INVESTMENT OBJECTIVE
The Company aims to give shareholders a higher than average return with growth of both capital and income over the medium to long-term, by investing in a broad spread of predominantly UK Companies. The Company measures its performance against the FTSE All-Share Index Total Return.
INVESTMENT POLICY
Asset Allocation
The Company invests in a combination of large, medium and smaller companies listed in the UK. We are not constrained by the weightings of any index; we limit risk by running a diversified portfolio, which is constructed on a bottom-up, stock-picking basis. In normal circumstances up to half the portfolio is invested in FTSE 100 companies; the remainder is divided between small and medium-sized companies. The Manager may also invest a maximum of 15% in other listed trusts.
Dividend
The Company aims to pay a progressive dividend, with each quarterly dividend equal to or greater than its previous equivalent.
Gearing
The Board believes that debt in a closed-end fund is a valuable source of long-term outperformance, and therefore the Company will usually be geared. At the point of drawing down debt, gearing will never exceed 29.99% of the portfolio valuation but generally will be around half that level. Borrowing will be a mixture of short and long-dated debt, depending on relative attractiveness of rates.
Key Data as at 30 September 2023
· Net Asset Value (‘NAV’) Total Return1,8 of 17.2%
· Benchmark Total Return2 of 13.8%
· Dividend growth of 2.5%
· Dividend for the Year3 of 6.25p
| Year ended30 September2023 | Year ended30 September2022 | |
| NAV per share at year end (debt at par)4 | 129.3p | 115.9p |
| NAV per share at year end (debt at fair value)4,8 | 131.7p | 118.1p |
| Share price at year end5 | 113.0p | 104.5p |
| Market capitalisation | £305m | £282m |
| Dividend per share | 6.25p3 | 6.10p |
| Ongoing charge8 | 0.6% | 0.6% |
| Dividend yield6,8 | 5.5% | 5.8% |
| Gearing at year end8 | 12.3% | 12.5% |
| Discount at year end7,8 | 14.2% | 11.5% |
| AIC UK Equity Income Sector Average Discount | 5.5% | 3.9% |
Performance
I am pleased to report that your Company made sound progress during its sixtieth year in meeting its twin objectives of growth in capital and income. Net Asset Value (‘NAV’) increased by 17.2%, outstripping the FTSE All-Share benchmark return of 13.8%. In addition, Earnings per Share (‘EPS’) grew by 10% to 6.7p, fully covering the recommended total dividend of 6.25p. It is a source of some satisfaction that the Company has maintained or increased its annual dividend each year since its first dividend in 1963.
I will cover capital growth first. In previous years we have referred to the Company’s weighting in small and medium-sized companies, much greater than that of the Company’s benchmark, as having held back capital growth. The long-term trend for such companies to outperform larger companies was interrupted by Brexit and then COVID. We are confident that the trend will reverse, but it has not happened yet. In the year ended 30 September 2023, the FTSE 100 returned 14.7%, a better return than the indices for medium and smaller companies, and most especially AIM, which registered a negative 8.3%. Lowland’s portfolio was invested 47.2% in the FTSE 100, against the benchmark’s 84.4%. However, the portion of Lowland’s portfolio invested in each segment of the market outperformed each of the relevant indices, as indicated below. This enabled Lowland to beat the benchmark, an achievement given its bias to the smaller end of the market.
I mentioned last year that the Board also monitors performance against a composite index, being 50% FTSE All-Share/50% Numis Smaller Companies ex Investment Trusts, which is more representative of the universe in which we invest. Lowland substantially outperformed this composite index which returned 8.4%. We aim to beat the FTSE All-Share, but use the composite index as a check – if we are not beating the All-Share, is it because we are consciously biased to out-of-fashion segments of the market, or are we getting it wrong. In this case the health check is, thankfully, doubly reassuring.
The Fund Managers go into more detail as to the weighting of the portfolio, and indeed the reasons why it performed very satisfactorily. It is worth highlighting that a significant factor underlying performance has been the number of take-overs at values which, while at a premium to pre-bid prices, are not necessarily reflective of the true value of the company. I refer further to this in the outlook section below.
Turning to the revenue account, your Board is highly cognisant of the importance to shareholders of a regular, dependable and growing level of dividend. Despite moments of concern resulting from the hiatus in normal economic activity which accompanied COVID, the Board stuck by its progressive quarterly dividend policy. It did this mindful of the availability of reserves, and with confidence that the Company’s income would recover. Happily, that confidence has been rewarded and the EPS increased by 10% in the year.
Dividends
Having maintained the first and second dividends at 1.525p, your Board had sufficient confidence to increase the third and now recommend an increase in the final dividend, to 1.60p. These last two dividends represent an increase of 4.9%, resulting in a 2.5% increase in the year’s total dividend.
Total dividends for the year have risen each year since 2009 and have been at least maintained since the Company’s launch in 1963. In 2012, prompted by feedback from shareholders at an AGM, the Company adopted a quarterly dividend policy.
It is fair to say that when we began paying quarterly dividends, we did not necessarily envisage that each quarterly dividend would be equal to or greater than its previous equivalent. We have nurtured this practice since 2012 and feel that it has been suitably tested under fire, to be promoted from an aspiration to a firm Board policy, which we will strive hard to follow. Research tells us that a regular and growing dividend is especially valued by private investors; we believe we will be able to meet their requirement.
It flows from the above that shareholders should expect to receive quarterly dividends of no less than 1.60p in respect of the 2024 financial year.
Gearing
The Company has a medium-term borrowing facility of £40m, and £30m of long-term debt at a fixed rate of 3.15%, maturing in 2037. We see the ability to gear the portfolio as a key benefit of an investment trust. We do not tend to move gearing levels dramatically. Gearing amounted to 12.3% at the year-end compared with 12.5% a year earlier.
Ongoing charges
Ongoing charges remained around 0.6%. We reviewed the fee arrangements with Janus Henderson during the year and believe them to be competitive.
Discount
During the financial year the discount varied from 5.2% to 14.9%, ending the year at 14.2%. The Board has a clear policy with regard to discount, which is set out in the annual report.
The Board
As previously indicated, an external recruitment process is underway for the appointment of a new Director. We expect to announce the appointment shortly. The process involved a diverse range of individuals, and the successful candidate will be the one we believe will contribute most to the success of the Company.
I intend to step down at the 2025 AGM. My replacement as Chairman is expected to be one of the serving Directors, and will be announced before then.
The changes set out here are part of the orderly planned process of Board renewal, and are consistent with the policy on tenure and diversity set out in the annual report.
Contact
I and the Board are always pleased to hear from shareholders. Please contact me with comments or questions via ITSecretariat@janushenderson.com
AGM
The AGM will be held at the Janus Henderson office on 24 January 2024. Full details of the business to be conducted at the meeting are set out in the Notice accompanying this report. Our Fund Managers, James Henderson and Laura Foll will be making a presentation to shareholders. The Board and Fund Managers always welcome the opportunity to hear from shareholders, and we encourage as many as possible to attend.
Outlook
Chairmen, and other commentators, are apt to open by remarking on ‘uncertain times’. No-one would dispute that we are in such times now. In reality, however, we always are, and what varies is the depth of uncertainty.
I think it more constructive to comment on some more measurable considerations, and one in particular, which is value. The Fund Managers refer to the miserly valuation of the UK market in general, the discount then applied to the smaller end of the market, and finally to the extraordinarily low valuation of our own portfolio, chosen as it is to grow value and income. This amounts to 8.5 times historic earnings, which reduces to 7.3 times on a ‘look-through’ basis after taking the Lowland share price discount into account. The attractiveness of valuations is underlined by two other considerations; firstly the level of take-over activity, and secondly the dividend yield, which amounts to 5.5% on your Company’s shares.
There can have been few times when valuation considerations have been more persuasive.
Robert Robertson
Chairman
December 2023