Rights and Issues Investment Trust PLC: IR-Half-yearly Results

RIGHTS AND ISSUES INVESTMENT TRUST PLC

For the six months ended 30th June 2023

A copy of the Company's Half Yearly Financial Report for the six months ended 30th June 2023 will shortly be available to view and download from www.jupiteram.com/rightsandissues.  Neither the contents of this website nor the contents of any website accessible from hyperlinks on this website (or any other website) is incorporated into or forms part of this announcement.

Printed copies of the Report will be made available to shareholders shortly. Additional copies may be obtained from the Corporate Secretary – Apex Fund Administration Services (UK) Limited, Hamilton Centre, Rodney Way, Chelmsford, Essex CM1 3BY.

INTERIM DIVIDEND

An interim dividend of 11.75p per share has been approved by the Board and is payable on 25th September 2023 to shareholders on the register as at 25th August 2023 (ex-dividend 24th August 2023).

The following text is copied from the Half Yearly Financial Report.

HALF YEARLY FINANCIAL REPORT

for the six months ended 30th June 2023

Financial Highlights

Financial Highlights for the six months to 30th June 2023

Capital Performance

+Source: Jupiter, Morningstar

++Source: Trustnet

Chairman’s Statement

Market backdrop

Market conditions in the first six months of 2023 can probably be best described as weak and volatile; against the background of the devastating war in Ukraine, we have seen other geopolitical tensions emerge on a regular basis and we are frequently reminded that the path to recovery from the pandemic will not be simple. Whilst energy prices seem to be easing, the UK is facing a number of unique challenges not seen in other developed economies with borrowing costs at a 16 year high, record wage growth and persistently high core inflation.

Net asset value and share price returns

Against this background, the Company’s net asset value per share increased from 2283.2p to 2333.8p, an increase of 2.2% over the six- month period, compared with an 0.5% increase in the FTSE All Share index. Including dividends, the Company has delivered a total investment return of 3.5% for the period.

Portfolio changes

Dan Nickols and Matt Cable, our portfolio managers at Jupiter, have made a number of significant changes to the Company’s investment portfolio in terms of holdings and concentration since they were appointed, and in the last six months they added four new positions to the portfolio whilst disposing of the four ‘tail’ positions. The full details of the changes are provided in the Investment Manager’s Review.

Jupiter’s appointment

Whilst it is still less than 12 months since the appointment of Jupiter as investment manager, the Board is pleased with the level of engagement with the managers and with the progress made in repositioning the portfolio. The first formal review of Jupiter’s performance will take place during the Management Engagement Committee following the anniversary of their appointment on 3rd October 2022.

Discount control

At 30th June 2023, the discount to net assets stood at 13.5%, an improvement from the 17.2% at year-end. That said, discounts across the sector continue to be volatile and on 26th July, being the latest practicable date prior to publication of this report, the Company’s discount has widened to 16.6%. During the period, the Company bought back 292,378 shares for cancellation, which added an estimated 0.8% to net asset value per share.

Having discussed possible alternative discount management mechanisms, the Board has concluded that the continuation of the existing buyback arrangement for a period of 12 months will be in the best interests of shareholders, providing liquidity for those shareholders seeking to sell, whilst delivering a modest economic uplift to those shareholders wishing to remain invested. It is hoped that the Company’s inclusion in the FTSE Russell Index, effective from 19th June, will similarly help improve liquidity.

Share split

Conscious that shareholders were not able to vote on a resolution to approve a proposed 10:1 share split at this year’s AGM, the Board has consulted with, and received feedback from, certain key shareholders and has concluded that, whilst the merits of such a scheme are unlikely to have universal support, it is appropriate to offer all shareholders a vote on this issue. Therefore, it intends to do so when most economically cost effective and this is likely to be at the 2024 AGM.

Dividends

The Directors are equally conscious of the importance of income to shareholders and therefore the Company will be paying an interim dividend of 11.75p per share, an increase of 9.3%, payable to shareholders on 25th September 2023.

Board succession

I was appointed to the Board in May 2011 and have now served for 12 years. Due to a change in my own personal circumstances I shall retire from the Board on 31st August 2023. Upon retirement I am delighted to report that Dr Andrew Hosty will become Chair; Andrew has been a director since July 2017 and brings a wealth of experience and knowledge to the position.

Outlook

Inflation is proving more persistent than expected and interest rates will likely continue at higher levels for longer, dampening consumer confidence. Such macro-economic headwinds can impact upon share prices in the short term but fundamental value should be reflected across a longer timeframe as quality companies will deliver superior performance. The Company’s long-term record is strong and the Directors believe Jupiter is well placed to continue to deliver the Board’s successful high conviction strategy.

David M Best

Chairman

1st August 2023

You can view or download copies of the Half Yearly and the Annual Reports from the Company’s website at www.jupiteram.com/rightsandissues

The Half Yearly Report will also be made available to shareholders and copies are available at the registered office of the Company on request.

Investment Manager’s Review

Introduction

We are pleased to present our investment report for the first half of 2023 to shareholders of the Company. As mentioned in the Chairman’s statement above it has been another period of heightened volatility in global markets, with the FTSE All-Share index ending the half broadly flat but experiencing significant gains and losses along the way. With that backdrop we are pleased to have generated a positive investment return for the period as well as strong shareholder returns as the Company’s discount has narrowed. We have also made good progress in adjusting the structure of the portfolio in the way we highlighted in the annual report and as further discussed below.

Market backdrop

The UK equity market enjoyed a strong start to the year as investors took the view that inflation was likely to moderate and central banks would therefore take a less hawkish approach to interest rates. As the outlook for inflation deteriorated through the half this view became less credible and markets gave up their earlier gains. In addition, the market had to digest the fallout from the collapse of Silicon Valley Bank in the US and the rescue of Credit Suisse in Switzerland.

While the direct effects of these developments on companies and earnings appear to be limited so far, the market seems to be increasingly convinced that a period of lower growth or even outright recession is likely in the UK.

Performance

In the context of a weak and volatile market we are pleased that the Company has delivered a total investment return (NAV return with dividends added back of 2.1%) of 3.5% (Source: Jupiter, Morningstar) for the period. Furthermore, a narrowing of the Company’s discount resulted in a total shareholder return (share price return with dividends added back of 6.6%) of 8.4% (Source: Trustnet).

Given the concentrated nature of the portfolio, investment performance is generally a consequence of stock selection. Over the period there were a number of positive and negative contributors to performance, including:

Hill & Smith (+30%)

As a provider of infrastructure-related products and services, Hill & Smith is well placed to benefit from increased government spending across its regions, in particular the USA. The market’s anticipation of higher profits was confirmed in a trading statement in May which pointed to a stronger than expected outlook for the year.

Renold (+31%)

Manufacturer of industrial chains and transmissions, Renold experienced a period of strong trading and issued two positive trading statements during the half. In addition, rising interest rates are expected to help reduce Renold’s pension deficit, which has previously been seen as a negative for the share price.

Carr’s Group (+24%)

Following a period of significant change which saw Carr’s dispose of its distribution business to focus on agricultural supplies and engineering, the market has taken a more positive view of the company’s prospects. The shares were suspended for a time early in the year due to audit delays but have performed strongly since.

Videndum (-34%)

Manufacturer of products for the content creation markets, Videndum has seen significant levels of de-stocking in its retail-oriented channels and, more recently, weakness in professional markets resulting from the writers’ strikes in Hollywood. While these issues are frustrating, we view both as ultimately transitory and are therefore retaining our holding in Videndum.

Spirent (-40%)

A recent addition to the portfolio (see below), Spirent is exposed to strong medium to long term growth drivers from the transition to newer mobile technologies (5G) and higher network data speeds. Unfortunately, these longer term trends have been interrupted by a period of caution among Spirent’s customers which will result in lower short term growth. While this is negative for the share price in the near term, we remain positive on the longer-term opportunity.

Portfolio changes

In the last annual report we said that we planned to retain the Company’s concentrated approach but reduce the proportion of the portfolio in the very largest positions. We also said that we wanted to introduce new holdings which would improve the portfolio’s balance from a sector perspective.

At the start of the year the Company held positions in 22 stocks with the top five positions accounting for 50% of NAY and the top ten for 76%. On 30th June the Company held 21 stocks with the top five accounting for 41% of NAY and the top ten for 67%. While portfolio construction is always a dynamic process and further changes are likely, we are now broadly happy with the shape of the portfolio.

As part of the portfolio restructuring we have reduced the size of some of our largest positions. For example the largest position in the portfolio is now 10.6% of NAY, down from 12.6% at the start of the year. We have also disposed of some of the ‘tail’ of holdings with very low market capitalisations, including Titon Holdings (£8m market cap) and Coral Products (£14m market cap). We also sold the Company’s tiny residual holding in Costain and some preference shares issued by Santander which we felt did not fit the Company’s stated objectives. Finally, we disposed of the holding in Castings which we felt offered limited valuation upside.

We have added four new positions to the portfolio over the first half of the year.

OSB Group (£2bn market cap)

OSB is the UK’s largest specialist buy-to-let mortgage lender. It benefits from a state-of-the-art lending platform, strong deposit base and a balance sheet free of legacy pre-financial crisis loans. OSB is very well capitalised and consistently generates excellent returns, allowing the company to return capital to shareholders through ordinary and special dividends as well as a share buy-back programme. As well as a compelling growth and valuation case, OSB brings exposure to financial services and UK consumer cyclicality, which was previously a significant underweight in the portfolio.

Spirent (£1bn market cap)

As referenced above, Spirent is a global provider of testing equipment and software for the telecommunications industry. Its structural growth drivers include the expansion of 5G technology and the ever-higher demands for speed in networks and data centres. Some short-term disruption to the 5G market, especially in the US, has resulted in a moderation to immediate growth expectations, but we see the long-term drivers as fully intact. Spirent is very well capitalised, with over $200m of net cash on its balance sheet.

Gresham Technologies (£118m market cap)

Gresham is a software business tightly focussed on the market for advanced data reconciliation. Selling primarily into the financial services sector, Gresham addresses the ever-increasing need to fully reconcile large, complex datasets, often across multiple systems and in real time. This has allowed them to consistently take market share with their long-term subscription-based products around the world. We see the growth and valuation case as highly attractive and, along with Spirent (above), an important source of exposure to technology for the portfolio.

Marshalls (£610m market cap)

Marshalls is one of the UK’s leading providers of heavy building materials such as blocks, stone and concrete roofing tiles. It sells into the new-build housing, commercial, infrastructure and repair and maintenance markets. The well publicised challenges in some of these markets in recent months have led to a significant decline in Marshalls’ share price which we believe now represents a significant opportunity for long-term investors to invest in an excellent business at a very attractive valuation. The inherent uncertainty in timing the bottom of the cycle means we have started the holding at a modest position size, with a view to building it as the path of recovery becomes clearer.

Summary and Outlook

While inflation in the UK remains stubbornly high, it is hard to see a short-term catalyst to bring the market back into favour with investors. However the UK, and smaller companies in particular, remain very modestly valued compared to both international peers and their own history. Meanwhile economic conditions do not appear to be causing significant problems for companies beyond moderately weaker growth rates in the near term. As such, we see the current valuation environment as an opportunity for investors with a longer investment horizon and the patience to wait for the market to change.

We are pleased with progress on adjusting the shape of the portfolio and introducing a greater degree of sectoral balance. Over the coming months we will continue this process at a considered pace while looking for further opportunities to invest in good businesses at attractive valuations.

Dan Nickols
Lead Manager
Matt Cable
Fund Manager
1st August 2023

Portfolio Statement