Aberforth Geared Income Trust (AGIT) research

Aberforth Geared Income Trust (ticker: AGIT) is a split capital investment trust, which invests in quoted UK smaller companies. The trust is managed by Aberforth Partners, the specialist UK smaller companies fund manager, which also manages the Aberforth Smaller Companies Trust (ASCoT), together with an equivalent open-ended fund.

AGIT and ASCoT have similar holdings, although AGIT is more heavily weighted towards higher dividend stocks. Both trusts use the Numis Smaller Companies Index (formerly the Hoare Govett Smaller Companies index) as a benchmark. The NSCI includes companies with a much higher market value than the alternative FTSE SmallCap index, and overlaps significantly with the mid-cap FTSE 250 index. The average market cap of AGIT’s investments is somewhat lower than the benchmark, although around 60% of the portfolio is invested in mid-cap companies. The investment style is value orientated. The management fee is reasonably low, working out at about 0.8% of total assets annually.

AGIT was launched in 2010 and has planned winding-up date of 30 June 2017. The trust’s capital structure consists of 109.5m ordinary shares and 73m zero dividend preference shares (ZDPs). The gearing on the ordinary shares is around 156% (based on the ratio of total net assets to net assets attributable to ordinary shares). The ZDPs were issued at 100p and are due to pay out 159.7p on the winding-up date, representing an annual redemption yield of 6.75%. The ZDPs are currently trading at a premium of 9% to NAV and have a redemption yield of around 4.65%.

The most recent NAV for the ordinary shares was around 141p, representing a discount of around 18%. Using the market price of the ZDPs, rather than their official NAV, the discount falls to around 14%. The current discount is now at its highest level since the launch of the trust, after widening considerably since the start of the year, and compares to a discount of around 13% for ASCoT. AGIT’s discount has averaged around 10% over the last 12 months.

I anticipate that discount will narrow to around 10% over the next year or two, and would look to sell at around that level. Given the trust is due to wind-up in just over four years, I think it is unlikely that the discount will widen much further; the set wind-up date also ensures that I receive a minimum return of 3-4% above the underlying NAV return in the event that I hold the shares to that date. The shares have an attractive dividend yield of 5.6%; the discount effectively increases the yield on the underlying portfolio by around 1%. Around 25% of the current share price will be returned to shareholders over the next four years at NAV.

At the current share price of around 116p, in my opinion, AGIT’s ordinary shares represent an attractive investment. There is a moderate level of gearing inherent in the structure, which obviously adds to the risk, but also provides certain benefits: it is a factor, which needs to be taken into account when judging position size. I also own shares in ASCoT; together they account for around 6.7% of my portfolio (although my exposure rises to over 8% based on gross assets, taking into account the gearing in AGIT). I am comfortable with this level of exposure, but would be keen to reduce it if a suitable opportunity arises.