It has been another eventful year for the financial markets, with a positive response to signs of a soft economic landing offsetting ongoing geopolitical volatility. The UK Retail Price Index ("RPI") fell from 8.9% in September 2023 to 2.7% in September 2024 allowing the Bank of England to cut the base rate for the first time since 2020.
Globally, a key theme for 2024 was that over half the world's population went to the polls, including the UK general election and the selection of the next US president. This inevitably increased the degree of reticence in equity markets as investors opted to wait for any resulting policy changes which could affect the outlook for the economy and equities, before committing capital. Geopolitical fears have been accentuated by ongoing conflicts, their impact on supply chains and the cost of goods.
A prolonged period of investor caution towards UK equities has resulted in a wide gap between the valuation of UK equities and their global peers. Within the UK equity market small and mid-cap companies have been particularly unloved, reflecting fears over the prolonged stagnation in the UK economy. As the year unfolded, investors began to respond to these low valuations, spurred on by hopes of interest rate cuts and the rise in corporate activity. This is reflected in the performance of the various UK Indices, the FTSE 250 and the FTSE Small Cap indices both outperformed the FTSE 100 Index over the 12 months to 30 September 2024, the first time that they have done so for three years. Despite this, globally, the allocation of funds to UK equities remains low.
Against this backdrop the overall performance of your Company has been positive, and the Board is pleased to see the Portfolio Manager's investment thesis play out positively across a range of holdings, including an increase in mergers and acquisitions ("M&A"), reflecting the compelling valuations on offer. Thomas is focused on delivering income, while also looking to identify companies with positive change that can, over time, deliver capital growth for shareholders. The Portfolio Manager has maintained the investment approach by continuing to invest across the market, providing access to small and mid-cap shares trading on attractive valuations. For some time, this approach has been out of favour, constraining returns, but as market conditions gradually improve, it is encouraging to see that the Shareholders are now starting to be rewarded. Please see the Portfolio Manager's Review for more detail on the sources of the performance and income.
Earnings
Gross income generated by the Company's investments in the year ended 30 September 2024 was £12.6 million (2023: £12.5 million). The costs of managing the portfolio, including administration costs, were down over 12%, as a result of the change to the management fees which came into effect at the start of the financial year as well as a significant reduction in the auditor fee as a result of the move to Johnston Carmichael LLP. Interest costs on the borrowings attributable to the revenue account were up from £401,000 to £454,000, largely driven by the increase in average cost of borrowing during the year. After tax, the income of the Company was £11.0 million, marginally down from £11.1 million last year.
This resulted in the Company's earnings per share being 23.05 pence which was 1.6% lower than last year. Despite this decline in challenging markets, the Board was encouraged that the dividend for the year is covered by the earnings once again and without losing focus on overall performance.
Dividends
As a result of the earnings performance, the Board is declaring a fourth interim dividend for 2024 of 5.8 pence per share which will be paid on 10 January 2025 to shareholders on the Register on 6 December 2024 with an associated ex-dividend date of 5 December 2024. This takes the total dividend for the year to 22.9 pence per share (2023: 22.8p), representing the 24th consecutive annual dividend increase declared by the Company. At the time of writing, the Company's shares are trading on a yield of 7%, which is among the highest in the AIC UK Equity Income sector.
After payment of the fourth interim dividend and based on the current number of shares in issue, 0.14 pence per share will be transferred to revenue reserves which will be increased to 15.76 pence per share.
The Board is committed to maintaining and extending the Company's track record of dividend growth. We therefore expect that, in the absence of any adverse circumstances, in the coming financial year we will extend our track record to 25 consecutive years of dividend growth by paying a dividend of at least 23.0 pence per share. We believe that we are in a position to do this because the most recent analysis from the Portfolio Manager indicates that the portfolio will be able to cover this cost out of the current year earnings. We are also carrying revenue reserves of £10.3 million in the balance sheet which we could also utilise if needed. We expect that the first three interim dividends will be 5.7 pence per share, payable in March, June and September and the fourth interim will be at least 5.9 pence per share payable in January 2026.
Performance
The overall performance of your Company has been encouraging. The Net Asset Value ("NAV") total return, with dividends reinvested at the ex-dividend date, was 13.3% (2023: 1.8%), a fraction shy of the Company's reference index total return (the FTSE All-Share Index) of 13.4%. The slight widening of the share price discount resulted in a share price total return of 10.4% (2023: 11.4%). More detailed information on capital performance can be found in the Portfolio Manager's Review and outlines stock-specific drivers that have contributed to this performance. The Company's performance against its Key Performance Indicators.
Whilst the UK equity market remains undervalued, we believe that Thomas' portfolio construction provides an opportunity for re-rating that recognises the underlying value of our investments. The Board remains focused on improving performance and growing the dividend.
Premium & Discount
Over the last couple of years, the investment trust sector has been plagued by wider discounts. The Company's share price ranged from trading at a premium to NAV in the first couple of months of the financial year to briefly trading at a discount to NAV of over 11% in March 2024 and then closing the financial year at a discount of 3%. This experience was not unique to the Company. Many trusts traded on a wider than usual discount, partially attributable to the run up to the end of the tax year as investors realised capital gains ahead of the reduction in Capital Gains Tax thresholds coming in on 6 April 2024. Once that deadline passed, we saw demand pick up and the Company's discount reverted to trading at around 5%. For all but about three weeks, in the year ended 30 September 2024, the Company's discount was trading at a narrower level than the average for the UK Equity Income investment trust sector.
While the Company was trading at a premium in the early months of the financial year, the Company issued 135,000 shares at a premium to NAV, raising just over £400,000. There were no shares bought back during the year. The Board monitors the level of the premium / discount and will step in should it believe that the impact of doing so would be in the best interests of shareholders.
Borrowing facility
At the year end, the Company had drawn down £22.5 million (2023: £21 million) of its £30 million Revolving Credit Facility which will expire in June 2026. The Board and Manager weigh up the cost of borrowing, which has increased significantly over the last couple of years, versus the financial benefit of gearing the portfolio. The Board continues to believe in the long-term benefits of gearing and sees it as one of the potential benefits of closed-end investment companies.
Online Investor Presentation
In order to encourage as much interaction as possible with our shareholders, we will be hosting an online investor presentation, which will be held at 11: 30 am on Tuesday, 28 January 2025. At this event there will be a presentation from the Portfolio Manager followed by an opportunity to ask live questions to the Portfolio Manager and me. The online presentation is being held ahead of the AGM to allow shareholders sufficient time to submit their proxy votes after the presentation but prior to the AGM should they so wish. Full details on how to register for the online event can be found on the Company's website at www.abrdn.com/aei.
Annual General Meeting
This year's Annual General Meeting ("AGM") will be held at abrdn's office, 18 Bishops Square, London, E1 6EG on Tuesday, 18 February 2025 at 11:30 am. The meeting will include a presentation by the Portfolio Manager and will be followed by lunch. This is a good opportunity for shareholders to meet the Board and the Manager and the Board encourages you to attend.
Outlook
The start of the current financial year can definitely be described as "interesting times" for an equity investor in the UK. In the first few weeks of the new financial year, we have seen Rachel Reeves deliver Labour's first budget statement for 14 years and the re-election of Donald Trump as the next President of the United States after a four-year interlude. With those events behind us, there is less uncertainty as to the medium-term outlook. Conflicts in Ukraine and the Middle East have been ongoing for some time, but it remains to be seen whether any escalation in these conflicts further adversely affects the global stock markets.
The fiscal impact of the UK Government's intention to increase borrowing and raise taxes, in particular Employer's National Insurance, will undoubtedly have an impact on many UK companies. Whilst how this will manifest is not clear, it is evident that the Government will need the economy to grow to support much needed investment in infrastructure. Meanwhile Donald Trump's economic agenda - a push for growth accompanied by tariffs - is likely to be inflationary, both in the US and elsewhere. Consequently, the scale of interest rate cuts that are expected, on either side of the Atlantic, appears to be receding.
It is worth remembering that while we invest in companies listed in the UK, many operate internationally, so the National Insurance increase will only affect their UK payroll. The strengthening of the US Dollar that we have witnessed since the start of the period has reversed the weakness seen in August and September. A strengthening dollar negatively affects UK exporters but is beneficial to investors in companies with operations outside the UK generating sales in US Dollars and remitting the proceeds back to the UK. The Portfolio Manager is aware of the sensitivities of the portfolio to such macro variables. The resilient performance of the portfolio since the start of the new financial year, despite these macro changes, would support the manager's view that the portfolio has been structured on the basis of stock-specific insights which makes it more resilient and less likely to be affected by sharp changes in macro variables.
Against this backdrop the Portfolio Manager will continue to position the portfolio in companies where we see the potential for a combination of dividend yield, dividend growth and valuation re-rating with the aim of delivering a further increase in the dividend in the coming year to extend the track record to 25 years and to deliver this from the revenue earnings in the year.
Performance
Cumulative performance (%)
| as at 31/10/24 | 1 month | 3 months | 6 months | 1 year | 3 years | 5 years | |
|---|---|---|---|---|---|---|---|
| Share Price | 313.0p | (2.6) | (2.3) | 6.7 | 12.4 | 10.3 | 13.9 |
| NAV | 327.5p | (1.2) | (4.8) | 5.0 | 20.5 | 4.4 | 9.4 |
| FTSE All-Share Index | (1.6) | (2.5) | 1.8 | 16.3 | 19.7 | 31.9 | |
| FTSE 350 Higher Yield Index | (0.7) | (2.9) | 0.9 | 15.6 | 35.0 | 37.7 |
Discrete performance (%)
| 31/10/24 | 31/10/23 | 31/10/22 | 31/10/21 | 31/10/20 | |
|---|---|---|---|---|---|
| Share Price | 12.4 | 4.2 | (5.8) | 53.9 | (32.9) |
| NAV | 20.5 | (7.3) | (6.6) | 44.6 | (27.5) |
| FTSE All-Share Index | 16.3 | 5.9 | (2.8) | 35.4 | (18.6) |
| FTSE 350 Higher Yield Index | 15.6 | 7.0 | 9.2 | 44.3 | (29.3) |
Source: abrdn, total returns. The percentage growth figures are calculated over periods on a mid to mid basis. NAV total
returns are calculated on a cum-income basis.
Past performance is not a guide to future results
Important information
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.
- 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 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.
- 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.
- The Company may charge expenses to capital which may erode the capital value of the investment.
- The Alternative Investment Market (AIM) is a flexible, international market that offers small and growing companies the benefits of trading on a world-class public market within a regulatory environment designed specifically for them. AIM is owned and operated by the London Stock Exchange. Companies that trade on AIM may be harder to buy and sell than larger companies and their share prices may move up and down very sharply because they have lower trading volumes and also because of the nature of the companies themselves. In times of economic difficulty, companies listed on AIM could fail altogether and you could lose all your money.
- The Company invests in the securities of smaller companies which are likely to carry a higher degree of risk than larger companies
Other important information:
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.
Find out more at www.abrdn.com/aei or by registering for updates. You can also follow us on X, Facebook and LinkedIn.