9 March 2023
F&C Investment Trust PLC (‘FCIT’/the ‘Company’) today announces its results for the year ended
31 December 2022.
· FCIT’s share price was 904.0 pence representing a total return of -0.9%, ahead of its benchmark, the FTSE All-World Index, of -7.7%.
· FCIT’s Net Asset Value (“NAV”) total return of -5.3%, with debt at market value, ahead of the benchmark.
· The Company has delivered a total shareholder return of 240.7% over the ten-year period to the end of 2022, equivalent to 13.0% per annum .
· The final dividend will be 3.9 pence per share, subject to shareholder approval, and will bring the total dividend for the year to 13.5 pence per share. This will be a 5.5% increase, the 52nd consecutive annual increase.
· FCIT is committed to transition its portfolio to net zero carbon emissions by 2050 at the latest.
Commenting on the markets, Paul Niven, Fund Manager said:
“Throughout 2022, rising inflation and interest rates, in conjunction with geopolitical volatility, weighed on global equities and resulted in valuations falling sharply over the course of the year. The exiting of a low interest rate world has fundamentally changed the investment environment and we will likely continue to see pressure on parts of the equity market. The coming years may also see greater opportunity for performance from markets outside of the US and improved prospects from emerging markets, partly driven by valuation differentials.”
Chairman’s Statement
Dear Shareholder,
2022 was a challenging year for the world and for financial markets, with global equities delivering their weakest annual returns since the Global Financial Crisis of 2008. At the same time, government bond markets suffered their steepest losses in decades. Investors grappled with geopolitical concerns, dominated by the war in Ukraine, and the impact of sharp rises in inflation, leading to aggressive rises in interest rates. Against this backdrop, a sharp decline in sterling against major currencies helped to cushion the decline in our Net Asset Value (‘NAV’). Our NAV total return, taking debt at market value, of -5.3% outperformed the return from our benchmark of -7.7% and the discount on which our share price traded relative to NAV per share narrowed, from a start of year level of 7.3%, to end the year at 3.0%. The narrowing of our discount enhanced shareholder returns, resulting in a share price total return of -0.9%. While it is disappointing to report negative returns for shareholders, this return was the strongest amongst our peer group of global investment companies.
Our strong performance, in comparison to other UK listed companies, led to our promotion, for the first time since 2009, to the FTSE 100 in September 2022. Our inclusion in the index of the largest 100 UK companies increases the Company’s profile to investors and may lead to higher demand for our shares, which in turn may assist in narrowing the discount at which they trade.
Our NAV per share, with debt at market value, fell from 998.7p per share to 932.1p per share and our share price fell from 926.0p to 904.0p. Again, while disappointing to report a decline, this was modest by comparison to deeper losses in equity markets.
I am pleased to report that our portfolio was relatively well positioned for the volatility which unfolded during the year, with cash levels raised and gearing reduced ahead of significant market declines. A reduction in our long position on sterling, which fell by -10.7% against the US dollar in response to rising US interest rates, declining investor risk appetite and UK domestic political concerns, as well as the sale of our small cap allocation also helped returns. A significant positive contributor was the material reduction in exposure to expensive growth stocks, which provided some protection against their underperformance. Our private equity holdings once again outperformed their listed equivalents which declined in value and lagged the return from the benchmark. The impact of gearing in a weak market environment detracted from our returns but we made significant mark-to-market gains on the fair value of our outstanding debt as a result of rises in global interest rates.
Within our listed portfolio, all regions lost value over the year although the sharp decline in sterling against major currencies reduced the scale of the losses. Value and income-oriented strategies delivered strong excess returns against both the market and growth-focused portfolios. While we were tilted towards these outperforming areas in our listed portfolio, the underperformance from stock specific exposure offset the positive impact of this decision. Indeed, while there were some notable highlights, it was a year of disappointing returns from a number of our underlying fund managers, leading to our listed exposure underperforming the benchmark for the year.
In contrast to lacklustre returns from listed equities, our private equity holdings had another strong year with both our newer commitments and historic holdings delivering gains in absolute terms. While there is typically a lag in recognising changes in valuations of private equity holdings and one must take a long-term perspective in considering results, it is pleasing that our portfolio of unlisted investments held up well in this challenging market environment. The Company holds very limited exposure to unlisted disruptive technology companies, many of which have been the subject of significant reductions in valuation. Nonetheless, the Board remains mindful of the risks associated with unlisted investments and continues to adopt a careful approach to both valuation and any new commitment opportunities.
A CONTINUED FOCUS ON THE LONG-TERM
While it was disappointing to lose value for shareholders in 2022, we remain firmly focused on the delivery of growth in both capital and income for shareholders over the long-term. The past decade remains a period where investors in global equities have enjoyed exceptional returns and your Company has delivered a total shareholder return of +240.7% over the ten-year period to the end of 2022, equivalent to +13.0% per annum. 2022 was only the second year in the past decade during which shareholder returns have been negative, with 2018 seeing a similarly modest decline (0.6%).
Reflecting further on longer-term returns and the power of compounding, over the twenty-year period to 31 December 2022 the Company’s share price total return was +743.5%, equivalent to +11.2% per annum. Our capital-only returns over the past twenty years were +454.6%. Dividends paid to shareholders have risen by 4.7% per annum over the past decade and by 7.0% over the past twenty years. Such results continue to demonstrate the importance of compounding income and capital gains over long periods in the process of value creation for shareholders.
FIFTY SECOND CONSECUTIVE ANNUAL DIVIDEND INCREASE
After a sharp downturn in our revenue during 2020, we enjoyed a robust recovery in 2021 which continued over the course of 2022. Our earnings rose on the year to £72.6m, a record high, while special dividends increased slightly to £1.6m (2021: £1.4m). The impact of currency movements added £4.9m to our income (2021: detracted £4.0m). Our Net Revenue Return per share rose by 26.7% to 13.92 pence per share from 10.99 pence per share in 2021.
Inflation rose sharply over the year and, while annual rates of Consumer Price Index (‘CPI’) increases may now be past their highs, the backdrop is one where price pressures are expected to remain elevated for some time to come. While it remains the ambition of the Board to deliver real rises in dividends for shareholders over the long-term, it is also our intention to deliver sustainable rises in dividends. I am therefore delighted to report that the proposed annual dividend will be fully covered by our revenue.
Subject to approval at the Annual General Meeting (‘AGM’), shareholders will receive a final dividend of 3.9 pence per share on 11 May 2023, bringing the total dividend for 2022 to 13.5 pence: an increase of 5.5% over that of 2021. The increase compares to the 10.5% rise in inflation as measured by the CPI, which in October reached its highest level for over forty years. In addition, as well as being our fifty second consecutive rise in annual dividends, it is our one hundred and fifty fifth annual dividend payment.
Shareholders can also take comfort that in addition to our substantial revenue reserve (£97.5m at the year end), we have capital reserves which stood at £4.3bn at the year end. We therefore remain in a very strong position to continue our track record of increasing annual dividends well into the future.
MARKETING
We launched our new branding at the FCIT sponsored lecture held last July at The Guildhall, London. The lecture, which focused on “Smart Choices for a Smarter Future” was a great success and we hope to host another such event in 2024. The new branding has been supported by a marketing campaign which will continue into 2023 and is aimed at increasing awareness of the benefits of investing in the Company and attracting new investors. We hope shareholders like the new look of our annual report.
COMPANY RATING AND EFFICIENCY
Prior to the Covid-19 pandemic your Company was trading at a premium rating and we issued shares in both 2018 and 2019. In 2020 and 2021 we saw the re-emergence of a discount in our share price relative to NAV but it is pleasing to report an improvement in the Company’s rating over the course of last year. We bought back a total of 8.4m shares into treasury as part of our commitment towards achieving a sustainably low deviation between the share price and NAV. The discount averaged 7.5% over 2022 and ended the year at 3.0%, narrower than the 7.3% level at the start of the year. The narrowing in our discount was accretive to the shareholder total return over the year.
| Contributors to total return in 2022 | % |
| Portfolio return | (7.9) |
| Management fees | (0.4) |
| Interest and other Expenses | (0.4) |
| Buy backs | 0.2 |
| Change of value of debt | 4.2 |
| Gearing/other | (1.0) |
| NAV total return | (5.3) |
| Change in share price discount | 4.4 |
| Share price total return | (0.9) |
| FTSE All-World total return | (7.7) |
Source: Columbia Threadneedle Investments
Our Ongoing Charges figure remained at 0.54%, the same level as 2021, with an increase in marketing expenses being offset by a reduction in the management fee paid. From 1 January 2023, as explained in last year’s Annual Report, the management fee was reduced to a rate of 0.3% on our market capitalisation up to £4 billion and at 0.25% thereafter. The Board remains focused on delivering value for money for shareholders as part of its performance objectives.
BORROWINGS
In recent years we have taken advantage of historically low interest rates to secure long-dated fixed rate borrowings. We reported in last year’s Annual Report that, in the closing stages of 2021, we had agreed £140m of borrowings with repayment dates between 2037 and 2061. These borrowings were drawn down during the first quarter although, given the near term caution of the Fund Manager, they have not yet been invested into equity markets.
As at the end of 2022 we had outstanding debt of £581.3m and a blended borrowing rate of less than 2.4%. These are exceptionally low rates of borrowing for your Company and represent a low hurdle which we expect the returns from our investments to exceed and, therefore, expect that the use of these borrowings will prove accretive to returns over the long-term. At the year end, we held £244m in cash and cash equivalents leading to an effective gearing level (with debt at par value) of 7.3% (2021: 9.4%).
A notable feature of the year was the sharp rise in borrowing costs for both governments and companies. The rise in market based borrowing costs led to a substantial reduction (£182m) in the fair value of our outstanding debt. Indeed, taking debt at fair value, our effective gearing level fell from 9.8% at the start of the year to 3.5% at the end.
BOARD COMPOSITION
Julie Tankard joined the Board on 1 August 2022 as Chairman of the Audit Committee, replacing Jeffrey Hewitt, who retired at the conclusion of the 2022 Annual General Meeting. Her appointment continues our planned sequence of Board changes and again reflects our focus on maintaining the highest level of skills and knowledge on the Board. I would like to thank Jeff once again for his significant contribution in chairing the Audit Committee for 10 years.
Francesca Ecsery will retire at the conclusion of the forthcoming AGM and the process to appoint her successor is in progress. We thank Francesca for her very considerable contribution over almost 10 years, through her expertise in consumer marketing and branding and her guidance on the effective promotion of the Company’s investment proposition.
ANNUAL GENERAL MEETING
It was a great pleasure to be able to meet shareholders again last year as we returned to an in-person AGM. It was a “hybrid” meeting, as we also enabled shareholders to view the AGM and participate by asking questions and voting online. We will again offer shareholders the opportunity to participate online at this year’s AGM. Full details of how to do so are set out in the letter that accompanies your Form of Proxy or Form of Direction.
Voting at this year’s AGM will again be conducted by way of a poll and you are requested to lodge your votes ahead of the meeting by completing your Form of Proxy or Form of Direction in accordance with the instructions. Its completion and return will not preclude you from attending the meeting and voting in person. If you are unable to attend the AGM, you are requested to submit any questions you may have with regard to the resolutions proposed at the AGM, or the performance of the Company, in advance of the meeting to fcitagm@columbiathreadneedle.com. Following the AGM, the Fund Manager’s presentation will be available on the Company’s website www.fandc.com.
OUTLOOK
In 2022 we witnessed a profound change in the backdrop which had supported equity markets in recent decades. High inflation and rising interest rates punctured extended valuations in equity markets and delivered sharp losses for investors in the most expensive segments of the market. While company fundamentals in many leading businesses may not have changed significantly, the price which investors are willing to ascribe to the prospect of future success has diminished.
Despite declines in equity markets last year leading to a more reasonable valuation backdrop, there are still significant near-term risks. While recent rises in food and energy prices are a challenge, especially to consumers and businesses in Europe and the UK, domestically generated inflation remains uncomfortably high in the US and UK in particular. The bulk of tightening may now be behind us, but there are likely to be more interest rate rises to come and risks to economic growth and corporate earnings are high. Indeed, there is a possibility of recession in coming quarters in many developed economies and corporate margins are likely to remain under pressure over the course of this year.
While the near-term outlook for equity markets remains challenging, we continue to have a long-term investment focus. We have secured long-dated fixed borrowings at the lowest rates of interest for generations and recent setbacks in markets should provide greater prospective returns for the patient investor. We have significant cash which can be deployed to take advantage of long-term opportunities that we expect to arise. In doing so, we will continue to be mindful of our approach to investing responsibly and to our commitment to transition to net zero carbon emissions by 2050, at the latest. While the period of exceptional returns from equity markets and from US equities in particular appears to be over, we remain focused on our overriding objective in the delivery of long-term growth in capital and income for our shareholders.
Beatrice Hollond
Chairman, 8 March 2023