existing shareholders. Over the last one, three, five and 10 years, the trust’s average discounts range between 6.2% (10 years) and 12.2% (one year). There is considerable scope for AUSC to be afforded a higher valuation if its relative performance returns to its historical winning ways. It should be remembered that the strategy is unchanged, and the recent underperformance is a function of the change in market leadership from growth to value shares.

Market outlook: Volatility continuing

Looking at the 10-year chart below in Exhibit 1 (left-hand side), UK small-cap stocks had outpaced the broader UK market over a multi-year period. However, this outperformance has reversed since the beginning of 2022 as investors have become more risk averse during a period of rising inflation and higher interest rates. This may provide an opportunity for investors with a longer-term perspective that are prepared to ride out periods of small-cap share price volatility, as generally, smaller businesses have better growth prospects than larger corporates.

UK share prices performed well in recent months, having bottomed in October 2022, but the failure of two US regional banks, Silicon Valley Bank and Signature Bank, in early March 2023, followed by concerns about the much larger Credit Suisse bank, have added to the macroeconomic uncertainty and investors have once again become more cautious. With such a backdrop, selectivity is surely warranted. Seeking quality businesses that can grow regardless of the economic environment and that are trading on undemanding valuations would appear to be a sensible approach.

In general, UK stocks remain very attractively valued in both absolute and relative terms having been in a relative declining trend since the June 2016 Brexit vote. The 11.1x forward P/E multiple of the Datastream UK Index is around a 20% discount to its 10-year average. It is also a 28.5% discount to the Datastream World Index, which is considerably wider than the 11.8% average discount over the last decade.

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 10 April 2023.

The fund managers: Abby Glennie & Amanda Yeaman

The managers’ view: Positive on the outlook for UK SMIDs

When meeting with existing and potential AUSC shareholders, Glennie and Yeaman note that there is currently much interest in the macroeconomic environment. They say that there has been a modest change in sentiment towards the UK market, which had been out of favour since the 2016 Brexit vote despite attractive valuations and high international exposure. The managers attribute the change to the relative valuation of the UK versus other markets becoming really stretched, there is now more political stability since the mini-budget debacle and economic conditions are getting tougher in other regions. The UK economy is now looking stronger than feared, while c 50% of UK mid-cap companies’ revenues are generated overseas, providing a less-expensive way of accessing this growth than investing in larger businesses.

While not all holdings will be immune from macroeconomic challenges, Glennie and Yeaman expect resilient earnings from portfolio companies, and they highlight that fund flows from large to small-cap stocks have started. The managers believe that the majority of UK small and mid-cap companies (SMID) earnings estimate downgrades have already occurred, and that the UK is further ahead than other geographies in terms of downgrading estimates. They explain that during economic cycles stock markets typically bottom before earnings trough. The UK stock market bottomed in October 2022 and rallied strongly from this low point, until the recent concerns about bank solvency. There had been concerns about a consumer-led recession, but the managers report that discretionary spending has exceeded consensus expectations, evidenced by the results from retailers and travel companies for example. They also point to purchasing managers’ indices, which have also moved off their low points, saying that typically, this point in an economic cycle coincides with outperformance by SMID stocks.

Glennie and Yeaman suggest that stock market ‘pain’ in 2022 was due to macroeconomic uncertainty, highlighting that the biggest style changes occur when there is a change in macroeconomic factors. Last year saw inflation pick up and interest rates rose more than expected. They comment that there are also uncertainties this year, but believe that the inflation and interest rate paths are broadly known, so are expecting a more style-neutral market. The managers explain that this backdrop should be positive for AUSC, which is focusing on companies with the potential to meet or exceed earnings expectations. They add that inflation is moderating and following peak inflation stock markets tend to perform well. Glennie and Yeaman suggest that risks to this scenario are a recession, another pickup in inflation or interest rates that are higher than consensus expectations.

The managers believe that AUSC’s focus on quality, growth and momentum should mean the trust performs relatively well during an economic recovery. Investors paid up for growth companies during the global pandemic, but these stocks experienced a large derating in 2022, particular in the shares of small-cap businesses. Glennie and Yeaman also highlight that the UK was the region where small-cap growth stocks were at the widest discount to the broader stock market. They say last year investors did not care about quality it was all about value stocks. However, in October 2022, quality factors started to come to the fore and AUSC had a strong period of relative performance last October and November. The managers add that while market falls can be very painful, recoveries can be rapid.

Current portfolio positioning

Exhibit 2: Top 10 holdings (at 28 February 2023)

Company

Sector

Portfolio weight %

28 February 2023

31 August 2022*

Alpha Financial Markets

Industrial support services

4.4

3.9

4imprint Group

Media

3.6

2.8

TelecomPlus

Telecom service provider

3.4

3.9

Kainos Group

Software and computer services

3.4

4.5

discoverIE Group

Technology hardware and equipment

3.2

2.8

JTC Group

Investment banking and broking services

3.2

2.9

Ergomed

Pharmaceuticals and biotechnology

3.0

2.7

Cranswick

Food producers

2.9

N/A

Next Fifteen Communications

Media

2.9

N/A

Diploma

Industrial support services

2.9

N/A

Top 10 (% of portfolio)

32.9

33.8

Source: AUSC, Edison Investment Research. Note *N/A where not in end-August 2022 top 10.

At end-February 2023, AUSC’s top 10 positions made up 32.9% of the fund, which was modestly lower than 33.8% six months earlier; seven positions were common to both periods.

AUSC’s sector breakdown is shown below in Exhibit 3. The trust is exposed to all 11 of the broad market sectors except utilities. Over the six months to the end of February 2023, the largest changes are a lower real estate weighting (-3.9pp) and a higher allocation to industrials (+2.1pp).

Exhibit 3: Portfolio sector exposure (ex-cash and gearing, % unless stated)

Portfolio end-February 2023

Portfolio end-August 2022

Change (pp)

Consumer discretionary

24.7

24.1

0.6

Industrials

19.9

17.8

2.1

Technology

14.9

14.8

0.1

Financial services

12.4

12.8

(0.4)

Telecommunications

6.8

6.2

0.6

Consumer staples

5.8

6.4

(0.6)

Real estate

5.4

9.3

(3.9)

Healthcare

4.8

4.0

0.8

Basic materials

3.8

2.9

0.9

Energy

1.6

1.8

(0.2)

100.0

100.0

Source: AUSC, Edison Investment Research

Glennie comments that she and Yeaman are never short of investment ideas. In recent months, new additions to the fund are:

FDM Group, which has been held in the portfolio before. It is an international recruitment company that the manager says has posted a series of good trading updates.

Ricardo, which was another former AUSC holding, was sold because its business was struggling. However, the company now meets the trust’s quality, growth and momentum criteria. It has global engineering, environmental and strategic consultancy businesses and is reducing its exposure to its legacy, lower-growth operations.

Spirent Communications, which is a telecommunication testing company. Following the initiation of a small position in the fund, the firm issued a disappointing January 2023 trading statement. Glennie reports that Spirent’s business is getting tougher as corporates are delaying their decision making. However, she believes that the company is well positioned for when business returns, at which stage the Spirent position is likely to be topped up.

Three positions have been sold in recent months due to poor Matrix scores and changes in the investment cases: Alliance Pharma, Moonpig Group and Watkin Jones.

Performance: Outperforming when growth stocks lead

Exhibit 4: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

Index*
(%)

CBOE UK Smaller Companies (%)

CBOE UK All Companies (%)

31/03/19

(7.8)

0.5

(4.1)

(3.1)

6.2

31/03/20

(1.1)

(9.2)

(23.2)

(25.3)

(19.1)

31/03/21

38.9

48.6

71.3

75.0

26.6

31/03/22

1.0

5.4

(2.1)

13.0

13.2

31/03/23

(27.0)

(25.3)

(13.4)

(11.1)

3.8

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

In H123 (ending 31 December 2022), AUSC’s NAV and share price total returns of -2.2% and +3.3% respectively compared with the reference index’s -0.6% total return. The best performing stocks were: Kainos (resilient business and pricing power); 4imprint (strong demand and increasing share in a fragmented market, leading to consistent earnings upgrades); and Alpha Financial Markets (beating earnings expectations driven by both sector and geography growth).

Stocks that detracted most from AUSC’s H123 performance were: Hilton Food Group (earnings downgrades as the company was unable to fully pass through higher salmon pricing); Mortgage Advice Bureau (negative repercussions in the housing market following the UK’s mini budget); and Alliance Pharma (Chinese COVID-19 restrictions hindered exports, disrupted distributor orders, and a Competition Market Authority investigation – the position was subsequently sold).

Exhibit 5: Investment trust performance to 31 March 2023

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).

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*

0.0

(6.6)

0.6

(15.7)

(29.4)

(12.6)

10.4

NAV relative to index*

1.4

(2.4)

0.7

(13.7)

(19.4)

(0.1)

22.6

Price relative to Numis Smaller Cos plus AIM ex-ICs

0.0

(6.6)

0.6

(15.7)

(29.4)

(12.6)

15.2

NAV relative to Numis Smaller Cos plus AIM ex-ICs

1.4

(2.4)

0.7

(13.7)

(19.4)

(0.1)

27.9

Price relative to CBOE UK Smaller Companies

0.4

(7.6)

1.7

(17.9)

(41.7)

(26.6)

(16.8)

NAV relative to CBOE UK Smaller Companies

1.8

(3.4)

1.7

(16.0)

(33.4)

(16.1)

(7.6)

Price relative to CBOE UK All Companies

(3.0)

(10.0)

(5.2)

(29.6)

(31.1)

(26.9)

10.1

NAV relative to CBOE UK All Companies

(1.6)

(5.9)

(5.1)

(28.0)

(21.3)

(16.4)

22.3

Source: Refinitiv, Edison Investment Research. Note: Data to end-March 2023. Geometric calculation. *Index is Numis Smaller Cos plus AIM ex-Investment Companies (Numis Smaller Cos ex-Investment Companies to 31 December 2017).

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

Source: Refinitiv, Edison Investment Research

Exhibit 6 shows AUSC’s relative performance. Unfortunately, an investor preference for value rather than growth stocks over the last 12 months has negatively affected the trust’s longer-term record. However, it remains comfortably ahead of the reference index and the broad UK market over the last decade. The managers explain that in October and November 2022, there was a market shift towards growth stocks. AUSC meaningfully outperformed the reference index over this period, which is clearly shown below in Exhibit 7. Glennie and Yeaman are also encouraged by the trust’s NAV outperformance in March 2023, which was a very volatile month due to concerns about the US and European banking sectors.

Peer group comparison

AUSC is a member of the AIC UK Smaller Companies sector. In Exhibit 8, we show the 18 largest funds with market caps above £50m; they follow a variety of mandates. The trust has a differentiated strategy, using the Matrix proprietary screening tool to highlight stocks that satisfy the managers’ quality, growth and momentum criteria.

Investors’ general preference for value rather than growth stocks since the beginning of 2022 has negatively affected AUSC’s relative returns. Its NAV total returns rank 16th and 17th out of 18 funds over the last one and three years respectively, 11th out of 17 funds over the last five years and ninth out of 14 funds over the last decade. The trust’s discount is narrower than average, and it has a competitive ongoing charge, a below-average level of gearing and a dividend yield that is below the mean. This is unsurprising given AUSC’s focus on capital growth rather than income.

Exhibit 8: Selected peer group at 6 April 2023*

% 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

373.8

(27.5)

3.9

2.9

113.3

(14.1)

0.8

No

102

2.0

Aberforth Smaller Companies

1,035.3

(8.2)

58.8

8.6

102.8

(13.7)

0.8

No

109

3.9

Aberforth Split Level Income

135.8

(6.8)

76.5

(0.1)

(6.1)

1.2

No

141

6.0

abrdn Smaller Companies Income

55.7

(19.8)

7.7

(2.5)

95.7

(10.7)

1.3

No

106

3.9

BlackRock Smaller Companies

629.0

(22.0)

18.2

4.4

136.1

(12.4)

0.7

No

107

2.7

BlackRock Throgmorton Trust

571.4

(18.9)

24.6

15.5

156.8

(5.0)

0.5

Yes

113

2.0

Crystal Amber

64.5

(15.6)

71.7

(22.1)

37.7

(38.0)

2.0

Yes

100

25.8

Henderson Smaller Companies

590.9

(18.3)

20.5

4.3

114.2

(12.4)

0.4

Yes

114

3.0

Invesco Perpetual UK Smaller

143.8

(18.9)

17.7

10.5

126.4

(11.7)

0.9

No

100

2.1

JPMorgan UK Smaller Companies

201.8

(19.1)

34.3

26.7

133.6

(14.9)

1.0

No

110

2.7

Marwyn Value Investors

51.3

5.5

29.7

5.3

7.2

(47.0)

2.4

No

100

9.8

Miton UK Microcap

54.9

(31.3)

40.5

(5.5)

(7.6)

1.4

No

100

0.3

Montanaro UK Smaller Companies

173.2

(14.6)

2.8

(0.3)

41.2

(7.1)

0.8

No

104

6.2

Odyssean Investment Trust

180.8

(3.4)

68.1

1.7

1.5

Yes

100

0.0

Oryx International Growth

162.4

(1.5)

75.5

75.1

317.9

(24.9)

1.5

No

100

0.0

Rights & Issues Investment Trust

114.5

(15.3)

40.2

5.3

178.5

(15.8)

0.5

No

100

2.1

River and Mercantile UK Micro Cap

50.8

(28.9)

12.5

(6.3)

(16.7)

1.4

Yes

100

0.0

Strategic Equity Capital

150.6

(6.4)

44.6

24.7

172.1

(4.8)

1.1

Yes

100

0.7

Simple average

263.4

(15.1)

36.0

8.6

123.8

(14.5)

1.1

106

4.1

Rank (out of 18 funds)

5

16

17

11

9

12

7

9

12

Source: Morningstar, Edison Investment Research. Note: *Performance at 6 April 2023 based on ex-par NAV. TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

Dividends: Stepped up in FY22, after three flat years

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 H123, the trust’s revenue earnings per share was 5.32p, which was a 24.9% increase compared with 4.26p in H122, reflecting increased confidence from investee companies’ management teams. An FY23 interim dividend of 3.00p per share was declared, which was 11.1% higher year-on-year.

As shown above in Exhibit 9, having remained steady for three years, there was a step-up in AUSC’s annual dividend in FY22 despite economic uncertainty, which is testament to the resilience of investee companies’ earnings. The FY22 annual payment of 8.10p per share was a 5.2% increase compared with 7.70p per share in FY21.

Exhibit 9: Dividend history since FY17

Source: Bloomberg, Edison Investment Research

Valuation: Scope for a narrower discount

AUSC’s shares are trading at a 13.6% discount to cum-income NAV, which compares to an 8.2% to 15.4% range of discounts over the last 12 months. It is wider than the 12.2%, 8.5%, 7.7% and 6.2% average discounts over the last one, three, five and 10 years, respectively. There is scope for a higher valuation if the trust’s relative performance improves or there is higher investor demand for UK small-cap companies.

The 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 H123, c 2.3m shares (c 2.5% of the share base) were bought back at an average 12.0% discount, which added 1.5p to the trust’s NAV. AUSC also has a discretionary tender mechanism in place, although no tenders have taken place 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 January 2023, the trust has been managed by Abby Glennie, who replaced long-standing lead manager Harry Nimmo; they had worked closely together since January 2016, and she had been AUSC’s co-manager since 17 November 2020. Amanda Yeaman is the trust’s deputy manager; she joined abrdn in 2019. Glennie and Yeaman aim to generate long-term capital growth from a diversified portfolio of UK smaller companies. The trust’s board stresses that the 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). 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.

Glennie and Yeaman 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 managements 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. Glennie and Yeaman 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

In H123, AUSC entered into a new £40m revolving credit facility (RCF) with Royal Bank of Scotland International, which has a further £25m uncommitted accordion provision. On 1 November 2022, £25m of the RCF was drawn down and used to repay, in full, a former £25m 2.349% term loan. At 31 December 2022, £25m of the RCF was drawn down at an interest rate of 4.73% and at 31 March 2023, AUSC had net gearing of 2.9%.

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 forecast FY23 ongoing charges ratio is 0.94%, which is 12bp higher than 0.82% in FY22.

Capital structure

AUSC is a conventional investment trust with one class of share; there are 89.7m ordinary shares in issue, with 14.4m held in treasury. Its average daily trading volume over the last 12 months is c 140k shares.

Exhibit 12: Major shareholders

Exhibit 13: Average daily volume

Source: abrdn. Note: At 28 February 2023.

Source: Refinitiv. Note: 12 months to 6 April 2023.

Exhibit 12: Major shareholders

Source: abrdn. Note: At 28 February 2023.

Exhibit 13: Average daily volume

Source: Refinitiv. Note: 12 months to 6 April 2023.

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.

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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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London │ New York │ Frankfurt

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London │ New York │ Frankfurt

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London, WC1R 4PS

United Kingdom

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 2023 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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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