The merger in March of Aberdeen Equity Income Trust (AEI) with its Aberdeen stablemate Shires Income was viewed as a winning move for everyone concerned, with both trusts in fine fettle and sharing much common ground.

As the new regime beds down, we caught up with Iain Pyle, former Shires manager and now co-manager of the new-look AEI with Thomas Moore, to find out how it’s going.

Because the two trusts were very much on the same page in regard to the kinds of company in which they were invested pre-merger, portfolio realignment has been a smooth business so far, says Pyle.

“It’s been a period when we’ve had a lot of company meetings and met a lot of management teams, sometimes both of us together, sometimes individually. Then it’s just a case of finding common ground about what we want in the portfolio,” he explains. “But there was much crossover between Shires and AEI before the merger, so agreeing what we want to do has been pretty straightforward.”

Partnership is working well in other respects too. For desk work such as preparation for board meetings, monthly updates and half yearly reports, a job shared is a job halved, while a managerial double act can enhance marketing trips and investor presentations, says Pyle.

A light portfolio pruning

Getting the £350 million AEI portfolio fully into shape takes time, of course, and there is still a little tidying up to do as the pair decide where their highest conviction lies and how they want to allocate capital looking ahead. But as Pyle points out: “There’s no rush; we can run a slightly larger number of holdings for a while, to make sure we get the timing right to exit or top up. We don’t want to be forced sellers unnecessarily.”

Indeed, so far almost all trading decisions have been around selling out of tail positions and adding to attractive holdings that are felt to be too small.

Exits include London property company CLS, “where we saw more risk than reward compared to peers”, and also housebuilder Taylor Wimpey. “We already own Barratt Redrow, which is slightly bigger and higher quality, and that’s enough exposure to housebuilders at present,” Pyle explains.

Among recent top-ups, he picks out software businesses Softcat and Kainos. In addition, GTT, which builds the containment systems for gas tankers, is “a good stable growth story, very defensive,” while online financial trading platform CMC Markets usually sees increased activity in volatile markets, when clients hedge or adjust their positions.

Performance without undue risk

The managers’ emphasis on taking their time to adjust the portfolio is particularly significant, given the extreme volatility of markets over the past few months as the fallout from the Iran/US war continues.

In fact, says Pyle, the portfolio has proved reassuringly robust in the face of the conflict.

“We both already had really strong exposure to energy companies, building substantial overweight positions in smaller UK energy producers over the last couple of years because they are a natural source of high yield and valuations became so attractive,” he says.

“On bad news days when concerns about global fuel supplies push oil and gas prices up, those holdings have done very well; and when peace talks seem to be making progress and markets rise strongly, our UK mid-cap holdings tend to feel the benefit, so we have been well positioned.”

That’s reflected in performance in 2026 to date. As of 28 April, the trust is up 8.0% in total return terms, around 3% ahead of the benchmark FTSE All-Share index. 

Historically, Pyle notes AEI’s portfolio has had a relatively high beta, which means it is more sensitive to volatility than the broader market in both rising and falling scenarios. He is therefore particularly pleased that it has delivered good recent performance, outperforming significantly against the current backdrop of continuing elevated risk.

Looking ahead, it’s very likely that markets will react positively to any more secure indications of peace. But Pyle warns against complacency in that event. “Even if a deal is made and oil prices start to fall, we anticipate broad global supply chain problems for lots of oil-based components, from jet fuel and diesel to fertiliser, for a while,” he observes.

The risk in such a situation is that companies start to set more cautious trading guidance for the coming months, and those downbeat forecasts can result in unexpectedly negative market sentiment and falling share prices.

As far as adjusting or adding to the portfolio is concerned, therefore, “we are trying to steer clear of more cyclical or high-risk businesses, and to find those where there are company-specific reasons why we see value or a strong investment case,” Pyle says.

He refers to such businesses – which demonstrate resilience and some control over their own destiny – as “‘whatever the weather’ winners,” pointing to a new position in the soft drinks manufacturer AG Barr as a good example.

“Soft drinks is a defensive sector, and the company has a new management team keen to rejuvenate some of its brands, reposition products and improve outcomes. It’s trading at a material discount to the sector; and it’s not likely to be nearly as impacted by the Iran conflict as many other types of business.”

Overall, the UK economy was generally in pretty good shape before the Iran conflict, with companies looking strong, confidence building and valuations not stretched. So, these first weeks of AEI’s merger, defined by painful market turbulence, have thrown up plenty of value and attractive opportunities for the managers.

However, Pyle remains cautious about medium term prospects in the face of continuing uncertainty. “The market has been surprisingly resilient in the face of continuing difficult news, but a lot depends on how quickly we can get a resolution to the war and avoid supply chain issues escalating,” he warns, “but our focus on resilient, high dividends, gives us a strong chance of generating returns”. 

Discrete performance (%)

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. The company is authorised and regulated by the Financial Conduct Authority in the UK.

Find out more at www.aberdeeninvestments.com/aei or by registering for updates. You can also follow us on LinkedIn, Facebook, YouTube and X.