Review of the Period

The UK equity market delivered a strong total return over the six months under review, driven by an improving domestic macroeconomic landscape and attractive starting valuations. The Bank of England's recent base rate cut in August signals a potential peak in the current interest rate cycle, marking a shift towards a more accommodative monetary policy. Lower inflation alleviates cost pressures on businesses, enhances consumer purchasing power, and provides central banks with more flexibility to ease interest rates, collectively supporting economic stability and growth.

In a politically charged year, marked by elections in over 100 countries, representing nearly half of the global population, the UK general election outcome in July was largely as expected. Following the decisive outcome of the election, there are signs of renewed interest in UK equities as institutional investors re-engage with the UK market and turn their focus more to economic and business fundamentals. This, along with an increase in UK merger and acquisition activity, signals a potential shift in sentiment which could support a UK market recovery.

Against this backdrop, the Company’s net asset value (“NAV”) total return for the six months ended 31 July 2024 was 8.2%. This compares to a total return of 12.3% from the FTSE All-Share Index. The share price total return for the period was 10.5%, reflecting a narrowing of the discount at which the shares trade relative to the NAV, from 10.7% to 9.0% at the end of the period.

The Company's performance relative to the market reflects the portfolio of high quality companies which were out of favour during the period. The portfolio continues to showcase strong quality characteristics while delivering a premium yield and stronger dividend growth compared to the FTSE All-Share Index. Furthermore, the portfolio remains concentrated, exhibiting a high active share and stock-specific risk, which underscores the Company’s differentiated approach to generating income and capital growth in contrast to many UK income equity investment trust peers.

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

Earnings and Dividends

Revenue earnings per share increased by 8.1% during the period, to 8.92p per share compared to 8.25p per share for the first six months of last year. This was due principally to an increase in income generated from option writing activity, along with the impact of the reduction in the number of shares in issue as a result of the share buy back activity. Underlying dividend income from the portfolio was broadly unchanged compared to the same period last year, but the Investment Manager has seen a number of dividend declarations well ahead of their expectations and they expect to see further progress in the second half of the financial year. Further details are provided in the Investment Manager’s Review.

A first interim dividend in respect of the year ending 31 January 2025, of 3.2p (2024: 3.2p) per share, was paid on 30 August 2024 and the Board has declared a second interim dividend of 3.2p (2024: 3.2p) per share, which will be paid on 29 November 2024 to shareholders on the register on 1 November 2024.

Based on last year’s annual dividend of 13.75p per share, the dividend yield on the Company’s shares was 4.6% at the end of the period. This is one of the higher yields available from the AIC’s UK Equity Sector and is approximately 20% higher than the yield available from the UK equity market as measured by the FTSE All-Share Index.

Our distribution policy remains to grow the dividend faster than inflation over the medium term and, with the Company’s robust revenue and capital reserves and the healthy underlying dividend and earnings growth of the companies within the portfolio, we believe that the policy remains very well supported.

Regulatory Change

In line with my statement in the Annual Report on the UK’s sustainability disclosure requirements and investment labels regime (together “SDR”), the Board has continued to consult with the Investment Manager on the application of the new regime to the Company.

As background, shareholders will be aware that the Company adopted a sustainable investment overlay to its investment objective in 2021 and full details of the sustainable and responsible investing criteria adopted by the Board are set out in the Company’s Annual Report each year. The move reflected an evolution of the investment process and formalised the existing approach to quality investing, which incorporates an assessment of long term environmental, social and governance risks and opportunities.

At the time of writing, our understanding of the way in which the new regime will apply to the Company continues to evolve but the Board wishes to emphasise that it intends to be fully compliant with the SDR regime from its implementation date on 2 December 2024 and the Investment Manager is not intending to change its strategy in managing the Company’s portfolio.

Gearing

The level of gearing (net of cash) was 9.5% as at 30 June 2024, compared to 6.8% at the beginning of the period. During the period, the Investment Manager drew down an additional £6 million from the Company’s revolving credit facility (“RCF”) to enable it to take advantage of some of the attractive investment opportunities in the market. Gearing also increased as a result of a lower cash balance held at the period end than at the start of the period, and through the impact of share buy backs, which reduce the Company’s capital base.

Since the end of the period, the Company has announced the renewal of its multi-currency RCF with Bank of America, N.A., London Branch (the “Lender”) on a secured basis. The facility replaced the previous, unsecured, £30 million facility with Bank of Nova Scotia London Branch, which expired on 8 August 2024.

Under the terms of the new 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 consent. The facility sits alongside the Company’s £30 million secured 30 year loan note, which is drawn down in full until 8 December 2045 at an all-in rate of 3.99%.

Following the renewal of the facility, the level of the Company’s borrowings remains unchanged.

Discount

As stated above, at the end of the period the Company’s shares traded at a discount of 9.0% (on a cum-income basis with borrowings stated at fair value), compared to a discount of 10.7% at the beginning of the period. We continued to buy back shares during the period, buying back 3.4 million shares (2.3% of the share capital) at an average discount of 10.9%, thereby providing a small enhancement to the NAV per share for shareholders. Since the end of the period we have bought back a further 1.5 million shares.

As we have previously stated, the Board believes a consistent rating of the Company’s shares close to the underlying asset value is of significant benefit to shareholders. As well as a strong focus on execution of the investment strategy, the Board continues to support efforts to attract new investors and retain existing ones through clear messaging and regular engagement with investors. We are confident that the Company’s attractive dividend yield and differentiated positioning are a good basis to support a strong rating for its shares over the medium term. The Company will continue to buy back shares to provide liquidity and address any imbalances between buyers and sellers.

Board Succession

It is the Company’s stated policy that Directors should stand down after nine years on the Board. Jasper Judd, who is Chairman of the Audit Committee, and I, both joined the Board in February 2016. As stated in the Annual Report, we will therefore stand down from the Board at the conclusion of the Company’s AGM in 2025. The Board will recruit a further Director during the course of this financial year who, it is intended, will take over from Jasper as Chairman of the Audit Committee. The number of Directors will therefore increase to six for a short period to allow for an orderly handover and smooth succession. Howard Williams, who has been a Director since April 2018, will succeed me as Chair of the Company and it is the Board’s intention to recruit a fifth Director in 2025 to bring the number of Directors back to five.

Outlook

The UK macroeconomic picture, while still subdued, looks more encouraging than it did at the turn of the year. Inflation has fallen to close to the Bank of England’s 2% target, there is the prospect of further interest rate reductions and economic growth is expected to gradually improve.

There remain a number of geo-political risks. The details of the new government’s first budget will be important in setting the economic and fiscal landscape in the UK. Protracted conflicts in Ukraine and the Middle East continue to pose potential upside risks to commodity prices. The outcome of the upcoming US presidential election in November adds a layer of uncertainty that could significantly impact global international relations. While the UK macro environment is showing signs of improvement, the US economy is projected to experience a moderation in growth, although it is expected to avoid a significant recession. Meanwhile, the Chinese economy faces substantial challenges, including weak domestic demand and an unstable real estate sector.

The Investment Manager continues to select high-quality, sustainable companies that can provide income resilience and capital growth across various economic conditions, and remains optimistic for the outlook for the companies in the portfolio. The concentrated portfolio reflects the Investment Manager’s best investment ideas to meet this objective. While performance can lag the benchmark in periods where businesses exposed to rising commodity prices and positively geared to rising interest rates are in favour, the Investment Manager believes that limiting exposure to the most cyclical companies with high financial and operating risks, while favouring those exposed to structural growth and stronger balance sheets will support long term shareholder total returns.

Read the full article in the half yearly report here.

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Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG, authorised and regulated by the Financial Conduct Authority in the UK.