Shares we’ve been buying and the biggest bargains

Abby Glennie, co-fund manager of the Aberdeen UK Smaller Cos Growth Trust plc (LSE:AUSC), explains why she’s finding more new opportunities than usual, and names a handful of new holdings that have entered the portfolio since the start of the year.

Glennie also addresses performance, with the past five years being a tough period, and names stocks that are in bargain-basement territory.

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to our latest Insider Interview. Today in the studio, I have with me Abby Glennie, co-fund manager of the Aberdeen UK Smaller Companies Growth Trust. Abby, thanks for coming in today.

Abby Glennie, co-fund manager of the Aberdeen UK Smaller Companies Growth Trust: Thanks for having me.

Kyle Caldwell: So, Abby, to kick off, could you explain how the investment trust invests and how you narrow down the universe of UK smaller companies?

Abby Glennie: I think one thing that’s really important for us is having our distinct investment process. That really helps to guide that focus. So, with our investment process, we talk about quality, growth, and momentum as the characteristics we’re looking for in companies, and obviously, valuation is always a consideration in all those decisions.

We also use a screening tool, which we call the Matrix, which has been in-house developed. That uses external data around those characteristics to really narrow down that universe. That’ll identify groups of stocks that the Matrix thinks are displaying quality growth momentum characteristics.

[Co-manager] Amanda Yeaman and I will then utilise that list of stocks to do more fundamental research, meeting with the companies and that really helps us to narrow down that list.

Kyle Caldwell: How often do you make changes to the portfolio? Is there a particular portfolio turnover level in a given year?

Abby Glennie: So, we won’t be led by targeting a turnover level. We think that the investment decisions need to be the right thing for the fund.

If we look historically, over the long term, there were periods of very low turnover in the portfolio. But those were during periods where we had a very stable macro environment. So, we had long periods of years where we had low interest rates and inflation. We had stocks where returns of stocks compounded and compounded after years, and stock specifics were the big, big driver of markets.

Now, we have to be aware that the macro environment is very different. We have more top-down influences into markets. There’s definitely more volatility at the moment. So, I think, actually, where we’re seeing quality growth momentum, where we are seeing those stock opportunities come from is often changing as we go through economic cycles.

Therefore, at the moment, as I’m sure we’ll come to talk about, we’re seeing more new ideas, and turnover in the short term is certainly higher than it has been over the long term.

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Kyle Caldwell: Let’s now move on to those new holdings that you’ve just mentioned. So, you’ve made several changes to the fund so far this year. Which companies have you bought?

Abby Glennie: Sure. So, a variety of inputs are helping us to identify new ideas, such as the Matrix. What we’re seeing is the benefit that quality growth momentum will evolve and it will highlight to us where there are stock ideas that are coming through that perhaps we haven’t owned before.

There have been a lot of new ideas into the portfolio of late. I would say there’s been quite an international tilt to a number of those. We, for instance, added a few mining-exposed stocks. So, Pan African Resources (LSE:PAF) is a gold miner in Africa and Australia, Atalaya Mining Copper SA (LSE:ATYM) is a copper miner from Spain, and also Capital Ltd (LSE:CAPD), which is like a drilling services business.

We’ve also added Helios Towers (LSE:HTWS), which is an African telco infrastructure business, and Ashmore Group (LSE:ASHM), an emerging market fund manager. We’ve also added Plus500 Ltd (LSE:PLUS), which is an online trading platform.

We are still seeing ideas though, which are UK based. I think that’s important to remember, that there’s real areas of strength in the UK. For instance, the portfolio has a high exposure to UK infrastructure names.

But a couple of other names we’ve added are Shawbrook Group (LSE:SHAW), which is a UK lender, and also Greencore Group (LSE:GNC), a food producer stock [which] is combining with Bakkavor. We think there’s some really interesting growth levers and cost synergy levers to that story.

Kyle Caldwell: To fund those new positions, is there any commonality in terms of the types of companies that have exited the portfolio?

Abby Glennie: So, I think a couple have been bid for - there’s been a lot of bids in the UK. So, we did have exposure to JTC Ordinary Shares (LSE:JTC) and also a small position in International Personal Finance (LSE:IPF). So, both of those have been bid for.

Around the rest of them, actually, there’s a variance. We’ve exited, for instance, Gamma Communications (LSE:GAMA), which is a UK and European communication services business where its exposure to UK SME has been a challenge.

We’ve also exited Trustpilot Group (LSE:TRST). We believe that at the valuation the stock’s trading at, which is perceived as quite high, that they really need to make a success of the US market. And perhaps artificial intelligence (AI) has come a bit early to that before they’ve really been able to build their brand there.

Kyle Caldwell: I wanted to next move on to performance. So, the past five years have been a challenging period for investing in this part of the market. Over the past five years, the investment trust has made a loss of around 9% in share price total return terms at the time of this recording (in mid-March). Could you explain why it has been such a tough backdrop for this area?

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Abby Glennie: I think there’s a few aspects. Actually, smaller companies overall globally has been really tough in recent years. That’s come partly from that macroeconomic environment we talked about. But also it has come from other areas, like, for instance, AI has been a big driver. That has been a large-cap theme generally on a global basis.

When we look at the UK, what we’ve seen is concerns around GDP in the UK, around political uncertainty, and those are all more challenging for the smaller company segment because of the more domestic revenue compared to large cap.

I think lastly it would be our investment process. Markets have favoured value investing in recent years and that’s been more difficult if you’re a quality growth manager.

Kyle Caldwell: We’ve seen signs over a shorter time period, such as one year, that the performance gap between UK smaller companies and UK larger companies has been narrowing. Could you explain why that’s happened and could you outline the opportunities you’re seeing among UK smaller companies?

Abby Glennie: Yes, so we saw the FTSE 100 had a great performance year last year as an asset class. When we look at the characteristics of what that offered investors, actually small-cap investing offers a lot of those characteristics now.

Valuation is not everything, but it is important, and if I take the FTSE 250 as a proxy for smaller companies, there’s a 15% discount to large cap now. Importantly, if we look over, say, the last 30 years’ historic valuations, actually, the FTSE 100 is a slight premium to that, whereas the FTSE 250 is a big discount still to that average long-term level. So, there is a real valuation opportunity in the asset class, but I think it needs more than that.

So, what we saw if we looked at the FTSE 100, say, at the start of 2025, was that it offered a lot of other characteristics. It offered attractive income yields, it offered international diversification, and also, it did benefit from flows.

When we look at small cap now, the income yield on small cap is a lot bigger than large cap and that doesn’t happen that often. That surprises investors because when they think about income, they look to large cap. Actually, I think small-cap markets have that to offer now.

We also see a similar share buyback yield. We’re seeing lots of companies, probably about half the FTSE 250 now buying back their own shares. So, there’s lots of areas of support.

Interestingly, when we speak to companies as well, I believe that more companies are now seeing direct buying from overseas-based investors, which I think is really encouraging.

Kyle Caldwell: What needs to happen for fund flows to pick up? It’s widely known that this part of the market is cheaper than larger companies. Do we need to see a sustained period of strong performance for UK retail investors to return?

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Abby Glennie: Flows are really important because we’ve seen in the open-ended space that there’s been constant outflows from UK smaller companies and that has to be a drag on the returns. When we look at the investment trust space, we see quite wide discounts and, therefore, a lot being spent on share buybacks within that space as well.

For retail investors, one thing to remember is what you’re being paid for to wait for that sentiment to improve as well. So, I think when you look at some of those income yields and some of those levels of discount, there’s a real entry opportunity in terms of that being paid to wait and what’s been priced in.

In general, though, for small cap to become more attractive and to start to generate those returns, a decreasing interest-rate environment would be helpful. As we sit here today, I think with the Iran situation, that’s probably been pushed out a bit.

Kyle Caldwell: When you’re looking at the portfolio today, which couple of companies would you pick out as being in bargain-basement territory?

Abby Glennie: When we talk about bargain basement, we naturally think about the things which are the perceived cheapest stocks. Now, that’s not relative to perhaps their quality or their growth characteristics, which I think actually would provide a wider list.

If we think about that bargain basement wording, though, I would highlight things like some of the UK lenders, so Paragon Banking Group (LSE:PAG) and Shawbrook, where I think sentiment is really driving those share prices. Actually, the quality of their credit lending will be more stable through the cycle than many are pricing in.

When we look at things like Jet2 Ordinary Shares (LSE:JET2), it looks very cheap now, but obviously does have some headwinds given the situation. Also things like Ashtead Technology Holdings Ordinary Shares (LSE:AT.) and the oil and gas services, that looks very cheap still.

Actually, even with mining, for instance, when you look at some things that have done quite well, like Pan African Resources, on the valuation, it’s still a very cheap stock with a supportive dividend yield.

Kyle Caldwell: Abby, thanks for your time today.

Abby Glennie: Thank you.

Kyle Caldwell: So, that’s it for our latest Insider Interview, I hope you’ve enjoyed it. For more videos in the series, do hit the subscribe button and hopefully I’ll see you again next time.