Market Review
Macroeconomic uncertainty prevailed during the Company’s financial year to 31 January 2024. Investors were particularly focused on monetary policy developments, geopolitical tensions and the uncertainty surrounding the possibility of either a recession or a soft landing for the US economy. Against this backdrop, the Company’s net asset value (NAV) total return per share (which includes dividends reinvested) decreased by 1.6% in sterling terms compared to a 2.6% rise in the total return of the Company’s primary reference index, the Russell 1000 Value Index, in sterling terms. The Company’s share price total return fell by 0.9% as the Company’s discount to NAV narrowed marginally to 9.1% from 9.3% at the previous year end. The investment trust sector, in general, experienced a widening of discounts over much of 2023, exacerbated by global uncertainty and higher interest rates available for cash which in turn led to increased activity in the sector in an effort to realise shareholder value. The Company uses its shareholder authority to buyback its own shares seeking to limit discount volatility and also provide liquidity in the Company’s shares while signalling our confidence in the intrinsic value of the Company’s portfolio. Even with the volatility witnessed in financial markets, US equities recorded gains over the year, with growth stocks significantly outperforming value stocks. The Investment Manager’s Review goes into further detail on performance. The US Federal Reserve (the “Fed”) continued with its monetary tightening measures in the first half of the financial year, with the central bank increasing the target range for the federal funds rate to 5.25%-5.50%, a level unseen in over two decades. In the latter half of the financial year, the Fed maintained interest rates and the messaging turned more dovish as price pressures reduced, fuelling expectations of monetary easing. However, annual core inflation remained above the Fed’s 2% target, while conflicts in the Middle East and Ukraine increased the risk of an uptick in inflation and, at the end of 2023, the Fed signalled that it would proceed cautiously. On a positive note, the US economy remained strong and avoided the widely anticipated recession after the Fed’s prolonged period of monetary tightening, as well as the banking sector failures that occurred earlier in 2023. The US government reached an agreement in June 2023 to suspend its debt ceiling, thereby avoiding a government shutdown, which helped markets. As the financial year progressed, investors embraced the likelihood of a soft landing for the economy, as opposed to a recession. Nevertheless, as I allude to in the Outlook section, the Board and Manager are well aware that macroeconomic uncertainty continues, especially with the ongoing conflicts in the Middle East and Ukraine and the upcoming US election.
Performance
The Company’s portfolio underperformed its reference benchmark in sterling terms over the year to 31 January 2024. Stock selection, mainly in the materials sector, weighed on performance relative to the Russell 1000 Value Index, the primary reference index. Sector allocation, especially in the industrials sector, was also negative. For more details on performance, refer to the Investment Manager’s review on page 23. The Board monitors portfolio performance regularly and receives quarterly reports from the Manager on portfolio changes and the decisions behind them.
Revenue Account
The Company’s equity portfolio generated £17.1 million in revenue during the financial year, close to the £17.8 million in the previous year. Options continue to be part of the portfolio and represented 17.2% of the Company’s total gross income, whilst corporate bonds accounted for only 2.6%. The Company’s revenue return per ordinary share dipped marginally to 12.0 pence compared to last year’s 12.2 pence.
Dividend
The Board remains committed to the Company’s progressive dividend policy and extending the track record of thirteen consecutive years of dividend growth. The Board declared, on 28 March 2024, a fourth interim dividend of 3.9 pence per share, resulting in total dividends for the year ended 31 January 2024 of 11.7 pence per share (2023 - 11.0p) and representing annual growth of 6.4%. The fourth interim dividend will be paid on 3 May 2024 to shareholders on the register on 12 April 2024 (exdividend date: 11 April 2024).
Outlook
At the time of writing, investors expect the Fed to end its rate-hiking cycle and begin monetary easing in 2024. This is despite the Fed’s somewhat conservative tone as its favoured measure of annual inflation, the core Personal Consumption Expenditures Price Index, remained above 2%. Additionally, conflict in the Middle East has increased the risk of a resurgence in inflation, due to possible oilsupply disruptions and rising shipping costs. While a robust US economy helped the country to avoid a recession in 2023, the risk has not completely gone. The Board and Investment Manager believe that a mild recession or soft landing remain in the balance. Meanwhile, the upcoming US election may add to market volatility, as investors remain focused on potential changes to government policies. Added to this, geopolitical issues elsewhere in the world could affect the global economy and financial markets in general. It is pleasing therefore to note that the Investment Manager has designed the Company’s portfolio to include financially robust companies with strong incomegenerating potential and sound governance practices. The investment team continues to review the portfolio and seek opportunities to ensure its ability to withstand any volatility surrounding the forthcoming US Presidential election, as well as a possible economic downturn, as it seeks to protect against downside risks. The Company has made progressive annual dividend payments for thirteen consecutive years, including the period through the Covid-19 pandemic. The Board continues to remain positive on the strategy’s ability to face turbulent times together with the sustainability of the Company’s income and the comfort of the revenue reserve which has been built up to the equivalent of over one year’s full dividend.
Performance table
Cumulative performance (%)
| as at 29/02/24 | 1 month | 3months | 6 months | 1 year | 3 years | 5 years | |
|---|---|---|---|---|---|---|---|
| Share Price | 283.0p | (2.1) | 7.8 | 3.3 | (2.4) | 36.9 | 20.1 |
| NAV* | 327.4p | 2.4 | 8.3 | 6.1 | 2.3 | 36.6 | 36.6 |
| Russel 1000 Value | 4.4 | 9.6 | 9.5 | 9.1 | 40.8 | 64.6 |
Discrete performance (%)
| 29/02/24 | 28/02/23 | 28/02/22 | 28/02/21 | 28/02/20 | |
|---|---|---|---|---|---|
| Share Price | (2.4) | 12.4 | 24.8 | (7.8) | (4.9) |
| NAV* | 2.3 | 9.7 | 21.6 | 1.3 | (1.3) |
| Russel 1000 Value | 9.1 | 7.7 | 19.8 | 11.7 | 4.7 |
Five year dividend table (p)
| Financial yearc | 2022 | 2021 | 2020 | 2019 | 2018 |
|---|---|---|---|---|---|
| Total dividend(p) | 11.00 | 10.30 | 10.00 | 9.50 | 8.50 |
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 performance.
Important information
Risk factors you should consider prior to investing:
- The value of investments and the income from them can fall 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.
- Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
- 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.
- The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
- 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.
- With funds investing in bonds there is a risk that interest rate fluctuations could affect the capital value of investments. Where long term interest rates rise, the capital value of shares is likely to fall, and vice versa. In addition to the interest rate risk, bond investments are also exposed to credit risk reflecting the ability of the borrower (i.e. bond issuer) to meet its obligations (i.e. pay the interest on a bond and return the capital on the redemption date). The risk of this happening is usually higher with bonds classified as ‘sub-investment grade’. These may produce a higher level of income but at a higher risk than investments in ‘investment grade’ bonds. In turn, this may have an adverse impact on funds that invest in such bonds.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends with 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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