Abrdn UK Smaller Companies - November 2022 Fund Update

• Abby Glennie will step up to lead manager when vastly experienced smaller companies investor Harry Nimmo retires at the end of 2022
• The managers focus on investing in quality companies with strong growth prospects and positive momentum behind their earnings and share price
• Long-term performance has been strong
• The fund does not currently feature on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Abrdn UK Smaller Companies fund aims to grow an investment over the long term by investing in small UK companies. Smaller companies typically have more room for growth than larger ones, although they are more volatile and higher risk. This fund could add diversification to the UK portion of a more adventurous portfolio. The managers’ growth-focused investment style also means it could complement other funds investing more in companies perceived to be undervalued.

The fund is fairly large in size for a smaller companies fund though, and the managers don’t want to attract significant levels of new investment so they can keep it manageable. That's why we're not currently considering it for the Wealth Shortlist.

Manager

The fund is co-managed by Harry Nimmo and Abby Glennie. However, at the end of 2022, Nimmo will bring an impressive career spanning over three decades to a close and retire from the industry. We’re disappointed to see Nimmo step down as investors will no longer have access to an outstanding fund manager who has proved he’s one of the best. That said, it’s natural to see fund managers eventually retire after such a long stint in the industry.

Abby Glennie, Deputy Head of Smaller Companies, was named co-manager of the fund in November 2020. From January 2023, she will become its lead manager. Glennie started her career at Kames Capital before joining what was then Standard Life Investments in 2013. Most of her time has been spent analysing UK companies and in 2016 she joined the smaller companies team. With 15 years of industry experience, Glennie is building a strong track record. She will be supported by Amanda Yeoman as deputy manager.

Glennie and Nimmo have worked together for many years and their investment philosophy is closely aligned. Glennie will continue to use the same investment process, based on their quantitative tool called the ‘Matrix’, which has helped the team to uncover some great smaller companies over the years.

Process

The managers scour an investment universe of around 700 stocks to uncover the big companies of tomorrow. Their process has remained the same since launch in 1997 and has proved effective over that period.

They use a quantitative tool called ‘the Matrix’ to help with the heavy lifting. It gives every company a score based on its quality, growth prospects and the momentum behind its earnings and share price. This enables the managers to exclude weaker candidates such as loss-making or highly indebted companies. They like businesses that perform well throughout a market cycle, so they tend to avoid those with earnings that are tied to the fate of the wider economy.

This leaves a shortlist of roughly 100 companies, which the managers and their team then investigate and debate further. Companies in the fund are usually still managed by their founders or led by a proven management team. They should also possess barriers to entry from competition, a sustainable business model and the ability to raise prices without significantly impacting demand. Meeting each company's management team is another crucial part of the managers’ due diligence.

The managers consider the smallest 10% of companies listed on the UK stock market to be 'smaller companies'. But many of these businesses technically fall within the FTSE 250, meaning the fund invests more in medium-sized companies than many of its peers in the IA UK Smaller Companies sector. We don’t see this as a bad thing though. Medium-sized companies are often seen as the UK stock market's ‘sweet-spot’ – they have more growth potential than larger businesses, but are lower risk than smaller ones. This doesn’t make them a sure thing of course.

The managers believe that a change in sentiment amid the challenging market conditions has contributed heavily to recent performance. They remain confident in the prospects of the companies they own in the fund and that their quality, growth and momentum focused investment process will be effective over the long term.

Culture

The fund was previously part of Standard Life plc, until the business merged with Aberdeen Asset Management in 2017 to create Standard Life Aberdeen plc. This later became Aberdeen Standard Investments and in July 2021, the company changed name once again to abrdn in order to simplify and unite under one single brand.

While mergers have the potential for disruption, we think the smaller companies team, which also includes UK and European funds, were relatively unaffected. There’s a collegiate feel to the smaller companies team at abrdn. Members share research and ideas with each other, and work with one another to debate and challenge stock decisions.

ESG Integration

Although the manager's process doesn’t specifically exclude any particular area, ESG (Environmental, Social and Governance) considerations form a part of company analysis. The managers engage with companies where they feel there are serious ESG issues and use their right to vote at shareholder meetings.

Abrdn is a firm well known for its commitment to ESG. Responsible investing has been part of the business since it set up its Corporate Governance team in 1992 and launched its first ethical fund in 1994. We like that the firm’s policy positions on a range of divisive issues, from plastics and tobacco to palm oil and biodiversity, are easily available on their website. The firm also produces several ESG-related thought leadership articles on a monthly basis, a fortnightly podcast series and a quarterly Active Ownership report.

We’re pleased to see that the firm’s commitment to ESG has filtered down to the fund level. Abrdn fund managers generally see themselves as owners of businesses, not investors, and stewardship is an important part of their investment processes. The firm exercises all voting rights and engages with management to encourage best practice. ESG and stewardship factors are included in every stock research note and each firm receives an ESG score, based on its ESG credentials and its ability to manage ESG risks. All managers have access to a central ESG team, as well as specialist on-desk analysts.

Cost

The fund has an ongoing annual charge of 0.98%, but we’ve secured HL clients an ongoing saving of 0.22%. This means you’ll pay a net ongoing charge of 0.76%. The HL platform fee of up to 0.45% per year also applies.

Performance

Since Nimmo took over management in August 2003 the fund has delivered exceptional performance. Over this period, it’s returned 715.84%* vs 444.70% for the IA UK Smaller Companies sector. Our analysis puts this down to Nimmo’s impressive stock picking. Remember all funds will rise and fall in value, so you could get back less than you invest. Past performance is also not a guide to future returns, and funds are intended to be held for the longer term.

During periods of market weakness, the managers' focus on high-quality companies has helped the fund hold up better than the broader market. The fund’s also tended to outperform in rising markets, although we expect it to struggle when unloved companies perceived to be undervalued are in vogue. This has been the case over the past 12 months and the fund’s underperformed the IA sector average by 5.73%. Over the year, our analysis suggests that one of the biggest detractors from performance was media company Future plc, with marketing company 4IMPrint Group among the better performers.

Smaller companies, which are typically more focused on the domestic UK economy, came under significant pressure from the start of 2022. Investors have had to deal with elevated inflation, rising interest rates and the disruption and challenges caused by Russia's invasion of Ukraine. When inflation is high and interest rates are rising, demand can be hit, especially in consumer exposed sectors. With consumers battling higher living costs and a squeeze on their disposable incomes, these tend to be the first things to be cut back on.

Past performance is not a guide to the future. Source: *Lipper IM to 31/10//2022.

Find out more about Abrdn UK Smaller Companies fund including charges

Abrdn UK Smaller Companies Key investor information