Aberforth Spli. Regulatory News (ASIT)

Aberforth Split Level Income Trust Plc - Final Results

PR Newswire

London, July 29

Aberforth Split Level Income Trust plcAudited Annual Results for the year to 30 June 2020

The following is an extract from the Company's Annual Report and Financial Statements for the year to 30 June 2020. The Annual Report is expected to be posted to shareholders on or before 7 August 2020. Members of the public may obtain copies from Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its website: www.aberforth.co.uk. A copy will also shortly be available for inspection at the National Storage Mechanism at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

FINANCIAL HIGHLIGHTS

INVESTMENT OBJECTIVE

The investment objective of Aberforth Split Level Income Trust plc (ASLIT) is to provide Ordinary Shareholders with a high level of income, with the potential for income and capital growth, and to provide Zero Dividend Preference (ZDP) Shareholders with a pre-determined final capital entitlement of 127.25p on the planned winding-up date of 1 July 2024. ASLIT is managed by Aberforth Partners LLP.

CHAIRMAN’S STATEMENT

Introduction

I present the third annual report of Aberforth Split Level Income Trust (“ASLIT” or “the Company”) for the year to 30 June 2020, and my first as Chairman.

I find it hard to believe how much the world has changed since the half year Chairman’s Statement only six months ago. At the time, and for the first time in several years, the UK’s political backdrop appeared to be stabilising after the decisive General Election result. The market had started to rise in anticipation of the outcome and the mood of optimism continued into 2020. This was very helpful for an investment trust exposed to small UK quoted companies, particularly with ASLIT’s capital structure and value investment philosophy.

However, the positivity was short lived, overtaken by Covid-19. The distress caused by the virus itself has been accompanied by a severe recession, as lockdown has brought much economic activity to a shuddering halt. Stockmarkets, unprepared for a pandemic and its consequences, reacted with some of the sharpest drops in living memory. As governments and central banks have stepped in to offer support, there has been a subsequent partial recovery in share prices, but people and companies are still confronted with considerable uncertainty. It will take time to assess the lasting impact of the pandemic and the damage done to economies.

Performance

As the introduction implies, the year to 30 June 2020 can be split into two distinct periods, before and after the onset of Covid-19. Though the timing is not precise, it is nevertheless instructive to compare and contrast ASLIT’s fortunes in the first and second halves of the year to 30 June 2020. The financial year started well. Over the six months to 31 December 2019, ASLIT’s total assets total return – essentially the ungeared portfolio performance was +17.3%. It was helped by a buoyant asset class and a good period for our Managers’ value investment style. With the benefit of gearing from the ZDP shares, the NAV total return of the Ordinary shares was +22.3% over the same period.

Unfortunately, in the second six months of the financial year, these traits worked against ASLIT. The total assets total return was -37.3%, which, after the effects of gearing, translated into a -47.9% NAV total return for Ordinary shareholders. Over the full twelve months to 30 June 2020, the total assets total return was -26.5% and the Ordinary NAV total return was -36.2%.

For reference, the FTSE All-Share Index, which is representative of larger UK listed companies, recorded a total return of +5.5% for the first six months, -17.5% in the second half and -13.0% for the year to 30 June 2020. The Numis Smaller Companies Index (excluding Investment Companies) (“NSCI (XIC)”), which defines ASLIT’s opportunity base of small UK quoted companies, generated total returns of +13.3%, -25.0% and -15.0% over the respective time periods.

The decline in the portfolio’s capital value has resulted in a fall in ZDP shares’ projected final cumulative cover. At 30 June 2020, this stood at 2.3 times, compared with 3.1 times twelve months earlier.

Further details on portfolio performance is provided in the Managers’ Report.

Earnings and Dividends

ASLIT generated a Revenue Return per Ordinary share of 3.47 pence for the year to 30 June 2020, 32% below the previous year’s result. As discussed in the Managers’ Report, the portfolio’s dividend receipts were progressing as expected into March, but Covid-19 has materially reduced the level of dividends from UK quoted companies. It is likely that 2020 will be, by a significant margin, the worst year for dividends from both large and small companies in the post war period. Our Managers estimate that dividends paid by companies in the NSCI (XIC) are likely to decline by around 60% in the 2020 calendar year.

For ASLIT, with its June year end, the impact of the dividend downturn is spread across both the 2019/20 and the 2020/21 financial years. The first six months of the financial year to 30 June 2021 will be a particularly barren period. Beyond that, the outlook is uncertain, but, with companies prioritising debt reduction, it would be prudent not to anticipate a rapid recovery in the second half of the financial year. The Board therefore expects the Revenue Return per Ordinary share for the year to 30 June 2021 to be lower than in the financial year just ended. Thereafter, there is reason to believe that ASLIT will benefit from a general recovery in UK dividends.

Regrettably, this backdrop for income means that a reduction to ASLIT’s dividend will be necessary. As a relatively young company, ASLIT entered the financial year to 30 June 2020 with modest revenue reserves of 1.61 pence per Ordinary share. Nevertheless, these reserves offer some flexibility over how to phase the inevitable dividend cut. The Board has therefore decided to use 0.75 pence per Ordinary share of revenue reserves to declare a second interim dividend for the year to 30 June 2020 of 2.71 pence per Ordinary share. This is unchanged on the corresponding payment in the previous year and takes the total Ordinary dividend per share for the financial year to 4.22 pence, which is a 1.4% increase over the previous year’s underlying dividend excluding the special dividend.

The Board has carefully considered the Managers’ income forecasts and has also taken into account views from shareholders. The use of revenue reserves strikes a balance between the current income shortage facing equity investors and some retained flexibility to support dividends in future periods. The effect of this is to defer the dividend cut into the financial year to 30 June 2021, by which time the dividend outlook for ASLIT’s investee companies should be clearer.

The second interim dividend of 2.71p per Ordinary Share will be paid on 28 August 2020 to Ordinary Shareholders on the register on 7 August 2020. The ex dividend date is 6 August 2020. Your Company operates a Dividend Reinvestment Plan. Details of the plan, including the Form of Election, are available from Aberforth Partners LLP or on the website, www.aberforth.co.uk.

Annual General Meeting (“AGM”)

The AGM will be held at 14 Melville Street, Edinburgh EH3 7NS at 11.00 a.m. on 29 October 2020 and details of the resolutions to be considered by Shareholders are set out in the Notice of the Meeting. Shareholders are encouraged to submit their votes by proxy in advance for the meeting in case restrictions related to the Covid-19 pandemic persist and it is therefore not possible for shareholders to attend in person. The Company will issue a regulatory news announcement, which will also be posted on the Company’s website if the only attendees permitted will be those required to allow the business of the meeting to be conducted.

Outlook

The second half of ASLIT’s financial year to 30 June 2020 coincided with some of the most challenging conditions for the country, businesses and the stockmarket that I have experienced in my career and considerable uncertainty remains. Covid-19 remains a threat, as the recent experience of parts of the US illustrates. Lockdown, though easing, is still with us, so it is not yet possible to determine how economic activity settles down, particularly with the nature of the UK’s future relationship with Europe to be determined. It is reassuring to hear from our Managers that companies are adapting well and addressing their immediate liquidity requirements. It would seem prudent, however, to expect company boards to continue to prioritise balance sheet strength for some time, which inevitably tempers the pace of dividend recovery.

This backdrop has been a challenge to ASLIT’s objective “to provide Ordinary Shareholders with a high level of income, with the potential for income and capital growth, and to provide ZDP Shareholders with a pre-determined final capital entitlement of 127.25p on the planned winding-up date of 1 July 2024”. The income component of the objective has been dealt a blow – the smooth year-on-year growth achieved by this and the predecessor trusts is not now possible, though growth in dividends over ASLIT’s planned seven year life is not out of the question.

On the capital front, the impact of Covid-19 has resulted in a sharp decline since inception, but prospects are brighter. The recovery is in its early stages, but there are encouraging signs. The virus can be controlled, while official support measures have mitigated the economic fallout and companies are getting to grips with the new circumstances. At the same time, the portfolio’s valuation multiples are extremely low, which history suggests should bode well for the future returns from our Managers’ value investment approach. The Board is therefore optimistic that, with four years to run till the planned winding-up date, the value of ASLIT’s portfolio can appreciate in a manner consistent with the investment objective. This would see the ZDP shareholders’ cover expand and, with the benefits of gearing, should give Ordinary shareholders a strong return from here.

Angus Gordon Lennox

Chairman

29 July 2020

Angus.GordonLennox@aberforth.co.uk

MANAGERS’ REPORT

Introduction

ASLIT’s financial year to 30 June 2020 was a rare period in which the superlatives and dramatic metaphors that characterise much financial market commentary were justified. Covid-19 has taken its toll in terms of human lives, to which this report cannot do justice. It has also unleashed a series of extraordinary developments in societies and economies, as authorities have sought to contain its spread. There are no truly useful precedents – Spanish Flu being too long ago and other viral outbreaks being essentially local events – and so the world was caught unprepared. Financial markets reacted accordingly.

6 Months to 31 December 2019 6 months to 30 June 2020 12 months to 30 June 2020

FTSE All-Share +5.5% -17.5% -13.0%

NSCI (XIC) +13.3% -25.0% -15.0%

ASLIT total assets total return +17.3% -37.3% -26.5%

ASLIT Ordinary share NAV total return +22.3% -47.9% -36.2%

As the table shows, and as the interim report and accounts described, ASLIT’s financial year to 30 June 2020 started well. December’s decisive General Election result promised greater political stability and improved economic activity. ASLIT benefited as the stockmarket started to anticipate this positive outcome. The Managers’ value investment style was helpful, reflecting the fact the value cohorts of equity markets around the world are laden with economically sensitive businesses.

Unfortunately, this economic sensitivity proved a handicap with the onset of Covid-19 and the deeply recessionary impact of lockdown. The value style suffered disproportionately in the second six months of the financial year as stockmarkets witnessed some truly remarkable moves. In the context of Aberforth’s 30 year history, both the NSCI (XIC) and the FTSE All- Share experienced their sharpest monthly declines in March, while the March quarter was the weakest three month period in the same timescale. The table sets out the pain endured by ASLIT in this period, with the additional effect of gearing from the ZDP shares explaining the difference between the total assets total return and the Ordinary share NAV total return.

Towards the end of March, stockmarkets began a tentative recovery as the risks associated with the virus have become better understood and as remedial actions by governments and central banks have taken effect. ASLIT’s performance has consequently improved, but the damage done in February and March means a disappointing outcome to the financial year for ASLIT’s shareholders.

The stockmarkets’ anticipation of recovery contrasts with the present reality of a sharp recession that is unusual in several respects. It is a consequence of the government’s lockdown strategy to control the virus and so may be considered self-inflicted. The intensity of the contraction in activity is remarkable, with numerous macro economic data series showing the sharpest declines in generations. Moreover, the downturn, at least in the initial stages, was a supply-side event as businesses were commanded to close. The effect on demand remains to be seen and will be determined by the length of the lockdown, eventual redundancies and the willingness of consumers to reduce savings ratios from currently elevated levels.

In terms of their size and speed of implementation, the official support measures are as extraordinary as the recession itself. On the monetary side, interest rate cuts and additional quantitative easing programmes have played a part. The range of assets that central banks can buy has been broadened and, in the UK, debt monetisation is a reality, with the Bank of England directly financing government spending. Fiscal measures include tax breaks and the job retention scheme, which has, at least temporarily, prevented too sharp a deterioration in unemployment. Furthermore, through the Covid Corporate Financing Facility (CCFF) and the Coronavirus Large Business Interruption Loan Scheme (CLBILS), the Bank of England and the Treasury have sought to alleviate the liquidity squeeze confronting businesses.

Though these official measures have created breathing space, running a business against such a backdrop has been no easy task. The immediate priority for small UK quoted companies has been to tackle the liquidity squeeze that has resulted from the interplay of a sharp drop in sales – to zero for numerous businesses – and working capital cycles. While the official liquidity schemes and an easing of terms from existing lenders have played a part, there has been some reluctance to rely on government and many companies have resorted to the equity market for additional funding. As in 2009, equity investors have stepped up to ensure that fundamentally strong businesses can continue to trade. It is plausible that the returns from the current crop of equity issues over the coming years can match those enjoyed during the financial crisis.

However, in the near term, one clear consequence of the downturn and liquidity squeeze is the most severe fall in UK dividends of the post-war period, which is described in greater detail later in the report. At one level, it is entirely right that dividends should be cut: equity is the riskiest form of corporate funding and is the first to take the strain in extreme conditions such as those experienced so far in 2020. However, the reasons for some of the dividend cuts are dubious. It is perplexing that companies robust enough to continue to pay dividends should feel social or governmental pressure to cut. It is also perplexing that some decisions to pass dividends have been made easier by the actions of others. The frustration expressed here should not be mistaken for irresponsibility – Aberforth never encourages a course of action that is detrimental to the long term value of a company. Rather, the Managers believe that dividends impose capital discipline on businesses and are an important component of long term returns for the ultimate beneficial owners of equities. Reinstatement of dividends at appropriate levels will be a fundamental element of the recovery from Covid-19.

Investment Performance

ASLIT’s total assets total return is a measure of the portfolio’s performance, without any effect from the structural gearing provided by the ZDP shares. In the year to 30 June 2020, the total assets total return was -26.5%, while that of the opportunity base represented by the NSCI (XIC) was -15.0%. The following paragraphs describe the main influences on ASLIT’s performance.

Style

The value investment style had a significant effect on ASLIT’s performance in the year to 30 June 2020. Helpful in the first half, it turned significantly adverse in the second as value stocks under-performed growth stocks in most stockmarkets around the world. The London Business School, which maintains the NSCI (XIC), also produces style analysis for the index. This showed that the value cohort lagged the growth cohort by 17% in the second half of ASLIT’s financial year, which presents the most difficult start to a calendar year for the value style in the 65 year history of the NSCI (XIC). The reason for such underperformance is that, for much of the past decade as companies with secular growth prospects have been re-rated, the value cohort has become increasingly dominated by economically sensitive businesses. Among small UK quoted companies, this was to the advantage of the value style in the second half of calendar 2019, when a clearer political situation promised an improved economic outlook. However, the onset of recession has been a significant challenge to value.

Cyclicality does not mean that a company is unviable or is a poor investment. It has not prevented the value cohort of the NSCI (XIC) out-performing the index as a whole by 3% per annum over the long term since 1955. Most small UK quoted companies, while sensitive to the economy’s fortunes, are well governed businesses that grow from cycle to cycle. In recent years, they have contended with the financial crisis, the euro crisis and with heightened political uncertainty, but have proved themselves resilient. The peculiarities of the present downturn mean that some small companies inevitably require refinancing, but that need not mean that the underlying businesses are unworthy of support. Indeed, as was the case in 2009, equity issues at such points can yield good investment returns. In deciding which companies to support, the Managers are cognisant of the risk of putting good money after bad.

Size

Small companies under-performed large companies in the twelve months to 30 June 2020. Within the NSCI (XIC), the size effect was negligible, with the index’s smaller small companies performing in line with its mid cap constituents. As the table below sets out, ASLIT’s portfolio has a greater exposure to the NSCI (XIC)’s smaller small companies. The reason for this positioning comes through in the final row of the table: these smaller small companies, whose growth prospects are superior, are much more modestly valued than their larger peers.

It is notable that smaller small companies out-performed the NSCI (XIC)’s larger constituents in the second half of the financial year. This is somewhat surprising in the historical context of bear markets, but may be explained by the sharpness of the sell-off – the less liquid smaller smalls perhaps did not have time to catch up with their larger peers on the way down.

Sector

In the second half of ASLIT’s financial year, all but six of the NSCI (XIC)’s 36 sectors declined in value. The combined weight of those sectors that did rise was just 8%, which reflects that small company universe’s lack of the defensive sector exposures in comparison with the FTSE 100.

However, the sector theme most pertinent to ASLIT’s performance continues to be the distinction between the NSCI (XIC)’s domestically oriented constituents and its overseas earners. Since its inception, ASLIT has had a higher exposure to the former grouping. This positioning reflected the under-performance of the domestics since the EU referendum and their lower valuations, which the Managers considered likely to rise as greater political clarity emerged. There were signs of this scenario developing in the first half of the financial year. The domestically oriented part of the NSCI (XIC) out-performed the overseas earners, which helped ASLIT’s performance.

All this changed in the second half of the year, as the imposition of lockdown resulted in the domestics under-performing the overseas earners by 14%. For many domestic businesses, such as retailers and leisure companies, the effect of lockdown was to reduce their revenues to zero for several months. In contrast, overseas facing companies tended to enjoy a degree of protection from a spread of geographical exposures. All else being equal, this hindered ASLIT’s performance. Clearly, the impact of the virus has necessitated a recalibration of prospects, which is undertaken on a company by company basis. In general, the Managers’ medium to long term assessment is that the share prices of the domestic companies have over-reacted and that value gaps have expanded. Wherever that is not the case, the position is reduced. At the end of June, ASLIT retained its domestic skew, with a weighting of 57%, compared with 49% for the NSCI (XIC).

Balance sheets

The table below shows the balance sheet profile of the portfolio and of the tracked universe at the start of the financial year. The portfolio had less exposure to companies with net cash and to companies with leverage (i.e. net debt over EBITDA) above 2x. Conversely, it was over-weight companies with more modest leverage of below 2x. This analysis shows that, before entering the Covid-19 period, the portfolio was not exposed to a series of weakly financed companies. Therefore, all else being equal, the managers would not have expected balance sheets to influence returns once effects of the virus and the recession took hold in the second half.

However, all else was not equal – Covid-19 and the recession have changed much. The unique nature of the downturn has exposed balance sheets that the Managers had not considered at risk. Given the economic sensitivity of the portfolio, it is likely that ASLIT’s performance in the second half of the financial year was influenced by the impact of lockdown on leverage. The share price falls of companies confronted by a liquidity squeeze are likely to have been compounded by concerns that additional equity funding would be required. Echoing the experience of the rescue rights issues in 2009, these circumstances can represent profitable opportunities to deploy additional capital in companies that were already on attractive valuations.

Corporate Activity

The period since the onset of Covid-19 has been busy in terms of corporate activity, though mostly in the form of equity issues. In the early stages of the outbreak, issuance took the form of non pre-emptive placings, the ceiling for which was raised temporarily to 20% of issued share capital. The nine to ten weeks required to produce a prospectus – no doubt complicated by working-from-home – meant that bigger raises, in the form of rights issues and placings with open offers, began in June. From the virus’s outbreak to the end of June, 28 constituents of the NSCI (XIC) had each raised at least £5m in response to Covid-19, with a total of £2.7bn additional equity issued. Greater sums have been raised outside the index, with FTSE 100 companies also under pressure. Among the small caps, some of the equity issues have been more opportunistic than others. The Managers have prioritised those companies with good prospects beyond the recession, with attractive valuations and with the greatest need for additional capital. So far, ASLIT has supported three equity issues.

Meanwhile, Covid-19 has restrained other forms of corporate activity. Since the end of December, there were four new listings likely to be eligible for the NSCI (XIC), though ASLIT did not participate in any. In terms of takeovers, seven deals for NSCI (XIC) constituents were announced. ASLIT owned one of these, which was acquired by private equity on attractive terms that were struck before Covid-19. The sharp falls in share prices and valuations might elicit further opportunistic interest from private equity and others. It may prove in ASLIT’s better long term interests to resist takeover approaches unless they are struck at appropriate valuations. In this regard, one of the equity issues in the period is relevant. It was part funded by private equity taking a 27% stake in the company. This unusual move reflects the particularly attractive valuations on offer among small caps – private equity is keen to take advantage of them, but existing shareholders are unwilling to lose their interest in a business with good prospects but a depressed share price. Similar deals have been undertaken in the US, but it remains to be seen whether there is lasting appeal in the UK beyond the Covid-19 crisis period.

Income

Whereas share prices adjusted quickly to the impact of Covid-19, ASLIT’s income account felt the effects more slowly. The portfolio’s dividend experience was on track into March, until the implications of lockdown became clear to the boards of investee companies. This precipitated what was to become a flood of announcements of future dividend cuts and cancellations of previously announced distributions – extraordinary events without precedent in Aberforth’s experience. Half way through 2020, it is almost certain to be the worst calendar year for UK dividends – both small and large cap – in the post war period. A decline across the entire UK stockmarket of around 40% is likely in 2020, while a drop of around 60% is plausible for the NSCI (XIC). In 2009, previously the worst year for small company distributions, the decline was “just” 22%.

ASLIT has felt the force of the cuts. The table below analyses the portfolio’s anticipated income experience in what is likely to be the harshest calendar year for dividends, 2020. Companies are categorised on the basis of ex dividend dates. It illustrates that only 36 of the 69 holdings are likely to pay a dividend in the period.

As the chairman described in his statement, ASLIT’s June year end means that the impact of these cuts is spread over two financial years. It will not be until February or March 2021, when many investee companies announce their final dividends, that the trajectory of the recovery will become clear. During the financial crisis, dividends fell in 2009 and promptly started their recovery in 2010. It is to be hoped that a similar experience can be forthcoming in the current downturn. Given how far dividends are likely to fall in 2020 and therefore how low the base will be, it is reasonable to expect a quick recovery that can begin in calendar 2021. However, it is necessary to acknowledge other influences on dividends at the current time, such as access to official liquidity schemes and political or social pressure. The Managers are actively engaged with company boards to understand the influences on future dividend decisions and, where appropriate, to encourage a return to the dividend register. Meanwhile, it may be possible to tilt the portfolio towards companies that continue to pay dividends, but such opportunities must be evaluated alongside the capital upside available.

Turnover

Portfolio turnover in the year to 30 June 2020 was 26%, up from 12% in the corresponding period twelve months earlier. There was an element of involuntary activity, as a result of the sales of companies that have grown too large for the NSCI (XIC) or of takeovers. Adjusting for these, underlying turnover in the financial year was 20%.

Active share

Active share is a measure of how different a portfolio is from an index. It is calculated as half of the sum of the absolute differences between each stock’s weighting in an index and its weighting in the portfolio. A higher active share would indicate that a portfolio has a higher chance of performing differently from the index, for better or worse. The Managers target a ratio of at least 70%. At the end of June, ASLIT’s active share in relation to the NSCI (XIC) was 78%.

Valuations

Even before the impact of Covid-19, portfolio valuations were attractive in a historical context. The sell-off has seen valuations reach extreme levels. At the end of March, the historical price earnings ratio (PE) was 6.3x. The table below shows that it had risen to 6.7x by the end of June, as share prices rebounded and companies started to report earnings affected by recession. The historical PE will rise more meaningfully over coming months as the downturn is fully reflected in earnings, before falling in subsequent periods as companies’ cost actions combine with higher demand to drive profits sharply higher. Recoveries from recession are always uneven and difficult to forecast accurately – this time will be no different. However, the portfolio’s 6.7x multiple at the end of June suggests that there is significant margin of safety in the valuation to accommodate an uneven recovery. Over the 30 years of Aberforth’s longest standing portfolio, a historical PE this low has only been seen once before, during the financial crisis, while the average multiple over the three decades is 11.7x.

ASLIT’s PE was 35% lower than that of the NSCI (XIC) at the end of June. This compares with a discount of 31% twelve months earlier and a 30 year average discount for Aberforth’s longer standing portfolios of 14%. This degree of relative cheapness reflects how out of favour the value investment style is at the current time. The gap between the average valuations of value stocks and growth stocks is particularly stretched in stockmarkets around the world, perhaps most obviously in the US as a small number of technology stocks have led NASDAQ to an all-time high.

The table also sets out average historical dividend yields for ASLIT’s portfolio and for the NSCI (XIC). These do not yet fully reflect the widespread dividend cuts noted previously in this report. As these feed through over coming months, dividend yields will decline from the levels shown in the table. Regrettably, equities have lost dividend yield as a valuation anchor for the time being – investors in many companies are not being “paid to wait”.

The following table sets out the portfolio’s prospective valuation, using the Managers’ preferred metric of EV/EBITA (enterprise value divided by earnings before interest, tax and amortisation). The ratios are the accumulation of bottom-up forecasts for each company in the portfolio and tracked universe, but these forecasts are influenced by a broad macro-economic framework. The Managers assume that lockdown lasts into the third quarter – allowing economic activity to start to pick up – and that any second wave does not lead to the re-imposition of national lockdowns. Into 2021, it is assumed that the recovery continues, helped by the low base effect. However, profits are not expected to return to their pre-Covid-19 state until 2022. Overseas economies are a further complication and it is unlikely that these assumptions will prove fully accurate, but the framework helps the flow of capital from companies offering less value to those offering more.

Overall, the portfolio remains more modestly valued than the tracked universe as a whole and than the growth stocks. The discount is narrower in 2020, the year which bears the brunt of the recession, before expanding in the subsequent two years as recovery is anticipated to come through.

Outlook & Conclusion

Covid-19 has cost thousands of lives and the threat of subsequent waves of the virus remains. It has also challenged societies and economies. Beyond its direct financial impact, lockdown has exacerbated pre-existing issues, such as relations between the US and China, tensions within the US during an election year, existential questions for the Eurozone and populist unrest. Monetary and fiscal support programmes have mitigated the initial economic damage, but the extent of the eventual recovery in demand is uncertain: unemployment is likely to rise as businesses cut costs once furlough schemes end, which may affect the willingness of households to run high savings ratios back down.

Prospects for the UK seem particularly unclear. This is reflected in sterling’s leadership in the foreign exchange unpopularity contest, with 7% drops against both the dollar and the euro since the end of December. Several of the attributes that have made the UK an attractive economy in which to invest seem under threat. Dividends have been slashed, pre-emption limits have been relaxed, the government has greater influence on the corporate sector and rules are being set informally without clear legislation. As temporary adjustments to cope with the impact of Covid-19, these are understandable, though a greater role for fiscal spending was likely even before the onset of the virus. The concern is that they herald more lasting changes at a time when the UK’s future relationship with Europe and the future openness of its economy are moot.

Of course, these are risks – they may not come to pass. Indeed, it is rare that the stockmarket does not have something to worry about. Admittedly, Covid-19 is a different type of risk compared with others experienced in recent years. At least in its early stages, its pathology was unquantifiable, and nothing shortens investment horizons like being forced to contemplate mortality. However, the world’s reaction to the disease serves as a good reminder of where people – their efforts structured through societies and companies – excel. The significant advances in the understanding of Covid-19 in just a handful of months, along with economically costly but effective measures to control its spread, demonstrate human adaptability and ingenuity. Notwithstanding current outbreaks in parts of the US, it is not unreasonable to believe that any subsequent waves of the disease can be much less severe than the initial outbreak.

In the meantime, it is clear that the virus has affected companies’ prospects, some more than others. However, it is also clear that share prices have swiftly adjusted, some more than others. In the Managers’ estimation, many in the NSCI (XIC) and further afield have overreacted. Sentiment towards inherently profitable businesses, confronted by an extraordinary set of circumstances, has been damaged by fears for their very survival. This has taken valuations to extreme levels. In the case of portfolios managed by Aberforth, despite the rebound from the mid March lows, valuations remain towards their most attractive in thirty years, in both absolute terms and relative to the NSCI (XIC). While not belittling what it has taken to get to this point, history suggests that starting valuations such as these tend to be associated with stronger returns over subsequent years. Another lesson of past bear markets is that the recovery is usually led by those that have suffered most on the way down: ASLIT’s value style and skew towards smaller small companies should thus bode well.

Beyond the medium term recovery period, a familiar controversy looms. The outcome of the financial crisis proved deflationary, as austerity strategies were promptly implemented and as extraordinary monetary policies boosted asset prices but not consumer prices. A dozen years on, quantitative easing and other monetary tools are back in force, but the substantial fiscal stimulus has come against a backdrop of populist pressure. It is not clear that today’s governments will prioritise austerity as their predecessors did. With the deflationary impetus from globalisation also in question, there would appear to be heightened prospects of an inflationary outcome. Inflation – or perhaps even merely the fear of it – would fundamentally challenge the investment strategies that have prospered for more than a decade. In turn, those that have struggled – such as the value style within equities – should find renewed interest. Given the valuation relationships described above, investors in general see little to no chance of this outcome. For the value investor, whose discipline is to embrace what others shun, this represents opportunity.

The extreme valuations, together with confidence in the continued relevance and profitability of the portfolio’s companies, give the Managers confidence in the outlook for total returns from ASLIT’s portfolio. The likely contribution from income is diminished compared with expectations at inception, but prospects for capital appreciation are encouraging. This has motivated the Managers to continue to add to their own shareholdings in ASLIT. It has been a difficult period, but the outlook is far from bleak.

Aberforth Partners LLP

Managers

29 July 2020

TOTAL RETURN PERFORMANCE

ORDINARY SHARE

At inception an Ordinary Share had a NAV of 100p and a gearing7 level of 25%.

ZERO DIVIDEND PREFERENCE SHARE (ZDP SHARE)

At inception a ZDP Share had a NAV of 100p, a Projected Final Cumulative Cover8 of 3.4x, and a Redemption Yield9 of 3.5%.

HURDLE RATES10

REDEMPTION YIELDS & TERMINAL NAVs (ORDINARY SHARES)

As at 30 June 2020

The capital growth and dividend growth parameters shown in the table have been selected in the context of the impact of Covid-19 on share prices and dividends.

The valuation statistics in the tables above are projected, illustrative and do not represent profit forecasts. There is no guarantee these returns will be achieved.

1-12 Refer to Glossary

DIRECTORS’ RESPONSIBILITY STATEMENT

The Directors who were in office at the date of approving the financial statements confirm to the best of their knowledge that:

(a) the financial statements, which have been prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit/loss of the Company;

(b) the Strategic Report includes a fair review of the development and performance of the business and financial position of the Company, together with a description of the principal risks and uncertainties that it faces; and

(c) the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company’s performance, business model and strategy.

On behalf of the Board

Angus Gordon Lennox

Chairman

29 July 2020

PRINCIPAL RISKS AND RISK MANAGEMENT

The Board has established an on-going process for identifying, evaluating and managing the principal risks faced by the Company. This process was in operation during the year and continues in place up to the date of this report.

Investment in small companies is generally perceived to carry more risk than investment in large companies. While this is reasonable when comparing individual companies, it is much less so when comparing the risks inherent in diversified portfolios of small and large companies. In addition, the Company has a simple capital structure and outsources all the main operational activities to recognised, well-established firms. The Board receives internal control reports from these firms to review the effectiveness of their control frameworks. Since the Covid-19 pandemic, these firms have deployed alternative operational practices, including staff working remotely, to ensure continued business service.

The principal risks faced by the Company, together with the approach taken by the Board towards them, have been summarised below. As described in the Chairman’s Statement and Managers’ Report, Covid-19 has caused a significant reduction in capital values and dividends from UK small companies. The principal risks set out below are forward looking and stated after this has occurred. Further information regarding the review process can be found in the Corporate Governance and Audit Committee Reports.

(i) Investment policy/performance risk – The investment portfolio is exposed to share price movements owing to the nature of the Company’s investment policy and strategy. The performance of the investment portfolio will be influenced by market related risks including market price and liquidity. The Board’s aim is to achieve the investment objective by ensuring the investment portfolio is managed in accordance with the policy and strategy. The Board has outsourced portfolio management to experienced Managers with a clearly defined investment philosophy and investment process. The Board receives regular and detailed reports on investment performance. Senior representatives of the Managers attend each Board meeting. Peer group performance is also regularly monitored by the Board. The Board and Managers closely monitor economic and political developments and, in particular, are mindful of the continuing uncertainty following the departure of the UK from the EU on 31 January 2020 and other geopolitical issues referred to in the Managers’ Report. The Board and Managers have also been monitoring the impact of the Covid-19 pandemic.

(ii) Structural conflicts of interest – The different rights and expectations of the holders of Ordinary Shares and the holders of ZDP Shares may give rise to conflicts of interest between them. While the Company’s investment

objective and policy seek to strike a balance between the interests of both classes of Shareholder, there can be no guarantee that such a balance will be achieved and maintained during the life of the Company.

(iii) Significant fall in investment income – A significant fall in investment income could lead to the inability to provide a high level of income and income growth. The Board receives regular and detailed reports from the Managers on income performance together with income forecasts. The Board and Managers have been monitoring the impact of the Covid-19 pandemic on investment income.

(iv) Loss of key investment personnel – The Board believes that a risk exists in the loss of key investment personnel at the Managers. The Board recognises that the collegiate approach employed by the Managers mitigates this risk. Board members are in regular contact with the partners and staff of the Managers and monitor personnel changes.

(v) Regulatory risk – Breach of regulatory rules could lead to suspension of the Company’s share price listings, financial penalties or a qualified audit report. Breach of Section 1158 of the Corporation Tax Act 2010 could lead to the Company losing investment trust status and, as a consequence, any capital gains would then be subject to capital gains tax. The Board reviews regular reports from the Secretaries to monitor compliance with regulations.

The Income Statement, Reconciliation of Movements in Shareholders’ Funds, Balance Sheet and Cash Flow Statement are set out below:-

INCOME STATEMENT

Year to 30 June 2020

(audited)

The Board declared on 29 July 2020 a second interim dividend of 2.71p per Ordinary Share. The Board also declared on 27 January 2020 a first interim dividend of 1.51p per Ordinary Share.

The total column of this statement is the profit and loss account of the Company. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period. A Statement of Comprehensive Income is not required as all gains and losses of the Company have been reflected in the above statement.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS

Year to 30 June 2020

(audited)

BALANCE SHEET

As at 30 June 2020

(audited)

CASH FLOW STATEMENT

For the year to 30 June 2020

(audited)

SUMMARY NOTES TO THE FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

The Company has presented its financial statements under Financial Reporting Standard 102 (FRS 102) and the AIC’s Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts” (SORP) issued in 2019. The principal accounting policies have been consistently applied throughout the period. The financial statements have been prepared on a going concern basis under the historical cost convention, modified to include the revaluation of the Company’s investments as permitted by FRS 102. The functional and presentation currency is pounds sterling, which is the currency of the environment in which the Company operates.

2. DIVIDENDS PAID

The second interim dividend for the year ended 30 June 2020 of 2.71p (2019: 2.71p) per Ordinary Share is payable on 28 August 2020 and has not been recognised in the financial statements as at 30 June 2020. Deducting the second interim dividend from the Company's revenue reserves at 30 June 2020 leaves revenue reserves equivalent to 0.86p per Ordinary Share.

3. RETURNS PER SHARE

There are no dilutive or potentially dilutive shares in issue.

4. INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT OR LOSS

All investments are in ordinary shares listed on the London Stock Exchange.

In accordance with FRS 102 fair value measurements have been classified using the fair value hierarchy:

Level 1 - using unadjusted quoted prices for identical instruments in an active market;

Level 2 - using inputs, other than quoted prices included within Level 1, that are directly or indirectly observable (based on market data); and

Level 3 - using inputs that are unobservable (for which market data is unavailable).

All investments are held at fair value through profit or loss, have been classified as Level 1 and are traded on a recognised stock exchange.

5. NET ASSET VALUE (“NAV”) PER SHARE

The Net Assets and the Net Asset Value per share attributable to the Ordinary Shares and ZDP Shares are as follows:

13 Refer to Glossary

6. RELATED PARTY TRANSACTIONS

Under UK GAAP, the Directors have been identified as related parties and their fees and interests have been disclosed in the Directors’ Remuneration Report contained in the Annual Report. During the period no Director or entity controlled by a Director was interested in any contract or other matter requiring disclosure under section 412 of the Companies Act 2006.

7. FURTHER INFORMATION

The foregoing do not constitute statutory accounts (as defined in section 434(3) of the Companies Act 2006) of the Company. The statutory accounts for the period ended 30 June 2019, which contained an unqualified Report of the Auditors, have been lodged with the Registrar of Companies and did not contain a statement required under section 498(2) or (3) of the Companies Act 2006.

Certain statements in this announcement are forward looking statements. By their nature, forward looking statements involve a number of risks, uncertainties or assumptions that could cause actual results or events to differ materially from those expressed or implied by those statements. Forward looking statements regarding past trends or activities should not be taken as representation that such trends or activities will continue in the future. Accordingly, undue reliance should not be placed on forward looking statements.

The Annual Report is expected to be posted to shareholders by 7 August 2020. Members of the public may obtain copies from Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its website: www.aberforth.co.uk.

GLOSSARY:

1 Total Assets Total Return - the return of the combined funds of the Ordinary Shareholders and ZDP Shareholders assuming that dividends paid to Ordinary Shareholders were reinvested at the NAV per Ordinary Share at the close of business on the day the Ordinary Shares were quoted ex dividend.

2 Ordinary Share NAV Total Return – the theoretical return on the NAV per Ordinary Share assuming that dividends paid to Ordinary Shareholders were reinvested at the NAV per Ordinary Share at the close of business on the day the Ordinary Shares were quoted ex dividend.

3 Ordinary Share Price Total Return – the theoretical return to an Ordinary Shareholder, on a closing market price basis, assuming that all dividends received were reinvested, without transaction costs, into the Ordinary Shares at the close of business on the day the shares were quoted ex dividend.

4 ZDP Share NAV Total Return – represents the return on the NAV value of a ZDP Share. The ZDP Share NAV as at 30 June 2020 was 110.48p (30 June 2019: 106.63p).

5 ZDP Share Price Total Return – the theoretical return to a ZDP Shareholder, on a closing market price basis.

6 Ongoing Charges – represents the percentage per annum of investment management fees and other operating expenses to the average published Ordinary Shareholders’ NAV over the period.

7 Gearing – calculated by dividing the asset value attributable to the ZDP Shares by the asset value attributable to the Ordinary Shares.

8 Projected Final Cumulative Cover – the ratio of the total assets of the Company as at the calculation date, to the sum of the assets required to pay the final capital entitlement of 127.25p per ZDP Share on the planned winding-up date plus future estimated management fees charged to capital and estimated winding-up costs.

9 Redemption Yield (ZDP Share) – the annualised rate at which the total discounted value of the planned future payment of capital equates to its share price at the date of calculation.

10 Hurdle Rate - the rate of capital growth per annum in the Company’s investment portfolio to return a stated amount per Share at the planned winding-up date.

11 Redemption Yield (Ordinary Share) - The annualised rate at which projected future income and capital cash flows (based on assumed future capital/dividend growth rates) is discounted to produce an amount equal to the share price at the date of calculation.

12 Terminal NAV (Ordinary Share)- The projected NAV per Ordinary Share at the planned winding-up date at a stated rate of capital growth in the Company’s investment portfolio after taking into account the final capital entitlement of the ZDP Shares, future estimated costs charged to capital and estimated winding-up costs.

13 Dividend reinvestment factor - is calculated on the assumption that dividends paid by the Company were reinvested into Ordinary Shares of the Company at the NAV per Ordinary Share/ share price, as appropriate, on the day the Ordinary Shares are quoted ex dividend.

CONTACT:

Euan Macdonald / Christopher Watt - Aberforth Partners LLP - 0131 220 0733

Aberforth Partners LLP

Secretaries

29 July 2020

ANNOUNCEMENT ENDS