Aberforth Split Level Income Trust plc
Audited Annual Results for the year to 30 June 2021

The following is an extract from the Company's Annual Report and Financial Statements for the year to 30 June 2021. The Annual Report is expected to be posted to shareholders by 9 August 2021.  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

Performance (Total Return)	Year to 30 June 2021
	------------
Total Assets	+61.9%
Ordinary Share NAV	+94.4%
Ordinary Share Price	+97.7%
ZDP Share NAV	+3.6%
ZDP Share Price	+7.5%
Dividends Declared
Second Interim Dividend	2.13p
The second interim dividend has an ex-dividend date of 5 August 2021, record date of 6 August 2021 and pay date of 27 August 2021.

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 fourth annual report of Aberforth Split Level Income Trust (“ASLIT” or “the Company”), which covers a truly remarkable period, the twelve months to 30 June 2021.

You will recall that, as the financial year started, the pandemic was in full swing and the share prices of small UK quoted companies were on historically low valuations. However, by the time of the interim report, the gloom was lifting and the rebound in share prices has proved as dramatic as the previous collapse. The approval of several vaccines and their continued rollout has been remarkably quick, particularly in the UK. This has led to significant re-appraisal of value for many stocks and sectors, which had been deemed “covid losers” and whose viability was being widely questioned.

The improved backdrop has been very helpful for an investment trust with ASLIT’s capital structure and investment policy. However, before moving on to the numbers themselves, it would be remiss of me not to acknowledge that this year’s strong performance follows a difficult year in which share prices felt the full force of the pandemic and recession.

Performance

Stockmarket returns were favourable for the year to 30 June 2021. The Numis Smaller Companies Index (excluding Investment Companies) (“the Index” or “NSCI (XIC)”), which defines ASLIT’s opportunity base of small UK quoted companies, generated a total return of 49.8% over the twelve months. Larger UK listed companies, represented by the FTSE All-Share Index, recorded a total return of 21.5%.

Influenced by market conditions that have favoured a portfolio invested in smaller UK companies and utilising a value investment style, ASLIT’s total assets total return, which captures the Company’s ungeared portfolio performance, was, at 61.9% during the year to 30 June 2021, significantly better than that of the Index. However, when geared by the Zero Dividend Preference (ZDP) Shares, the net asset value total return of the Ordinary Shares was 94.4%, which reflects the return attributable to equity shareholders of 46.75p per Ordinary Share together with the effect of the reinvestment of previously declared dividends. The Ordinary Share price total return of 97.7% was also helped by a narrowing of the share price’s discount to the net asset value. The recovery in valuations this year following the onset of the pandemic last year is reflected in the Company’s two year performance with ASLIT recording a total assets total return of 19.0% and Ordinary Share net asset value total return of 24.0%.

As the capital value of the portfolio has recovered, the projected final cumulative cover of the ZDP shares has rebuilt to 3.6 times at the end of the reporting period, compared with 2.3 times twelve months earlier.

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

Earnings and Dividends

It is well known that the Covid-19 pandemic has had a severe detrimental impact on dividends from both large and small UK quoted companies. The London Business School calculates that aggregate dividends from NSCI (XIC) constituents reduced by c.52% in real terms during calendar year 2020. The effect on ASLIT’s Income Statement is felt in two financial years, though the Board chose to utilise revenue reserves to maintain the dividend in respect of the year to 30 June 2020. The consequence of that decision was to defer the impact of the pandemic on ASLIT’s dividends to the year to 30 June 2021. This resulted in a 39% reduction in the first interim dividend compared with the previous year. When the Board announced this cut in January, we also observed that the first half of calendar 2021 – the second half of ASLIT’s financial year to 30 June 2021 – would be very important for understanding the full extent of the dividend downturn and the trajectory of the recovery.

In the event, the dividend experience of the past six months has been more positive than expected in January. Two special dividends have been paid by holdings and, as the Managers describe in their report, more holdings have resumed dividend payments than expected. This positive backdrop, which owes much to the resilience and good management of the investee companies, has resulted in earnings per ordinary share in the second half of the financial year to 30 June 2021 more than doubling compared with the corresponding period a year earlier. It gives the Board more flexibility with regard to ASLIT’s second interim dividend, which in January we had indicated would decline at no worse a rate than the first interim dividend. ASLIT generated a Revenue Return of 2.90p for the year to 30 June 2021.

The Board declares a second interim dividend of 2.13p per Ordinary Share, which compares with 2.71p in the prior year. This represents a 21% reduction and is an improvement on the 39% rate of decline in the first interim dividend. The total dividend per Ordinary Share in respect of the year to 30 June 2021 is 3.05p, a decrease of 28% year-on-year. To pay the total dividend, it is necessary to utilise 0.15p of ASLIT’s revenue reserves, which were 0.86p per Ordinary Share at the start of the year to 30 June 2021.

In arriving at this decision, the Board has carefully considered the Managers’ income forecasts and the likely trajectory of the dividend recovery. We have sought to balance the encouraging recent developments with the inherent uncertainty in forecasts over a period still subject to the lingering effects of the pandemic. The remaining revenue reserves, though modest since ASLIT is a relatively young company, offer scope to offset a degree of deviation from the central forecast and will, in any case, be returned to Ordinary Shareholders over the remaining three years of the Company’s planned life.

The second interim dividend of 2.13p per Ordinary Share will be paid on 27 August 2021 to Ordinary Shareholders on the register on 6 August 2021. The ex dividend date is 5 August 2021. 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 28 October 2021. Details of the

resolutions to be considered by Shareholders are set out in the Notice of the Meeting on page 57 of the Annual Report. Shareholders are encouraged to submit their votes by proxy in advance of 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 its website, if the only attendees permitted will be those required to allow the business of the meeting to be conducted. The Board welcomes questions from Shareholders and invites them to be submitted by email to [email protected] before the meeting, in case attendance is not allowed. In light of the circumstances an update on performance and the portfolio will be available on the Managers’ website following the meeting.

Outlook

When considering ASLIT’s prospects, I am conscious that the virus, in its several variants, is still very much with us and continues to affect how we live and do business. Nevertheless, it does seem that the vaccines have moved the world from apparent disaster to recovery in a remarkably short period of time. There is genuine confidence that economic activity is rebounding, as investment and consumption increase across the world. This optimism is reflected in rising share prices and an uptick in the frequency of M&A deals. In addition, for the first time in several years, UK stockmarkets are not being left behind by their international peers. While challenges remain under the terms of the trade deal with the EU, political uncertainty has diminished.

An emerging consideration which has been widely commented upon is the potential return of inflation. Evidence of inflationary pressures abounds at present, but it is unclear whether this is a temporary or lasting phenomenon. If it proves more than transitory, it could herald a change in market leadership away from the highly valued growth stocks that have flourished under the “lower for longer” interest rate environment since the global financial crisis. Such a development could be helpful for your Company and the value investment discipline followed by the Managers.

An important source of confidence for me and my fellow directors is the resilience of ASLIT’s investee companies through the intensely difficult conditions of the pandemic period. As the Managers explain in their report, costs and cash were carefully husbanded by experienced boards, so that the businesses are now in a good position to benefit from recovering demand. The Managers have been exemplary in these very trying times and we thoroughly commend them for “keeping the faith” in the investee companies when the market had not and for sticking to what they do best. They have produced excellent returns this year and your Board is encouraged by their confidence for the future. While the Ordinary Shares’ net asset value remains just below its level at launch, there is good reason to believe that returns over the last three years of ASLIT’s planned life will be consistent with the investment objective and to the benefit of all shareholders.

Finally, we directors welcome the views of shareholders and are available should you wish to discuss these with us. My email address is noted below. Thank you for your support.

Angus Gordon Lennox
Chairman
28 July 2021
[email protected]

Managers’ Report

Introduction

The performance described in this report covering the twelve months to 30 June 2021 makes rather more pleasant reading than a year ago. The FTSE All-Share’s total return was 21.5%. This was bettered by small UK quoted companies, with a 49.8% return generated by the NSCI (XIC). ASLIT’s total asset total return, which is a measure of the portfolio’s ungeared performance, was 61.9%. This has allowed a recovery in the prospective final cumulative cover of the ZDP Shares to 3.6 times. After taking into account the gearing provided by the ZDP Shares, the net asset value total return of the Ordinary Shares was 94.4%. These numbers have repaired most of the damage inflicted by the pandemic.

The main influence on this rebound in performance was the vaccines. Their arrival in November last year precipitated a powerful recovery in asset prices, which has continued into 2021. Financial markets anticipated a normalisation in societal behaviour and a strong recovery in activity, which is now showing through in macro economic data releases and in trading updates from companies.

The high returns from ASLIT’s portfolio are a reminder of how desperate sentiment had become a year ago. Companies sensitive to the economic cycle, many of which were classified as value stocks, saw their share prices collapse as concerns about these businesses’ viability reached a peak. Clearly, the vaccines eased the threat, but it is necessary to acknowledge the resilience of small UK quoted companies through 2020. Some of that resilience was due to external help, from lenders, governments and central banks. Shareholders also played a part, though the frequency of rights issues and placings amongst constituents of the NSCI (XIC) has been lower than the Managers had expected. Much of the resilience was down to internal measures put in place by boards that have undergone several tests in recent years, from the global financial crisis through the Eurozone crisis to Brexit. The consequence is that the corporate sector has passed the inflection point. Despite

lingering lockdown conditions, profits are starting to recover and balance sheets are strengthening as free cash flow is generated. The improved outlook has allowed many boards to reinstate dividends, more quickly than expected even six months ago.

Another factor contributing to the good performance of constituents of the portfolio and of the NSCI (XIC) was – for the first time in several years – their “Britishness”. This is not a jingoistic point but reflects the fact that prospects for UK companies have been under a cloud since the EU referendum. And, just as the political uncertainty of Brexit was lifting, the challenges of the pandemic and lockdown arrived. These events led to deep under-performance from UK equities over the last five years and to very low valuations in the global context. But the successful vaccine roll-out has been a catalyst for a reappraisal: the FTSE All-Share has out-performed global equities since October 2020, with domestically oriented small companies performing particularly strongly. The renewed interest in UK assets also comes through in higher corporate activity in the form of both M&A and IPOs.

The vaccines have been a catalyst for the reappraisal of “Britishness” and economic cyclicality, which has boosted the share prices of value stocks. The value style has also benefited from concerns about inflation. Growth stocks, whose valuations are skewed to cash flows generated in the more distant future, are more sensitive than value stocks to increases in discount rates and bond yields. Therefore, to the extent that higher inflation – whether actual or expected – raises bond yields, value tends to benefit relative to the growth style.

Evidence of inflationary pressure is abundant at present. Consumer prices are rising at 3-5% per annum in major western economies, while various gauges of inflation expectations have also risen to their highest levels for several years. These top-down measures are corroborated by commentary from many companies. Second order effects of the pandemic are raising raw material prices and, with some teething trouble from the Brexit trade deal, are constraining supply chains. These may be considered temporary consequences of the pandemic, but they are happening against the background of a continuation of extraordinary monetary policy, massive growth in money supply and astonishing trillion dollar fiscal programmes in the US. In this context, it is somewhat puzzling that government bond yields have not risen further, but the inertia that comes with the conditioning of three decades of disinflation is considerable.

Analysis of performance

The following paragraphs describe the main influences on ASLIT’s ungeared portfolio performance over the twelve months to 30 June 2021. In that period the total asset total return was +61.9%, while that of the opportunity base represented by the NSCI (XIC) was +49.8%.

Style

As noted above, the economic and financial market backdrop turned more conducive to the value investment style with the arrival of the vaccines. The London Business School uses price to book ratios to categorise stocks as “value” or “growth”. It calculates that the NSCI (XIC)’s value cohort under-performed the growth stocks in the first four months of ASLIT’s year, but out-performed strongly after the vaccine announcement. Over the financial year as a whole, value out-performance amounted to 21%. While the Managers’ definition of value is broader and their investment cases are based on more than a near term valuation ratio, this degree of difference is indicative of a boost to ASLIT’s performance from investment style.

Size

ASLIT’s portfolio has had a higher exposure than the NSCI (XIC) to the index’s smaller constituents since inception. This reflects the considerably lower valuations on offer down the scale of market capitalisations, irrespective of companies’ fundamental prospects. This size positioning was beneficial to ASLIT’s returns in the twelve months to 30 June 2021. A useful gauge of this is a comparison of returns from the FTSE SmallCap and the FTSE 250 – the former out-performed the latter by 28%. Despite this, the valuation advantage of smaller small companies remains, so the portfolio ended the financial year with 36% invested in the NSCI (XIC)’s mid cap constituents against 65% in these companies for the NSCI (XIC) itself.

Geography

Exposure to the UK’s domestic economy has been an important influence on UK equities since 2016’s EU referendum. As sterling adjusted to the implications of the leave vote, the share prices of companies that do most of their business outside the UK performed more strongly than those reliant on the domestic economy. The political clarity promised by the decisive election result at the end of 2019 was short lived. It was quickly overwhelmed by the pandemic as lockdown measures were more punitive for domestic businesses. However, since the vaccine announcements, the share prices of domestic facing companies out-performed by 8% in anticipation of re-opening and a normalisation of spending. This has benefited ASLIT’s performance since the portfolio retains a relatively high exposure to the domestic economy. At 30 June 2021, 58% of the portfolio holdings’ underlying sales were generated in the UK, compared with 52% for the NSCI (XIC).

Dividends

Recent dividend experience is encouraging, though some context is important. Last year saw the steepest fall in small company dividends since records began in 1955 – according to the London Business School’s calculations, aggregate dividends from the NSCI (XIC) fell by 52%, adjusted for inflation. Given the severity of this decline and the effect of a low base, a further fall was unlikely. However, the recovery has so far proved broader and swifter than expected six months ago. This is illustrated in the following table, which splits ASLIT’s holdings at 30 June 2021 into categories corresponding to their most recent dividend action.

Nil Payer	Cutter	Unchanged payer	Increased payer	Returners	IPO
------------	------------	------------	------------	------------	------------
19	7	8	12	22	1

The “Returners” category points to the resilience of the holdings. It contains companies that stopped dividends in the first part of 2020 as the pandemic took effect but that have returned to paying dividends a year or less later. The Managers expect that current constituents of “Returners” will progress to “Unchanged payer” or “Increased payer” over the next twelve months. The other noteworthy category is “Nil payers”, which comprises companies that did not pay a dividend a year ago and have not yet resumed distributions. The Managers believe that all the current “Nil Payers” will be able to recommence dividend payments as the recovery progresses over the next three years.

The early signs of a robust dividend recovery are encouraging and point to the careful management of cash by the investee companies through the downturn. However, based on current forecasts, a full return to pre-pandemic levels of portfolio income is unlikely until the financial year to 30 June 2024. It might be possible, through portfolio management, to accelerate this, but the Managers and Board are keen to balance income receipts with the capital upside from ASLIT’s current holdings. In practice, this is a straightforward task in the recovery phase of the economic cycle, when share prices and dividends tend to move in unison.

Balance sheets

The resilience of small companies illustrated by the dividend analysis also comes through in terms of balance sheet leverage.

Portfolio weight	Net cash	Net debt/EBITDA < 2x	Net debt/EBITDA  > 2x	Others*
	------------	------------	------------	----------
2020	31%	47%	10%	12%
2021	34%	47%	10%	9%
2022	44%	41%	9%	6%
2023	46%	44%	4%	6%

*includes loss-makers and lenders

The Managers forecast the portfolio’s exposure to companies with net cash to rise strongly over the recovery period, while exposure to companies with relatively high leverage ratios of more than two times declines sharply. This strengthening of balance sheets is driven by the generation of free cash flow – no incremental equity issuance is assumed. Companies have needed to issue less equity through the pandemic period than the Managers had expected. This was due to the combination of tight control of cash by the companies themselves, government support and relaxed terms from existing lenders. However, the ending of furlough schemes and the impact of recovering revenues on working capital requirements may see a tail of equity issues through 2021, while other companies are looking to raise equity to support acquisitions or accelerate investment. In the year to 30 June 2021, ASLIT supported seven equity raises by its holdings, subscribing to a total of just under £3m new equity.

The resilience displayed in the table should allow companies to accelerate investment plans, particularly if they can benefit from the super-deduction scheme announced by Rishi Sunak in the Budget. Alternatively, companies may return cash to shareholders or, if valuations make sense, acquisitions may be considered.

Corporate Activity

The vaccine rally has seen an upsurge in corporate activity around the world. The total value of pending and completed M&A deals announced in the first half of 2021 was an all-time high of $2.8 trillion, according to Refinitiv. The UK has very much been a part of this, with the low valuations of British assets proving particularly attractive to acquirers. On top of the numerous deals outside the NSCI (XIC), there have been eight takeover transactions announced within the index itself. Of these, ASLIT held two in its portfolio. The Managers believe that the valuations of both these deals were fair, but the risk remains that typical takeover premiums fail to reflect appropriate value for small UK quoted companies whose valuations have been depressed by Brexit and the pandemic. It is important not to cede control cheaply to opportunistic would-be acquirers.

On top of the rise in M&A, the UK stockmarket has seen its first meaningful bout of IPO activity for several years. So far in 2021, sixteen companies have floated whose current market capitalisations could make them eligible for inclusion in the NSCI (XIC) on its 1 January 2022 rebalancing. Most of these companies have online business models that thrived during lockdown and so, at today’s valuations, are of greater appeal to growth investors. The stretch between the valuations of these recent IPOs and comparable businesses held in the portfolio is considerable. The Managers believe that these divergent valuations fail to reflect the fact that many “old economy” businesses have been investing in their online offerings. Well-articulated “omni-channel” strategies, under which established businesses seek to sell both online and through physical stores, are common and are likely to find increased relevance as lockdown measures are eased.

Portfolio turnover

Portfolio turnover is defined as the lower of purchases and sales divided by average portfolio value. Over the twelve months to 30 June 2021, the rate was 20%. There can be a relationship between higher rates of turnover and better relative performance from portfolios managed by Aberforth – if the share price of a holding rises close to the Managers’ target, there is the opportunity to realise value and redeploy the proceeds in another company with a higher upside. The Managers term this the “value roll”. If performance remains strong it might be reasonable to expect turnover to rise.

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. The higher a portfolio’s active share, the higher its chance of either out or under-performing the index. The Managers target a ratio of at least 70% in relation to the NSCI (XIC). At 30 June 2021, it was 75%.

Valuations

Portfolio characteristics	30 June 2021		30 June 2020
	ASLIT	NSCI (XIC)	ASLIT	NSCI (XIC)
Number of companies	69	324	69	330
Weighted average market capitalisation	£761m	£996m	£513m	£760m
Price earnings (PE) ratio (historical)	15.3x	17.4x	6.7x	10.3x
Dividend yield (historical)	2.5%	1.7%	4.9%	2.4%
Dividend cover	2.6x	3.4x	3.0x	4.1x

At points during 2020, with the pandemic at its most intense, the average historical price earnings ratio (PE) of ASLIT’s holdings reached extremely low levels, approaching the lowest that the Managers have observed for their portfolios in 30 years. Since the commencement of the vaccine rally, both the absolute portfolio PE and its discount to the NSCI (XIC)’s PE have returned to what might be considered more normal levels. There are two factors behind this normalisation. First, share prices recovered strongly, with ASLIT managing to out-perform the NSCI (XIC)’s return. Second, companies have started reporting results that have been affected by the lockdown conditions of 2020 and so the historical earnings used in the PE calculation have fallen. This latter dynamic has yet to play out in full, which means that the PE should rise further over coming months even if prices stay the same.

Of course, the stockmarket looks ahead and, in taking historical or near term valuation multiples to high levels, is anticipating a recovery of profits over subsequent years. The following table sets out forward valuation multiples, using the Managers’favoured valuation metric of enterprise value to earnings before interest, tax and amortisation (EV/EBITA). The Tracked Universe comprises 246 companies within the NSCI (XIC) that the Managers follow particularly closely.

EV/EBITA	2020	2021	2022	2023
ASLIT	13.3x	10.3x	8.7x	7.6x
Tracked Universe (246 stocks)	15.2x	12.9x	10.7x	9.6x
-   43 growth stocks	19.5x	22.2x	19.2x	16.7x
-   203 other stocks	14.5x	11.9x	9.8x	8.8x

The forecasts underlying the EV/EBITA multiples are the Managers’ and anticipate aggregate small company profits to return to pre-pandemic levels in 2023. The profits of the portfolio’s holdings are expected to grow more strongly than those of the Tracked Universe over the forecast period. This reflects the higher economic cyclicality of ASLIT’s portfolio – profits fell further in 2020 and, all else equal, have greater scope to recover. By 2023, ASLIT’s EV/EBITA multiples are around 20% lower than those of the Tracked Universe. This was the sort of discount that prevailed before the onset of the pandemic and, indeed, has been typical over recent years. Another useful reference point is the recent upsurge in M&A deals – these have been struck at much higher multiples than those prevailing for similar businesses in which ASLIT invests.

To be clear, the investment cases for all portfolio holdings are based on more than a near term valuation ratio. The Managers determine a target price for each holding, which is usually based upon an estimate of normalised profits to which a multiple is applied. The emphasis of the investment process is assessment of the appropriate multiple, taking into account factors such as the company’s market position, its record, its management and its longer term prospects. The ranking by upside to price targets allows the Managers to circulate capital from companies whose share prices are near their calculated values to those with a larger gap between the two. The relatively low aggregate valuations for the portfolio, shown in the table, indicate the scope for this circulation of capital. Over time this “value roll” can make a meaningful contribution to investment returns.

Outlook & Conclusion

While the pandemic has almost certainly peaked, it continues to cast a shadow on the outlook. From the epidemiological perspective, new variants would seem inevitable though the vaccines give cause for optimism that this risk can be controlled if global deployment is swift. Arguably, the greater issue for society, for the economy and for companies is how government chooses to address the risk. So-called “Covid Zero” policies would have profound and lasting implications for how we live our lives and do business.

Another set of risks emerges from the measures by governments and central banks to offset the impact of the virus on the economy. Furlough has succeeded in averting mass unemployment, but it is necessary to get through the Autumn’s expiry of the Job Retention Scheme to assess the more lasting consequences and the willingness of consumers to spend the substantial savings accumulated during lockdown. The passage of time will also allow better understanding of the underlying effects of the UK’s new relationship with the EU, which have so far been largely obscured by the pandemic.

Eventually, the official support programmes will have to be paid for and it seems inevitable that the Chancellor will describe a path to tighter fiscal policy in due course. For the time being, however, monetary and fiscal stimuluses are in full swing, which, together with price pressures arising from the pandemic, is fomenting concern about inflation. On the other hand, it is noteworthy that some of the financial markets’ enthusiasm for reflation ebbed in June in response to the Federal Reserve’s latest prognostications in the US. The debate between inflationists and deflationists is, therefore, finely balanced at present, but a nuanced outlook can itself be helpful to the value style given that markets have been positioned decisively for deflation ever since the financial crisis. A lasting turn to inflation, and higher bond yields, should be relatively good for the value investment style, though its effect on equity valuations would have to be accompanied by careful scrutiny of the pricing power of individual businesses.

These big picture issues will be important to ASLIT’s future investment returns, but the main influence is the fortunes of the investee companies. Just twelve months ago, the stockmarket’s judgement of their prospects was unequivocal: many were valued in a way that suggested their very viability was at risk. Given the unprecedented nature of the pandemic, valuations should have reflected a degree of uncertainty, but that judgement has proved much too harsh. The subsequent rebound in economic activity, in profitability and in share prices owes much to the astonishingly rapid development and roll-out of the vaccines. However, companies and their boards deserve credit too: the resilience demonstrated by ASLIT’s holdings, and small companies more generally, is testament to the fact that these are well run businesses whose products and services are relevant even in a world living with Covid-19. Once this recovery phase ends, the Managers are confident that these companies will continue to grow their profits in real terms, exceed their cost of capital and generate free cash flow. At some point, the convincing record of these cyclical companies in dealing well with economic shocks should be recognised by the stockmarket with higher valuations.

While the profile of the recovery is assuming the classic “V” shape for the economy and stockmarket, not all of ASLIT’s holdings have seen their share prices return to their pre-pandemic levels. At 30 June 2021, 54% of the portfolio was invested in companies whose prices were lower than at 31 December 2019, with a weighted average decline of 21%. This is one illustration that normalisation of economic activity, company profits and share prices should have further to run.

Not all companies will emerge from the pandemic as profitable as when they entered it – there will be longer term winners and losers. At points last year, the stockmarket seemed to judge that ASLIT owned only the losers, while the share prices of technology companies and other work-from-home beneficiaries rose sharply. However, the portfolio contains companies that have taken advantage of the pandemic’s disruption to adapt their business models, to improve their ability to do business online and to restructure their cost bases.

In conclusion, the low stockmarket valuations of ASLIT’s portfolio holdings contrast with the resilience of the underlying businesses, their return to paying dividends, and their good prospects even beyond the current recovery phase. There are catalysts for a broader recognition of these qualities, with global capital re-embracing UK assets, with cyclicality now desired rather than shunned, and with a more nuanced inflationary outlook. While acknowledging the strong gains of the past eight months, the Managers remain optimistic about ASLIT’s prospective investment returns.

Aberforth Partners LLP
Managers
28 July 2021

TOTAL RETURN PERFORMANCE

		Ordinary Share		ZDP Share
	Total Assets1	NAV2	Share Price3	NAV4	Share Price5
	------------	------------	------------	------------	------------
Year to 30 June 2021	61.9%	94.4%	97.7%	3.6%	7.5%
Annualised: - since inception	3.2%	3.4%	1.3%	3.4%	3.3%
Cumulative: - since inception	13.4%	14.4%	5.3%	14.5%	14.0%

ORDINARY SHARE

	Net Asset Value per Share	Share Price	Discount / (Premium)	Ordinary Dividends per Share	Special Dividends per Share	Ongoing Charges6	Gearing7
	------------	------------	------------	------------	------------	------------	------------
30 June 2021	95.7p	87.2p	8.8%	3.05p	-	1.2%	29.9%
30 June 2020	52.5p	47.3p	10.0%	4.22p	-	1.3%	52.6%
30 June 2019	86.7p	77.0p	11.2%	4.16p	0.19p	1.2%	30.7%

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

ZERO DIVIDEND PREFERENCE SHARE (ZDP SHARE)

	Net Asset Value per Share	Share Price	Discount / (Premium)	Return per Share	Projected Final Cumulative Cover8	Redemption Yield9
	------------	------------	------------	------------	------------	------------
30 June 2021	114.5p	114.0p	0.4%	4.0p	3.6x	3.7%
30 June 2020	110.5p	106.0p	4.0%	3.8p	2.3x	4.7%
30 June 2019	106.6p	111.5p	(4.6%)	3.7p	3.1x	2.7%

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

	Ordinary Shares Hurdle Rates to return			ZDP Shares Hurdle Rates to return
	100p	Share Price	Zero Value	127.25p	Zero Value
	------------	------------	------------	------------	------------
30 June 2021	3.4%	-0.1%	-35.5%	-35.5%	-87.0%
30 June 2020	15.1%	1.4%	-19.1%	-19.1%	-75.6%
Inception	1.5%	n/a	-17.0%	-17.0%	-57.2%

REDEMPTION YIELDS & TERMINAL NAVs (ORDINARY SHARES)

As at 30 June 2021

			Ordinary Share Redemption Yields11 Dividend Growth (per annum)
Capital Growth (per annum)	-20.0%	-10.0%		+0.0%	+10.0%	+20.0%	Terminal NAV12
	------------	------------		------------	------------	------------	------------
-20.0%	-26.8%	-25.9%		-24.9%	-23.7%	-22.3%	29.1p
-10.0%	-10.8%	-10.1%		-9.3%	-8.4%	-7.4%	55.1p
+0.0%	3.3%	3.8%		4.5%	5.2%	6.1%	87.5p
+10.0%	16.4%	16.9%		17.5%	18.1%	18.9%	127.2p
+20.0%	29.0%	29.5%		30.0%	30.5%	31.2%	174.8p

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
28 July 2021

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. As described in the Chairman’s Statement and Managers’ Report, Covid-19 has caused a significant impact on capital values and dividends from UK small companies.

On a forward looking basis, the principal risks faced by the Company, together with the approach taken by the Board towards them, have been summarised below. 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 (refer to Note 19 of the Annual Report for further details). 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.

(ii) Market risk – investment performance is impacted by a number of market risk factors, including uncertainty about future price movements of investments. The Managers regularly assess the exposure to market risk when making investment decisions and the Board monitors the results of the investment process with the Managers. 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; the ongoing impact of the Covid-19 pandemic and government responses; and other geopolitical issues referred to in the Managers’ Report.

(iii) 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.

(iv) 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.

(v) 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.

(vi) 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 2021

(audited)

	Year to			Year to
	30 June 2021			30 June 2020
	Revenue	Capital	Total	Revenue	Capital	Total
	£000	£000	£000	£000	£000	£000
Net gains / (losses) on investments	-	86,522	86,522	-	(59,879)	(59,879)
Investment income	6,258	-	6,258	7,404	78	7,482
Investment management fee	(395)	(921)	(1,316)	(459)	(1,071)	(1,530)
Portfolio transaction costs	-	(285)	(285)	-	(490)	(490)
Other expenses	(316)	-	(316)	(349)	-	(349)
	--------	--------	--------	--------	--------	--------
Net return before finance costs and tax	5,547	85,316	90,863	6,596	(61,362)	(54,766)
Finance costs:
Appropriation to ZDP Shares	-	(1,889)	(1,889)	-	(1,830)	(1,830)
Interest expense and overdraft fee	(3)	(6)	(9)	(1)	(2)	(3)
	--------	--------	--------	--------	--------	--------
Return on ordinary activities before tax	5,544	83,421	88,965	6,595	(63,194)	(56,599)
Tax on ordinary activities	(22)	-	(22)	-	-	-
	--------	--------	--------	--------	--------	--------
Return attributable to Equity Shareholders	5,522	83,421	88,943	6,595	(63,194)	(56,599)
	======	=======	=======	======	=======	=======
Returns per Ordinary Share	2.90p	43.85p	46.75p	3.47p	(33.22)p	(29.75)p

The Board declared on 28 July 2021 a second interim dividend of 2.13p per Ordinary Share. The Board also declared on 25 January 2021 a first interim dividend of 0.92p 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 2021

(audited)

	Share	Special	Capital		Revenue
	capital	reserve	reserve		reserve		Total
	£000	£000	£000		£000		£000
Balance as at 30 June 2020	1,902	187,035	(95,786)		6,801		99,952
Return on ordinary activities after tax	-	-	83,421		5,522		88,943
Equity dividends paid	-	-	-		(6,906)		(6,906)
	--------	--------	--------		--------		--------
Balance as at 30 June 2021	1,902	187,035	(12,365)		5,417		181,989
	======	======	======		======		======

   

Year to 30 June 2020
	Share	Special	Capital		Revenue
	capital	reserve	reserve		reserve		Total
	£000	£000	£000		£000		£000
Balance as at 30 June 2019	1,902	187,035	(32,592)		8,596		164,941
Return on ordinary activities after tax	-	-	(63,194)		6,595		(56,599)
Equity dividends paid	-	-	-		(8,390)		(8,390)
	--------	--------	--------		--------		--------
Balance as at 30 June 2020	1,902	187,035	(95,786)		6,801		99,952
	======	======	======		======		======

BALANCE SHEET

As at 30 June 2021

(audited)

	30 June 2021	30 June 2020
	£000	£000
Fixed assets
Investments at fair value through profit or loss	235,448	151,999
	----------	----------
Current assets
Debtors	416	466
Cash at bank	1,200	90
	----------	----------
	1,616	556
Creditors (amounts falling due within one year)	(638)	(55)
	----------	----------
Net current assets	978	501
	----------	----------
Total Assets less Current Liabilities	236,426	152,500
Creditors (amounts falling due after more than one year)
ZDP Shares	(54,437)	(52,548)
	----------	----------
TOTAL NET ASSETS	181,989	99,952
	=======	=======
Capital and Reserves: Equity Interests
Share Capital:
Ordinary Shares	1,902	1,902
Reserves:
Special reserve	187,035	187,035
Capital reserve	(12,365)	(95,786)
Revenue reserve	5,417	6,801
	----------	----------
TOTAL SHAREHOLDERS’ FUNDS	181,989	99,952
	=======	=======
Net Asset Value per Ordinary Share	95.66p	52.54p
Net Asset Value per ZDP Share	114.46p	110.48p

CASH FLOW STATEMENT

For the year to 30 June 2021

(audited)

	Year to 30 June 2021		Year to 30 June 2020
		£000	£000
Operating activities
Net revenue before finance costs and tax		5,547	6,596
Stock dividends		(328)	(477)
Tax withheld from income		(22)	-
Receipt of special dividends taken to capital		-	78
Investment management fee charged to capital		(921)	(1,071)
Decrease in debtors (excluding stock dividends receivable)		22	918
(Decrease) / increase in creditors		(2)	4
		--------	--------
Cash inflow from operating activities		4,296	6,048
		=====	=====
Investment activities
Purchases of investments		(35,708)	(55,646)
Sales of investments		39,437	57,019
		--------	--------
Cash inflow from investing activities		3,729	1,373
		=====	=====
Financing activities
Equity dividends paid		(6,906)	(8,390)
Interest and fees paid		(9)	(3)
		--------	--------
Cash outflow from financing activities		(6,915)	(8,393)
		=====	=====
Change in cash during the period		1,110	(972)
		=====	=====
Cash at the start of the period		90	1,062
Cash at the end of the period		1,200	90
		======	======

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 2021.  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                                                                                                                               

Amounts recognised as distributions to equity holders:	Year to 30 June 2021 £000	Year to 30 June 2020 £000
In respect of the year to 30 June 2019:
Second interim dividend of 2.71p (paid on 30 August 2019) Special dividend of 0.19p (paid on 30 August 2019)	- -	5,156 361
In respect of the year to 30 June 2020 First interim dividend of 1.51p (paid on 6 March 2020)	-	2,873
Second interim dividend of 2.71p (paid on 28 August 2020)	5,156	-
In respect of the year to 30 June 2021: First interim dividend of 0.92p (paid on 9 March 2021)	1,750	-
	------------	------------
Total	6,906	8,390
	------------	------------

The second interim dividend for the year ended 30 June 2021 of 2.13p (2020: 2.71p) per Ordinary Share is payable on 27 August 2021 and has not been recognised in the financial statements as at 30 June 2021.  Deducting the second interim dividend from the Company's revenue reserves at 30 June 2021 leaves revenue reserves equivalent to 0.72p per Ordinary Share.

3.RETURNS PER SHARE                                                                                                                                                                                                              

	Year to 30 June 2021	Year to 30 June 2020
Ordinary Shares
Net return for the year	£88,943,000	£(56,599,000)
Weighted average Ordinary Shares in issue during the year	190,250,000	190,250,000
Return per Ordinary Share	46.75p	(29.75)p
ZDP Shares
Appropriation to ZDP Shares for the year	£1,889,000	£1,830,000
Weighted average ZDP Shares in issue during the year	47,562,500	47,562,500
Return per ZDP Share	3.97p	3.85p

There are no dilutive or potentially dilutive shares in issue.

4. INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT OR LOSS

	Year to 30 June 2021 £000	Year to 30 June 2020 £000
Investments at fair value through profit or loss
Opening fair value	151,999	213,581
Opening fair value adjustment	78,901	35,023
	------------	------------
Opening book cost	230,900	248,604
Purchases at cost	36,416	55,526
Sale proceeds	(39,489)	(57,229)
Realised losses on sales	(1,481)	(16,001)
	------------	------------
Closing book cost	226,346	230,900
Closing fair value adjustment	9,102	(78,901)
	------------	------------
Closing fair value	235,448	151,999
	------------	------------

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

	Year to 30 June 2021 £000	Year to 30 June 2020 £000
Gains/(losses) on investments:
Net realised losses on sales	(1,481)	(16,001)
Movement in fair value adjustment	88,003	(43,878)
	------------	------------
Net gains / (losses) on investments	86,522	(59,879)
	------------	------------

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:                                  

		30 June 2021		30 June 2020
	Ordinary Shares	ZDP Shares	Total	Ordinary Shares	ZDP Shares	Total
Net assets attributable	£181,989,000	£54,437,000	£236,426,000	£99,952,000	£52,548,000	£152,500,000
Number of Shares at the reporting date	190,250,000	47,562,500	237,812,500	190,250,000	47,562,500	237,812,500
	------------	------------	------------	------------	------------	------------
NAV per Share (a)	95.66p	114.46p	99.42p	52.54p	110.48p	64.13p
Dividend reinvestment factor13 (b)	1.196195	-	1.140600	1.120159	-	1.092117
	------------	------------	------------	------------	------------	------------
NAV per Share on a total return basis at the end of the period (c) = (a) x (b)	114.43p	114.46p	113.40p	58.85p	110.48p	70.04p
	------------	------------	------------	------------	------------	------------
NAV per Share on a total return basis at the start of the period (d)	58.85p	110.48p	70.04p	92.31p	106.63p	95.28p
	------------	------------	------------	------------	------------	------------
Total Return performance (c) / (d) - 1	94.4%	3.6%	61.9%	-36.2%	3.6%	-26.5%
	------------	------------	------------	------------	------------	------------

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 2020, 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 9 August 2021.  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 2021 was 114.46p (30 June 2020: 110.48p).

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 and 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
28 July 2021

ANNOUNCEMENT ENDS