Review of the period

In recent years we have got used to writing about “extraordinary” times, be that the Financial Crisis, Brexit or the Covid 19 pandemic. In the first half of our financial year we find ourselves again in a challenging period. The biggest war in Europe since 1945, soaring gas and power prices, the fastest inflation since the 1980’s and a consequently aggressive central bank tightening cycle. Against this difficult backdrop, the Company delivered an almost flat absolute return for the six-month period ended 31 July 2022. The net asset value (“NAV”) fell by 0.1% on a total return basis, matching its benchmark, the FTSE AllShare Index. The share price total return for the period was -2.6%, reflecting a slight widening of the discount at which the Company’s shares trade relative to the NAV. At the end of the period, the shares traded on a discount of 2.2% (on a cum-income basis with borrowings stated at fair value), compared to a premium of 0.3% at the beginning of the period.

Your Investment Manager has continued to execute our investment strategy, focussing on UK and European businesses of higher quality that meet our sustainable and responsible investment criteria and balancing attention between both income and capital growth potential. The portfolio continues to exhibit strong quality characteristics, while retaining a premium yield to and superior dividend growth to the market.

In the half-year under review, market conditions were not particularly propitious for our strategy. Small and mid-cap companies, to which the Investment Manager tends to have an overweight exposure, have, on average, significantly lagged their larger counterparts. Energy, mining, and tobacco companies, in which we are strategically underweight, have performed well. However, stock selection has been good and we have benefitted from some corporate acquisition activity involving companies we have invested in.

As I commented at the time of the full year results earlier in the year, we see events in Ukraine and the growing energy crisis in Europe as intensifying investor focus on all elements related to environmental, social and governance matters. Developments since then have only strengthened our view that companies will need to make sustainability a core part of their strategy if they are to prosper longer-term. The passing of the Inflation Reduction Act in the United States earlier this year paves the way for significant investment into renewable energy. While from the end investors’ perspective we will see the implementation of the Sustainable Disclosure Requirements (“SDR”) in the UK which will likely have far reaching consequences for asset allocation - developments which we believe your company will be well positioned to navigate and potentially prosper from over the longer-term.

A detailed review of portfolio activity during the period is contained in the Investment Manager’s Review.

Earnings and Dividends

Revenue account performance during the period was strong. Revenue earnings per share rose by 16.2% during the period to a new interim record level of 8.54p per share (2021: 7.35p). This increase was driven by a combination of a rebound in dividend payments from companies recovering from the effects of the pandemic, as well as strong underlying trading from a number of holdings. A first interim dividend in respect of the year ending 31 January 2023, of 3.0p per share (2021: 3.0p), was paid on 26 August 2022 and the Board has declared a second interim dividend of 3.0p (2021: 3.0p) per share, which will be paid on 25 November 2022 to shareholders on the register on 4 November 2022.

The Board recognises the importance of delivering a growing dividend to shareholders, with the aim of keeping pace with the cost of living. However, given the current high levels of inflation, increasing the dividend in real terms over the short term is unlikely to be achievable. Our distribution policy remains to grow the dividend faster than inflation over the medium term and, with the Company’s robust revenue reserves, modest level of gearing and the healthy underlying dividend growth of the companies within the portfolio, that policy remains well supported.

Sustainability

Your company continues to exhibit strong evidence of its sustainable positioning. The portfolio’s carbon footprint is significantly lower than the benchmark, as is its carbon intensity. MSCI gives the Company’s portfolio its highest AAA ESG rating. The Investment Manager has continued to actively engage with the companies invested in, having addressed ESG-specific issues with management teams at companies representing 31 of the holdings in the portfolio. Voting policy also forms an important part of the Investment Manager’s corporate engagement approach and they voted against management recommendations at least once in 23% of company general meetings held during the period.

Gearing

The Company currently employs two sources of gearing: the £30 million loan notes maturing in 2045, and a £30 million multi-currency revolving credit facility which matures in July 2023. Under the terms of the revolving credit facility, the Company has the option to increase the level of the commitment from £30 million to £40 million at any time, subject to the lender's credit approval. A Sterling equivalent of £13.1 million was drawn down under the facility at the end of the period.

With debt valued at par, the Company’s net gearing fell from 8.4% to 7.8% during the period, reflecting higher cash balances at the period end despite a decline in net assets. The Board believes this remains a relatively conservative level of equity gearing and, with the option to increase the commitment under the revolving credit facility, provides the Company with financial flexibility should further opportunities to deploy capital arise.

Discount

As stated above, at the end of the period your company’s shares traded at a slight discount of 2.2% (on a cumincome basis with borrowings stated at fair value), compared to a premium of 0.3% at the beginning of the financial year. Your company remains one of the highest rated investment trusts in its sector. We believe the premium rating has been driven by the relatively resilient income delivery, a consistent record of total return performance and the Company’s adoption of more sustainable investment criteria.

The Board will continue to monitor the rating of your company’s shares carefully and make further use of both the Company’s share buy back and issuance powers to address any imbalance of supply and demand in the Company’s shares. The Board believes that this action, together with continued delivery of investment performance, our commitment to grow the dividend faster than inflation over the medium term and a clear communication of the strategy should all help to maintain the Company’s rating.

Outlook

As I write this interim report, we move into unchartered waters in the United Kingdom. A new King, a new Prime Minister and a new government. Globally too, the challenges are mounting from ongoing events in Ukraine, a slowing Chinese economy, recessionary conditions in Europe and an aggressive monetary tightening in the United States. It is likely to be a tough and challenging period. Yet, building our strategy around a single outcome, given such a wide variance of potential future developments, seems an unwise course of action. The very unpredictability of world and economic events instead makes us concentrate on the companies within the portfolio and their ability to navigate the environment ahead of them.

As such, the approach of the Investment Manager is to balance the portfolio to handle a range of potential scenarios. There is an emphasis on quality, by investing in well-managed companies, financially healthy companies with robust earnings potential and good management of their environmental, social and governance risks. We invest actively across the range of market capitalisations and sectors to identify businesses that have the potential to participate in any upside growth opportunities, particularly stemming from powerful long-term structural drivers, dynamics likely to be less sensitive to the ups and downs of the economic cycle.

Our objectives remain to meet investor needs for capital and income return, over the medium and long-term. We have made good progress in this period. Whilst the global outlook is uncertain and likely to be volatile, building an actively managed portfolio of UK and European companies, that are leading on sustainability today or taking steps to lead the way in the future, is, we believe, a sound strategy, and particularly so when the outlook is more difficult to foresee.