Strong players in smaller companies

This article is part of
AIM and Small Caps - December 2013

The relatively member-light UK Smaller Companies investment trust sector has witnessed something of a re-rating in the past 12 months on the back of the enduring equity rally. Over the period, the average discount on these investment vehicles has reduced dramatically from almost 16 per cent to some 9 per cent, as at the end of October, while the mean discount across all trusts is at an even tighter 5 per cent, according to the Association of Investment Companies (AIC).

The AIC’s UK Smaller Companies sector is a fairly crowded one. Although a closed-end structure is a sensible way to gain access to the relatively illiquid UK smaller companies space, says Mick Gilligan, head of research at Killik & Co, he believes this advantage has been outweighed in many cases by sub-scale trusts with wide bid-offer spreads and persistent discounts.

Mr Gilligan adds: “We have seen some consolidation in this sector in recent years, but the wide discounts suggest we should have more to rectify the balance between supply and demand.”

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While small-cap funds are likely to provide investors with a meaningful allocation to mid cap, many of the more popular ones tend to mine the market within the Alternative Investment Market (Aim), too, in a bid to find investment gems.

There have been a number of strong players in the sector and for Mr Gilligan the one that stands out as expensive when recent performance is taken into account is Standard Life UK Smaller Companies investment trust. The Harry Nimmo-run investment trust is currently trading at a premium of 0.5 per cent, after its share price rallied by some 33 per cent in the past 12 months.

Hargreaves Lansdown head of research Mark Dampier acknowledges that the Standard Life portfolio’s performance has left it looking on the costly side, but he notes that while discounts have narrowed, there are still trusts in the sector offering investment opportunities.

BlackRock Smaller Companies is 53 per cent better in the past year, but it is still trading at a discount, albeit at lower than average 6 per cent. But there are a number of strong performers that still look cheap, relative to their peers. For example, the JPMorgan Smaller Companies trust has jumped by 56 per cent in 12 months and is trading on a discount of just more than 14 per cent, while Henderson Smaller Companies, up by 53 per cent is on a 12.6 per cent discount. In addition, the BlackRock run Throgmorton Trust is up 52 per cent and is trading on a 10 per cent discount.

Somewhat less covered in glory is Gresham House, which has limped ahead by just 0.8 per cent in the past 12 months and, as a result, is trading on a 29 per cent discount.

Looking broadly at the sector’s discounts, Mr Dampier adds: “This at least suggests that things have not got out of hand yet. During the 1990s, most smaller companies trusts were in a bear market. It is only in the past five to 10 years that they have really come into their own, where there has been quite a revival.”

A long-term winner in the area for a number of commentators is the value- orientated Aberforth Smaller Companies, which in the past year has firmed by 55 per cent, but it is trading on a 10.9 per cent discount.