Some business lobby groups and commentators never hesitate to state that small companies are the real engines driving growth in economies. Whether they can do so consistently for investors’ returns is a different question, though quite a few investment trusts are trying to provide a positive answer.
Aberforth Smaller Companies Trust published its results for 2017 on Friday and managed to outperform its benchmark. The trust, formed in 1990 and based in Edinburgh, provided a 22.1 per cent net asset value total return, compared with 19.5 per cent for the Numis Smaller Companies Index. The focus on UK equities did not hold it back, with the share price return also being greater than 22 per cent for the calendar year.
The trust’s shares started 2017 trading at around £11 and finished it above £13, a steady climb since concerns over the Brexit vote and about the trust’s exposure to the domestic economy prompted a drop below 900p in July 2016.
There was also a 5.3 per cent increase in the ordinary dividend for last year to 28.8p. Paul Trickett, the trust’s chairman, pointed out that sum was more than 51 per cent greater than the 19p awarded in 2010.
In recent years Aberforth Smaller has topped up payments with a special dividend. It paid an additional 2.75p per share in both 2015 and 2016, with a bumper 6.7p special dividend declared for 2017. The trust’s managers at Aberforth Partners point to the generally robust balance sheets and average dividend cover of 2.8 times across the portfolio, which gives rise to an expectation of further dividend growth from the companies it holds in 2018.
The fund’s philosophy is simple: buy shares that are undervalued. Within that, the industrials category is the largest in the portfolio, making up 39 per cent of the total, compared with 26 per cent of the benchmark index. Vesuvius, the engineering group, Coats, the maker of sewing thread and supplies, Vitec, a maker of photographic and broadcasting equipment, and Keller, a ground engineering specialist, are all in the top ten holdings.
A liking for consumer services, comprising 22 per cent of the portfolio compared with 19 per cent for the benchmark, again comes through in the top ten, with Brewin Dolphin, the stockbroker, First Group, the bus and rail operator, and Bovis Homes, Urban and Civic and Grainger, the property businesses.
Further down the portfolio, there are well-known names that have had some bumps in the road over the past few years, including Stagecoach, the transport group, Speedy Hire, the plant hire company, and retailers such as Halfords and Carpetright.
Companies earning profit overseas were a primary driver of investment returns for the trust in 2017 as they benefited from the lower pound. About 47 per cent of aggregate sales in the portfolio came from outside the UK at the start of last year, compared with 41 per cent for the benchmark index. It might be expected, therefore, that the fund would start to increase its weight in firms trading primarily overseas. In fact, its managers believe that the trend is likely to present buying opportunities in potentially undervalued companies focused on the domestic market, although the portfolio had moved only slightly, to 46 per cent of aggregate sales overseas, by the start of this year.
As ever in the investment world, optimism is tempered by caution, in this case about an uncertain economic backdrop and the way in which valuations between smaller and larger companies continue to grow ever wider.
Advice Hold
Why The trust has a solid record of growth, but the headwinds facing many UK-focused companies do not look like easing soon
Countryside Properties Investors are feeling jittery about housebuilding stocks at the moment. There is a feeling that Britain’s biggest residential developers are reaching the peak of what they can deliver each year. Yet, despite this, one company stands out for being worth some consideration: Countryside Properties.
Underlying pre-tax profits at the FTSE 250 company are due to rise 27 per cent in 2018. That is one of the highest growth rates in the housebuilding sector. A trading statement last week showed that its completions for the three months to the end of December were ahead of expectations, rising 47 per cent to 852 homes. Ian Sutcliffe, the group’s chief executive, also has made an effort to move the company away from expensive areas that are more at risk of a downturn, with the average sale price down 11 per cent to £394,000.
Yet, at 328p, the shares are trading on eight times earnings for December 2018. Analysts at Numis think that the company is undervalued and “is not gaining full credit for its growth trajectory or the attractive characteristics of the Partnerships division”. The Partnerships division is a key distinction of Countryside. Unusually for a housebuilder, the company is divided equally between building private homes for sale and entering partnerships with local authorities, under which the group develops brownfield sites, building shared-ownership and other affordable homes. Indeed, Mr Sutcliffe is determined to push this ratio up to 60 per cent in favour of partnerships.
At a time when Sadiq Khan, the London mayor, is pushing for 50 per cent affordable housing on all new large residential developments in the capital, and as the government has come round to the idea of the market needing a wider range of housing tenures than simply owner-occupiers, this is one of the best times for Countryside Properties. Volumes in the Partnerships division rose by 50 per cent in the latest quarter, with an additional 1,128 plots now secured.
The group has moved, too, from a net debt position of £86 million to net cash of £65 million. This all bodes well for a positive year ahead.
Advice Buy
Why Looking cheap with plenty of growth to come
