Portfolio Strategy

We take a long term approach to investing, believing that, whilst there might be volatility in the short and even medium term, share prices should ultimately reflect the fundamental value of a company. Consequently, there has been no change to our approach to the construction of the portfolio during the year under review. The Company's investment portfolio is invested in equities, preference shares and other fixed income instruments. At the year end, 81% of the portfolio was invested in equities and 19% was invested in fixed income, roughly in line with the weightings at the end of the prior year.

While the portfolio is primarily focused on UK listed companies, we have the ability to invest up to 20% of the assets in overseas companies, with the aim of improving diversification and finding opportunities not available to investors in the UK market. The limit was increased from 10% to 20% during the year in order to increase flexibility. However, we see valuations in the UK as particularly attractive and it is notable that overseas exposure has actually reduced compared to the prior year. As at the year end we held four overseas companies, making up 4.8% of the portfolio, compared to eight positions and 9.4% at the prior year end.

Equity Market Review

The year to the end of March 2025 was a good one for equity markets globally. The MSCI World index delivered a total return of 7.5%, even though it fell by almost 7% from its highs in the middle of February to the end of March. US markets continued to perform well, with the S&P 500 returning 8.5% over the period, but equity market performance was much more consistent across the world last year than it has been for some time. Europe almost kept pace with a 7.5% return from the MSCI Europe Index and the MSCI Emerging Markets Index also did well, returning 8.6% in US Dollar terms. Notwithstanding the amount of negative press around UK equities, the UK market as measured by the FTSE All-Share Index performed even better, returning 10.5% for the year.

While performance for different equity markets was more balanced over the 12 months, this reflected different winners and losers at different points in the year. For much of the period, the US led the way, with large cap technology stocks such as Nvidia leading the market higher. Continued strong earnings and flows into US index trackers supported share prices, with the election of Donald Trump as President in November giving the US market a push into the calendar year end. However, this reversed in early 2025. Growing concerns over trade policy in the US, combined with high valuations, led to a pullback in US equities. At the same time, the removal of government borrowing restrictions in Germany provided a potential source of stimulus for the European economy, boosting European markets and causing a rotation out of US into European equities. Between January and March, Europe outperformed the US by around 10%. We had been hoping for a broadening out of equity returns away from a concentrated set of companies in the US for some time and the rotation is a welcome, and healthy, development for markets.

Within the UK market, financial stocks were the stand-out performers, with banks up by 56% and the insurance sector up by 20%. Over the year, interest rates and bond yields remained at high levels, boosting bank returns, while the market has slowly understood the strength of the UK banks hedge position, which helps protect them from falling interest rates over the next few years. The combination of earnings upgrades for the sector and valuations which remain low compared to history has been a powerful combination. Another sector that has performed well has been capital goods, with defence stocks performing well and also UK construction and industrial companies as activity levels have remained robust. The outlook for increased government spending has supported construction companies.

The sectors that have lagged the market have been the more cyclical ones. Shares in consumer goods have been weak, reflecting concerns about the UK domestic economy, while materials and energy have also lagged as global growth has slowed, especially in China which drives much of the world's commodity demand. While some sectors have benefitted from higher interest rates, the reverse has also been true for sectors that correlate negatively with yields. Healthcare was up slightly, but lagged the market, while the real estate sector fell 10% over the period.

Investment Performance

The net asset value ("NAV") total return for the year was 9.4%, a strong return. This compares to a total return of 10.5% from the FTSE All-Share Index.

The largest negative impact on performance over the period was the weighting towards smaller companies. Over the long term, small and mid-cap companies in the UK have delivered markedly superior returns to large caps. They are more likely to grow and, in turn, to deliver dividend growth. As an active manager, we see more ability to deliver differentiated returns from small and mid-cap companies, given they are less well analysed and understood by market participants. Furthermore, we have a genuinely size agnostic approach to investing. That means that the portfolio is more likely to have an underweight exposure to large companies and an overweight exposure to small companies compared to the benchmark. However, this weighting towards smaller companies did not work well during the year as returns within the benchmark were heavily skewed towards larger companies. The FTSE 100 Index returned 11.9%, but the mid-cap FTSE 250 Index returned only 1.1%, an unusually wide spread between the two.

Why was this the case? We don't see compelling fundamental reasons - earnings revisions from the FTSE 250 have been comparable to the FTSE 100. But we do see an impact from lower liquidity in the UK market and there is a clear correlation with negative sentiment on the UK and investor caution. The FTSE 250 is slightly more domestically focused and is seen as higher risk by investors. However, it very rarely trades at a valuation discount to the FTSE 100, with the most recent occurrences during the Covid-19 pandemic and immediately following the Brexit vote in 2016, yet it currently trades at an approximate 10% discount on a price to earnings multiple. Smaller companies tend to underperform when UK bond yields rise, as investors are more risk averse, and growth is discounted to a greater extent. Our hope would be that, as interest rates come down and sentiment towards the UK improves, we will see a recovery in UK mid cap stocks.

On an individual stock basis, the top performers included Morgan Sindall, which returned 50% as it continued to deliver strong earnings upgrades, benefiting from tightness in the fit-out market and robust construction demand in the UK. Imperial Brands (+72%) delivered improved cashflows and was helped by a consistent high level of share buybacks through the year. Banks in general were particularly strong, boosted by higher for longer interest rates and low starting valuations. Within the portfolio, NatWest (+83%), HSBC (+54%), Standard Chartered (+74%), and OSB (+30%) all delivered notably positive returns. Games Workshop (+46%), was another smaller-cap holding that delivered earnings upgrades and re-rated over the course of the year.

The greatest detractors from performance this year were companies where there were unexpected, company specific events. Wood Group (-79%) fell sharply after announcing an investigation into internal accounting procedures. Two potential bids for the company demonstrated the attractions of the underlying business, but uncertainty and bad timing meant these did not complete, leaving the company in a weak position. We retain a small position in the portfolio and the company remained in discussions with one potential acquirer as at the year end. Close Brothers (-33%) also fell as the company dealt with the fall out of an FCA investigation into historical motor finance loans. We see the impact of this as reflected in the price and hope for some relief on an outcome of a recent Supreme Court hearing. Novo-Nordisk (-40%) was another detractor, due to increased competition to its GLP-1 weight loss drugs. We have been reducing the holding for some time after a period of strong performance, and the holding has still had a positive contribution to performance over the last five years. Conduit (-30%) underperformed due to exposure to the fires in Los Angeles at the start of 2025, while Melrose Industrials (-30%) was impacted by concerns over global trade and the pace at which free cashflow is generated.

Gearing and Fixed Income Portfolio

Gearing (net of cash) was stable over the year, moving from 16.4% to 16.5%. The gearing is notionally invested in the portfolio of preference shares and fixed interest securities. At the year end these securities had a value of £23.5 million, materially in excess of net indebtedness which stood at £17.7 million.

The fixed income portfolio delivered a return of 17.5% over the period. Values were helped by the stabilisation of bond yields and by strong underlying performance of the issuing companies which are primarily in the banking and insurance sectors. Although this portion of the portfolio has generally very low turnover, there were some changes during the year. This was largely driven by the tender offer for the RSA preference shares in July 2024. A change of capital rules for insurance companies means that preference shares are less valuable to issuers, making it more attractive for insurers such as RSA to retire them. From our point of view, the tender offer came at attractive terms, with an implied yield of 6% resulting in an uplift in the value of around 10% and pricing the preference shares at a level last seen in a much lower interest rate environment.

We reinvested the proceeds of the RSA tender offer into Nationwide Building Society perpetual debt at a 7.8% yield, thereby delivering an increase in income generation for shareholders alongside the gain in capital value. Overall, this is a positive development, and it sets an encouraging precedent for terms on any future tender offers. So far in 2025 we have also seen Aviva tender to redeem outstanding General Accident preference shares at terms we see as similarly attractive for holders.

Revenue Account

This year marks the first full year post the merger with abrdn Smaller Companies Income Trust PLC at the end of 2023 and, as such, the period reflects greater income generation from a larger portfolio, offset by the higher share count following the completion of the merger. The income generation from the portfolio was resilient through the year, despite an increased use of buybacks by UK companies and the resultant slowing of dividend growth and lower special dividends.

The following table details the Company's main sources of income over the last five years.

Portfolio Activity

The year under review was an active period for the portfolio. Although we invest for the long term, we always try to remain active, deploying capital to enhance income and to react to market events and changes in valuation. If we feel a company is fairly valued, or if the outlook has deteriorated, we should not be slow to act and to redeploy capital to more attractive opportunities. The impetus to make changes has felt particularly strong this year, with an uncertain and somewhat volatile outlook. With UK equity valuations low and many companies attractively valued, it is sensible to be active and take advantage of opportunities. Looking back to the portfolio at the end of the prior financial year, 21 positions have been exited completely, with 17 new holdings replacing them.
The majority of trading during the year was in response to company specific factors, although the one common driver of trading decisions was the need to protect and enhance income generation. The primary aim of Shires Income is clear: to deliver a high, and over time growing, level of income to shareholders. At a time when we see market levels as relatively high and the importance of income for total return as increasing, many decisions during the year were made to enhance income. Below, we briefly discuss the new positions and portfolio exits in chronological order through the course of the year. While this is extensive, it is hopefully a useful insight into the decisions made on your behalf and how the portfolio is run.
In April, we added a new position in construction contractor Kier Group. The company has delivered significant balance sheet improvement in recent years and was about to resume paying dividends. We like the company given structurally supportive industry trends, high cash generation and still low valuation, despite a period of outperformance. The free cash flow yield at close to 20% supports dividend growth and continued deleveraging. The shares trade on a 6x price to earnings multiple compared to peers on 9-10x. Another trade was to switch the holding in Mondi into Smurfit Westrock. This reflected our preference in the paper and packaging sector, and we see greater upside in the medium term from Smurfit Westrock as it delivers on a significant acquisition in the US market, with material self-help potential.
In May we started a new position in Reckitt Benckiser. The portfolio has generally had an underweight exposure to the consumer staples sector in recent years, given unattractive valuations, low yields and limited genuine growth. A recent sell-off in the shares offered an opportunity to gain sector exposure at a material discount to the peer group and with a yield over 4.5%. The company has struggled operationally in recent years, but there are signs of a turnaround under new management and the underlying brands remain high quality. We also sold out of IT distributor SoftCat in May. This had been in the portfolio for two years and it grew over that time. The shares had re-rated and traded in excess of 25x price to earnings, while the dividend yield had compressed to just 2% at the point of sale. It remains a well-run company with growth potential, but there was more obvious value elsewhere.
We exited one position in June, Greggs. The company had performed very well since it was added to the portfolio in November 2023, and we continue to like the business model and the potential for strong medium-term growth as it expands its offering and rolls out more stores. However, with the yield compressed and the shares trading at over 21x earnings, this was another one we saw as more fairly valued. 
In July we started a new position in UK reinsurance company Conduit. This is a relatively new reinsurance business which is set to deliver earnings growth as its book matures and it benefits from positive market trends. The company has recently demonstrated strong premium growth and improved underwriting profitability. The shares had a 6% dividend yield at the time of purchase and the position helped to diversify the portfolio. At the same time, we sold out of AXA. The French insurer had performed very well since purchase, but had no further income this financial year.
In August we sold out of the position in Lloyds, again reflecting the timing of dividends and the need to generate income through the year. Capital was reallocated to NatWest. Similarly, we switched the holding in BHP into Rio Tinto, a company with very similar drivers but more near-term income. A more meaningful trade in August was to start a position in Dutch technology company ASML. When adding overseas companies to the portfolio, we generally look for something that can't be found in the UK market, and ASML is a prime example of this. The company designs and manufactures the lithography machines essential in the production of today's cutting-edge semiconductors. It has extremely high technical barriers to entry, making products that are essential for one of the highest growth parts of the market and is a genuine diversifier in the portfolio. While it screens as relatively expensive, a recent pullback in its share price means it has de-rated in the last few months and we expect growth to make it look much more reasonably priced a few years from now. We should not forget that the company's end markets are cyclical, but it is one to hold for the long term. The purchase was funded by selling the position in French utility company Engie. This had been an excellent performer since its introduction into the portfolio but we had downgraded it and it had no more income this year - time to take profit.
At the other end of the market cap spectrum, we started a new position in ME Group. This UK mid-cap company operates automated photo booths and laundromats. A somewhat niche market, but one with high returns on capital and plenty of room for growth as it rolls out the self-service, high capacity, laundry model into Europe and Asia. It is a company that our small-cap team like and is a great example of Aberdeen teams working together to find interesting and differentiated income opportunities. We also started a new position in UK property REIT London Metric in August. This is a liquid property company with a high-quality management team and solid performance through the economic cycle. It has an excellent track record of delivering dividend growth and the recent 19% year-on-year increase in dividend takes it to a very attractive 5.9% yield. The purchase was funded by selling the holding in Dutch bank ING. Since purchase in April 2023, the holding had delivered a total return of 65%, outperforming the benchmark by 50%. However, with no income in the next six months we again chose to prioritise other ideas. Another overseas exit this month was Mercedes-Benz. Again, the driver was a lack of income in the near term but very much combined with some difficult trends in auto markets which made us less optimistic on the near-term prospects for the company.
There was only one meaningful trade in September, switching UK housebuilder Berkeley Group into peer Barratt. The move came ahead of Barratt going ex-dividend, so we captured some additional income, but the investment primarily reflected the fact that Barratt had lagged the sector following its deal to buy Redrow.
The remaining holding in GSK was sold in October. This is our least preferred large-cap pharma company and, while the recent Zantac litigation progress has been positive, this has been offset by some uncertainty on vaccine sales rates.
In November, one new holding was added, French listed Gaztransport Et Technigaz ("GTT"), with the position funded by selling TotalEnergies to maintain the weight to energy. GTT provides the membrane containment technology to liquefied natural gas ("LNG") carriers, which ship cooled gas between international markets. This is a growing market as LNG import and export capacity expands. The market will require greater tanker capacity and GTT dominates this space with high technological barriers to entry. It has a strong order book, and we expect that, as the tanker fleet ages in the next few years, we will see a growing replacement market, supporting long term cashflows. The company has a strong balance sheet, provides a high return on capital and pays a high dividend yield. This switch also reduces commodity price leverage in the portfolio. Given a mixed outlook for energy demand in 2025, we don't think that is a bad thing.
In December the weight in Standard Chartered was reduced, with the capital used to buy back into ING. ING was only sold in August, but Standard Chartered outperformed it by 30% in the four months since, and with a defensive mix and high yield it looked attractive. The other notable trade in the month was to exit animal genetics provider Genus. While Genus remains a high-quality business with high barriers to entry, underperformance meant it had fallen below our minimum position size, forcing the question of "up or out". With risks to the timing of its disease resistant genetics and low yield we chose to move on.
At the start of January, we started a new position in UK bank Barclays. The position was funded by selling down some of the holding in NatWest which had performed very well. The move helped to diversify the exposure to UK banks and to increase exposure to capital markets where we saw more potential for positive surprise in 2025. During January we also switched the position in Aviva preference shares into the equity. The preference shares deliver a reliable, high yield, but equities generally have better long-term growth prospects. In the case of Aviva, the equity also offered a premium yield to the preference shares and there is an opportunity for the company to extract meaningful synergies from the recent acquisition of Direct Line, resulting in some earnings upgrades. That makes the equity relatively more attractive. The position in Italian utility Enel was also sold during the month. The share had risen by approximately 30% since the addition to the portfolio in mid-2023 and we had become less attracted to the company.
During February there were changes to the UK consumer discretionary exposure, with the holding in Dr. Martens sold and the proceeds reinvested into Dunelm. Although we see good long-term potential from Dr. Martens under new management, the share price had rallied and the shares do not deliver a meaningful income. By contrast, Dunelm had de-rated due to concerns around the UK consumer and remains a high quality, cash generative, retailer. With a special dividend coming up and a business model that continues to win market share through the cycle, we saw it as a better balance of risk and reward in the current environment. The exposure to UK housebuilders was also changed in February, switching from Barratt Redrow into Taylor Wimpey. The change reflected a materially higher dividend yield from Taylor Wimpey, making it a more attractive way to gain exposure to market improvement for the portfolio. Finally, we also switched holdings in European banks during the month, selling ING and buying Italian bank Intesa Sanpaolo. Intesa Sanpaolo has a higher dividend yield and its weighting to investment services offers stronger long term growth and better protection for income if interest rates move lower in Europe.
Closing the year, March was an active month for trading. At the start of the month, we sold out of the remaining position in 4Imprint, reflecting potential headwinds from higher tariffs and slower economic activity in the US. We like the company, but saw it as fairly priced at those levels, with the dividend yield only marginally above the benchmark level. We also started a new position in self-storage provider Safestore. The shares have been very weak recently and now offer a yield of over 5%. The shares are trading at a material discount to asset value, providing downside protection. We also sold out of the remaining position in Novo-Nordisk. This has been a great holding over recent years but has moved down our order of preference in the healthcare sector as competition has increased and it offers limited yield.
At the end of the month, we switched UK bank exposure back from NatWest to Lloyds. This provided an income benefit due to dividend timing and there is potential for some near-term catch-up for Lloyds on clarity over investigations into historic motor finance deals.  We also bought back into 4Imprint - an unusually quick turnaround! Since we sold the position, the share price had fallen on US activity concerns and all the reasons we like the company for the long term continue to apply. Having sold the shares 30% higher earlier in the month we were happy to buy them back with concerns more reflected, even if we are likely to see some more tariff turbulence in the short term. The purchase was funded by selling Games Workshop. This is a great company, but we consider that the shares are now more reasonably priced having more than doubled since the position was added to the portfolio.

Stewardship

We believe that, as long-term owners of the businesses in which we are invested, it is not sufficient merely to seek out assets that we believe to be undervalued. It is also incumbent upon us to take a proactive approach to our stewardship of these companies. Therefore, we engage extensively with investee companies. We have attended a range of meetings with chairmen, non-executive directors and other stakeholders. Topics covered have included the composition of the board, environmental and social issues, and remuneration. Risk is a very broad subject that is interpreted in varying manners by different companies. However, by engaging on this subject, we secure a deeper understanding of how the boards of investee companies perceive and seek to manage these issues. Such interactions also enable us to push for improved disclosure and better management practices and, on occasion, different decisions where appropriate. We have had conversations regarding companies' financing choices. We find that it is always worthwhile communicating our preference for conservatively structured balance sheets that place a company's long-term fortunes ahead of possible short term share price gains. Such activity is by its nature time consuming, but we regard it as an integral aspect of our role as long term investors.
Consideration of Environmental, Social and Governance ("ESG") factors form an important part of our process. Whilst the management of the Company's investments is not undertaken with any specific instructions to exclude certain asset types or classes, we take these factors into account as part of the investment process. ESG investment is about active engagement with the goal of improving the performance of assets held by the Company. We aim to make the best possible investments for the Company by understanding the whole picture of the investments - before, during and after an investment is made. That includes understanding the ESG risks and opportunities they present, and how these could affect longer term performance and valuation.

Outlook

The 2025/2026 financial year has certainly started with a high degree of volatility. A very active new US administration has turned global trade relations upside down in recent weeks, causing markets to swing one way or the other depending on the latest statements. As such, by the time we reach our AGM in July any outlook statement may be more redundant than usual!
Despite the short term unpredictability of markets, we are seeing some events happen that have been well flagged. After an almost unprecedented period of market leadership, US equities are struggling this year as concerns build around the strength of the domestic economy and the consumer in particular. While the potential for inflationary tariffs have acted as a catalyst for this, it would be no surprise if we saw a US downturn after such a strong period of growth. At the same time, international markets have held up well, helped by government stimulus in Europe and by much lower starting valuations. Given the extent of US outperformance in the last decade and the still extreme weighting of global equity funds to the US, we consider there is significant runway for this trend to continue. Diversification for all investors should be at the top of the agenda. Any holder of a global index tracker has around 70% of their assets in US large cap companies and April's changes should be a trigger to look closely at that allocation.
Any change in equity allocation should favour UK markets - a small outflow from the US becomes a big inflow if it crosses the Atlantic. UK companies remain cheap on any objective measure and the high level of distributions should prove very attractive to investors at a time when market directions are uncertain. Our focus today is to lean into UK domestic markets and continue to find those companies with resilient cashflows supporting high distributions through the economic cycle. While the portfolio is style agnostic, the opportunities in value stocks remain compelling in our view and we continue to steer in this direction. Low starting values protect the downside in the event of a recession while providing the potential for higher returns in the eventual cyclical upturn - even if great care is needed to avoid the value traps.
An important part of the portfolio positioning remains having an overweight exposure to UK small and mid-cap companies. This has not worked so far in 2025, with rising bond yields at the start of the year acting as a headwind to this part of the market. However, we remain convinced this is the place to be. The fundamentals for UK mid-caps have been robust and there are bargains to be found, with quality companies at very reasonable prices. The expectation is that we will see a faster pace of interest rate cuts from the Bank of England this year, and that will help government finances, allow bond yields to move lower and act as a tailwind.  Following the merger with abrdn Smaller Companies Income Trust in 2023 we are able to take more small-cap exposure directly, increasing the allocation to high conviction ideas and maximising income generation from this segment of the market. However, we continue to work closely with our small-cap team to identify opportunities.
A return to international and mid-cap outperformance would also likely benefit active management. While benchmarks and passive index trackers think in terms of market capitalisation, active managers tend to think about the opportunity set as more equally weighted. This matters - in the UK, the large cap FTSE 100 Index makes up over 85% of the FTSE All-Share Index by market-cap, but only 20% of the constituents. There are plenty of opportunities out there for the year ahead. Our focus remains squarely on meeting the income objective and growing income over time, while also preserving capital and maintaining the potential for long term growth.

Discrete performance (%)

Total return; NAV to NAV, net income reinvested, GBP. Share price total return is on a mid-to-mid basis.
Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value.
Source: Aberdeen and Morningstar.
Past performance is not a guide to future results.

Investment Objective

The Company’s investment objective is to provide shareholders with a high level of income, together with the potential for growth of both income and capital from a diversified portfolio substantially invested in UK equities but also in preference shares, convertibles and other fixed income securities.

Important information

Risk factors you should consider prior to investing: 

Other important information:

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