WITAN INVESTMENT TRUST PLC
Financial Report for the Half Year ended 30 June 2023
SUMMARY
• Witan’s NAV total return was +8.7%, 1.5% ahead of our composite global benchmark’s total return of +7.2%
• The discount widened, although by less than the AIC Global sector average; 4.2% of our shares were bought into treasury, at an average discount of 8.5%
• A second interim quarterly dividend of 1.45 pence per ordinary share will be paid in September. Total dividends paid in respect of the period are 2.90 pence per ordinary share (2022: 2.80 pence)
• Our revenue earnings for the first half rose 16% on the corresponding period of 2022
| Key data(4) | ||
| (Unaudited)30 June 2023 | (Audited)31 December 2022 | |
| Share price | 226.5p | 221.5p |
| Net asset value per ordinary share (debt at fair value) (3) | 251.4p | 234.1p |
| Discount (NAV including income, debt at fair value) (3) | 9.9% | 5.4% |
| (Unaudited)30 June 2023 | (Unaudited)30 June 2022 | |
| Dividend per share | 2.90p | 2.80p |
| Total return performance | ||||
| 6 months return% | 1 year return% | 5 yearsreturn% | 10 yearsreturn% | |
| Share price total return (1)(3) | 3.6 | 12.8 | 18.2 | 143.2 |
| Net asset value total return (1)(3) | 8.7 | 13.9 | 29.3 | 140.8 |
| Witan benchmark (1) | 7.2 | 11.2 | 46.3 | 147.9 |
| MSCI ACWI Index(2) | 8.1 | 11.9 | 57.1 | 190.7 |
| MSCI UK IMI Index(2) | 2.3 | 7.0 | 14.5 | 73.4 |
| (1) | Source: Witan/Morningstar. |
| (2) | Source: Witan/Morningstar. See also MSCI for conditions of use (www.msci.com). |
| (3) | Alternative performance measuresThe financial statements (on pages 10 to 18) set out the required statutory reporting measures of the Company’s financial performance. In addition, the Board assesses the Company’s performance against a range of criteria which are viewed as particularly relevant for investment trusts. Definition of the terms used and the Witan benchmark are set out in the Annual Report. |
| (4) | 30 June 2023 data is unaudited. |
Page 2 of 18
WITAN INVESTMENT TRUST PLC
Financial Report for the Half Year ended 30 June 2023
| Percentage of total funds as at 30 June 2023* | % |
| North America | 38 |
| Europe | 21 |
| United Kingdom | 18 |
| Asia ex Japan | 6 |
| Japan | 3 |
| Other | 2 |
| Unquoted Funds | 2 |
| Investment Companies | 10 |
| Sector breakdown of the portfolio as at 30 June 2023(5) | % |
| Industrials | 16 |
| Financials | 15 |
| Information Technology | 12 |
| Healthcare | 10 |
| Consumer Staples | 10 |
| Consumer Discretionary | 8 |
| Communication Services | 6 |
| Materials | 6 |
| Energy | 3 |
| Other | 1 |
| Unquoted Funds | 2 |
| Investment Companies | 10 |
| Company size breakdown of the portfolio as at 30 June 2023(5) | % |
| Large Cap | 69 |
| Mid Cap | 14 |
| Small Cap | 5 |
| Unquoted Funds | 2 |
| Investment Companies | 10 |
| (5) | Source: BNP Paribas as at 30 June 2023 |
| * | Figures may not sum due to rounding. |
Page 3 of 18
WITAN INVESTMENT TRUST PLC
Financial Report for the Half Year ended 30 June 2023
INTERIM MANAGEMENT REPORT
Investment backdrop and performance
The first half of 2023 saw a degree of relief that earlier forecasts of global recession were not borne out. In combination with disappointment at the slow decline in inflation, this meant interest rates rose higher than expected. Bond markets underestimated inflation’s persistence, with yields declining in Q1, then rising in Q2 as forecasts for the level of base rates were recalibrated upwards.
Global equities delivered positive returns in both quarters but from contrasting sources. Europe was the strongest region in Q1, with generally positive returns from most other regions. In the second quarter, returns were almost wholly driven by the US (and, within it, the technology majors) with most other regions (apart from Japan) delivering near zero, or slightly negative, returns. This reflected genuine excitement about the potential of Artificial Intelligence (‘AI’) to disrupt many established businesses and drive productivity growth, which favoured the US, given its leadership in the key technologies. Elsewhere, weaker returns reflected flagging growth numbers across Europe and disappointment about the lack of follow-through in the Chinese recovery, following its lifting of Covid restrictions in late 2022.
This was a changeable environment for investors to navigate, both in terms of the rotating leadership within equity markets and due to the unfamiliar experience of bonds and cash offering genuine competition to equities, following a decade in which cash and bond income returns were negligible.
Witan’s NAV total return was +8.7%, 1.5% ahead of the return of +7.2% from our benchmark. The share price total return was +3.6% (owing to a 4.5% widening of the discount). For perspective, the AIC’s Global sector experienced an average +7.1% NAV total return and a 7.5% widening in its discount to NAV.
Manager performance
The full table of the performance of our incumbent managers as at 30 June is shown on the following page. Four of our six core managers outperformed during the period, notably the global managers with greater exposure to the US and growth companies. In particular, Jennison, whose style had been a significant handicap in 2022, delivered a total return of almost 25% in the period, 17% ahead of their MSCI World benchmark. The UK and Emerging Markets were relatively weak areas but Artemis and GQG respectively outperformed them by a sufficient margin to match or exceed Witan’s benchmark return of 7.2%. Amongst the global managers, Lansdowne’s relatively cyclical portfolio was strongly ahead of the benchmark for most of the period, although the more cautious market mood in Q2 meant that their 6.6% return was 1.5% behind their benchmark at the end of June.
Page 4 of 18
WITAN INVESTMENT TRUST PLC
Financial Report for the Half Year ended 30 June 2023
INTERIM MANAGEMENT REPORT continued
Investment managers: Assets under management and investment performance as at 30 June 2023
| Investment manager | Mandate | Appoint-ment date | Witan assets managed as at 30.06.23 | Performance in 2023 (%) | Annualised performance since appointment(2)(%) | |||
| £m | (%)(1) | Manager | Benchmark | Manager | Benchmark | |||
| CORE | ||||||||
| Jennison | Global | 31.08.20 | 134.6 | 7.3 | 24.8 | 8.1 | 2.2 | 9.9 |
| Lansdowne | Global | 14.12.12 | 320.3 | 17.5 | 6.6 | 8.1 | 13.0 | 12.0 |
| Lindsell Train | Global | 31.12.19 | 303.5 | 16.5 | 6.0 | 8.1 | 5.0 | 9.1 |
| Veritas | Global | 11.11.10 | 319.7 | 17.4 | 10.1 | 8.1 | 12.0 | 10.8 |
| WCM | Global | 31.08.20 | 208.7 | 11.4 | 11.2 | 8.1 | 5.3 | 9.9 |
| Artemis | UK | 06.05.08 | 84.6 | 4.6 | 7.7 | 2.3 | 8.1 | 5.5 |
| SPECIALIST | ||||||||
| GMO | Climate Change | 05.06.19 | 113.0 | 6.2 | 0.9 | 8.1 | 15.1 | 10.2 |
| GQG | Emerging Markets | 16.02.17 | 92.4 | 5.0 | 9.0 | (0.6) | 7.9 | 3.3 |
| Unquoted Growth | Specialist Funds | 02.07.21 | 29.8 | 1.6 | (8.8) | 8.1 | (11.6) | 3.3 |
| Witan Direct Holdings | Specialist Funds | 19.03.10 | 229.4 | 12.5 | (0.3) | 7.2 | 9.2 | 8.9 |
Notes:
| 1 | Amount of percentage of Witan’s investments managed, excluding centrally managed cash. |
| 2 | The percentages are annualised where the date of appointment was more than one year ago. |
The two principal laggards were the directly managed portfolio of investment companies (-0.3%) and the GMO Climate Change fund (+0.9%). The former was held back by poor sentiment towards some of the specialist assets held, notably life sciences, mining and sustainable energy. Although operational reports were mostly positive, adverse sentiment and wider discounts meant these assets delivered negative returns for investors. Our listed private equity investments, by contrast, delivered positive returns (despite negative sentiment towards the sector) and we were able to establish a new holding (HarbourVest Global Private Equity) at a near 50% discount to NAV. The GMO Climate Change portfolio also marked time, lagging the general rise in markets (after performing well in 2022). Its exposure to the alternative energy and commodities sectors was a drawback, in an environment of declining energy prices and concern that the Chinese economy might be stalling.
Environmental, Social and Governance policy (‘ESG’)
Our responsible investment policy is set out in detail in Witan’s 2022 Annual Report. In summary, we aim to make well-informed investment decisions that ensure that the pursuit of prosperity for our shareholders is not achieved at the expense of the environment or the wellbeing of society. We believe companies which disregard this will fail to deliver sustainable returns to shareholders because, far from there being a conflict between good returns and responsible investment, managing assets in line with these principles is key to achieving good returns.
Page 5 of 18
WITAN INVESTMENT TRUST PLC
Financial Report for the Half Year ended 30 June 2023
INTERIM MANAGEMENT REPORT continued
This year, we have made progress on our Net Zero pathway and have set initial Net Zero Asset Managers’ Initiative targets. The interim target (a 50% reduction in portfolio carbon emissions intensity by 2030) applies to Witan’s Core portfolio, which makes up 75% of our assets. The baseline year for this target was 2019, when estimated portfolio emissions were 218 tons of CO2 per $1m sales. We are already well on the way to achieving this goal, with current emissions running at 122.5 tons of CO2 per $1m sales vs a 2030 target of 109 tons of CO2 per $1m sales. Ultimately, hitting Net Zero by 2050 is the goal, which will require significant investment in carbon-saving technology and infrastructure by global economies. This investment will provide opportunities for those companies which are well-placed to benefit from efforts to mitigate or adapt to climate change. For this reason, we have invested a significant proportion of Witan’s specialist portfolio in companies within the climate change, sustainable energy and infrastructure sectors (amounting in total to c. 10% of Witan’s whole portfolio).
Investment income and expenses
Revenue earnings per share for the period were 2.90 pence per share, a rise of 16% from the level of 2.51 pence seen in the first half of 2022. The comparison between early 2023 and early 2022 may flatter the position but we nonetheless expect revenue earnings to continue to show recovery from the pandemic setback.
General expenses were little changed at £2.9m. Investment management expenses declined 18% to £3.5m, owing to lower asset levels than in the first half of 2022. First half total expenses of £6.4m were down 11% on the comparative 2022 figure of £7.2m. Finance costs rose £1.9m to £4.7m, due to a rise in short-term borrowing costs. We continue to benefit from the majority of our borrowings having a fixed rate averaging under 3%. The ongoing charges figure (‘OCF’) for the six months was 0.43% (2022: 0.42%). The OCF for the whole of 2022 was 0.77%.
Dividend
As already noted, the Company’s revenue earnings per share in the first half of 2023 (2.90 pence) have shown a further recovery compared with the same period of 2022 (2.51 pence). The Company has increased its dividend every year since 1974 (a 48-year record of increases), recognising the importance for investors of a reliable and growing income. The Board’s policy remains to grow the dividend each year and the full year’s dividend for 2023 is expected to show another year of growth.
The Board has stated its willingness to continue to smooth dividend pay-outs using retained revenue reserves, which amounted to £31.3m at the start of 2023 (after payment of the fourth interim dividend in respect of 2022).
A second interim dividend of 1.45 pence per ordinary share (2022: 1.40 pence) will be paid on 15 September 2023, for which the ex-dividend date will be 24 August 2023. This dividend is one quarter of the total paid in respect of 2022 (5.80 pence per share) and takes the dividends paid in respect of the first half of 2023 to 2.90 pence (2022: 2.80 pence).
Page 6 of 18
WITAN INVESTMENT TRUST PLC
Financial Report for the Half Year ended 30 June 2023
INTERIM MANAGEMENT REPORT continued
Gearing
The Company’s gearing has been maintained in a relatively high range of 13-15% this year. This has been helpful to performance, given the rise in equity markets. The Company has long-term borrowings of £155m with a blended interest rate of 3%, fixed for an average of 25 years. This provides a very low hurdle for investment of these funds to boost shareholder returns in the future. In addition, the Company has a £125m short-term variable rate facility (expandable to £150m), of which £104m was drawn at the period end. The interest costs of this have risen significantly given the increase in bank base rates but balances are repayable at will when not required for investment.
Discount and buybacks
One of the Company’s key performance indicators is for its shares to trade at a sustainable low discount or a premium to NAV, subject to market circumstances. This has been difficult to achieve in 2020-23, given the successive shocks of the pandemic, rising inflation, higher interest rates and worries about recession, all of which have subdued demand for equity investments. Although markets generally rose during the first half of 2023, investors appeared wary of committing additional funds, given the prevailing uncertainties. Our discount, having ended 2022 at 5.4%, was 9.9% at the end of June 2023. To put this into context, the discount on the AIC’s Global Growth sector widened from 6.8% to 14.3% over the same period, so we were less affected than many others.
The Company has been active (in absolute terms and relative to its peers) in buying back shares, buying 28.6m shares (4.2% of the total) into treasury in the period, at an average discount of 8.5%. This added £6.0m to the net asset value which more than offset the Company’s investment management costs for the period.
The Company remains cognisant of the benefit to shareholders from buying back shares, taking account of prevailing market conditions, the level of the discount and the impact on the NAV per share. The Company will only issue shares at a premium to NAV.
Outlook
So far in 2023, equity markets have taken encouragement from a more positive growth environment, weathering the consequence that central banks have had to tighten monetary policy more than expected, owing to the resilience of inflation. Headline inflation (affected by 2022’s rises in energy costs dropping out) has peaked but improvement at the underlying level has been more elusive.
There are several plausible reasons (including the prevalence of fixed-rate mortgages, US fiscal easing and consumer savings built up during the pandemic) why higher rates have taken longer to affect economic growth than in the past. However, central banks who lost credibility in 2022 by failing to anticipate the inflationary surge may now be oversensitive to the slow progress in reining it back and risk overestimating its persistence. If they raise rates sufficiently to accelerate the fall in inflation, there is a risk of overkill and having to reverse course in 2024.
Page 7 of 18
WITAN INVESTMENT TRUST PLC
Financial Report for the Half Year ended 30 June 2023
INTERIM MANAGEMENT REPORT continued
The recent tightening in conditions (as bond yields have risen sharply towards the highest levels for over 10 years) seems likely to have a further dampening effect on growth and inflation in coming months. Whether policy patience or overreaction wins the day is not currently clear. However, given the burden of debt in many economies, high rates are likely to prove unsustainable – a combination of economic growth and moderate inflation (possibly higher than official 2% targets) is likely to prove necessary to reduce debts as a proportion of the economy’s output. So, despite legitimate concerns that inflation has so far failed to respond as hoped, a sustained plateau of relatively high rates may prove more effective than a spike followed by a collapse.
Leaving aside the preoccupation with timing the peak in rates and the trough for economies, in the medium-term enormous sums have been committed to mitigating and adapting to the effects of climate change, improving the security of supply chains and increasing spending on military defence. Since these plans are viewed as social (and economic) priorities, there will be political pressure to create the conditions to be able to fund them. This could include pressing for tolerance of the pace at which inflation converges with target, or justifying additional borrowing where it is linked to long-term investment plans.
As we approach the peak in rates worldwide and look towards better long-term growth prospects in 2024 and beyond, Witan’s managers will continue to select companies with sound business strategies, resilient finances, and good management, on the basis that companies that grow the fundamental value of their business will create sustainable returns for shareholders.
For and on behalf of the Board
Andrew Ross
Chairman
14 August 2023