Standing out as rates fall and UK equity sentiment brightens: Aberdeen Equity Income

Aberdeen Equity Income (AEI) has undergone a notable rerating over the past 12-16 months, with it trading at a 1.3% premium at the time of writing, having been at a discount of 11.7% in March 2024. We think a combination of strong performance, falling interest rate expectations and renewed appetite for high dividend income has helped lift sentiment and bring AEI back into focus.

The trust, managed by Thomas Moore since 2011, targets a high and growing income alongside real capital growth through a diversified Portfolio of UK equities. His valuation-led, index-agnostic approach is built around three core stock types: income growth, mispriced yield and unrecognised change, businesses with robust fundamentals, strong dividends and scope for valuation-driven upside. This has allowed Thomas to invest across the market-cap spectrum, blending high-quality, high-yielding large caps with overlooked mid- and small-cap companies where he sees underappreciated fundamentals and stronger long-term growth potential.

Thomas’s approach, and his focus on blending these stock types, has helped maintain a portfolio capable of capital growth, alongside a highly competitive Dividendyield, which sits at a significant premium to both the FTSE All-Share and AIC UK Equity Income sector average. The dividend has grown for 24 consecutive years, and full-year revenue forecasts suggest a 25th year should be covered by current year earnings. Given the trust’s strategy, Thomas has found several opportunities over the past year. Much of the activity has centred around the mid-cap arena, including new additions like Greggs, Bridgepoint and Balfour Beatty.

AEI has outperformed the FTSE All-Share Index over the 12 months to 24/07/2025. The trust delivered a NAV total return of 16.3%, ahead of the Index’s share price total return of 15.3%.Performancewas supported by a more favourable market backdrop and strong stock selection within financials, with Petershill Partners, NatWest and TP ICAP among the top contributors.

From a double-digit discount to a slight premium, AEI’s rerating reflects more than just improved sentiment. In our view, it signals a strategy coming back into favour. AEI offers investors a compelling mix of resilience and recovery: high-yielding stocks with dividend durability and valuation upside, in companies where earnings, cashflows and dividends are supported but not yet fully reflected in prices. As interest rate expectations shift and investors look again at undervalued UK equities, we think the trust’s high and rising income, paired with its disciplined focus on valuation, has found renewed appeal, particularly at a time when UK equities remain under-owned and overshadowed by pessimism.

The portfolio also looks different from more traditional equity income strategies. Less constrained by benchmarks and featuring an above-average allocation to mid- and small-cap companies, AEI has exposure to more varied income streams and differentiated capital drivers. This multi-cap flexibility has paid off more recently, with contributions from financials and undervalued mid- and small-cap companies aiding outperformance over the past year. That said, it’s worth noting that AEI’s style can lag during growth-led or large-cap-dominated markets, and at times of pronounced US dollar strength, as seen at points over the past five years.

Still, we think the backdrop is increasingly shifting in AEI’s favour. UK fundamentals are improving, interest rate cuts seem more likely, and the appeal of cash or high-yielding bonds may wane in a lower-rate environment. Additionally, with early signs of rotation from US growth stocks into value-focussed UK equities emerging, AEI’s elevated income—a prospective 6.0% dividend yield, supported by strong free cash flow and a 24-year track record of growth—alongside its capital growth potential, may become hard to ignore for income-focussed long-term total return investors alike.