A second-half rebound at Abrdn UK Smaller Companies Growth (AUSC ) has encouraged fund managers Abby Glennie and Amanda Yeaman to call a turning point in depressed, domestic small-cap stocks.

Good stock picking and an end to peak pessimism as inflationary pressures eased saw the £425m trust deliver an 18.1% underlying return in the year to 30 June, reversing a 7.4% drop in net asset value (NAV) in the previous year.

The shares surged 21% as their discount to NAV narrowed, beating the 10% rise in the Deutsche Numis Smaller Companies plus AIM (excluding investment companies) index after two years of underperformance, annual results show.

At yesterday’s close, the trust, which Glennie (pictured below) and Yeaman took over from Harry Nimmo at the start of last year, had returned 23% over the past 12 months but was still down 31% over three years, worse than the 16.3% decline in the benchmark. The shares have fallen from a peak of 784p in September 2021 to 498p today, but trade at a two-year high.

Over 10 years, the 108.6% total shareholder return comfortably beats the index’s 58.3% gain but lags rivals at BlackRock, Invesco and JP Morgan. 

The managers were positive on the outlook, saying the start of interest rate cuts by the Bank of England in July eased the macroeconomic squeeze on smaller companies.

‘Smaller companies will always be an asset class with relatively high volatility, but we believe the current time is an attractive entry point for new capital, where investors are able to take a longer-term investment horizon,’ they said.

They added that UK small-cap outflows, recently exacerbated by UK pension funds allocating capital elsewhere, had stabilised and were showing tentative signs of reversal.

Subsea equipment rental company Ashtead Technology (AT) was the duo’s top performer, rising 104% from purchase in July 2023, as supportive end markets in oil and gas and the green energy transition allowed management to upgrade earnings.

Pharmaceutical company Ergomed jumped 36% after private equity firm Permira pounced with an all-cash offer of £13.50 per share.

Veterinary services provider CVS Group (CVSG) was the worst performer, slumping 49% after the Competition and Markets Authority launched a review of its sector focusing on price, consumer visibility and branding. The fund managers expect the outcomes to be manageable for CVS and have retained the position.

The result of takeovers and the economic cycle meant portfolio turnover jumped to 28%, with 13 new positions, including the flotation of single-board computer manufacturer Raspberry Pi (RPI). There were 18 exits, four of which were taken over: Spirent, Mattioli Woods, Smart Metering Systems and Ergomed.

Concerns about cyclical slowdowns and protracted recoveries saw Glennie and Yeaman bail out of recruiter FDM (FDM), sustainable asset manager Impax (IPX) and landscaping products group Marshalls (MSLH).

They topped up Tatton Asset Management (TAM), which has grown assets significantly, and Alpha Group (ALPH) after a well-executed expansion into alternative banking solutions, as well as Citywire Elite Companies A-rated share-dealing platform AJ Bell (AJB).

The pair lifted gearing, or borrowing, from 2.5% to 5.8% to reflect their improving outlook. It has since dropped to 4.8%.

Top individual positions include construction product designer Hill & Smith (HILS), technical products supplier Diploma (DPLM) and fund administration services group JTC (JTC), which have respective weightings of 4.2%, 3.9% and 3.9%.

Chair Liz Airey said poor performance in 2022 and the first part of 2023 would continue to act as a drag on the five-year performance record, which currently shows total underlying returns of 21% and shareholder returns of 16% – ahead of the Numis index’s 23% gain.

Over the year, the board bought back £61m shares, or 16% of capital, to try to keep the share price discount below 8%. That has failed, with the shares drifting 11% below NAV.