Retail investors have jostled for a piece of the high-yielding Abrdn Equity Income (AEI ) trust, driving a rerating of the shares to a premium that allowed the board to issue new equity for the first time since 2016.

Writing in the annual report, chair Sarika Patel highlighted that the board moved from buying back shares in the first two months of the year to October, to issuing some over the summer, as well as another wave post-period end.

Retail platforms snapped up the equity, with retail platforms the top-10 buyers over the year. Hargreaves Lansdown added a further two million shares on behalf of clients, swelling its position to 11.1m shares, or a 23.4% stake, while Interactive Investor added close to 1m, taking its holding to 21.1%.

Those ten large buyers now collectively own over 65% of the company’s shares up from 41% in 2021. 

While the 7.6%-yielder paid out hefty dividends of 22.80p over the period, the increased raft of private investors were no doubt also attracted to the 15.4% fee reduction the board negotiated with manager Abrdn, which deemed the tiered fee structure of 0.65% on the first £175m of assets uncompetitive, replacing it with a flat fee of 0.55%, which took effect on 1 October 2023.

Increased enthusaiasm for the £143m trust is some good news for the Edinburgh-based manager, which has seen a wave of mergers and strategic reviews across its stable, as well as the retirement of the head of its investment company business William Hemmings last month. Veteran fund manager Bruce Stout is also hanging up his boots next year.

Annual results

The underlying portfolio delivered net asset value (NAV) total returns of 1.8%, including dividends, falling short of the FTSE All-Share’s 13.8%, as a result of holding too few large UK companies and the underperformance of energy and consumer investments. Shareholders received total returns of 11.4%. 

Manager Thomas Moore (pictured) pointed to the outperformance of a narrow range of large companies linked to the strong US dollar and ongoing investor de-allocations from domestic UK stocks as the reasons for the decline in the small and mid-cap focused portfolio.

The portfolio’s 53% exposure to the FTSE 100 was well short of the 84% that the blue-chip index represents in the total value of the FTSE All-Share index.

In terms of company specifics, Thungela Resources (TGA) and Diversified Energy (DEC) were the weakest energy companies, but remain highly cash generative even at lower energy prices.

Some of the financial companies struggled in the rising interest rate environemnt, with share exchange CMC Markets (CMCX), banking services provider OSB Group (OSB) and bank Vanquis (VANQ) all issuing profit warnings.

Moore bought several new companies, such as HSBC (HSBA) where he sees rapid improvement in profitability thanks to the benefit of higher base rates, as well as the re-opening of the China and Hong Kong border. 

He also added National Grid (NG), which is well positioned to deliver the grid expansion necessary for the transition to electric vehicles, he wrote. 

Some resources holdings were trimmed, including miners Rio Tinto (RIO) and BHP (BHP), with profits also taken at oil companies Shell (SHEL) and BP (BP).

Moore called time on ‘growth’ stocks in the belief that markets will acknowledge interest rates won’t fall back to the last decade’s lows, paving the way for a rerating of cash-generating ‘value’ businesses.

In a world of higher interest rates, investors should be more attracted to value stocks that pay out dividends now, rather than growth stocks that promise returns in the future, he said.

‘We are confident that this will change in time, as companies are rewarded for using this period to set their house in order, taking actions to improve profitability, while distributing capital via dividends and buybacks,’ he wrote.

Special dividends fell from £8000,000 a year ago to £186,000, with over half the portfolio favouring share buybacks instead. The portfolio’s free cash flow yield of 9.9%, strengthening Moore’s confidence in his ability to maintain a growing dividend per share to our shareholders. 

Five-year performance

Source: Morningstar