Aberdeen Diversified Income and Growth Trust — Moving within the target

Aberdeen Diversified Income and Growth Trust (ADIG)

Last close As at 28/03/2024

97.60

−0.20 (−0.20%)

Market capitalisation

GBP302m

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Research: Investment Companies

Aberdeen Diversified Income and Growth Trust — Moving within the target

Aberdeen Diversified Income and Growth Trust (ADIG), a diversified multi-asset fund, performed in line with its targets over the last 12 months. Overall performance has stabilised and improved since the Q320 strategic review, when the board addressed the disappointing performance between 2017 and 2020, as the three-year period of the chart below illustrates. The restructured portfolio assets have been generating both yield and return on capital. The manager expects stable and dependable dividends to be covered with recurring income within one to two years (current cover 0.99x), supported by steady income and the use of revenue reserves, if necessary. The continuing double-digit discount could present an investment opportunity, as ADIG is on a performance recovery track.

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Aberdeen Diversified Income and Growth Trust

Moving within the target

Investment trusts
Multi-asset

18 July 2022

Price

97p

Market cap

£299m

AUM

£380m

NAV*

116.8p

Discount to NAV

16.9%

NAV**

118.1p

Discount to NAV

17.9%

*Excluding income. **Including income. As at 14 July 2022.

Yield

5.8%

Ordinary shares in issue

308.7m

Code/ISIN

ADIG/GB0001297562

Primary exchange

LSE

AIC sector

Flexible Investment

52-week high/low

103.5p

95.6p

NAV* high/low

122.8p

117.0p

*Including income.

Net gearing*

0.4%

*As at end-May 2022, with debt at market value.

Fund objective

Aberdeen Diversified Income and Growth Trust (ADIG) invests globally using a flexible multi-asset approach via quoted and unquoted investments. It aims to generate attractive long-term capital and income returns by applying a diversified multi-asset approach, using quoted and unquoted investments, with no geographical or sector restrictions. This is a new investment objective which was approved by shareholders at the AGM in February 2021.

Bull points

Attractive over 5% dividend yield that the fund manager expects to be cash covered within the next one to two years.

Structured stability of returns at NAV level.

The still stubbornly wide discount is an opportunity, provided the team delivers on its targets.

Bear points

The last three- to five-year performance has lagged peers.

Has undergone two strategic reviews in the last five years.

Dividend likely to be uncovered in FY22.

Analyst

Victoria Chernykh

+44 (0)20 3077 5700

Aberdeen Diversified Income and Growth Trust is a research client of Edison Investment Research Limited

Aberdeen Diversified Income and Growth Trust (ADIG), a diversified multi-asset fund, performed in line with its targets over the last 12 months. Overall performance has stabilised and improved since the Q320 strategic review, when the board addressed the disappointing performance between 2017 and 2020, as the three-year period of the chart below illustrates. The restructured portfolio assets have been generating both yield and return on capital. The manager expects stable and dependable dividends to be covered with recurring income within one to two years (current cover 0.99x), supported by steady income and the use of revenue reserves, if necessary. The continuing double-digit discount could present an investment opportunity, as ADIG is on a performance recovery track.

ADIG’s improving performance

Source: ADIG, Edison Investment Research. Data to end-June 2022. Note: Three-, five- and 10-year performance annualised.

Why invest in ADIG now?

Reaching the target of c 45% of the portfolio in the private markets basket within c 18 months by Q122, the manager, abrdn (rebranded from Aberdeen Standard Investments, ASI, in 2021), has achieved a quick transition. The portfolio has become much more diversified and yet easier to understand, with three clearly defined asset categories (private markets, listed equities and fixed income and credit). The strategy is designed to deliver the targeted return (6% pa net TR over a rolling five-year period) and lower volatility of NAV compared to global equities. A major component of ADIG’s investor proposition is offering a dependable and regular dividend. It has continued to pay regular dividends throughout the pandemic. The revenue reserve stood at £37m or c 2.1x annual dividend at end-March 2022 (see page 8).

The analyst’s view

With portfolio realignment making good progress and improving performance, ADIG could be undervalued at a c 16.9% ex-income (with debt at fair value) discount (13.4% three-year average discount). Last 12 months performance in difficult markets has been encouraging, with a NAV total return of 4.5% (to end-June) edging towards the peer average of 7.5% and improving ADIG’s peer group ranking (see page 6). Based on the current share price, ADIG’s last 12-month dividend yield is 5.8%, the highest among its peers.

Fund profile: Portfolio realignment nearly complete

abrdn took over ADIG, founded in 1898, as manager in February 2017, following two years of disappointing performance under the management of BlackRock Income Strategies (2015–17).

Following the latest strategic review, announced in October 2020, ADIG’s investment objective is to provide income and capital appreciation over the long term through investment in a globally diversified, multi-asset portfolio, aiming to deliver a total return (defined as net asset value (NAV) growth plus dividends) of 6% pa over a rolling five-year period. This was approved by the shareholders at the AGM in February 2021 and shifted the performance measurement focus to absolute from relative.

The manager also proposed the following changes: increase exposure to alternatives and private markets (to add to the available sources of return), diversify risk exposure, reduce listed equity exposure, at the same time tilting it more to income. The strategic review also assumed increasing its exposure to private investments to c 45% of NAV over the shorter term, (complete, 47.4% at end-March 2022 versus 30% at end-November 2020) and c 55% over the longer-term. This compares with its pre-2020 strategic review long-term target of c 43%.

abrdn is targeting completion of the portfolio transition with a 55% allocation to private markets within two years.

The fund manager: abrdn

The managers’ view: Balanced positioning for growth and income

Following the strategic review in Q420, Nalaka De Silva, head of private markets solutions at abrdn, was appointed to run ADIG, assisted by two co-portfolio managers, Jennifer Mernagh and Nic Baddeley. The managers believe the fund is structured well to continue delivering on its targets. With inflation concerns persisting, triggered further by Russia’s invasion of Ukraine, rocketing energy prices and new concerns about food price inflation, abrdn considers diversification and active management to be key to ADIG’s revised multi-asset strategy. They expect asset allocation combined with asset management to result in steady, dependable dividends, predominantly covered by recurring income.

To date, the team has struck a desirable balance between listed and unlisted credit, infrastructure and alternatives, as well as between listed and private market assets, so that the fund can offer a combination of growth, income and some inflation protection. Among other things, the well diversified portfolio creates some inflation shield as not only inflation, but also shifting expectations of inflation could have an impact on asset pricing and therefore on portfolio positioning.

Portfolio

Current portfolio positioning

At 31 May 2022, there were 643 holdings in ADIG’s portfolio, with the top 10 making up 39.0% (Exhibit 1, 35.2% in the top 10 at end-September 2021).

Exhibit 1: Top 10 holdings, portfolio weight (%)

Investment

Asset category

31-May-22

30-Sept-21

Change (pp)

TwentyFour Asset Backed Opportunities Fund

Fixed income and credit

6.8

6.8

0.0

Aberdeen Global Infrastructure Partners II

Private markets

5.5

2.5

3.0

Aberdeen Standard Global Private Markets Fund

Private markets

4.7

4.4

0.3

SL Capital Infrastructure II

Private markets

4.4

3.8

0.6

Burford Opportunity Fund

Private markets

3.7

3.3

0.4

Neuberger Berman CLO Income Fund

Private markets

3.5

4.0

-0.5

Aberdeen European Residential Opportunities Fund

Private markets

2.7

3.1

-0.4

Aberdeen Social Infrastructure Fund I

Private markets

2.6

1.5

1.1

Healthcare Royalty Partners IV

Private markets

2.6

2.6

0.0

Aberdeen Property Secondaries Partners II

Private markets

2.5

3.2

-0.7

Total top 10 on the date shown:

39.0

35.2

3.8

Source: Aberdeen Diversified Income and Growth Trust.

We present a breakdown of the company’s portfolio allocation by asset class in Exhibit 2. It shows that the team has nearly completed positioning the portfolio to its tactical asset allocation (TAA) targets, as the ‘remaining balance to reach target’ column shows. As the portfolio transformation plan is nearing completion, abrdn has been increasing the weight to private markets, looking for both capital income and growth. Cash represented 2.6% of ADIG’s NAV at end-May 2022, down from 8.0% in December 2020, as the team has been bringing the portfolio towards its targets.

Exhibit 2: Target portfolio allocation versus current portfolio allocation

Asset type

Target portfolio allocation before the strategic review

Target portfolio allocation from Dec-20, post the strategic review

31 Mar 22

Remaining balance to reach target

31 Dec 20

Change since Dec-20

Private markets

35.0%

45.0%

47.4%

-2.4%

31.7%

15.7%

Listed equities*

33.0%

29.4%

30.0%

-0.6%

35.2%

-5.2%

Fixed income and credit

32.0%

22.6%

22.6%

0.0%

29.3%

-6.7%

Cash

0.0%

3.0%

2.6%

0.4%

8.0%

-5.4%

Total portfolio assets

100%

100%

102.6%***

N/A

104.2%***

N/A

Total return

5.4%

5.7%

Risk**

8.1%

8.5%

Source: Aberdeen Diversified Income and Growth Trust. Note: *Listed equities allocation includes special opportunities, as well as active systemic and global risk mitigation strategies. The management team has recently combined listed alternatives and listed equity into a single listed equity segment. **Defined as annual standard deviation of returns. ***With other net assets and 6.25% debenture 2031 portfolio assets total 100.0%.

The current portfolio structure is the outcome of the strategic review during the summer of 2020, and September 2020 marked the start of the portfolio’s restructuring. To simplify the presentation of the fund, the management team has recently combined listed alternatives and listed equity into a single listed equity segment. The restructured portfolio currently splits the assets into three major categories (Exhibit 2) and the team presents exposures on a look-through basis, showing asset by asset exposures. For example, where previously emerging market debt was shown on one line, the team now shows individual investment lines. abrdn believes that this structure makes the portfolio more transparent to investors.

Portfolio activity

During the past 12 months to 31 March 2022, ADIG has not sold any assets at fund level. Individual underlying funds have sold portfolio investments, for example, DWS PEIF I Fund sold Peel Ports in Q421.

Below we outline portfolio purchase activity over the last year in the three major asset clusters: private markets, listed equity and fixed income and credit.

Private markets (c 47.4% of portfolio)

Having made its intended investments in 2021 and Q122, by end-March 2022 the team had increased its share of the portfolio held in private market investments to 47.4% (Exhibit 2). According to management, this was achieved principally through investments in multiple sectors, including private credit (Mount Row Credit Fund II and PIMCO Private Income Fund (£10m commitment each, fully drawn). Investcorp’s Mount Row Credit Fund II is targeted at European senior secured loans, to generate consistent cash returns and strong relative value. The PIMCO Private Income Fund is primarily focused on income-producing private assets. It seeks to deploy capital fluidly across credit sectors and over economic cycles. It targets lending across the residential, commercial, speciality finance and corporate sectors. New investments also included private equity Aberdeen Standard Secondary Opportunities Fund IV ($25m commitment, 19% drawn) and Bonaccord Capital Partners ($20m commitment, 43% drawn). Bonaccord Capital Partners makes equity investments in alternative asset management companies. These provide a steady stream of income returns from management fees. abrdn believes there is upside potential for further payments from performance-related fees from this fund.

During CY21 ADIG invested in Hark III ($13m commitment, 0% drawn). Hark III provides fund financing facilities to alternative asset managers and will target lending to portfolio companies or investment vehicles that would typically require dilutive equity capital, since they generally do not meet the standalone underwriting criteria of the lenders.

During the past 12 months, ADIG invested in diversified private markets (Aberdeen Global Private Markets Fund), infrastructure (additional investment into existing funds and a new investment in the Pan European Infrastructure Fund), royalties (additional investment in HealthCare Royalty Partners IV). It also committed to the Aberdeen Standard Secondary Opportunity Fund IV (SOF IV) investment to ensure a pipeline of mature private equity assets.

According to Mernagh and Baddeley, the next step is to manage the existing commitments. In the private markets basket, the team has one more £7.5m outstanding transaction to complete, with the current focus on sourcing income-producing opportunities in the real assets space.

Fixed income and credit (c 22.6% of portfolio)

As the proportion of the private markets bucket has increased, the proportion in the fixed income and credit basket decreased, as the team reduced its holdings within emerging markets (EM) and frontier markets bonds, halving the position. The managers also diversified the asset-backed securities (ABS) exposure. The top holding TwentyFour Asset Backed Opportunities Fund was reduced by 1.8pp to 6.8% (see Exhibit 1). This was partially invested in Neuberger Berman CLO Income Fund (also a top 10 holding, 4.0% position in the portfolio at end-January 2022). This diversification mitigated asset concentration risk, which the team perceived to be high before this reallocation.

Listed equities (c 30% of portfolio)

The other portion of funding to increase private markets’ exposure was in listed equity. The team reduced holdings in low-volatility equity strategies, making sure the equity portion is generating growth.

ADIG also reduced its exposure to listed alternatives in the listed equities segment over the last 12 months. This cluster remains diversified, including funds in the litigation finance, healthcare, insurance-linked securities, infrastructure, private equity and trade finance space. For example, ADIG owns music royalties via Round Hill Music Royalty Fund (RHM). It also has material exposure to renewable energy via a number of funds, including energy storage (Gresham House Energy Storage Fund, GRID), UK solar (Foresight Solar Fund (FSFL) and NextEnergy Solar Fund (NESF).

Performance: On an improving trajectory

Exhibit 3: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

Blended benchmark* (%)

MSCI AC World
(%)

UK Gilts All Stocks (%)

30/06/18

7.1

0.7

6.0

9.5

1.9

30/06/19

(6.1)

1.1

6.3

10.3

4.9

30/06/20

(10.6)

(2.4)

6.2

5.7

11.3

30/06/21

17.2

13.0

5.6

25.1

(6.3)

30/06/22

0.0

5.7

6.1

(3.7)

(13.6)

Source: Refinitiv. Note: *Blended benchmark is FTSE All-Share/FTSE World ex-UK 80:20 composite up to 26 February 2015 as provided by the trust, then UK CPI + 4.0% up to 10 February 2017 and Libor + 5.5% since 10 February 2017. All % on a total return basis in GBP.

From February 2021, relative performance is displayed for reference only, when ADIG replaced the Libor + 5.5% benchmark. ADIG’s NAV total return (net of fees) and share price returns have improved considerably during the past 24 months following portfolio reorganisation, outperforming the Libor + 5.5% measure over 12 months to June 2021 and being very close over 12 months to June 2022. The board and the portfolio management (PM) team addressed the previous disappointing performance in the three discrete periods from the first ADIG reorganisation in 2017 through to 2020 during its Q420 strategic review and consequent portfolio restructuring.

The improving risk-adjusted performance is also evident from Exhibit 4. The risk-adjusted NAV TR (defined as NAV TR to standard deviation) in CY21 of 2.5 exceeds the 2.1 of the MSCI World GBP Hedged. This illustrates ADIG’s lower volatility approach compared to global equities.

Exhibit 4: ADIG’s total return and volatility versus global equities index*

Total return (TR)

Volatility (standard deviation)

Risk adjusted return (NAV TR to standard deviation)

ADIG share price

ADIG NAV

MSCI World GBP Hedged

ADIG share price

ADIG NAV

MSCI World Hedged GBP

ADIG share price

ADIG NAV

MSCI World Hedged GBP

2019

3.3%

9.2%

25.5%

12.5%

4.5%

9.9%

0.3

2.0

2.6

2020

-5.2%

0.0%

11.7%

39.4%

10.5%

31.0%

-0.1

0.0

0.4

2021

6.3%

11.7%

23.9%

11.6%

4.7%

11.2%

0.5

2.5

2.1

Source: Aberdeen Diversified Income and Growth Trust. Note: *MSCI World GBP Hedged. TR in GBP.

According to the investment objective, set post-restructuring in December 2020, performance is now measured in absolute terms and targets a total return (defined as NAV growth plus dividends) of 6% pa over a rolling five-year period. The portfolio repositioning has resulted in an improved performance in the last year. Exhibit 4 illustrates that, compared to 2020 when the share price TR was negative (-5.2%) and NAV TR was flat (0.0%), in 2021 the share price TR was 6.3%, NAV 11.7% (debt at fair value) against the 6% return target. All asset classes have delivered net positive returns.

According to the management team, private markets contributed about half of NAV TR during CY21 (5.9pp). In the infrastructure segment (see Exhibit 9), a secondary pan-European power network investment was the top performer. The DWS Pan-European Infrastructure Fund I (DWS) sold its stake in Peel Ports and retuned a proportionate share of the proceeds (c €3.2m) to ADIG. DWS was sourced by the infrastructure desk. abrdn acquired the assets at a discount in Q420, making it a very good entry point. Port Group, a water utility asset, contributed c 45bp to NAV performance over the past 12 months, according to the management team.

Another large driver of performance in the private equity segment was Aberdeen Standard Secondary Opportunities Fund IV, to which ADIG committed recently and which, since ADIG’s investment, generated an internal rate of return (IRR) of more than 50%. The fund distributed $1.9m to the company in November 2021. This fund contributed c 48bp to NAV TR. In addition, a Danish company, Godt Smil, operating a chain of dentists, made a c 32bp contribution. The Aberdeen Property Secondaries Fund distributed c €3.6m back to ADIG from the proceeds of its investment in the TCAP Gemlife fund, the final remaining asset of which was a mezzanine loan secured against a portfolio of 13 retirement villages in Australia.

After March 2022, there was a significant gain from the I77 toll road asset in Aberdeen Global Infrastructure Partners II, where the fund owns express lanes into Charlotte, NC. The toll price has changed dynamically to reflect demand and, following recent testing, the forward expectation of cost per mile that can be charged is significantly higher than previously modelled, leading to a 40% uplift at the asset level, and a gain of more than 110bp in ADIG’s NAV.

The alternatives within the listed equity basket were the second largest contributor to performance (2.7pp). There were bids for John Laing Infrastructure Fund, and ADIG exited at a profit. The real estate segment, where an asset was made private at a price favourable to abrdn, also contributed positively. In the listed equities basket, MSCI World ESG tilted quantitative strategy performed well, as did the zero-fee internally managed the UK mid-cap equity fund, which follows a quality growth strategy. Despite EM debt being a drag on performance, the fixed income basket contributed 1.9pp to NAV during 2021, led by asset-backed securities. To mitigate currency fluctuations from holding EM debt, the team uses a diversified basket of currencies. For example, abrdn rotated out of a long JPY position during the year, moving to long US dollar versus the euro and the British Pound.

Peer group comparison

ADIG is a member of the Association of Investment Companies’ Flexible Investment sector, a very diverse sector by strategy. We have selected eight multi-asset peers within the AIC Flexible Investment sector that pursue an absolute return strategy and generate some income. We consider ADIG to be most similar to RIT Capital Partners, Caledonia Investments and JPMorgan Global Core Real Assets, which all have private markets exposure. Although JPMorgan Multi-Asset Growth & Income does not invest in private markets to a substantial extent, it is also a diversified multi-asset fund, whose strategies display a high degree of similarity with ADIG’s, including infrastructure, fixed income and credit and alternatives. That said, each strategy is quite distinct from the others and as such performance can diverge markedly between funds.

Exhibit 5 illustrates an improvement in ADIG’s performance relative to its peers, potentially demonstrating that the refreshed approach is working.

Exhibit 5: Selected Flexible Investment peer group at 30 June 2022

% unless stated

Market
cap £m

NAV TR
6 months

NAV TR
1 year

NAV TR
3 year*

NAV TR
5 year**

Ongoing
charge

Perf.
fee

Discount
(ex-fair)

Net
gearing

Dividend
yield

Aberdeen Diversified Income & Growth

299.4

0.5

4.5

10.6

12.4

0.62

No

(16.9)

100

5.8

Caledonia Investments

1,940.6

11.0

26.5

51.0

76.9

0.85

No

(26.8)

100

1.8

Capital Gearing

1,195.1

(1.1)

3.2

21.0

32.8

0.52

No

2.5

100

0.9

JPMorgan Global Core Real Assets

221.8

11.9

23.8

1.35

No

(1.1)

100

3.9

JPMorgan Multi-Asset Growth & Income

75.8

(4.6)

(3.9)

7.6

1.07

No

(2.6)

100

4.3

Personal Assets

1,836.1

(3.1)

0.0

17.7

24.9

0.67

No

1.6

100

1.2

RIT Capital Partners

3,852.6

(2.4)

(2.1)

40.3

58.8

0.72

Yes

(6.1)

96

1.5

Ruffer Investment Company

982.0

2.2

5.2

33.1

33.6

1.08

No

4.4

100

1.0

Peer group average (incl. ADIG)

1,443.4

2.0

7.5

28.4

45.4

0.89

(4.0)

99

2.1

Trust rank in peer group

6

4

4

6

6

7

7

1

1

Source: Morningstar, Edison Investment Research. Note: *Ranking out of eight companies. **Ranking out of seven companies. TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets (100 = ungeared).

While ADIG’s NAV TR remains below the peer group average over the four periods shown, its progress in the peer group ranking is evident. Among the eight peers, ADIG’s ranking was up from sixth over three and five years to third over one year (compared with shortly after the portfolio restructuring) to fourth over the last six months. While its five-year returns are below the peer average, we note that this partly reflects the weak performance in 2015–17 when it was managed by BlackRock Income Strategies.

ADIG has the lowest ongoing charge among peers of 62bp. Its dividend yield of 5.8% remains clearly ahead of the peer average of 2.2%. Importantly, the dividend yield is presented on a last 12-month basis. It has remained around this level during the economic downturn triggered by the COVID-19 pandemic. We note that ADIG set an increased dividend target of 5.6p per share for FY22 (from 5.52p per share in FY21). The trust’s ongoing charges are lower than the peer average and it does not charge a performance fee. ADIG’s shares continue to trade at a double-digit discount to NAV (16.9%), which is wider than the peer average.

Discount: Still wider than the target

Since the change in strategy in 2017, ADIG has targeted a maximum discount to NAV (excluding income, with debt at fair value) of 5% in ‘normal’ market conditions. The average discount to NAV (excluding income, with debt at fair value) over the 12-month period to end-July 2021 was 15.8%, disappointingly below the target. This compares to the average five-year discount of 7.8%.

Exhibit 6: Share price discount to NAV (excluding income) over three years (%)

Source: Refinitiv, Edison Investment Research

Gearing

Gearing is permitted up to 20% of net assets. In the portfolio restructuring of Q420, ADIG’s cash position increased to 17.2% at end-October 2020 (from 3.3% at end-September 2020), falling to the 3% target level at end-June 2021. Net gearing (with debt at market value) was 0.4% at 31 May 2022. Net gearing reduced from 10.8% at end-October 2020, prior to the repurchase and cancellation of £43.9m of the company’s £60.0m bond in early November 2020 as part of the strategic review. The bond was repurchased at a c 54% premium to par value, which translated into a consideration of c £67.7m (excluding accrued interest) and was equivalent to reduction in NAV of c 1.55p per share. The board continues to keep the overall level of gearing under review but, in the prevailing economic environment, there is currently no intention to introduce further fixed-rate gearing.

Dividend policy, cover and record

ADIG aims to provide investors with a stable and reliable dividend stream. The trust pays quarterly dividends (in March, July, October and January) at a level consistent with the expected underlying annual portfolio yield.

For the year to 30 September 2022, the first two interim dividends of 1.4p per share each were declared. The first dividend was paid on 31 March 2022 and the second is to be paid on 14 July 2022. For the year to 30 September 2021, ADIG paid four quarterly dividends of 1.38p per share each (or 5.52p per share in total). For FY22, the board targets four 1.4p per share dividends (5.6p in total, up 1.4% year-on-year), which translates into a prospective dividend yield of 5.6% based on the end-February 2022 share price of 100.3p.

The managers highlight that during the period of recycling capital into private investments following the recent strategic review, ADIG’s dividend programme will be supported by lower interest costs after the bond repurchase and, if required, the revenue reserve. At end-March 2022, ADIG had revenue reserves of £37.0m, which we estimate was equivalent to c 2.1x its annual dividends. Over the longer term, the manager expects dividend payouts to be supported by the growing importance of unlisted holdings in the delivery of total income to ADIG’s portfolio, primarily in the form of dividend income from these assets.

Investment process: Research, access and portfolio construction

ADIG aims to generate attractive long-term capital and income returns by applying a diversified multi-asset approach, using quoted and unquoted investments, with no geographical or sector restrictions. The investment process consists of a number of connected steps: research, including strategic asset allocation (SAA), tactical asset allocation (TAA); access, including idea generation in both private and public markets: and portfolio construction, using sophisticated modelling and analytic tools. The abrdn multi asset & investment solutions (MA&IS) team has 130 investment professionals, whose expertise is at the portfolio managers’ (PMs) disposal. Importantly, ADIG’s team also has access to the private markets’ teams, which provide access to deals, using their extensive networks.

Capital markets assumptions are revised twice a year. In conjunction with PM judgement, these help to inform the SAA. The team aims to invest for the long term and does not trade the portfolio on a daily basis. Although it does not trade the portfolio, it evolves positions in response to changing fundamentals, so the annual turnover in the portfolio since the restructuring remains fairly low at c 30% (source: Morningstar). As part of revised SAA work, the ADIG portfolio was reduced to three main categories to reflect the risk premia in the portfolio (before October 2020, ADIG had 14 asset categories in the portfolio):

1.

private markets;

2.

listed equities; and

3.

fixed income and credit.

TAA is conducted, using outputs from various forums as the strategic investment forum and various asset class steering groups. Day-to-day management ensures that the portfolio is run on the most cost-effective basis. The ongoing charge ratio (OCR) was 0.84% (at end-June 2021). The managers use the full capabilities of abrdn as a firm.

The modelling and analytics team with MA&IS provide tools that enable the PMs to view the portfolio impact on various plausible scenarios. This enables the PMs to understand inherent portfolio risks, and manage them accordingly.

While the allocation between asset classes in ADIG is determined by the three PMs, the individual asset class sleeves of the three portfolio categories are run by specialist PMs within abrdn. Exhibit 8 illustrates that the bulk of the assets (c 70%) in the portfolio is managed by abrdn. When abrdn does not manage a certain asset class picked by the PMs for ADIG, the team looks for this asset class externally.

Exhibit 7: ADIG’s portfolio asset classes sleeves are internally and externally managed

% of the portfolio

% of internal/external

Portfolio categories

Internal

External

Total

Internal

External

Private markets

22.3%

15.6%

37.8%

59%

41%

Listed equities

32.5%

0.0%

32.5%

100%

0%

Fixed income & credit

12.0%

14.7%

26.7%

45%

55%

Cash

3.0%

0.0%

3.0%

100%

0%

Total

69.8%

30.2%

100.0%

N/A

N/A

Source: ADIG. Note: Manager’s estimates at 30 June 2022.

Exhibit 8 presents the asset classes and the features sought by ADIG’s management team in the highly diverse category of private markets.

Exhibit 8: Private market asset classes selected by ADIG

Asset class

Details

Attractive features

Private equity

Ownership interests in private companies that require capital for growth, management buyouts and turnarounds across multiple sectors and markets.

Typically, high growth, innovative and scalable

Private credit

Lending to businesses or projects that can include senior asset-backed loans, subordinated debt, speciality finance and special situations funding.

Typically, higher yielding

Infrastructure

Investing in essential infrastructure that supports domestic and regional economies, such as roads, schools, hospitals, transportation assets, energy generation and supply and communication assets.

Typically, very stable with attractive yield with inflation linkage

Real estate

The development and improvement of commercial buildings, residential property and mixed-use and special purpose facilities.

Typically generates income and growth

Natural resources

Investment in timber, agriculture, fisheries, aquaculture and physical commodities, such as minerals.

Typically generates income and has a strong linkage with inflation

Source: ADIG

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This report has been commissioned by Aberdeen Diversified Income and Growth Trust and prepared and issued by Edison, in consideration of a fee payable by Aberdeen Diversified Income and 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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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

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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

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

General disclaimer and copyright

This report has been commissioned by Aberdeen Diversified Income and Growth Trust and prepared and issued by Edison, in consideration of a fee payable by Aberdeen Diversified Income and 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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