abrdn UK Smaller Companies Growth Trust plc 27
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
However, with UK inflation remaining high and above other
major geographies, and interest rates continuing to
increase, UK share prices lagged major markets in Europe
and North America. The big question globally, but
particularly in the UK, with GDP numbers proving more
resilient than many thought, is whether we get a recession
or not.
Performance
Overall through the year, the net asset value (“NAV”) fell by
7.4% on a total return basis, underperforming the
reference index total return of -2.8%.
We had hoped for a more stable backdrop for the period,
yet the dominating market narrative has been one of UK
inflation that requires the BoE to increase interest rates.
Through the period, policymakers still expected inflation to
be benign and central banks to increase rates slowly. This,
however, proved to be too complacent as the UK suffered
from high persistent inflation and this changed the
trajectory of interest rates. Inflation injects uncertainty into
stock markets, affecting investor confidence. Value stocks
typically have strong current cash flows which are more
likely to grow slowly or diminish over time, while growth
stocks are likely to represent fast growing companies that
have stronger cash flows in the future. When valuing
companies’ share prices using the discounted cash flow
method in times of rising interest rates, growth stocks are
hit harder by this effect than value stocks, This has placed
our Quality, Growth and Momentum process out of favour.
Our quality focus has ensured that we have invested in
companies which have had supportive earnings and
resilience. These companies have also demonstrated
pricing power with the ability to protect margins. The
portfolio has not been entirely immune from macro
shocks, but we have seen the overall resilience and growth
delivering robust dividend payments.
The final quarter of 2022 saw UK markets rebound sharply,
and the portfolio outperformed the reference index. That
rally come earlier than many would have expected, given
the recession outlook. We believe this highlighted the
attractive valuations those growth businesses are trading
on, combined with the resilient earnings growth they
continue to provide.
Early 2023 saw market relief as consumers appeared
resilient in the face of the cost of living squeeze. This drove
the market to focus less on quality, and cheaper rated and
more cyclical companies performed well, proving a more
difficult start to the calendar year for the Company. As we
moved through the remainder of the financial year, macro
top down influences continued to drive the direction of the
markets, however we have felt more comfortable with the
degree of rationalism in share price moves, and the focus
towards company fundamentals. Whilst the market
remains wary of companies which are trading at high
valuations relative to their history, we have seen overall
less of a value bias to the market in recent months, and we
are seeing more importance placed back on factors such
as earnings revisions.
The five leading positive contributors to relative
performance during the year were as follows (the year
end portfolio weightings are included on pages 39 to 40):
· 4imprint 198bps (shares +106%) delivered strong results
through the year exceeding expectations on many
occasions, and also providing strong dividend growth
and a special dividend. Whilst benefitting from
increased face to face interactions at events driving
promotional product usage, self-help growth has been
enabled through spend on marketing in a highly
fragmented market, capturing market share and new
repeat customers.
· Games Workshop 135bps (shares +60%) has delivered
strong growth despite consumer spending challenges
globally. Its continued investment in new product
innovation and community engagement is paying off,
resulting in dividend increases and strong returns for
shareholders again this year. The shares were also
supported by the announcement of Amazon taking a
license for Warhammer for TV production.
· Diploma 99bps (shares +33%) traded well through the
year, proving itself as a quality industrial company. To
complement organic growth, it has also completed
attractive bolt on acquisitions, such as the TIE deal which
was partly funded through an equity raise.
· Kainos 95bps (shares + 11%) has successfully navigated
the macroeconomic environment this year, delivering
consistent growth and pricing power to offset wage
inflation. Its customer base is sticky, and digitisation
spend remains a priority for corporates. With the
departure of long term respected CEO Brendan
Mooney, it has also demonstrated strong succession
planning.
· discoverIE 88bps (shares + 27%) has proved another
quality industrial business, trading strongly through the
year. It has proactively chosen exposures to regulatory
and structurally growing areas, and with products being
designed into its customers’ solutions, this provides
stickiness of revenue and resultant visibility of earnings.
In addition, it has complemented organic growth
through bolt on acquisitions.