Friday 15 March 2013

Smaller Companies - Aberforth IT

Most investors will concentrate their investing firepower on the large quality companies that make up the FTSE 100. Institutional investors such as pension schemes tend to focus on this sector on the basis that the smaller companies are more risky and less well researched.

Low cost trackers are increasingly popular with small private investors - these will typically track the FTSE 100 or FTSE All Share index (the FTSE 100 makes up around 85% of the all share). Trackers will be a good choice in most situations mainly due to the low costs, however if you want exposure to the lower strata of the UK market, there is no option of tracker (yet!) so the choice will be between individual shares, OEICs or investment trust.

In a recent article I looked at the importance of maintaining a diverse portfolio. A good way to do this is by including smaller companies as part of the mix - when you look at the long term comparisons, SC investment trusts or OEICS will usually feature somewhere near the top of the leader board - especially over the longer periods.

2012 was an excellent year according to the Numis Smaller Companies Index (previously Hoare Govett) which rose 30% compared to the FTSE 100 total return of 10%. Although the index was first published in 1987, the data has been recorded since the mid 1950s and over this extended period, smaller companies have enjoyed an average total return of around 15% CAGR which is over 3% p.a. more than the FTSE All Share index. As we have seen (here) small percentages over long periods can make a big difference.

My own portfolio contains some smaller cap individual shares e.g. Dialight  and Abbey Protection as well as investment trust Aberforth Smaller Companies. They recently reported full year results for 2012 - here’s a link via Investegate (2012 Results)

NAV total return was 31.9% and share price TR was 43.9% - ( since the start of 2013 the sp has increased a further 17%). The management are very aware of the importance of the role of dividends in generating long term returns. 

“Supported by long term data, which show that dividend yield and dividend growth have accounted for over three quarters of the total real return from small companies, your managers believe that income will continue to be crucial to future returns from the asset class and, indeed, from equities in general.” 

The dividend for the year increased 7.2% to 22.25p giving a current yield of 2.75% at 810p.

Although NAV has increased significantly, the management fees and admin costs have been reduced this year and represent around 1.0% TER (including transaction costs). This may in part be due to the lower portfolio turnover rate of 26%.

In the same way that spreading your investments between different countries and sectors makes sense, it is hard to argue against having a balance of big and small in your portfolio. 

As ever, please DYOR


  1. I notice some recent graphs over at RIT plot the FTSE small cap index:

    To my eye they don't square with the quote that "three quarters" of small cap return comes from dividends. Perhaps this is just down to the timescale of the RIT graphs being 5 years and the "long term data" mentioned in the quote being considerably longer period?

  2. Hello Dave,

    Interesting point - as you say, the quote from the report probably refers to longer term data and will include the growth of dividends and also the compounding effect of the reinvesting of dividends.