DJ New Star Investment Trust PLC: Annual Results for the year ended 30th June 2021
New Star Investment Trust PLC (NSI) New Star Investment Trust PLC: Annual Results for the year ended 30th June 2021 24-Sep-2021 / 07:00 GMT/BST Dissemination of a Regulatory Announcement, transmitted by EQS Group. The issuer is solely responsible for the content of this announcement.
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NEW STAR INVESTMENT TRUST PLC
This announcement constitutes regulated information.
UNAUDITED RESULTS
FOR THE YEAR ENDED 30TH JUNE 2021
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 2021.
FINANCIAL HIGHLIGHTS
30th June 30th June %
2021 2020 Change
PERFORMANCE
Net assets (GBP '000) 138,132 113,885 21.3
Net asset value per Ordinary share 194.49p 160.35p 21.3
Mid-market price per Ordinary share 134.00p 106.00p 26.4
Discount of price to net asset value 31.1% 33.9% n/a
Total Return* 22.16% 0.80% n/a
IA Mixed Investment 40% - 85% Shares (total return) 17.48% (0.15)% n/a
MSCI AC World Index (total return, sterling adjusted) 25.10% 5.72% n/a
MSCI UK Index (total return) 17.46% (15.21)% n/a
1st July 2020 to 1st July 2019 to
30th June 2021 30th June 2020
Revenue return per Ordinary share 0.61p 1.87p
Capital return per share 34.93 p (0.59)p
Return per Ordinary share 35.54p 1.28p
TOTAL RETURN* 22.16% 0.80%
PROPOSED DIVIDEND PER ORDINARY SHARE 1.40p 1.40p
* The total return figure for the Group represents the revenue and capital return shown in the Consolidated Statement of Comprehensive Income divided by the net asset value at the beginning of the period.
CHAIRMAN'S STATEMENT
PERFORMANCE
Your Company generated a positive total return of 22.16% over the year to 30th June 2021, taking the net asset value (NAV) per ordinary share to 194.49p. By comparison, the Investment Association's Mixed Investment 40-85% Shares Index rose 17.48%. The MSCI AC World Total Return Index rose 25.10% in sterling while the MSCI UK Total Return Index rose 17.46%. Over the year, UK government bonds declined 6.48%. Further information is provided in the investment manager's report.
Your Company made a consolidated revenue profit for the year of GBP429,000 (2020: GBP1.32 million).
GEARINGS AND DIVIDEND
Your Company has no borrowings. It ended the year under review with cash representing 6.12% of its NAV and is likely to maintain a significant cash position. In respect of the financial year to 30th June 2021, your Directors recommend the payment of a dividend of 1.4p per share (2020: 1.4p). The level of future dividends may, in the short term, be adversely affected by Covid-19-related dividend cuts.
DISCOUNT
During the year under review, your Company's shares continued to trade at a significant discount to their NAV. The Board keeps this issue under review.
OUTLOOK
Monetary and fiscal stimulus programmes, the roll-out of Covid-19 vaccination programmes, the restoration of dividends after cuts imposed during the pandemic lockdowns and economic recovery are likely to support equities over the coming months. Inflation may, however, rise further, raising the prospect of an earlier end to monetary easing than had previously been expected. This may put further pressure on government bonds after their price declines during the year under review.
NET ASSET VALUE
Your Company's unaudited NAV at 31st August 2021 was 199.81p.
INVESTMENT MANAGER'S REPORT
MARKET REVIEW
Global equities gained 39.87% in local currencies over the year to 30th June 2021 but only 25.10% in sterling due to the pound's strength while global bonds returned 2.63% in local currencies but fell 8.20% in sterling. Ultra-loose monetary policies, unprecedented fiscal stimulus programmes and some successful Covid-19 vaccination programmes led to a rebound in the world economy. The strength of sterling, up 15.02%, 11.80% and 5.89% respectively against the yen, dollar and euro, resulted from the European Union-UK trade agreement, which averted a hard Brexit. Gold and gold equities fell 14.07% and 14.01% respectively in sterling as investors favoured risky assets over some safe-havens such as gold.
Leading central banks eased monetary policies to support economic recovery and mitigate the impact of fresh waves of the pandemic. The Federal Reserve bought more than USD80 billion of treasury securities and USD40 billion of agency mortgage-backed securities per month in pursuit of its dual mandate to deliver maximum employment and price stability. In August 2020, in a significant policy shift, the Federal Reserve moved its inflation target from a fixed 2% to a 2% average. The move implies that inflation may exceed 2% for some time before monetary policy tightens.
In June and December 2020, the European Central Bank (ECB) increased its Pandemic Emergency Purchase Programme bond purchases by EUR600 billion and EUR500 billion respectively to increase the programme from EUR750 billion to EUR1,850 billion. Market purchases will continue at least until March 2022 and maturing principal payments will be reinvested until the end of 2023. In July 2021, the ECB followed the Fed's lead, shifting from a target to keep inflation "below but close to 2%" to a 2% average. The Bank of England remained dovish, fearing that "premature tightening" might undermine the UK's recovery. In August 2021, the Bank's monetary policy committee voted to maintain the total target stock of bond purchases at GBP895 billion.
Since the 2008 global financial crisis, central bankers have encouraged governments to support monetary easing with fiscal easing. Covid-19 lockdowns provided the catalyst for major stimulus programmes. By autumn 2021, fiscal measures were winding down in some countries but the new US president, Joe Biden, had introduced measures that emulated Roosevelt's New Deal in the 1930s in their scope. In November's elections, the Democrats gained control, albeit by a narrow margin, of both houses of Congress in addition to the presidency. The USD1.9 trillion American Rescue Plan was enacted in March 2021, resulting in cash distributions to households. In August 2021, agreement was reached on the USD1 trillion Bipartisan Infrastructure Investment and Jobs Act although its passage was delayed to allow debate over a potential USD3.5 trillion of additional measures.
Inflation, particularly in the US and UK, was stronger than anticipated over the year under review despite higher unemployment and lower workforce participation compared to pre-pandemic levels. Pent-up consumer demand, materials shortages and disrupted supply chains contributed to inflation rising above central bank targets. US headline inflation in July rose to 5.4% and the personal consumption expenditures index, the Fed's chosen inflation measure, reached 3.6%. UK headline inflation was 2.1% in July while the initial estimate for eurozone inflation in August was 3%. Jerome Powell, the Fed chairman, became more hawkish, suggesting higher inflation might prove "more persistent" rather than "transitory". Price pressures may ease as supply catches up with demand and reduced lockdown restrictions lead to higher demand for consumer services at the expense of consumer goods. Manufacturers may, however, retreat from globalisation policies and increase their resilience by increasing supplier numbers and holding higher stocks of raw materials and finished goods. Consumers are likely to face higher prices as companies move from "just in time" to higher-cost "just in case" manufacturing. Over the longer term, monetary easing, fiscal easing, demographics, as workforces shrink relative to ageing populations, and decarbonisation goals may all contribute to rising inflation.
PORTFOLIO REVIEW
Your company's total return over the year under review was 22.16%. By comparison, the Investment Association Mixed Investment 40-85% Shares Sector, 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 17.48%. The MSCI AC World Total Return Index rose 25.10% in sterling while the MSCI UK Total Return Index rose 17.46%. Your company benefited from its allocations to UK smaller companies and emerging markets but allocations to dollar cash and gold equities hurt performance. Income fell due to dividend cuts resulting from Covid-19 lockdowns. Such cuts are, however, likely to be temporary and further investments in equity income holdings were made during the year.
UK equities lagged foreign equities for two main reasons: the pound's strength and the bias of the London stockmarket towards cyclical companies, leading to larger dividend cuts than experienced by companies in Europe excluding the UK and the US. UK smaller companies outperformed, however, rising 49.77% as Britain's relatively successful vaccination programme led to the lifting of some lockdown restrictions, fuelling a domestic recovery that exceeded expectations. Aberforth Split Level Income, which has a bias towards UK smaller value stocks, was your Company's best performer, rising 97.66% as strong investment returns were magnified by the leverage provided by its split capital structure.
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In July 2020, the UK equity allocation reduced through the sale of the SPDR FTSE UK All Share exchange-traded fund (ETF), which had been bought after stockmarket falls triggered by the initial lockdowns in March 2020. In January 2021, the allocation to higher-yielding UK smaller companies increased through an addition to Chelverton UK Equity Income, which gained 44.65% but lagged the gain for smaller companies overall as dividend cuts narrowed the opportunities to generate equity income. Brompton UK Recovery and Man GLG UK Income also benefited from their bias towards smaller companies, rising 30.35% and 23.32% respectively. Trojan Income lagged, however, up only 8.16% because of its focus on large stocks in defensive sectors such as consumer staples, accounting for 27% of its portfolio at the year end.
Equities in emerging markets and Asia excluding Japan gained 26.43% and 25.25% respectively in sterling as Covid-19 was initially contained following stringent lockdowns in China and other Asian countries. In July 2020, the allocation to Asia ex-Japan equities increased through the purchase of Matthews Asia ex Japan Dividend. The Chinese economy rebounded strongly at first but there were signs in the weeks after your Company's year end that growth was slowing. There were also fears that Beijing's focus on "common prosperity" might lead to regulation to reduce corporate profits.
At 30 June 2021, Matthews Asia ex Japan Dividend was underweight in China and overweight in Vietnam and South Korea. Vietnam benefits from manufacturers shifting production out of China to reduce costs and mitigate the impact of poor China-US trade relations. Vietnam Enterprise Investments, which invests mainly in quoted companies, was added to increase your Company's exposure to this fast-growing economy. Your Company's emerging markets allocation increased in February through the addition of JP Morgan Emerging Markets Income, an open-ended fund that follows a similar strategy to the JP Morgan Global Emerging Markets Income investment trust, an existing holding, which gained 40.11% over the year. Somerset Asia Income Fund, previously Liontrust Asia Income, also outperformed, rising 28.60%.
Among your Company's single-country Asian and emerging market investments, Stewart Investors Indian Subcontinent Sustainability rose 47.52%, outperforming the 40.41% gain for Indian equities in sterling as investors shrugged off rising Covid-19 infections exacerbated by the more infectious delta variant and focused on the longer-term impact of Narendra Modi's liberalisation of employment and agricultural laws. The HSBC MSCI Russia Capped ETF rose 22.96% while Russian equities gained 24.96% in sterling. The Russian market, which has a bias towards energy stocks, benefited from the strong oil price, up 61.63% in sterling, but currency weakness resulting from rising political risk in the wake of the US election, proved a headwind. Lindsell Train Japanese Equity fell 8.01%, lagging the 10.71% gain for Japanese stocks in sterling, because of its bias towards quality companies during a year in which cyclical stocks such as banks outperformed.
Investments in dollar cash and BlackRock Gold & General, which holds gold miners, provide diversification and may offer some capital protection should equity markets fall. Both investments were hurt during the year under review by currency swings as exceptional monetary and fiscal measures weakened the dollar and the Brexit deal buoyed the pound. Gold and gold equities fell 14.07% and 14.01% respectively in sterling, contributing to a 15.46% fall by BlackRock Gold & General. The holding in dollar cash suffered from the dollar's 10.56% fall against sterling although the impact was muted because some cash was invested during the year in new opportunities, predominantly in equity markets.
All six of the EF Brompton Global multi-asset funds were ranked above the median for performance in their respective Investment Association (IA) peer group with four funds in the top quartile and two funds in the second quartile.
Amongst your Company's private equity investments, there was good news regarding the holding in Embark, which accounted for 6.14% of net assets at the start of the year. In July 2021, Lloyds Banking Group said it had reached agreement, subject to regulatory approval, to buy the majority of Embark's business. As a result, your Company recognised an additional net GBP7.9 million in respect of this investment.
OUTLOOK
Over the late summer of 2020, the outlook for equities remained positive given the monetary and fiscal support in place and the possibility that further stimulus measures might be forthcoming, particularly in the US. By July, leading indicators for some of the world's major economies had risen significantly, implying that a global economic recovery was on the horizon. Your Company did, however take some profits from investments in equity funds shortly after the year end because of uncertainty regarding the spread of Covid-19. In June, the World Health Organisation warned the worst could be to come.
In the early autumn of 2021, there were grounds to be positive on the prospects for equities given the strong economic bounce-back fuelled by exceptional monetary and fiscal stimulus programmes. Dividends fell over the year as companies cut or deferred dividends but such cuts are likely to be temporary and your Company has added to its income-oriented equity investments.
Inflation may prove higher and more persistent than central bankers expect, raising the prospect of monetary tightening. Equities may perform well in an environment of moderate inflation but longer-dated bonds, in which your Company has no direct investments, may fall. Gold equities should provide diversification and the potential for gains in an environment where inflation is above interest rates. Low-risk multi-asset and alternative investments may also provide some protection in a falling market.
SCHEDULE OF LARGEST HOLDINGS AT 30TH JUNE 2021
Purchases/ Market
Market value 30 June (Sales) movement Market value 30 June
2020 2021 % of net
assets
GBP'000 GBP'000
GBP'000
GBP'000
Embark Group 6,990 - 7,852 14,842 10.74
Fundsmith Equity Fund 8,561 - 2,092 10,653 7.71
Polar Capital Global Technology 7,381 - 1,918 9,299 6.73
TM Crux European Special 4,921 - 982 5,903 4.27
Situations Fund
Matthews Asia Ex Japan Fund - 4,500 1,339 5,839 4.23
MI Chelverton UK Equity Income 3,013 1,000 1,374 5,387 3.90
Fund
EF Brompton Global Conservative 4,358 - 408 4,766 3.45
Fund
BlackRock Continental European 3,931 - 500 4,431 3.21
Income Fund
Aquilus Infection Fund 4,076 - 302 4,378 3.17
Aberforth Split Level Income Trust 2,253 - 1,959 4,212 3.05
BlackRock Gold & General 4,985 - (790) 4,195 3.04
Baillie Gifford Global Income 3,354 - 721 4,075 2.95
Growth
EF Brompton Global Equity Fund 2,972 - 754 3,726 2.70
First State Indian Subcontinent 2,446 - 1,162 3,608 2.61
Fund
EF Brompton Global Opportunities 2,923 - 622 3,545 2.57
Fund
EF Brompton Global Growth Fund 2,758 - 551 3,309 2.40
Liontrust Asia Income Fund 2,622 - 611 3,233 2.34
Lindsell Train Japanese Equity 3,531 - (332) 3,199 2.32
Fund
MI Brompton UK Recovery Unit Trust 2,317 - 703 3,020 2.19
EF Brompton Global Balanced Fund 2,314 - 355 2,669 1.93
Man GLG UK Income Fund 2,206 - 378 2,584 1.87
EF Brompton Global Income Fund 2,070 - 284 2,354 1.70
SPDR FTSE UK All Share 5,544 (5,551) 7 - -
Artemis Global Income Fund 3,361 (3,381) ____20 _____- ____-
88,887 (3,432) 23,772 109,227 79.08
Balance not held in investments 14,128 4,217 2,155 20,500 14.84
above
Total investments (excluding cash) 103,015 785 25,927 129,727 93.92
The investment portfolio, excluding cash, can be further analysed as follows:
GBP '000
Investment funds 100,642
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Investment companies and exchange traded funds 10,375
Unquoted investments, including loans of GBP1.4m 17,246
Other quoted investments 1,464
129,727
STRATEGIC REVIEW
The Strategic Review is designed to provide information primarily about the Company's business and results for the year ended 30th June 2021. The Strategic Review should be read in conjunction with the Chairman's Statement and the Investment Manager's Report, which provide a review of the year's investment activities of the Company and the outlook for the future. The Directors' Report and the Corporate Governance Statement form part of this Strategic Report.
STATUS
The Company is an investment company under section 833 of the Companies Act 2006. It is an Approved Company under the Investment Trust (Approved Company) (Tax) Regulations 2011 (the 'Regulations') and conducts its affairs in accordance with those Regulations so as to retain its status as an investment trust and maintain exemption from liability to United Kingdom capital gains tax.
The Company is a small registered Alternative Investment Fund Manager under the European Union Markets in Financial Instruments Directive.
PURPOSE CULTURE AND VALUES
The Directors acknowledge the expectation under the UK Code on Corporate Governance issued by the Financial Reporting Council in July 2018 (the 'Code') that they formally define a purpose for the Company. The Directors have reviewed this requirement and consider that the Company's purpose is to deliver the Company's stated investment objective to achieve long-term capital growth for the benefit of its investors.
Similarly, the Directors have also considered the Company's culture and values in line with Code requirements. The Board has formed the view that as the Company has no direct employees, and with operational management outsourced to the Investment Manager, the Administrator and the Company Secretary, the Company's culture and values have to be those of the Board. Having a stable composition and established working practices, the Board is defined by experienced membership, trust and robust investment challenge. These are therefore the key characteristics of the Company's culture and values.
STAKEHOLDER RESPONSIBILITIES (S.172 STATEMENT UNDER COMPANIES ACT 2006)
The Directors are aware of their responsibilities to stakeholders under both the Code and legislation through regular governance updates from the Company Secretary. As a UK listed investment trust, the Directors outsource operational management of the Company, including day to day management of the investment portfolio, to third parties. As a consequence, the Directors consider their key stakeholder groups to be limited to the Company's shareholders, its third party advisers and service providers, and individual Board members.
The Company's Articles of Association, the Board's commitment to follow the principles of the Code and the involvement of the independent Company Secretary in Board matters enable the Directors to meet their responsibilities towards individual shareholder groups and Board members. Governance procedures are in place which allow both investors and Directors to ask questions or raise concerns appropriately. The Board is satisfied that those governance procedures mean the Company can act fairly between individual shareholders and takes account of Mr Duffield's significant shareholding. In considering the payment of the minimum dividend required to maintain investment trust tax status, the recommendations to vote in favour of the resolutions at the AGM and the asset allocation within the investment portfolio, the Board assessed the potential benefits to shareholders and the manager of the investment portfolio.
The Board also regularly considers the performance of its independent third party service providers. Those third party service providers in turn have regular opportunities to report on matters meriting the attention of the Board, including in relation to their own performance. The Board is therefore confident that its responsibilities to each of its key stakeholder groups are being discharged effectively.
As the Company does not have any employees, the Board does not consider it necessary to establish means for employee engagement with the Board as required by the latest version of the Code.
INVESTMENT OBJECTIVE AND POLICY
Investment Objective
The Company's investment objective is to achieve long-term capital growth.
Investment Policy
The Company's investment policy is to allocate assets to global investment opportunities through investment in equity, bond, commodity, real estate, currency and other markets. The Company's assets may have significant weightings to any one asset class or market, including cash.
The Company will invest in pooled investment vehicles, exchange traded funds, futures, options, limited partnerships and direct investments in relevant markets. The Company may invest up to 15% of its net assets in direct investments in relevant markets.
The Company will not follow any index with reference to asset classes, countries, sectors or stocks. Aggregate asset class exposure to any one of the United States, the United Kingdom, Europe ex UK, Asia ex Japan, Japan or Emerging Markets and to any individual industry sector will be limited to 50% of the Company's net assets, such values being assessed at the time of investment and for funds by reference to their published investment policy or, where appropriate, the underlying investment exposure.
The Company may invest up to 20% of its net assets in unlisted securities (excluding unquoted pooled investment vehicles) such values being assessed at the time of investment.
The Company will not invest more than 15% of its net assets in any single investment, such values being assessed at the time of investment.
Derivative instruments and forward foreign exchange contracts may be used for the purposes of efficient portfolio management and currency hedging. Derivatives may also be used outside of efficient portfolio management to meet the Company's investment objective. The Company may take outright short positions in relation to up to 30% of its net assets, with a limit on short sales of individual stocks of up to 5% of its net assets, such values being assessed at the time of investment.
The Company may borrow up to 30% of net assets for short-term funding or long-term investment purposes.
No more than 10%, in aggregate, of the value of the Company's total assets may be invested in other closed-ended investment funds except where such funds have themselves published investment policies to invest no more than 15% of their total assets in other listed closed-ended investment funds.
Information on the Company's portfolio of assets with a view to spreading investment risk in accordance with its investment policy.
FINANCIAL REVIEW
Net assets at 30th June 2021 amounted to GBP138,132,000 compared with GBP113,885,000 at 30th June 2020. In the year under review, the NAV per Ordinary share increased by 21.29% from 160.35p to 194.49p, after paying a dividend of 1.4p per share.
The Group's gross revenue fell to GBP1,522,000 (2020: GBP2,419,000), mainly as a result of dividends received being adversely impacted by the Covid-19 pandemic. The pandemic did not impact dividends significantly last year, with the full impact being felt in the year under review. After deducting expenses and taxation, the revenue profit for the year was GBP429,000 (2020: GBP1,325,000).
Total expenses for the year were almost unchanged at GBP1,093,000 after an increased management fee (2020: GBP1,094,000 before the performance fee of GBP623,000). In the year under review the investment management fee increased to GBP774,000 (2020: GBP697,000), reflecting the Company's increasing NAV throughout the period. Last year a performance fee of GBP623,000 was payable in respect of the period to 31st December 2019. Since then, the performance fee arrangement has ceased. The performance fee was allocated to the Capital account in accordance with the Company's accounting policy.
Historically, dividends have not formed a central part of the Company's investment objective. The increased investment in income focused funds over the last few years has enabled the Directors to declare an increased dividend in recent years. The Company's fall in dividend income this year is seen as temporary, and the Directors have decided to utilise retained earnings to maintain the dividend. The Directors propose a final dividend of 1.40p per Ordinary share in respect of the year ended 30th June 2021 (2020: 1.40p). If approved at the Annual General Meeting, the dividend will be paid on 30th November 2021 to shareholders on the register at the close of business on 5th November 2021 (ex-dividend 4th November 2021).
The primary source of the Company's funding is shareholder funds.
While the future performance of the Company is dependent, to a large degree, on the performance of international financial markets, which in turn are subject to many external factors, the Board's intention is that the Company will continue to pursue its stated investment objective in accordance with the strategy outlined above. Further comments on the short-term outlook for the Company are set out in the Chairman's Statement and the Investment Manager's report.
PERFORMANCE MEASUREMENT AND KEY PERFORMANCE INDICATORS
Throughout the year the Group's investments included seven funds managed by the Investment Manager (2020: seven). No investment management fees were payable directly by the Company in respect of these investments.
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