Strong income performance: Aberforth Geared Value & Income

AGVI’s income performance since launch has been strong…by Thomas McMahon

Overview

 
Aberforth Geared Value & Income (AGVI) offers leveraged exposure to the UK small-cap market, with the primary purpose being to boost the income above what could reasonably and sustainably be derived from a typically lower-yielding market. As well as boosting the income, the gearing also adds to the capital growth potential (and sensitivity to falling markets). Gearing is taken via zero dividend preference shares (ZDPs) worth c. 37.5% of net assets at launch, and this means that all the income can be distributed to ordinary shareholders.

Performance from an income perspective has been strong in the early months since its launch in July 2024. As we discuss in the Dividend section, the trust seems on track to pay a dividend at the higher end of the 4p-5p range indicated in the prospectus, which would imply a yield of c. 6.7% on the share price at the time of writing.

UK small-caps have been out of favour for some years and so arguably offer an outstanding value opportunity. AGVI is managed with a disciplined value approach which means that its portfolio is even cheaper than the market and tilted to companies with resilient balance sheets towards which sentiment is weak. The team report that both overseas and domestic earners are out of favour, meaning that there is a broad opportunity set for them to pick from. The outstanding value in UK small-caps has finally led to M&A ramping up, with numerous takeover bids for companies within and without AGVI’s portfolio at hefty premiums to the market price.

However, sentiment towards the UK weakened towards the end of 2024 thanks to the budget, anticipated to be bad for the economy and company profitability. Early NAV Performance has therefore been disappointing and the shares have moved out to a Discount of 14%.

Analyst’s View

In our view, the surge of M&A we have seen in the UK small-cap market over the past year or so is strong evidence that the market is seriously undervalued and that this value will one way or another be realised. Private Equity and corporate buyers are queuing up to take over UK-listed businesses at significant premiums and we hope that this will bring in other investors too. Frustratingly, the market still seems fixated on the short-term outlook for the UK consumer and corporates, even though valuations arguably already incorporate a significant recession—and few are forecasting that. Meanwhile, the small-cap market is turning into a cash distribution machine. Low valuations are leading to high dividend yields, those dividends are supported by resilient operational performance and share buybacks are becoming more common too as company management teams recognise the value in buying back their own shares on behalf of shareholders.

AGVI offers an attractive way to take advantage of these distributions and generate a high yield from a sector on which equity income investors are often light. The gearing structure does bring risks, but it allows for a very high yield and offers exceptional outperformance potential in a rising market. With valuations currently so low and the shares trading at a discount, we think this is an attractive proposition for investors with an appetite for risk.

Bull

• High outperformance potential in a UK recovery
• A rare, pure-value approach to UK small-caps employed by a team of specialists
• High-income potential thanks to company structure

Bear

• High level of gearing would magnify losses in falling markets
• Complex structure means implications may be hard to track as the planned wind-up date draws near
• Market valuations may not revert to past levels

See the latest research on AGVI here >