Chairman’s report
Dear Shareholder
Introduction
I am pleased to present the refreshed format of our Annual Report, which is intended to give additional information and clarity.
Shareholder returns
Our Portfolio Manager, Alec Letchfield and his team at Hansa Capital Partners LLP (“HCP”, “Hansa Capital Partners”, “PM”) have performed robustly on a relative basis in a very difficult market. The portfolio he manages – the Company’s investment portfolio, excluding the holding in Ocean Wilsons Holdings Limited (“OWHL”, “Ocean Wilsons”) – achieved a gross time-weighted negative return of -1.1% in the past year (2021/22: gross time-weighted positive return of 1.1%). Our investment in OWHL generated a gross time-weighted negative return of -5.17% (2021/22: gross time-weighted positive return of 24.7%). Collectively, the entire Hansa Investment Company Limited (“HICL”, “the Company”) portfolio generated a gross time-weighted negative return of -2.0% for the 12 months ended 31 March 2023 (2021/22: gross time-weighted positive return 6.2%).
For the year ended 31 March 2023, the Net Asset Value (“NAV”) Total Return has declined by 3.1%, reducing from 319.1p per share to 305.8p per share, whilst also returning 3.2p per share in dividends. Regrettably, consistent with much of the Investment Trust sector, during the past 12 months there has been an increase in the discount from 37.8% to 43.1% for the Ordinary shares and from 39.5% to 44.2% for the ‘A’ Ordinary shares. More detail on our results and the longer-term performance can be found further on, as well as in our Portfolio Manager’s detailed review of markets and portfolio performance in his Report.
Prospects
I noted in my annual Chairman’s Statement last year that I could not remember a more challenging time to be forecasting events with so many moving parts. I am not sure any of the clouds of uncertainty have disappeared, other than more clarity on the future sourcing of energy for Europe and positive signs on the future decline of inflationary pressures. A decline in job openings and easing of wage increases are beginning to become apparent in the US.
The levels of confusion can probably be best illustrated by several major investment bank’s strategists’ disagreeing as to whether either a recession is coming due to higher interest rates and additional quantitative tightening to defeat inflationary forces or, conversely, whether there
will be a major decline in rates due to a banking crisis and a collapse in inflation creating a great new bull market!
At the time of writing, investor sentiment to both fixed income securities and equities seems to be holding up better than I had expected. However, to my mind, many obstacles still stand in the way of a substantial improvement in valuations.
These obstacles include the smaller US regional and local state banks which are overexposed to commercial lending and battling with their larger banking competitors and the Fed for deposits. I see the overabundance of office property in many parts of the world, partially created by the post Covid “work from home” activity, as a serious vulnerability for some banks struggling to improve net interest margins, an improvement which historically would be a given in a rising interest environment. They have not been helped by the obliteration of Contingent Convertible bonds from the Credit Suisse debacle, which will increase their cost of funding either through future bond issues or equity raises.
The overall net effects on the banking system should be de minimis – whilst creating a tightening of lending standards. I have been surprised that the signs of an oncoming recession have not become clearer, particularly with the shrinkage of the money supply. It is apparent that the generosity of government handouts as a result of the Covid pandemic were, in the round, so large that many recipients are still benefiting from this largesse and spending it quite slowly. This has deferred any recession and will probably slow the deceleration of inflation, with obvious consequences for the timing and speed of any future decline in interest rates.
Strategy
Alec Letchfield and his team, supported by the Board, have continued to take an increasingly defensive position during the year which has helped our overall performance. We do not hold any direct crypto type assets or real estate assets, other than our long-held investment in DV4. The Board, in consultation with Alec Letchfield, has decided to commence investing into a portfolio of illiquid alternative assets, primarily in Private Equity. We believe that, over time, this will differentiate HICL’s investment portfolio and give shareholders exposure to an asset class and underlying investments they could not easily gain exposure to directly.
The long-term nature of Private Equity also fits well with our own long-term investment horizons. Our Portfolio Manager has significant experience investing in Alternative Assets and we are positive about this new development. By its nature, the Private Equity portfolio will take a number of years to mature. The plan is to build this illiquid segment over a period of time, to a level of around 10% of HICL’s portfolio. Further details are set out in the Portfolio Manager’s Report.
The Discount
Your Board is aware that the Company’s discount to NAV for both share classes is in excess of 40%. The Board has listened to shareholder feedback and discusses this topic at Board meetings to consider what appropriate steps it could take up to help reduce the discount over the medium and long term.
The Board has considered a share buy-back policy but does not consider this would have a significant effect on the discount, at which the shares trade.
In the opinion of the Board:
it reduces the number of shares outstanding and therefore the liquidity of the shares in the marketplace; reduced liquidity may, in fact, cause a rise in the discount;
· it means a liquid investment portfolio needs to be maintained, compromising the ability to have a portfolio of special situations; the maintenance of the long-term investment policy and its portfolio takes precedence over the short‑term discount policy; and
· the holding in OWHL would represent an even greater percentage of the portfolio and buying back shares would raise the relative exposure to Brazil, which the Board does not wish to do, giving preference to the return generation potential and benefits of diversification generated by the investment portfolio.
The primary objective of the Company is to generate a good economic return over the medium to long-term and create a compelling investment proposition for private investors, enabling them to gain access to investments not otherwise readily available. This, in due course, should increase demand for the Company’s shares. Each Investment Trust must consider its own particular circumstances and objectives in assessing what is in the best interests at any particular point in time for the Company and its shareholders. Your Board continues to focus on the construction of a portfolio to create long-term value and it is in the light of this that it has decided to build an allocation to Private Equity.
We aim to promote the Company and its prospects through clear and transparent reporting to encourage demand for shares, particularly amongst private shareholders, thereby widening the shareholder base. With this in mind, we are revamping our website. We have refreshed this Annual Report and our regular communication with shareholders. We continue to work with Edison to produce appropriate marketing research reports and assist the Portfolio Manager in meeting with appropriate professionals. We will hold a hybrid meeting with shareholders in person and by video conference in London on 27 September this year.
The Board has also considered whether the stubborn level of discount reflects a lack of understanding of the quality and liquidity of the portfolio and, therefore, the integrity of the NAV. It may be helpful to consider:
· 47.6% of the value of the portfolio at year end was derived from securities which are tradeable on an Exchange and as such, their value is based upon their respective market listed share prices. This includes the holding in Ocean Wilsons (traded on the London Stock Exchange) which accounts for 22.8% of the portfolio.
· 46.2% of the value of the portfolio at year end was derived from third party fund vehicles, whose value is based on prices received directly from the funds themselves, the price at which HICL’s units could be sold for at that point in time.
· 3.7% was held in cash at the year end.
· Only 2.5% was held in illiquid vehicles (DV4, an evergreen holding).
Of the above, 91.3% of the total NAV has a pricing frequency of at least monthly, with 73.6% being daily or multiple times a day. Further, even if the Strategic holding in OWHL were considered illiquid, 68.5% of the total portfolio can be exited within a month, with 50.8% being daily. For these reasons, the Board considers that the values of the diverse investment portfolio are robust and do not reflect ‘stale’ values in a period of market volatility.
Dividends
Your Board has decided to continue with its existing dividend policy, which is to pay four similar interim dividends at the rate of 3.2p until it is fully covered by net revenue income and then increase it in line with any increase in the net revenue income of the Company. Currently the income generated by the portfolio is insufficient to meet this dividend commitment and the shortfall is made up from the Company’s reserves. In principle, your Board does not believe it to be in the Company’s best interests to use capital as a source from which to pay dividends.
Liquidity and investor base
The Board continues to work with our broker and Alec Letchfield to promulgate the HICL’s story and investment opportunity. We are also continuing to enhance transparent and timely communication.
Investment in Ocean Wilsons Holdings Limited
The Board continues to focus on the investment in Ocean Wilsons. Ocean Wilsons itself has two assets. An investment portfolio, held through its subsidiary Ocean Wilsons (Investments) Limited and a circa 56% holding in their main asset Wilson Sons Holdings Brasil SA (“Wilson Sons”), an established and respected Brazilian shipping and maritime business. Encouragingly, Wilson Sons performed well in 2022 in Brazilian Real terms with a 6.2% increase in revenue and a 9.3% uplift in EBITDA. All this despite the continuing challenges of global supply chain bottlenecks in the early part of the year. During the year to 31 December 2022, the investment portfolio returned -13.8%, which was better than the MSCI ACWI & Frontier Markets Index which, in US$ terms was -18.4% for the same period.
The Board notes that, on 12 June 2023, OWHL announced it was undertaking a strategic review involving its investment in Wilson Sons and that it will consider all potential strategic options. The Board will follow the process with interest but notes from OWHL’s announcement that it is currently at an early stage with no certainty as to its outcome.
Share classes
The current position of Ordinary and ‘A’ Ordinary share classes remains unchanged as the majority of Ordinary shareholders have informed the Board they do not wish to alter the present structure at this time.
Environmental, Social and Corporate Governance (“ESG”) matters
As I mentioned in my Report in the Half-Year accounts, our Portfolio Manager is now a signatory to the UNPRI initiative.
The Board continues to offset the carbon created by flights to Bermuda for meetings. The amount offset in the past year is 237 tonnes (2022 – 198 tonnes). Further, during the year, the Board sought an environmental cause that has relevance to Bermuda, our country of domicile. Amongst many worthy organisations, we discovered the Blue Marine Foundation, an environmental charity dedicated to restoring the ocean to health by addressing overfishing, one of the world’s biggest environmental problems. See more further on in the report.
Annual General Meeting (“AGM”) and Amendment to Bye-Laws
At the back of these Financial Statements, you will find a notice regarding our upcoming AGM to be held on 27 July 2023 in Bermuda. Within the notice you will find several resolutions that are presented annually. Additionally, you will note a one-off change the Company is proposing to its Bye-Laws requiring shareholders to supply, if requested, information relating to their tax residency. Globally tax authorities and government agencies require financial institutions, including investment companies, to collect and report certain tax information in relation to their shareholders. In principle, this should only affect a very small number of our shareholders who are personally on our share register – approximately 142 shareholders holding less than 1% of our share capital. Failure by those shareholders to supply the required information, will cause the Company to submit incomplete returns, with the consequent risk of penalties or censure by the authorities. The proposed Bye-Law changes enable the Company to take the necessary measures in relation to those few shareholders who refuse to provide the information required, so as to enable the Company to satisfy its reporting requirements.
Please see further on for more detail on the proposed changes and the more detailed reasoning behind the proposals.
Company Auditor
As at the Company’s most recent AGM in August 2022, PricewaterhouseCoopers Ltd of Bermuda (“PwC”) were appointed to audit the Company.
On behalf of the Board, I should like to extend our best wishes to you, our shareholders.
Jonathan Davie
Chairman
26 June 2023