The Company generated a positive Net Asset Value (“NAV”) per share (with debt at fair value) return of 4.5% for the six months ended 31 December 2023 (the “Period”). This underperformed the Company’s Benchmark (the FTSE All-Share Index ) which returned 5.2% (both figures calculated on a total return basis).

From a style perspective, the portfolio’s Quality bias continued to be a headwind to performance (albeit to a lesser extent than during the first half of the calendar year) as the Value factor outperformed. In sector terms, the portfolio’s overweight position in the Consumer Discretionary sector and underweight exposure to the Financials sector benefited performance. In contrast, the overweight position in the Industrials sector detracted from relative performance, as did the underweight exposure to the Basic Materials sector. The holdings in Sage, TotalEnergies and Vistry were the most beneficial to relative returns while the holdings in Rentokil Initial and Diageo detracted the greatest, relatively. Not holding Shell and Rolls-Royce also detracted from performance.

Two new holdings were purchased for the portfolio during the Period. The first addition was the leading global actuator business, Rotork, which has strong quality characteristics and under-appreciated growth opportunities. Drivers of growth include their electric actuator product which is used to reduce methane emissions in the Oil & Gas sector, which is increasingly a priority as the industry looks to meet emission reduction targets. The second new entrant was US-listed Mastercard, which we see as having attractive quality characteristics, including strong competitive positioning and high barriers to entry, as well as having multiple longterm growth opportunities. The Company’s ability to own overseas holdings allows the portfolio to access an industry not available through the UK market. Further information on Rotork and Mastercard may be found in the case studies on page 13.

Three holdings were sold during the Period: Croda, where our conviction in the long-term strategy deteriorated, while the valuation remains high; Marshalls, where we had concerns around the trading environment and potential implications for the company’s balance sheet; and Drax, due to increasing uncertainty around the long-term business model.

Other trading related to managing position sizes, reflecting conviction levels. In the utilities sector, National Grid was added to while SSE was reduced. In healthcare, we reduced Smith & Nephew and added to ConvaTec. In the mining sector, the position in BHP was reduced and proceeds reinvested in Anglo American. The holding in Mondi, which reached an agreement to sell its Russian business in September, was added to. The holdings in Rentokil Initial and Games Workshop were added to following trading statements which led to weakness in the shares, as we remain more positive on the longer-term outlooks for both companies. The holding in VAT Group was trimmed following strong share price performance, which made the valuation less attractive. The position in Vistry was reduced given it appears there is a low likelihood of dividend payments, with the company instead favouring buybacks. Further trades included adding to bp, Diageo, Intermediate Capital, L’Oréal, Oxford Instruments, Oversea-Chinese Banking Corp and RS Group while trimming AstraZeneca, Coca-Cola HBC, Inchcape, Novo Nordisk, RELX and Safestore.

We continued our measured option-writing programme which is based on our fundamental analysis of holdings in the portfolio. We believe that the option-writing strategy, which we have now employed for well over a decade, is of benefit to the Company by diversifying and modestly increasing the level of income generated and providing headroom to invest in companies with lower starting yields but better dividend and capital growth prospects. The Company also bought back shares, representing 3.3% of the shares in issue, during the Period.

One of the tenets of our investment philosophy is the belief that in order to grow dividends over the long term a company needs to grow its earnings and that high quality companies are best placed to do that. We believe that the portfolio is well positioned to do just this. Looking at the portfolio from a quantitative perspective at 31 December 2023, typical measures of portfolio quality such as returns measures and earnings stability were high in absolute terms and considerably better than the Benchmark (for example, in aggregate, the return on equity and return on assets of the portfolio holdings was 20.7% and 7.5% respectively, compared to the Benchmark at 15.8% and 5.3%, respectively). Furthermore, the portfolio generates a dividend yield approximately in line with the Benchmark. At 31 December 2023, the portfolio traded on a forward P/E multiple of 14.5x compared to the Benchmark on 11.5x: more expensive but to our minds a reasonable price to pay for a considerably better quality portfolio and one still attractively valued in absolute terms.

Five year dividend table (p)

Outlook

We expect the sharp monetary policy tightening over the past 18 months to lead to a slowdown in global economic growth in 2024. For the UK, we currently forecast zero GDP growth in 2024. Inflation is expected to continue to trend downwards but still remains higher than BoE targets and a key focus for markets will be on interest rate cutting cycles and when and how quickly they get under way. The most recent Consumer Prices Index data for the 12 months to January 2024 indicated a reading of 4.2%. At its January 2024 meeting, six members of the BoE’s 9-strong Monetary Policy Committee voted to maintain interest rates unchanged, at 5.25%. abrdn’s economists expect the BoE to start cutting rates in mid-2024.

Political risk, with a number of significant likely elections including the US and UK this calendar year, and geopolitical risk with, in particular, increased tensions in the Middle East, are likely to remain elevated.

The portfolio is full of high quality, predominantly global businesses capable of delivering appealing long term earnings and dividend growth at a modest valuation. Our focus on quality companies should provide protection through a downturn: those companies with pricing power, high margins and strong balance sheets are better placed to navigate a more challenging economic environment and emerge in a strong position. Furthermore, these quality characteristics are helpful in underpinning the portfolio’s income generation.

The valuations of UK-listed companies remain attractive on a relative and absolute basis. Apart from the global financial crisis in 2008/2009 the UK’s price/earnings multiple of 10.4x is near its lowest point for 30 years. The UK stock market appears cheap in absolute terms, relative to history and also relative to global equities. Investors are earning global income at a knock-down price. Moreover, the dividend yield of the UK market remains at an appealing premium to other regional equity markets.

In summary, we feel optimistic that our long-term focus on investments in high quality companies with robust competitive positions and strong balance sheets, which are led by experienced management teams, will be capable of delivering premium earnings and dividend growth.

Performance

Cumulative performance (%)

Discrete performance (%)

Total return; NAV to NAV, net income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value. Source: abrdn Investments Limited, Lipper and Morningstar. Past performance is not a guide to future results.

Company/Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Risk Factors

Risk factors you should consider prior to investing:

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• Certain trusts may seek to invest in higher yielding securities such as bonds, which are subject to credit risk, market price risk and interest rate risk. Unlike income from a single bond, the level of income from an investment trust is not fixed and may fluctuate.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.

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