Aberforth Smaller Companies

mf78

I was looking at the Aberforth Smaller Companies Acc Fund for a possible investment and noticed that there is an almost identical investment trust of the same name. Considering it will be inside my Sipp at Sippdeal, I've been trying to figure out which (if any) I'd go for, with about £2.5k. to start with and planning to hold for atleast 20 years.

The charges are similar. However, I believe the IT version pays income out where as the acc fund (obviously) reinvests it. That's what I'm after really. There is a scheme available to the IT to automatically reinvest dividends, but the cost eats into things a little. As would manually reinvesting the dividends due to Sippdeals trading charges.

So looking at the two, I think I'm better off with the fund (acc)version. The IT has been on a slight discount which is what caught my interest, but that discount isn't quite as good at the moment as it has been. I do see a lot of folks holding IT's in their portfolios though so wondered if there was some other factors in the decision.

Any thoughts?

BLB53

I have held the inv trust in my sipp for many years. Although similar to the UT in many ways, I believe the use of gearing gives the IT the edge on returns over time - maybe an extra 1% - 5% p.a. Compounded over 20 yrs this will have quite an impact.

For example in 2009 the returns for the IT were 20% more than the UT, last year the returns were 15% higher.

Of course, in 'down' years the gearing will have more of a negative effect - in 2011 the IT underperformed the UT by 6%.

The IT is currently trading at a discount and the yield is slightly higher so the inv trust would be the one I would choose for the longer term.

westy22

Aberforth Smaller Companies IT is one of the ITs that you can buy on Sippdeal with their regular investment option which only costs £1.50. You could hold your divis as cash until the next regular deal date which is usually the 12th of each month.

Ark_Welder

Check out the costs of dividend reinvestment with the IT compared to any additional platform cost that might be involved with holding the OEIC. [edit] including stamp duty on the IT purchase, plus any opportunity cost of not being able to reinvest the whole of the dividend immediately, i.e. it is possible to buy whole shares only, not fractions.

The portfolios are more or less the same, the main difference being that the IT is around 10 times the size of the UT. Morningstar has some interesting data re. historic returns. The effects of gearing can be seen in the NAV TR for the IT, which tends to return more than the UT in a positive year and less in a negative year. The discount looks to be back in the range that it occupied before the credit crisis hit (10-year chart data), so there may be little or nothing to be gained in that area, certainly not with a 20-year timescale in mind. Can't see any discount data for 10+ years, but not so sure that that data will be so relevant any more.

If the holding costs match then a decision might come down to expectations over market performance: a general uptrend ought to favour the IT due to the gearing; mixed performance could equalise the returns from the UT - check the 10-year annualised returns for both as an example. Otherwise, personal preference and familiarity with the type of fund is likely to be the deciding factor.

Morningstar: OEIC
Morningstar: IT

+++

[edit 2] In addition, and referencing the 'about £2.5k. to start with', would an increase be made using an occasional lump sum, and if so, then how soon would this be likely and by how much? Just thinking that the larger the holding, the greater the amount of the dividend (in pounds/pence terms), therefore lowering the proportional cost of any dividend reinvestment transaction charge.

Totton

Aberforths' advantage as an IT has seen it trail Fidelity and Cazenove UK Smaller Co's OEIC funds, you have to be careful with IT's in a dodgy market environment although they are my preferred 'vehicle'. It is interesting that Trustnet have both the IT and OEIC from Aberforth on a higher risk rating. I'm in the Cazenove fund which is my interest in commenting on this thread, Aberforth always seem to get a good write up and the OEIC is doing well YTD.

blinko

will the spread and charges be lower for an IT

mf78

Thanks for the replies everyone. As regards platform fees, I'm already paying Sippdeals quarterly charge due to holding other finds that trigger it - but its the same charge regardless of the number of funds so I'm not taking it into account when choosing between these two, as it wont be increasing my costs.

The 2.5k would be my starting investment, and the last for this financial year. In the future the plan is to add, if necessary, to rebalance my portfolio as and when I put more cash into it. I invest in lump sums, usually at least £1k at a time to minimalise the effect of the dealing charge.

From the data it looks to my eye that the OEIC and the IT have very similar performance over 10 years. The Cazenove fund looks to have outperformed them by quite a bit. Due to value investing being out of fashion to some extent?

From my original choices I'm certainly leaning towards the OEIC option, but before committing I think I'll research some of its competitors. I already have a little exposure to UK small cap growth, and it was the value aspect (as well as small cap) of Aberforth I was looking for.

Totton

The Cazenove fund looks to have outperformed them by quite a bit. Due to value investing being out of fashion to some extent?

I'd put it down to the managers being excellent as with their fund Cazenove UK Opps in the UK All Companies sector. It will be interesting to see what happens as the effects of the recent takeover come into play. Also worth looking at may be the Miton UK Multi Cap fund run by Gervais Williams with 36% in AIM, 24% in FTSE 250 and 21% in FTSE Small Cap - http://www.fundslibrary.co.uk/fundslibrary.dataretrieval/Documents.aspx?type=packet_fund_class_doc_factsheet_private&user=hl_web_test&sedol=B691919

Ark_Welder

mf78 wrote: »

As regards platform fees, I'm already paying Sippdeals quarterly charge due to holding other finds that trigger it - but its the same charge regardless of the number of funds so I'm not taking it into account when choosing between these two, as it wont be increasing my costs.

Which would tend to favour the OEIC. Assuming that the full £2.5k was invested in the IT and that its yield is 2.4% then that would produce total annual dividends of £60. Two dividends re-invested at £1.50 a time plus stamp duty would be a total cost of £3.30, or 5.5% of the dividends received.

However...

mf78 wrote: »

The 2.5k would be my starting investment, and the last for this financial year. In the future the plan is to add, if necessary, to rebalance my portfolio as and when I put more cash into it. I invest in lump sums, usually at least £1k at a time to minimalise the effect of the dealing charge.

So rather then re-invest the dividends automatically, they could be held as cash until a new lump sup was added and the whole lot invested in one go (subject to having to buy whole shares). This would bring back in the option of holding the IT.

mf78 wrote: »

From the data it looks to my eye that the OEIC and the IT have very similar performance over 10 years. The Cazenove fund looks to have outperformed them by quite a bit. Due to value investing being out of fashion to some extent?

From my original choices I'm certainly leaning towards the OEIC option, but before committing I think I'll research some of its competitors. I already have a little exposure to UK small cap growth, and it was the value aspect (as well as small cap) of Aberforth I was looking for.

Aberforth is probably the most value-oriented of the smaller companies fund managers, so you are likely to find it difficult to find a comparable fund elsewhere. Possibly those from Henderson and Invesco Perpetual (which also have equivalent ITs) - but that might just be my misinterpretation of their statements rather than something that can be totally relied on! I do remember Aberforth saying a few years ago that they expected their style to be out of favour for a while, so it will be worth reading their latest factsheets and reports to see what they're saying now.

An alternative method of looking for a complementary fund to your existing holding is to look at the pool(s) where the funds go fishing, i.e. from which smaller companies indices do they make their selections. Even then there may be certain companies that are excluded. Both Aberforth and Cazenove use the same index pool (which includes the bottom end of the FTSE 250 index), but Caz has just under a third in AIM stocks whereas Aberforth has none (can't remember them ever having done so, but I wouldn't expect a high proportion if they ever had/would). Aberforth is 50% in FT250, 40% Small Cap and 10% Fledgeling. In addition to AIM, Caz has more or less the same proportions in FT250 and Small Cap. There are also funds that concentrate more on Fledgeling companies - and these companies have done rather well in recent times. So check the index(s) that your current fund follows and the breakdown of its holdings: this should help you to select a fund that does things differently.

But remember that smaller companies have generally done rather well over the past five years, especially at the lower end of the scale. So try to filter out the siren call of past performance data...!