Abrdn Asn Inc Share Price (AAIF)

Actuary63,

I have always had respect for you technical ability and you have put more effort into your investigation than I did.

However by different methods we both come up with a similar number for capital return 1.4% against 1.5 - 1.6% but then I had a lower portfolio yield. These numbers I think can now be taken as a reasonable estimate of AAIF capital return.

Hello Everyone,

I have done my own calculations to examine whether AAIF is, to some extent, using the dubious approach of HFEL to boost its dividend income. Many thanks to ade2a for raising this important issue and doing his own calculations.

The first questions is what the underlying dividend yield on AAIF's stock portfolio is. I have calculated the weighted average dividend yield for all 58 stocks listed in the Annual Report to be 4.45%, which is a little higher than ade2a's figure based on the top 10 stocks. There is a huge variation in dividend yields, with many of the lower-weighting stocks having very high yields that pull up the average.

The next step is to calculate how much annual dividend income these stocks would have generated on a buy-and-hold basis. The market value of the stock portfolio at the end of 2023 was £430m, so the expected income on a buy-and hold basis would have been $430m x 4.45% = £19.1m.

Now let's compare this figure with the actual dividend income given in the Income statement for 2023. This was a higher figure £23.3m. Hence AAIF somehow generated an extra £4.2m of dividend income through its transactions in 2023. I'm afraid there is no other explanation than the same "dividend-washing" tactics of HFEL. The annual capital depreciation resulting from this approach is given by £4.2m / 430m, i.e. close to 1%.

In addition to this, the Capital column of the income statement indicates that £1.83m of the investment management fee is deducted from capital rather than income. This gives a total figure for annual capital depreciation of:

(4.2 + 1.83) / 430 = 1.4%

CONCLUSION

AAIF is generating additional dividend income by buying shares cum dividend and selling them ex-dividend (aka "dividend--washing"). Along with the management fee, this will results in a drag of 1.4% per annum on growth in future dividend income. In other words, the underlying dividend income on the portfolio needs to grow by 1.4% per annum just to maintain same dividend per AAIF share.

Now converting capital growth into dividend-income might be quite a sensible thing to do. I would prefer to have a dividend yield of 5.4% per annum growing at the rate of inflation than a 4% dividend yield growing at 1.4% above the rate of inflation. But the use of a covert dividend-washing strategy is not acceptable in my view. The AAIF fund managers need to come clean about what they are doing and justify their approach, explaining why it is preferable to writing call options on the shares they hold, which does not require a large turnover of the portfolio.

Lastly, we should not forget that AAIF is trading at a 14% discount to net asset value. This is creating a 0.8% increase in dividend yield which offsets most of the management fee. For this reason alone, I won't be selling my AAIF shares right now.

Name Yield Weighting Yield*Weighted Yield

TSMC 1.67% 8.20% 0.136940%

Samsung Electronics (Pref) 2.71% 6.60% 0.178860%

BHP Biliton 5.30% 4.50% 0.238500%

DBS 5.33% 3.50% 0.186550%

Oversea-Chinese Banking Corporation 6.08% 3.30% 0.200640%

MediaTek 4.60% 3.00% 0.138000%

Power Grid Corp 4.35% 2.80% 0.121800%

Venture Corporation 5.26% 2.60% 0.136760%

United Overseas Bank 5.80% 2.50% 0.145000%

Rio Tinto 5.37% 2.40% 0.128880%

Totals Average yield 4.65% 39.40% 1.611930% WEIGHTED YIELD 4.09%

NAV 238.59 Yield to assets 5.00%

Share price 208.00 Yield to share price 5.60%

Earnings 11.97

Dividend 11.75

We can see that the weighted yield for the top ten holdings is 4.09%. I am assuming these fundamentals are typical for the rest of the holdings. If charges were taken from income rather than capital the fund would yield about 3.2% we might want to add about 0.25% = 3.45% for gearing in favourable conditions.

The yield to NAV is about 5% therefore 1.6% let us say 1.5% of our income return one way or another will come from the capital account.

Many UK income funds distribute more than the yield on the underlying assets. There is no free lunch here and part of the income return from many funds is simply a return of our own capital.

2023/24 Final Results

Managers seem somewhat candid about the way the fund is managed.

Good news is that the total return matched the benchmark return. Of course the reduction in management fees is positive for the fund. Earnings did exceed dividends as expected but I think we need to dive deeper into those earnings.

As the managers reported a part of those earnings were from companies that paid a special dividend. Of course this dividend will not be repeated in following years. Furthermore as the Managers report some stocks were sold ‘xd’ this special dividend. The share price will obviously fall leaving less capital to replace this income somewhat weakening the income account in future.

It will be reasonable to estimate that future earnings growth will at best fall or we may have a year or two of lower earnings depending on management and market conditions.

Turnover at 40% is a little high for my liking. This implies the entire portfolio will be replaced in 2.5 years.

Maybe some of you have a different opinion.

Here I will have a quick look at the potential effect of gearing on the income and capital account in rising and falling markets. I will assume 10% gearing charged with interest charged 50/50 to income and capital.

A £25,000,000 fund.

First I would assume the interest rate will be marginally less than the yield on assets purchased. Now for rising markets.

Borrow £2,500,000 @ 4% since interest is only charged 50% to income and the yield on assets is higher than the interest payment there will be an increase in the revenue account. So e.g. interest payment £100,000, additional income from assets £120,000, £50,000 used to repay interest, £70,000 added to income account.

The capital account will be charged £50,000 annually to pay the interest. This will slowly decrease the capital base over time however if the assets grow fewer assets will be sold when the loan is to be repaid and there might be a net gain to the capital account.

This will benefit us as shareholders compared to an ungeared fund.

Revenue is increased by £70,000/£25,000,000 = 0.28% as long as the gearing is maintained.

If asset prices fall. The fall is magnified by gearing in this case 1.1X the fall in assets. Marginally more assets are required to repay interest from the capital account. If the loan is repaid more assets will be required to be sold than bought originally with the loan. This downward pull on the capital account will pressure the income account over time.

In conclusion gearing increases the risk of the fund. This will work in our favour if asset prices rise and there is a small boost to the income account roughly 0.25%. In weak markets pressure on the capital account will lead to modest downward pressure on the income account.

PS if 100 shares are bought when the loan is made and the price rises 100% only 50 shares need be sold to repay the loan. If the price falls 50% 200 shares or equivalent need be sold to repay the loan.