Investment Companies News

In its first set of results since manager Glasgow Investment Managers was taken over by Aberdeen Asset Management, Shires Smaller Companies investment trust beat its benchmark for the six months to 30 June.

The trust was part of three investment trusts (the others were Glasgow Income Trust and Shires Income) bought by Aberdeen at the end of August. The manager of Shires Smaller Companies, Iain Lynn, moved over with his team.

The £98.6m trust generated a total return on net assets of 3.3%, compared to 2.1% from its FTSE SmallCap (ex. Investment trusts) benchmark. Unusually for a smaller companies fund, the trust also aims to generate income. The first and second dividends for 2007 totalled 6.7p, up from 6.5p for the same period in 2006.

The trust had total gearing at the end of June of 53.7%. This is slightly higher than its level of 51.1% at 31 December. The manager uses gearing to invest in high-yielding fixed interest securities, usually investment grade corporate bonds. This provides the income component for investors.

The fixed interest exposure was hit by rising interest rates and dented performance slightly. However, strong stock selection in the equity portfolio compensated. The trust currently has 105.4% of net assets in equity, slightly higher than six months ago.

Lynn is currently overweight in industrials and financials relative to his benchmark. Among his largest holdings are life assurance group Chesnara, car parts manufacturer Titan Europe, paper and airline group John Menzies and Domino’s Pizza.

Lynn believes the current high interest rates will start to make life more difficult for consumers and retailers in the second half of the year. However, while personal balance sheets are stretched, the corporate sector remains strong as companies continue to announce higher dividends and share buy-backs.

He believes the recent rout has helped bring valuations back down to more realistic levels. The FTSE Mid-Cap, in particular, has lost its takeover premium and is now less expensive. Smaller companies are still generating good earnings and dividend growth. Lynn plans to use the volatility to invest selectively.

The share price was down 0.5p to 257.5p today. The discount is currently 4.7%, having risen to a premium of 0.2% in late June.

The share price has been knocked back significantly since May because of the trust’s leverage and exposure to riskier areas of the market. This has probably been overdone and, providing Lynn stays in place, it is an opportunity to pick up a well-managed trust at relatively cheap levels.