WITAN INVESTMENT TRUST PLC
Financial Report for the Half Year ended 30 June 2022
SUMMARY
- Witan's NAV total return was -14.3%, 4.7% behind our composite global benchmark
- Most of the underperformance (-4.4%) was during Q1, when the markets began to react to the consequences of the Russian invasion of Ukraine
- The discount widened, along with others in the sector; 4.2% of our shares were bought into treasury, at an average discount of 7.6%
- Our revenue earnings for the first half rose 39% on the corresponding period of 2021
- A second interim quarterly dividend of 1.40p per ordinary share will be paid in September. Total dividends paid in respect of the period are 2.80p per ordinary share (2021: 2.72p)
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Key data |
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(Unaudited) 30 June 2022 |
(Audited) 31 December 2021 |
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Share price |
206.0p |
252.0p |
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Net asset value per ordinary share (debt at fair value) (3) |
226.2p |
267.4p |
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Discount (NAV including income, debt at fair value) (3) |
8.9% |
5.8% |
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(Unaudited) 30 June 2022 |
(Unaudited) 30 June 2021 |
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Dividend per share |
2.80p |
2.72p |
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Total return performance |
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6 months return % |
1 year return % |
5 years return % |
10 years return % |
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Share price total return (1)(3) |
-17.1 |
-12.6 |
16.2 |
187.5 |
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Net asset value total return (1)(3) |
-14.3 |
-11.7 |
23.5 |
171.3 |
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Witan benchmark (1) |
-9.6 |
-2.6 |
42.7 |
169.9 |
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MSCI ACWI Index(2) |
-10.7 |
-3.7 |
53.8 |
214.9 |
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MSCI UK IMI Index(2) |
-2.9 |
3.7 |
17.0 |
90.4 |
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(1) |
Source: Morningstar. |
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(2) |
Source: Morningstar. See also MSCI for conditions of use (www.msci.com). |
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(3) |
Alternative performance measures The financial statements (on pages 11 to 19) 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 Half Year Report. |
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(4) |
30 June 2022 data is unaudited. |
Page 2 of 19
WITAN INVESTMENT TRUST PLC
Financial Report for the Half Year ended 30 June 2022
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Percentage of total funds as at 30 June 2022 |
% |
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North America |
37 |
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United Kingdom |
20 |
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Europe |
17 |
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Asia |
5 |
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Japan |
3 |
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Other |
4 |
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Unquoted Funds |
2 |
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Investment Companies |
12 |
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Sector breakdown of the portfolio as at 30 June 2022(5) |
% |
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Industrials |
14 |
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Information Technology |
12 |
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Healthcare |
11 |
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Consumer Staples |
11 |
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Financials |
9 |
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Communication Services |
8 |
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Consumer Discretionary |
8 |
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Materials |
7 |
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Energy |
4 |
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Other |
2 |
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Unquoted Funds |
2 |
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Investment Companies |
12 |
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Company size breakdown of the portfolio as at 30 June 2022(5) |
% |
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Large Cap |
72 |
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Mid Cap |
10 |
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Small Cap |
4 |
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Unquoted Funds |
2 |
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Investment Companies |
12 |
(5) Source: BNP Paribas as at 30 June 2022
Page 3 of 19
WITAN INVESTMENT TRUST PLC
Financial Report for the Half Year ended 30 June 2022
INTERIM MANAGEMENT REPORT
Investment backdrop and performance
The first half of 2022 was an unusually tough environment for investors, with both equity and bond markets registering significant falls. US equities on Wall Street exceeded the 20% fall often viewed as defining a “bear” market, fuelled by apprehension over how far inflation and interest rates would rise, as well as the energy crisis and geopolitical tensions following the Russian invasion of Ukraine. In these circumstances, Witan's employment of gearing, while historically beneficial, proved a drag on returns, while our managers' expectations for a post-pandemic reopening of economies were also stymied by the impact of higher inflation and interest rates.
As a result, Witan experienced a total NAV return of -14.3% and a share price total return of -17.1% (owing to a widening of the discount), compared with a return of -9.6% in our benchmark. For perspective, the AIC's Global Equity sector experienced an average -19% NAV total return, or -24% weighted for the size of the constituents (source: Morningstar).
For Witan, the underperformance was concentrated in Q1, with a 6.3% fall compared with a 1.9% fall in Witan's benchmark. In Q2, Witan's NAV total return performance of -8.6% was closer to the benchmark's -7.8%, with the managers performing in line at the portfolio level, offset by the impact of our gearing.
Economic developments
Inflation has provided an unfamiliar shock this year. The post-lockdown bounce-back in growth created a surge in demand which a still-disrupted global economy was unable to meet, leading to pressures that the world's central banks were initially slow to recognise. Their suggestion that inflation was transitory has itself proved transitory. Energy shortages were particularly evident, as growing investment in sustainable energy has so far been insufficient to fill the gap arising from underinvestment in oil and gas production. The resulting rise in energy prices was a major reason inflation hit multi-decade highs in early 2022, prompting a worldwide shift towards monetary tightening.
Initially, this created a rotation from highly rated growth stocks towards more lowly-valued sectors sensitive to economic recovery. However, the invasion of Ukraine created a further surge in energy as well as food commodity prices. This increased the urgency for interest rates to rise, dampening recovery hopes for cyclical sectors as well as further derating growth stocks. In this environment, energy stocks stood out with positive returns, while losses were widespread across the rest of the equity universe, as well as the bond markets.
Page 4 of 19
WITAN INVESTMENT TRUST PLC
Financial Report for the Half Year ended 30 June 2022
INTERIM MANAGEMENT REPORT continued
Investment managers: Assets under management and investment performance as at 30 June 2022
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Witan assets managed as at 30.06.22 |
Performance in 2022 (%) |
Annualised performance since appointment (%) |
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Investment manager |
Mandate |
Appoint-ment date |
£m |
(%)(1) |
Manager |
Benchmark |
Manager |
Benchmark |
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CORE |
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Jennison |
Global |
31.08.20 |
109.8 |
6.1 |
(30.4) |
(10.7) |
(7.9) |
8.8 |
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Lansdowne |
Global |
14.12.12 |
309.4 |
17.1 |
(15.8) |
(10.7) |
12.5 |
12.0 |
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Lindsell Train |
Global |
31.12.19 |
289.2 |
16.0 |
(11.8) |
(10.7) |
1.6 |
8.0 |
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Veritas |
Global |
11.11.10 |
351.7 |
19.4 |
(8.1) |
(10.7) |
12.5 |
10.7 |
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WCM |
Global |
31.08.20 |
195.4 |
10.8 |
(23.6) |
(10.7) |
0.7 |
8.8 |
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Artemis |
UK |
06.05.08 |
115.5 |
6.4 |
(13.6) |
(2.9) |
7.8 |
5.4 |
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SPECIALIST |
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GMO |
Climate Change |
05.06.19 |
92.3 |
5.1 |
(9.0) |
(10.7) |
16.3 |
9.6 |
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GQG |
Emerging Markets |
16.02.17 |
117.7 |
6.5 |
(8.8) |
(8.0) |
8.0 |
4.4 |
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Unquoted Growth |
Specialist Funds |
02.07.21 |
34.6 |
1.9 |
(8.5) |
(10.7) |
(13.2) |
(4.6) |
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Witan Direct Holdings |
Specialist Funds |
19.03.10 |
202.2 |
11.2 |
(12.7) |
(9.6) |
10.3 |
8.7 |
Notes:
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1 |
Amount of percentage of Witan's investments managed, excluding centrally managed cash. |
Manager performance
The full table of the performance of our incumbent managers as at 30 June is shown above. All the managers suffered falls, particularly those with a growth investment style (Jennison and WCM). Although they had the lowest allocations of our core global managers, the scale of underperformance proved painful. The GMO Climate Change portfolio and Veritas's quality-focused portfolio both outperformed. Artemis lagged the UK market return, as their actively managed portfolio tends to overweight the mid-cap section of the market, whereas the market index was dominated by outperformance of the energy sector. They have outperformed by more than 2% p.a. since 2008 and we expect relative performance to recover. GQG underperformed their emerging market benchmark but outperformed the global market index, so the allocation to emerging markets proved beneficial. Lansdowne's cyclically focused portfolio was ahead for much of the period but ended behind at the mid-year point, which coincided with a peak in recessionary fears. Lindsell Train's performance, whilst behind over the period, showed signs of greater resilience after an uncharacteristically poor 2021.
The Direct Holdings portfolio lagged overall, principally because of the discount widening in the private equity sector, which offset good operational performance across the major holdings. The BlackRock World Mining Trust holding was reduced significantly when the price surged following the Russian invasion, while the Schroder Real Estate Investment Trust holding was also trimmed into strength. We added to our investment in the Victory Hill Sustainable Energy Opportunities company, which has also performed well this year.
Page 5 of 19
WITAN INVESTMENT TRUST PLC
Financial Report for the Half Year ended 30 June 2022
INTERIM MANAGEMENT REPORT continued
A new position was initiated in a specialist biotechnology ETF, giving equally weighted exposure to companies in the S&P Biotechnology index, a sector that has seen significant weakness over the past year and is broadly flat over the past five years. Our longstanding holding in Syncona also gives us exposure to this theme and the shares have recently recovered ground after a volatile performance in the first quarter.
Environmental, Social and Governance policy ('ESG')
Our responsible investment policy is set out in detail in Witan's 2021 Annual Report. We (and, so far, half our managers) have signed the Net Zero Asset Managers' initiative, committing to have a zero net carbon portfolio by 2050 and to report on progress on the way. We have also committed to having a portfolio consisting only of companies with sustainable businesses by 2030. We are continuing to evolve our assessment of corporate sustainability and will report on progress in the 2022 Annual Report.
In the first instance we prefer engagement to divestment when we feel a company is departing from good practice – if we divest, we lose any influence over the Company's direction and the buyer may be less scrupulous. We would also forfeit the potential to benefit (financially) from improvements which such engagement might generate. We do have an exclusion on investment in companies engaged in the manufacture, supply, or use of controversial weapons (such as land mines and cluster munitions).
The Russian invasion of Ukraine (albeit an ESG issue at the government, rather than company, level) highlighted the need to attend to corporate risks that are not purely financial. Witan has negligible direct exposure to Russian investments, with any remaining holdings held at nil value. Whilst the subject of future investment is currently theoretical, given the sanctions on Russia and Russian assets, the bar will be set very high for investors, including Witan, to consider any investment in Russia even when conditions normalise.
Energy prices have emerged as a political hot potato in 2022. Low levels of investment in fossil fuel capacity, the speed of the recovery from lockdowns and the consequences of the war in Ukraine have led to shortages and high oil and gas prices. This has, perhaps inevitably, led to debate over the pace (if not the direction) of plans to phase out fossil fuels. Policy changes include delays and reversals in phasing out coal generation, more investment in oil and gas production as well as changed attitudes to nuclear power (clean in carbon terms but controversial in other ways). Given the extraordinary events of 2022, steps which are retrograde in climate change terms are not surprising as stopgap measures, but we hope for a positive longer-term outcome in terms of accelerated investment in sustainable energy.
Investment income and expenses
Revenue earnings per share for the period were 2.51 pence per share, a rise of 39% from the level of 1.80 pence per share seen in the first half of 2021. The comparison between early 2022 and early 2021 (when there was a hangover of dividend cuts from 2020 results) may flatter the position but we nonetheless expect a significant rise in revenue earnings this year and further progress towards restoring full dividend cover.
Page 6 of 19
WITAN INVESTMENT TRUST PLC
Financial Report for the Half Year ended 30 June 2022
INTERIM MANAGEMENT REPORT continued
General expenses rose £0.3m to £2.9m, principally due to website investment and increased marketing costs. Investment management base fees declined 8.4% to £4.3m, owing to lower asset levels. Overall investment management costs (which included a performance fee accrual for one manager in 2021) fell by 12.3% to £4.3m, compared with the first half of 2021. First half total expenses of £7.2m were down 3.5% on the comparative 2021 figure of £7.5m. Finance costs rose £0.2m to £2.8m, due to a rise in short-term borrowing costs.
The ongoing charges figure ('OCF'), including performance fees, was 0.42% for the first half of 2022 (2021: 0.40%). The OCF for the whole of 2021 was 0.71% excluding performance fees and 0.73% including performance fees.
Dividend
As already noted, the Company's revenue earnings per share for 2022 are expected to show a significant further recovery. The Company has increased its dividend every year since 1974 (a 47-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 2022 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 £48.9m at the start of 2022.
A second interim dividend of 1.40p per ordinary share (2021: 1.36p) will be paid on 16 September 2022. The ex-dividend date will be 25 August 2022. This dividend is one quarter of the total paid in respect of 2021 (5.60p) and follows the first interim dividend of 1.40p per ordinary share paid on 10 June 2022 (2021: 1.36p).
Gearing
The Company's gearing has been actively managed within a range of 10-14% this year. Due to the falls in markets, the use of gearing has detracted from returns so far in 2022, although it has historically benefited performance. 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 £150m short-term variable rate facility (current interest rate c 2%), of which £78m was drawn at the period end.
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 2020-22, given market conditions. In 2021, Witan's shares traded at an average discount of 6.9%, ending the year at a 5.8% discount. In 2022, along with others in the sector, our discount has widened, trading at an average of 7.7% and ending the period at 8.9%.
Page 7 of 19
WITAN INVESTMENT TRUST PLC
Financial Report for the Half Year ended 30 June 2022
INTERIM MANAGEMENT REPORT continued
The Company has been active (in absolute terms and relative to its peers) in buying back shares, buying 30.7m shares (4.2% of the total) into treasury in the period, at an average discount of 7.6%. This added £5.7m to the net asset value which, for perspective, 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
The sustained rise in global inflation and the widespread move to higher interest rates have radically altered the outlook for global liquidity and economic growth. This led to extremely negative sentiment mid-year towards bonds (whose yields were too low in real and nominal terms) and equities (due to fears of recession, as well as a valuation squeeze on the more highly rated or speculative sectors).
Inflation remains stubbornly high, for reasons not speedily addressable by higher interest rates, which can do little to boost the supply of oil and wheat, much less push Russia out of Ukraine. It will take time for higher rates to bring supply and demand into balance, with an increased risk of recession. This latter concern has weighed on equity sentiment in recent months, as the central banks prioritise inflation control over responding to financial market volatility.
There are signs that investors in the US are (possibly prematurely) reducing their forecasts of the peak level of interest rates. High debt levels may cause growth to slow even with interest rates at levels that remain lower than were typical prior to 2009. There are also several drivers of both government and private sector spending that are set to increase in coming years – renewing infrastructure, the electrification and decarbonisation of economies and, perhaps less positively, increased defence spending. Technology may now be more cheaply rated in the stock market but will continue to disrupt many sectors, reduce costs, and drive productivity. By focusing on the near-term unfamiliarity of high inflation and rising interest rates, investors may be overlooking the longer-term positives.
Once a peak in inflation comes into view, or there is a reduction in international tensions, investors are likely to switch from risk aversion to looking for the opportunities thrown up by lower valuations. Timing such changes can be a conundrum, as nobody rings a fire alarm at the top of the market nor does a dinner gong sound at the bottom. Notwithstanding the frustrations of the past two years, 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 eventually see their share prices follow that growth.
Page 8 of 19
WITAN INVESTMENT TRUST PLC
Financial Report for the Half Year ended 30 June 2022
INTERIM MANAGEMENT REPORT continued
The mid-year period end coincided with a low point in market sentiment and performance. Between then and 12 August (the latest practicable date before the publication of this report), the NAV rose 11.4% to 252p and the share price by 14.1% to 235p, ahead of the benchmark's return of 9.9%. While noting that there remains ground to make up, there is reassurance for shareholders that absolute performance significantly recovered and the Company outperformed during the summer rally.
For and on behalf of the Board
Andrew Ross
Chairman
15 August 2022