Aberforth Geared Income enters its final year

Over the year to 30 June 2016, Aberforth Geared Income Trust’s total assets total return – essentially the ungeared return from the portfolio – was -8.2%. Whilst there are many factors at play, the Managers’ tendency to find the greatest value opportunities within the smaller small companies, such that the portfolio has a greater exposure to those stocks than does the opportunity base, is significant in the context of this short term weakness. Applying a longer term perspective, in the period from 30 April 2010, when AGIT was launched, to 30 June 2016, the total return from the Numis Smaller Companies Index (excluding Investment Companies Index) or “NSCI (XIC)” has been 90.1%. Over the same period, AGIT’s cumulative total assets total return has been 104.5%. On an annualised basis, this return is 12.3%, or 8.3% on a capital only basis excluding the contribution from income, and is well above the hurdle imposed by the ZDP Shares. This hurdle represents the rising entitlement due to the ZDP Shareholders, which increases at 6.75% per annum to culminate at 159.7p on 30 June 2017.

The FTSE-All Share Index, which is representative of larger UK listed companies, turned around a decline, in total return terms, of 2.0% in the six months to 31 December 2015 and recorded a positive total return of 2.2% for the twelve months to 30 June 2016. In contrast, there was no such recovery in the(NSCI (XIC), which defines AGIT’s opportunity base of small UK quoted companies. Performance was weak in the first six months, declining by 1.0% in total return terms, and weaker still in the second half, closing 6.6% down for the year as a whole. They say smaller companies tend to have a greater reliance on the domestic UK economy and also less exposure to the resources sector than large companies. These factors were helpful to the stockmarket performance of smaller companies in the first six months of the financial year under review. However, the rebound in resources in the second half and, more recently, the impact of the “Brexit” referendum outcome on domestically focused stocks explain the disappointing performance from smaller UK listed companies, both absolute and relative to their larger brethren.

The existence of ZDP Shares creates a form of gearing on the Ordinary Shares. As a consequence, the NAV total return of the Ordinary Shares was -14.5% for the year to 30 June 2016. Since inception on 30 April 2010 to 30 June 2016, the cumulative NAV total return on the Ordinary Shares has been 145.6%, or 15.7% per annum.

Investment income over the period totalled GBP13.9m, which was 4% higher than the previous year’s GBP13.3m. On the face of it then, the Company’s revenue account enjoyed another good year in terms of dividends received from investee companies. However, they believe this result does require some further explanation. First, dividend income has, again, been flattered by the receipt of a number of special dividends, though to a lesser extent than in the prior year. These special dividends are by their nature unpredictable and, while their occurrence within the small company universe has increased in recent years, there can be no assumption that AGIT will receive further special dividends in the final year of its planned life.

Secondly, dividend payments from four investee companies fell in late June 2016 rather than, as was forecast, in early July 2016. Other things remaining equal, this has had the effect of shifting GBP0.5 million of dividend income from the 2016/17 financial year in to 2015/16.

If investment income is adjusted to eliminate the impact of these factors, then the “underlying” growth rate was 11% year-on-year.

In view of this positive dividend experience, the Board has declared a second interim dividend of 6.3p per Ordinary Share for the year ended 30 June 2016. Together with the first interim dividend of 2.7p, the total underlying dividend with respect to the year is therefore 9.0p, which represents a 12.5% increase on the underlying dividend of 8.0p for the previous year. In addition, the Board has declared a special dividend of 1.0p per Ordinary Share, which largely reflects the contribution to AGIT’s income from the special dividends received in the year from portfolio companies.

After accounting for these dividends, AGIT’s cumulative revenue reserves amounted to GBP7.0 million or 6.4p per Ordinary Share at the year end. In what remains of the Company’s planned life, the Directors do not envisage a material change from the progressive dividend policy it has employed to date. To the extent that any element of the revenue reserves remains undistributed at the end of the Company’s planned life then Ordinary Shareholders will receive value for this as part of the end of life proposals that the Board will present in due course.

Aberforth Geared Income has a planned life lasting until 30 June 2017 and, accordingly, is now in its final year. In this context, the Board is obliged by the Company’s Articles to convene a general meeting to propose that the Company be wound up on, or within the three months prior to, 30 June 2017. Before then, however, the Directors intend to examine means whereby holders of Ordinary Shares may effectively continue their investment while allowing the ZDP Shareholders to realise their investment. Whilst this might mean offering an alternative to cash in the form of shares in a successor or existing investment vehicle, nothing has yet been decided or, indeed, ruled out. The Board will seek specialist advice in due course and will also take account of feedback received
from the Managers and Shareholders when developing proposals, which it expects to finalise during the second calendar quarter of 2017.

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