Share price discounts may still be way too wide but there are some signs of life in the investment companies market with two flotations on the blocks.

The first of these is a rollover vehicle for Aberforth Split Level Income Trust (ASIT ). The new Aberforth Geared Value and Income Trust (AGVI) will be the fourth in a series of split capital trusts that follow the Aberforth value approach to investing in UK small and mid-cap companies.

I wrote about the Edinburgh-based boutique’s biggest trust, Aberforth Smaller Companies (ASL ), in February. The three months that have elapsed since then have been great for the portfolio – ASL’s net asset value (NAV) is up by 14.2% over that period.

By virtue of the zero dividend preference shares (zeros) that make up part of its capital structure, stablemate ASIT should have been a geared play on this UK, value-style, small cap recovery but it has lagged, returning 9.4% over the past three months. There is not a perfect overlap between the two portfolios, but they do have a number of large positions in common, so this is a bit odd but just comes down to stock selection and position sizing – ASIT has a more concentrated portfolio than ASL.

ASIT was launched as a rollover vehicle for Aberforth Geared Income in July 2017. The past seven years have not been kind to UK small caps – at 30 April, ASIT’s benchmark, the Deutsche Numis Smaller Companies ex-Investment Companies index, had returned an average of 3.2% per annum from the trust’s launch.

Unfortunately, the trust underperformed that, with its ordinary shares returning an average of 2.8% per annum. On that basis, investors would have been better off holding the zeros, which were structured to return 3.5% per annum.

In addition, it is worth highlighting that even though ASIT’s underlying portfolio was not set up to produce income, all of the ordinary share investors’ returns have come from the dividends the trust paid out. NAV per share has actually fallen from 100p at flotation to 88.4p today.

So, does that mean that ASIT investors should tick the cash box rather than rolling into AGVI? The short answer is probably no. While – as I pointed out in February – the catalyst for a re-rating of UK small caps is hard to pin down, mergers and acquisitions (M&A) activity alone should help drive decent returns from here. The sorts of companies that Aberforth buys have just become cheaper and are now being stalked by trade buyers and private equity firms. It does not make sense to me to cash in your exposure to UK small-caps so close to the bottom.

However, AGVI and ASIT are not twins. The starkest contrast between the two is that the gross redemption yield on AGVI’s zeros comes in at 7%, which is twice that of ASIT’s and sets a high bar for the minimum returns for the zeros require to be profitable.

In addition, while at the launch of ASIT there was one zero for every four ordinary shares, for AGVI, the ratio is 3:8. That extra gearing could make AGVI’s ordinary shares more volatile.

The zeros will be issued at 100p and redeemed on 30 June 2031 at 160.58p provided there are sufficient assets available then. The trust’s assets would have to dwindle by an average of 10.3% a year over the seven-year period for the zeros final entitlement not to be met in full, which seems unlikely. Are the zeros a better bet than the ordinary shares then? Well, that depends on whether Aberforth’s performance picks up.

Here the historical evidence might suggest that ASIT was an aberration. The total asset return on the first split cap trust Aberforth Geared Capital & Income was an average of 13.5% a year between 2001 and 2011; for Aberforth Geared Income the equivalent figure was an average of 15.2% per year between 2010 and 2017. A return to form could make AGVI a decent investment.

Property opportunity 

Talking of returns to form, the other new trust is Special Opportunities Reit (SOR). It is trying to raise £500m to invest in high-quality, but under-managed, UK commercial property. The managers are all ex-LXi (which got taken over by LondonMetric Property earlier this year). The central premise is that other investors are turfing out properties, often under duress, at a time when values are already depressed. The hope is that SOR can add some value to the properties it buys and ride a recovery in the property market.

The fund raise is off to a flying start thanks to cornerstone investments by GoldenTree Asset Management, TR Property (TRY) and other Columbia Threadneedle funds, and the Bhavnani family office, which add up to over £104m. The managers and board are putting £4m of their own money in.

Sub-sectors that SOR is looking at include student accommodation, industrial, data centres, retail parks and budget hotels. It thinks that rents from properties in this part of the market can grow faster than market averages.

SOR’s return targets are attractive – 12% to 15% internal rates of return (IRR) and a 6% yield on the flotation price for the financial year ended 30 June 2026 – but I think investors would be happy just to achieve double-digit returns.

I am really pleased to see SOR having a go at raising money at the bottom of the market. It has felt to me as though investors in a range of funds have been throwing in the towel at the wrong moment – Abrdn Property Income (API ) being a prime example of this. If I can make room in my portfolio, I might put in an application.

James Carthew is head of research at QuotedData.

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