DJ New Star Investment Trust PLC: Annual Financial Report
New Star Investment Trust PLC (NSI)
New Star Investment Trust PLC: Annual Financial Report
30-Sep-2019 / 07:00 GMT/BST
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NEW STAR INVESTMENT TRUST PLC
This announcement constitutes regulated information.
UNAUDITED RESULTS
FOR THE YEAR ENDED 30TH JUNE 2019
New Star Investment Trust plc (the 'Company'), whose objective is to achieve
long-term capital growth, announces its consolidated results for the year
ended 30th June 2019.
FINANCIAL HIGHLIGHTS
30th June 30th June %
2019 2018 Change
PERFORMANCE
Net assets (GBP '000) 113,971 111,366 2.34
Net asset value per Ordinary share 160.47p 156.80p 2.34
Mid-market price per Ordinary share 111.00p 113.00p -1.77
Discount of price to net asset value 30.83% 27.9% n/a
Total Return* 2.98% 6.5% n/a
IA Mixed Investment 40% - 85% Shares 3.66% 4.9% n/a
(total return)
MSCI AC World Index (total return, 10.30% 9.5% n/a
sterling adjusted)
MSCI UK Index (total return) 1.68% 8.3% n/a
1st July 2018 to 1st July 2017 to
30th June 2019 30th June 2018
Revenue return per Ordinary 1.81p 1.17p
share
Capital return per share 2.86p 8.51p
Return per Ordinary share 4.67p 9.68p
TOTAL RETURN* 2.98% 6.5%
PROPOSED DIVIDEND PER ORDINARY 1.40p 1.00p
SHARE
* The total return figure for the Group represents the revenue and capital
return shown in the consolidated statement of Comprehensive income plus
dividends paid (the Alternative performance measure).
CHAIRMAN'S STATEMENT
PERFORMANCE
Your Company's net asset value (NAV) total return was 3.0% over the year to
30th June 2019. This took the year-end NAV per ordinary share to 160.47p. By
comparison, the Investment Association's Mixed Investment 40-85% Shares
index gained 3.7%. Your Directors believe this benchmark is appropriate
because your Company has, since inception, been invested in a broad range of
asset classes. In a volatile year, global equity markets generated positive
returns although European and Asian equities underperformed US equities as a
result of escalating trade tensions, slowing economic growth and fears about
the consequences of a "no deal" Brexit. The MSCI AC World Total Return and
MSCI UK Total Return Indices gained 10.3% and 1.7% respectively while UK
government bonds returned 5.2%. Further information is provided in the
investment manager's report.
EARNINGS AND DIVIDEND
The revenue return for the year was 1.81p per share (2018: 1.17p). This
represents a substantial increase. Your directors do not envisage increases
of a similar magnitude in subsequent years. A performance fee of 0.58p per
share (2018: nil) was deducted from capital.
Your Company has a revenue surplus in its retained revenue reserve, enabling
it to pay a dividend. Your directors recommend the payment of a final
dividend in respect of the year of 1.4p per share (2018: 1.0p).
OUTLOOK
Global economic growth slowed during 2019, with manufacturing suffering more
than services as a result of trade disputes and rising tariffs. The US is
seeking to maintain its technological supremacy so there may not be an early
end to its trade dispute with China. This may have a significant effect on
eurozone and Asian exporters while Brexit uncertainties may continue to
affect UK commercial and consumer confidence.
The decline in long-term bond yields relative to short-term bond yields
shows that investors fear the onset of recession. Major central banks have
sought to counter slowing economic growth through monetary easing but, after
a decade of such measures, further easing may prove to be less of a stimulus
than in the past. Your Company reduced its equity holdings over the year and
increased its holdings in cash. Investments in dollars, gold equities and
lower-risk multi-asset funds provide diversification and potentially some
protection if equity markets weaken.
CASH AND BORROWINGS
Your Company has no borrowings and ended its financial year with cash
representing 18.1% of its net asset value. Your Company is likely to
maintain a significant cash position.
The Company is a small registered Alternative Investment Fund Manager under
the European Union directive. The Company's assets now exceed the threshold
of EUR100 million. As a result, should it wish to borrow it would require a
change in regulatory permissions.
DISCOUNT
During the year, your Company's shares continued to trade at a significant
discount to their NAV. The Board keeps this issue under review.
ANNUAL MEETING
The Annual General Meeting will be held on Thursday, 14th November 2019 at
11am.
NET ASSET VALUE
Your Company's unaudited net asset value per share at 31st August 2019 was
162.91p.
INVESTMENT MANAGER'S REPORT
MARKET REVIEW
US monetary policy reached a watershed moment during your Company's
financial year. Starting in December 2015, the Federal Reserve had tightened
monetary policy through successive interest rate increases and some
reduction of its swollen balance sheet, culminating in December 2018, when
the Fed funds target rate rose to 2.25-2.50%. Global equities fell 10.57% in
sterling over the final quarter of 2018, more than erasing the previous
quarter's gains because investors feared overly-restrictive monetary policy
might choke off economic growth. In a significant volte-face, however, the
Fed chairman, Jerome Powell, retreated from earlier hawkish comments that
interest rates were "a long way" from neutral, saying rates were "close to"
neutral. Confidence returned following the Fed's U-turn, with global
equities gaining 16.68% in sterling in the six months to 30th June 2019 to
end a volatile year up 10.30%. US equities outperformed, rising 14.54% in
sterling, but European and Asian equities underperformed.
Safe-haven assets were in demand as economic prospects deteriorated. Global
bonds rose 9.80% in sterling while UK government bonds and sterling
corporate bonds rose 5.23% and 6.83% respectively. The yield on 10-year US
treasury bonds fell from 2.85% to 2.20%, with investors looking forward to
US interest rate cuts. Gold rose 16.25% in sterling as the decline in bond
yields reduced the opportunity cost of holding this nil-yielding commodity
and investors sought safety from the potential debasement of some major
currencies through monetary easing.
The Fed changed tack because of slowing economic growth and below-target
inflation. US gross domestic product (GDP) rose 3.1% in 2018 but the rate
slowed to 2.2% in the final quarter as the impact of fiscal stimulus and
increased public sector spending faded. In August 2019, the Fed forecast
growth of 2.1% for 2019. The narrowing difference between short-dated and
long-dated US bond yields led some forecasters to be more pessimistic,
fearing a recession might be approaching.
In August, shortly after your Company's year end, the 10-year US treasury
bond yield fell below the two-year yield. This so-called "yield inversion"
has preceded every US recession in the last 40 years although some months
have typically elapsed between the inversion and the onset of recession. US
leading indicators for manufacturing and non-manufacturing sectors weakened
in the first eight months of 2019 and the manufacturing leading indicator
dipped to a level that implied output might fall. Consumer spending,
however, proved resilient as a result of low unemployment. Employment data
tend, however, to be lagging indicators. In August, the Sino-US trade
dispute escalated as both sides increased tariffs. US tariffs have gained
bipartisan support and are likely to become an established feature of US
trade policy, reducing the scope for an economic boost if the impasse is
resolved.
UK GDP expanded 0.5% quarter-on-quarter in the first quarter of 2019. GDP
did, however, fall 0.2% quarter-on-quarter in the second quarter, according
to the first estimate, probably as a result of activity having been brought
forward into the first quarter ahead of the first Brexit deadline of 29th
March. UK household spending continued to grow steadily but leading
indicators deteriorated and the potential disruption from a no-deal Brexit
may tip the UK into recession. Brexit-risks overshadowed UK equities, rising
only 1.68% over the year under review. UK smaller companies did worse,
falling 5.36% because they tend to be more reliant on domestic earnings than
larger companies, whose export and overseas businesses benefitted from
sterling weakness. In response to the increased likelihood of a no-deal
Brexit, sterling fell 3.60% and 6.23% respectively against the dollar and
yen.
Equities in Europe excluding UK rose only 8.18% in sterling over the year.
Eurozone manufacturers suffered from worsening global economic prospects and
the impact of trade disputes and tariffs. German GDP fell in the third
quarter of 2018 and the second quarter of 2019 as the manufacturing sector
contracted. In June, German industrial production fell 1.5% on the previous
month, leaving it down 5.20% over 12 months as vehicle production was hit
particularly hard.
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Over the summer of 2019, investors expected the European Central Bank (ECB)
to ease monetary policy later this year. The scope for interest rate cuts
may be limited, however, because the ECB's deposit rate ended your Company's
year at -0.40%. Banks have typically refrained from passing on the negative
deposit rate to retail customers, reducing their profits. Further cuts may
be no more effective in encouraging bank lending so the ECB may resort to
more bond buying, the previous programme having ended in 2018. As a result
of recent falls in bond yields, however, many Europe excluding UK sovereign
bonds were already trading on negative yields over the summer and the ECB
may encounter liquidity constraints.
During the year, equities in Asia excluding Japan and emerging markets
returned 3.55% and 5.40% respectively in sterling, held back by trade
disputes, with China, down 3.06% in sterling, particularly badly affected.
Chinese economic growth slowed as weak export demand was only partially
offset by increased infrastructure spending. Additional policy support may,
however, be forthcoming if trade talks stall. After the year-end, the
renminbi fell against the dollar, prompting the US to designate China a
currency manipulator. Renminbi-weakness generated fears of deflation in
August 2015 and January 2016, leading to sharp falls in some risky assets.
Within emerging markets, returns diverged widely. While Chinese equities
fell, Indian stocks rose 11.97% in sterling. The prime minister, Narendra
Modi, won a second term while the 16.15% oil price fall in sterling terms
benefitted India as an oil-importing economy. Russian equities rose 33.11%
in sterling as investors' fears of further sanctions proved unfounded for
now.
PORTFOLIO REVIEW
The total return of the Company was 2.98% for the year under review. By
comparison, the Investment Association's Mixed Investment 40-85% Shares
Index, which measures a peer group of funds with a multi-asset approach to
investing and a typical investment in global equities in the 40-85% range,
rose 3.66%.
The main reason for your Company's marginal underperformance relative to the
IA Mixed Investment 40-85% Shares Index was its relative lack of exposure to
Wall Street during a year in which US stocks outperformed. Your company's
largest holding, Fundsmith Equity, did, however, have the majority of its
assets in US stocks as did Polar Capital Technology. Both outperformed the
returns from US stocks, rising 18.48% and 16.03% respectively. Fundsmith
Equity holds a concentrated portfolio of large companies held for the longer
term. Its focus is on resilient companies with high returns on capital
employed and strong business models that are difficult for competitors to
replicate. This means future profits and cash flows are relatively easy to
predict.
Companies with these characteristics, regarded as "bond proxies", have
typically performed well since the credit crisis in an environment of steady
growth and low inflation. Many consumer staples companies such as Philip
Morris and Pepsico, which are among the top 10 holdings in Fundsmith's
portfolio, meet these criteria. In July 2019, the portfolio's largest sector
allocation was, however, technology, with Microsoft and Facebook among the
top 10 holdings. Both stocks are also top-10 holdings in Polar Capital
Technology. Your Company's Fundsmith Equity holding increased in August 2018
while profits were taken in Polar Capital Global Technology in September
2018.
By contrast with Fundsmith Equity, Artemis Global Income, which has a value
investment style, underperformed, falling 3.45% over the year. Its largest
holdings were in financial stocks, which were relatively weak because the
flattening yield curve damaged the profits of banks, which typically borrow
at lower short-term rates and lend for longer periods at higher rates.
Artemis Global Income does, however, have an above-average yield because of
its value bias, contributing to your Company's ability to pay dividends.
Value stocks have typically been out of favour since the credit crisis and
the valuation gulf widened over the year. Value stocks may, however,
outperform strongly should the macroeconomic outlook change in their favour
while delivering an attractive income in the meantime.
Aberforth Split Level Income, which invests in UK smaller companies and has
a value investment style, fell 18.42%, dragged down by fears of a "bad
Brexit", the greater sensitivity of smaller companies to the domestic UK
economy and investors' disenchantment with value investing. UK smaller
companies did, however, appear oversold over the summer of 2019 as a result
of investors' Brexit concerns while sterling's weakness may increase their
attractions to overseas investors.
Man GLG UK Income and Schroder Income fell 0.30% and 4.72% respectively as a
result of their bias towards value stocks although yields in excess of 5%
contributed significantly to your Company's ability to pay an increased
dividend. Trojan Income outperformed, however, rising 4.18% partly because
of its bias towards defensive consumer goods companies such as Unilever.
BlackRock Continental European Income was the best performer amongst the
investments in Europe excluding UK equities, rising 7.60%. FP Crux European
Special Situations, up 1.40%, remained amongst your Company's top 10
holdings although profit-taking through sales in August and October 2018
realised more than half of the investment. Standard Life European Equity
Income returned 1.39%.
Among the Asian and emerging markets holdings, the HSBC Russia Capped
exchange-traded fund gained 32.29% as it benefitted from Russian equity
strength. Russian holdings also enhanced the returns from JP Morgan Emerging
Markets Income, up 14.45%, while Liontrust Asia Income also outperformed,
rising 4.62%. Stewart Investors Indian Subcontinent underperformed, however,
up only 1.65% because of its cautious approach during a period of high local
equity valuations.
Your company has diversified risk through investments in gold equities,
dollar cash and lower-risk multi-asset funds. Gold price strength fuelled
the 20.54% gain from BlackRock Gold & General. Your company also benefited
from dollar strength through Trojan and EF Brompton Global Conservative,
which both had significant dollar holdings in their multi-asset portfolios.
Trojan and EF Brompton Global Conservative gained 4.15% and 2.87%
respectively.
During the year, your Company modestly increased investment in three private
companies, which have the potential to add an uncorrelated source of return.
The unquoted portfolio increased by more than GBP1 million after allowing for
sales and purchases. The investment in Embark, your Company's largest
unquoted investment, increased and the valuation has been written up in
response to the terms of a capital raising.
OUTLOOK
Global economic growth slowed over the summer of 2019, affected by US
monetary tightening in previous years and the fading of the impact of
President Trump's fiscal stimulus. The manufacturing sector was suffering
more than services as trade woes exacerbated worsening global economic
conditions. In the US, bipartisan support for tariffs aimed at Chinese
exports mean there may be no easy resolution of trade disputes as the US
seeks to maintain technological supremacy in key sectors such as information
technology and communications. The eurozone and some emerging markets were
more severely affected because of their dependence on exports while the UK
appeared vulnerable to a no-deal Brexit.
The flattening yield curve may imply a recession is approaching. The Federal
Reserve and some other major central banks have been seeking to mitigate the
impact of slowing growth through monetary easing. These policies may,
however, prove less effective than previously after more than a decade of
such measures. Your Company reduced the allocation to global equities over
the year and increased its investment in dollar cash. Investments in dollar
cash, gold equities and low-risk multi-asset funds provide diversification
and potentially some protection should equities fall. Investments in a small
number of private companies offer the potential for uncorrelated returns.
SCHEDULE OF TWENTY LARGEST INVESTMENTS AT 30TH JUNE 2019
Holding Activity Bid-market Percentage of
value net assets
GBP '000
Fundsmith Investment Fund 7,839 6.88
Equity Fund
Embark Group Unquoted 5,942 5.21
Investment
Polar Capital- Investment Fund 5,280 4.63
Global
Technology Fund
FP Crux Investment Fund 5,098 4.47
European
Special
Situations Fund
Schroder Income Investment Fund 4,795 4.21
Fund
EF Brompton Investment Fund 4,222 3.71
Global
Conservative
Fund
Artemis Global Investment Fund 3,856 3.38
Income Fund
BlackRock Investment Fund 3,794 3.33
Continental
European Income
Fund
Aberforth Split Investment 3,747 3.29
Level Income Company
Trust
Aquilus Investment Fund 3,698 3.25
Inflection Fund
BlackRock Gold Investment Fund 3,470 3.04
& General Fund
Lindsell Train Investment Fund 3,144 2.76
Japanese Equity
Fund
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