from New Star Investment Trust PLC (isin : GB0002631041)
New Star Investment Trust PLC: Interim ANNOUNCEMENT for the Six Months to 31 12 2022
New Star Investment Trust PLC (NSI) NEW STAR INVESTMENT TRUST PLC
This announcement constitutes regulated information.
UNAUDITED RESULTS FOR THE SIX MONTHS ENDED 31st DECEMBER 2022
The Company’s objective is to achieve long-term capital growth.
FINANCIAL HIGHLIGHTS
INTERIM REPORT
CHAIRMAN’S STATEMENT
PERFORMANCE
Your Company generated a positive total return of 0.19% over the six months to 31st December 2022, taking the net asset value (NAV) per ordinary share to 173.50p. By comparison, the Investment Association’s Mixed Investment 40-85% Shares Index rose 0.89%. The MSCI AC World Total Return Index rose 3.50% in sterling over the period, the MSCI UK Total Return Index rose 5.39% while UK government bonds fell 12.06%. Further information is provided in the investment manager’s report.
Your Company made a revenue profit for the six months of £735,000 (2021: £405,000).
GEARING AND DIVIDENDS Your Company has no borrowings. It ended the period under review with cash representing 14.63% of its NAV and is likely to maintain a significant cash position. In recent years, your Company has invested in income-yielding assets with the aim of increasing its revenue and dividend. Its revenue and retained earnings are now sufficient for your Directors to pay a maiden interim dividend of 0.9p per share (2021: nil). Your Directors intend to maintain this policy of paying an interim dividend and recommending a final dividend to shareholders. Your Company paid a dividend of 1.4p per share (2021: 1.4p) in November 2022 in respect of the previous financial year.
DISCOUNT Your Company’s shares continued to trade at a significant discount to their NAV during the period under review. The Board keeps this issue under review.
OUTLOOK
NET ASSET VALUE
Your Company’s unaudited NAV at 28th February 2023 was 178.10p.
Geoffrey Howard-Spink Chairman 21st March 2023
INVESTMENT MANAGER’S REPORT MARKET REVIEW
The leading central banks increased interest rates on four occasions over the six months to 31 December 2022 to combat inflation. The Federal Reserve and the Bank of England raised their policy rates to 4.25-4.5% and 3.5% respectively while the European Central Bank lifted the rate on its main refinancing operations to 2.5%. In February 2023, all three central banks increased rates again, the Fed by a quarter point and the BoE and the ECB by half a point. Investors were, however, anticipating a turn downwards in policy rates further ahead on expectations that inflation would reduce significantly.
US headline inflation peaked at 9.1% in June 2022 and declined every month thereafter, falling to 6.4% in January 2023. Eurozone and UK headline inflation proved more obdurate, standing at 10.6% and 11.1% respectively in October 2022 before falling to 8.6% and 10.1% respectively in January 2023. Oil prices fell 16.85% in sterling over the period under review, easing inflationary pressures. UK and eurozone inflation may have peaked later partly because of the impact of elevated gas prices following Russia’s invasion of Ukraine.
Fed hawkishness was founded on the strength of the labour market, with unemployment just 3.4% in January 2023, and the resilience of consumer spending. Unemployment tends, however, to be a lagging indicator and is typically low at the start of a recession. Inflation is widely regarded as “sticky” when it becomes entrenched in pay increases but real wages fell over the period despite the strength of the labour market.
Rising interest rates proved a headwind for global bonds, which fell 1.78% in sterling. UK government bonds were particularly weak, falling 12.06%. The government’s September announcement of unfunded tax cuts led to some pension funds becoming forced sellers of gilts. The BoE intervened, announcing UK government bond purchases of up to £65 billion to ensure financial stability.
PORTFOLIO REVIEW
Your Company’s total return over the period was 0.19%. By comparison, the Investment Association (IA) Mixed Investment 40-85% Shares sector, a peer group of funds with a multi-asset approach to investing and a typical investment in global equities in the 40-85% range, rose 0.89%. The MSCI AC World Total Return Index rose 3.50% in sterling while the MSCI UK Total Return Index rose 5.39%. Your company benefited from holding value-oriented equity investments and investments in gold miners and Indian stocks. A low overall exposure to bonds also helped performance. Performance suffered, however, from weakness among US and Chinese technology stocks, which resulted in falls for Polar Capital Global Technology and Matthews Asia ex Japan Dividend.
Your Company’s allocation to equity increased from October to December 2022 by approximately £6 million at the expense of cash because inflation appeared to be close to peaking, increasing expectations that easier monetary policy could be on the horizon. In October, your Company invested £2 million in Redwheel Global Equity Income, which has a disciplined approach to income-investing. All investments must yield at least 25% more than the market average at the time of purchase and profits are taken on stocks that appreciate to the point where they yield less than the market average. The managers aim to select high-quality stocks while excluding stocks that may be at risk of cutting dividends. The addition of holdings managed in accordance with an income mandate should support your Company’s ability to pay dividends.
More accommodative monetary policy may result in outperformance for growth-oriented investments and approximately £1 million was invested in the iShares S&P 500 exchange-traded fund, which tracks the US market, and £1 million was added to Lindsell Train Japanese Equity, which holds a concentrated portfolio of growth stocks including consumer-related companies that should benefit from increased Chinese tourism as China’s zero-Covid-19 policies are relaxed.
The remaining £2 million was invested in emerging markets, with £1 million added to Vietnam Enterprise Investments in October and £1 million added to Somerset Asia Income in November. Some emerging markets trade on low valuations relative to developed markets and dollar strength, which has proved a headwind for emerging markets, may subside in anticipation of easier monetary policy. In December, Beijing relaxed its zero-Covid policies, leading to gains for Chinese stocks.
Value stocks typically outperformed growth stocks over the period because rising interest rates affected longer-duration assets. Technology stocks were hurt because future cash flows from these high-growth stocks are discounted more aggressively at higher interest rates. US technology stocks fell 5.39% in sterling over the period, contributing to an 8.86% fall by Polar Capital Global Technology, but your Company’s largest holding, Fundsmith Equity, rose 3.49%, despite its growth style and significant technology holdings. Gains by Novo Nordisk, one of its 10 largest holdings, fuelled the rise as investors warmed to the potential of its anti-obesity drugs.
UK equities modestly outperformed, rising 5.39%, but smaller companies lagged, gaining 2.97%. Amongst value-oriented investments, Man GLG Income and Aberforth Split Level Income, a small-company investment trust, gained 9.60% and 11.22% respectively. Aberforth Split Level Income also benefited from the gearing provided by its zero-dividend preference shares. Chelverton UK Equity Income, another small-cap specialist, gained 2.99%. Trojan Income rose 2.30%, underperforming because of its focus on consumer-related stocks such as Diageo, Procter & Gamble, Reckitt Benckiser and Unilever. All these investments delivered income in excess of global equities, contributing to your Company’s ability to pay dividends.
Equities in Europe excluding the UK outperformed, rising 9.35% in sterling. BlackRock Continental European Income and Crux European lagged, however, up 7.82% and 8.55% respectively although both benefited from holding Novo Nordisk among their 10 largest investments.
Equities in Asia excluding Japan and emerging markets fell 2.91% and 1.81% respectively in sterling, with Chinese stocks, which account for the largest proportion of both indices, falling 11.10%. Chinese equities were hurt by Covid lockdowns, political interference in companies to promote wealth redistribution, so-called common prosperity, and high property sector debts. Within your Company’s portfolio, the most resilient performers were JP Morgan Global Emerging Markets Income Trust, JP Morgan Emerging Market Income Fund and Somerset Asia Income, up 3.87% and down 1.88% and 2.20% respectively. Their income mandates proved defensive during a period in which lower-yielding Chinese technology stocks such as Tencent and Alibaba fell significantly. Matthews Asia ex Japan Dividend, however, fell 10.21%. Its mandate permitted it to hold lower-yielding Chinese technology stocks provided it had an above-market yield overall. Indian stocks rose 9.99% against the trend in sterling although Stewart Investors Indian Subcontinent Sustainability gained only 8.00%.
Your Company achieves diversification through its allocations to cash, including dollar cash, gold equities and low-risk multi-asset holdings. Interest income rose as your Company benefited from higher interest rates on its deposits. BlackRock Gold & General rose 5.85% as gold prices increased 1.77% in sterling. Trojan and EF Brompton Global Conservative, both lower-risk holdings, fell 0.20% and 1.17% respectively.
Inflationary pressure from higher oil prices subsided somewhat in early 2023 but global economic growth is likely to slow over the year. Employment data were strong but falls in real incomes imply inflation had not become entrenched. Economic data in January and February 2023 were stronger than anticipated but the lagged transmission of tighter monetary policy may mean the full impact of tightening is yet to come. In March 2023, higher interest rates led to the collapse of Silicon Valley Bank in the US and the forced takeover of Credit Suisse by UBS. Central banks moved swiftly to contain the fallout and protect depositors. Banks are generally more tightly regulated and have higher levels of capital adequacy than at the time of the credit crisis in 2007 – 2008 but these signs of distress may militate against tighter monetary policy. At the end of the period under review, prospects for equities overall appeared positive despite the likely deterioration in some companies’ earnings because monetary policy easing was on the horizon. Emerging market equities appeared particularly attractive because of low valuations relative to some developed markets, signs of an end to zero-Covid polices and potential respite from dollar strength.
Your Company holds a diversified portfolio of assets including sterling and dollar cash, gold equities and lower-risk multi-asset investments. Investment in private equity is currently low. At the period end, your Company had more cash at the expense of bonds and higher allocations to emerging market equities at the expense of US and European equities than the average for the IA Mixed Assets 40-85% Shares peer group.
Portfolio diversification provides some protection in falling markets when dollar cash and other low-risk investments may be sought by investors as safe havens. At the period end, your Company had approximately £18 million in cash. This cash is benefitting from higher deposit interest rates and is available for investment should attractive opportunities arise. Higher interest income and a bias towards income-oriented equity investments support the growth in your Company’s dividend.
Brompton Asset Management Limited
DIRECTORS’ REPORT PERFORMANCE
In the six months to 31st December 2022 the total return per Ordinary share was 0.19% (2021: 2.59%) and the NAV per ordinary share decreased slightly to 173.50p, whilst the share price decreased by 0.40% to 124.50p. This compares to an increase of 0.89% in the IA Mixed Investment 40-85% Shares Index.
DIVIDEND
The Directors propose an interim dividend of 0.90p per Ordinary share in respect of the six months ended 31st December 2022 (2021: £nil). The dividend will be paid on 28th April 2023 to shareholders on the register at the close of business on 31st March 2023 (ex-dividend 30th March 2023).
INVESTMENT OBJECTIVE
The Company’s investment objective is to achieve long-term capital growth.
INVESTMENT POLICY
The Company’s investment policy is to allocate assets to global investment opportunities through investment in equity, bond, commodity, real estate, currency and other markets. The Company’s assets may have significant weightings to any one asset class or market, including cash.
The Company will invest in pooled investment vehicles, exchange traded funds, futures, options, limited partnerships and direct investments in relevant markets. The Company may invest up to 15% of its net assets in direct investments in relevant markets.
The Company will not follow any index with reference to asset classes, countries, sectors or stocks. Aggregate asset class exposure to any one of the United States, the United Kingdom, Europe ex UK, Asia ex Japan, Japan or Emerging Markets and to any individual industry sector will be limited to 50% of the Company’s net assets, such values being assessed at the time of investment and for funds by reference to their published investment policy or, where appropriate, their underlying investment exposure.
The Company may invest up to 20% of its net asset value in unlisted securities (excluding unquoted pooled investment vehicles) such values being assessed at the time of investment.
The Company will not invest more than 15% of its net assets in any single investment, such values being assessed at the time of investment.
Derivative instruments and forward foreign exchange contracts may be used for the purposes of efficient portfolio management and currency hedging. Derivatives may also be used outside of efficient portfolio management to meet the Company’s investment objective. The Company may take outright short positions in relation to up to 30% of its net assets, with a limit on short sales of individual stocks of up to 5% of its net assets, such values being assessed at the time of investment.
The Company may borrow up to 30% of net assets for short-term funding or long-term investment purposes.
No more than 10%, in aggregate, of the value of the Company’s total assets may be invested in other closed-ended investment funds except where such funds have themselves published investment policies to invest no more than 15% of their total assets in other listed closed-ended investment funds.
SHARE CAPITAL
The Company’s share capital comprises 305,000,000 Ordinary shares of 1p each, of which 71,023,695 (2021: 71,023,695) have been issued and fully paid. No Ordinary shares are held in treasury, and none were bought back or issued during the six months ending 31st December 2022.
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks identified by the Board, and the steps the Board takes to mitigate them, are discussed below. The audit committee reviews existing and emerging risks on a six monthly basis. The Board has closely monitored the geopolitical, societal, economic and market focused implications of the events in 2021 and 2022.
Investment strategy: Inappropriate long-term strategy, asset allocation and fund selection could lead to underperformance. The Board discusses investment performance at each of its meetings and the Directors receive reports detailing asset allocation, investment selection and performance.
Business conditions and general economy: The Company’s future performance is heavily dependent on the performance of different equity and currency markets. The Board cannot mitigate the risks arising from adverse market movements. However, diversification within the portfolio should reduce the impact. Further information is given in portfolio risks below.
Macro-economic event risk: The Covid pandemic was felt globally in 2021 and 2022 although economies and markets have recovered. The scale and potential adverse impact of a macro-economic event, such as the Covid pandemic, has highlighted the possibility of a number of identified risks such as market risk, currency risk, investment liquidity risk and operational risk having an adverse impact at the same time. The risk may impact on: the value of the Co |