Introduction

For the year ended 31 January 2024, the Company’s net asset value total return of 6.7% compared favourably to a total return of 1.9% from the benchmark, the FTSE AllShare Index. This encouraging outcome occurred despite various challenges in the UK market, such as geopolitical risks, concerns over the financial stability of the banking sector, fears of persistent inflation, and the delayed impact of tight monetary policy. Economies proved more resilient than anticipated coming into the year. Consumer confidence has benefited from real wage growth and a moderating cost of living, meanwhile the UK faced a mild technical recession in the latter half of the year. More disappointingly, in the context of portfolio outperformance, the share price of the Company declined over the year by 1.6% in total return terms and the discount widened. The revenue return hit a new record level of 13.54p a share.

The global macro-economic outlook remains mixed, with a high degree of uncertainty. While fears of a US recession have lessened, the Chinese recovery has disappointed and global growth is expected to slow. Recognising this backdrop, we believe the Company is well-positioned to navigate potential challenges in the market. Our focus on higher-quality companies and investments that can deliver both income and capital growth, while adhering to the Company’s sustainable and responsible investing approach, should help us manage any difficult market conditions ahead.

The portfolio remains highly differentiated compared to both peers and its benchmark. It remains the only UK Equity Income investment trust with a formal sustainability approach. The active share of the portfolio is 76%, while the number of holdings is a focussed group of 35. We see attractive opportunities in innovative mid-sized UK companies and have 25% of the Company’s assets in the FTSE 250 Index and 50% in UK large companies. We utilise the Company’s flexibility to invest overseas with an allocation of up to 25% to high quality overseas companies, offering diversification and unique exposures.

The Company offers an attractive 5.0% dividend yield (based on the year end share price of 276p), approximately 20% ahead of the FTSE All-Share Index. The free cash flow performance of companies held in the portfolio has been strong, with many growing their dividends during the year. As a result, income generation came in ahead of our initial expectations.

Performance

We are pleased with the Company’s income progression in the year. The revenue earnings per share of 13.54p exceeded our expectations and represents an increase of 4.0% over the previous year. We continued writing options based on our fundamental analysis of holdings in the portfolio and this has been a benefit to the Company by diversifying and increasing the level of income generated.

The UK market concluded the year with a modest increase, despite experiencing some volatility throughout the year. The Company benefited from positive sector allocation given its underweight exposure to the basic materials sector, which underperformed due to lower commodity prices associated with weaker Chinese activity. The portfolio's overweight position in the technology sector, an area with numerous quality and growth characteristics that we focus on, proved beneficial to performance.

The Company’s sustainable investment approach targets investment in high-quality, sustainable Leaders and Improvers across the market and we continue to engage with investee companies. Filters are applied to the universe to reduce exposure to sectors and companies facing the highest environmental and social risks. During the year, the investable universe provided a tailwind to relative performance, primarily due to its lower exposure to basic materials. While the primary focus of the Company is on selecting high-quality, sustainable companies, we continue to monitor factor risks presented by this approach and remain confident that it aligns with positive outcomes for shareholders.

Encouragingly, fundamental analysis and stock picking contributed positively, with the market rewarding companies that demonstrated attractive growth and improving fundamentals. In the healthcare sector, NovoNordisk announced a series of trial data indicating that the anti-obesity drug Wegovy not only leads to weight loss in patients but also reduces the risk of cardiovascular events. The drug targets a significant unmet need, obesity, with attractive long-term supply/demand dynamics and the shares responded very favourably. The accounting software firm Sage exceeded expectations with accelerating revenue growth, driven by its US cloud accounting software product, Sage Intacct. Upon purchasing shares in late 2022, we anticipated that the company was at a growth and margin inflection point, which has subsequently materialised. Sage's transition to subscription contracts and product innovation form a strong foundation for sustained growth in the medium term. Relx is performing better than anticipated due to its investment in data analytics and decision-making tools, which enable customers to extract more value from its platform. With the valuation at a discount to US peers, mainly due to its UK listing, we continue to believe it is a compelling opportunity.

As addressed in last year's Annual Report, UK domestic and mid-sized companies’ underperformance in 2022 resulted in heavily discounted valuations, but we anticipated that long-term alpha generation from UK midsized companies would return. This trend of underperformance continued through to October 2023 due to concerns about sticky inflation, recession risk and market liquidity headwinds, before sharply reversing in the last quarter of the financial year. The holding in Intermediate Capital rebounded strongly, while UK construction company Morgan Sindall and large housebuilder Taylor Wimpey saw share price recovery as fears of a deep UK recession and house price deflation moderated. Taylor Wimpey's unique dividend policy, based on net asset value rather than earnings, ensured a visible and healthy shareholder distribution.

Turning to the detractors to performance. The holding in the Asian insurer Prudential underperformed on concerns about the pace of recovery in China. We view this as a temporary setback and believe that Prudential's longterm structural growth potential, offered by its market exposures, is not reflected in its discounted valuation. The specialist UK lender Close Brothers faced news that the UK financial regulator, the FCA, has opened an enquiry into legacy motor finance commission structures in the industry and whether customers are owed financial redress. The quantum and timing of the amount to be paid to customers is uncertain and patience will be required, with a regulatory announcement anticipated in September this year. Meanwhile the company cut its dividend in order to conserve capital which was a disappointing development.

Portfolio Activity

We introduced several new holdings this year. We initiated a position in Telecom Plus, a retailer of utility, telecom and insurance products, which operates in the UK under the Utility Warehouse brand. The company has a capital-light business model, strong balance sheet and attractive cost advantage which means it is well placed to deliver longterm customer growth, earnings progression and shareholder distributions. We also introduced the UK’s largest IT value added reseller Softcat to the portfolio. We believe Softcat has significant potential for long-term growth, coupled with a strong balance sheet and the optionality for enhanced shareholder cash returns. Alongside these additions, we purchased a new position in German automotive manufacturer Mercedes-Benz which is repositioning its strategy towards the luxury end of the market and is well positioned from a technology perspective to meet the challenges of the electric vehicle transition and the gradual move to autonomous driving.

Finally, we introduced National Grid, which has been owned by the Company in the past. The company aims to deliver both asset value and earnings growth over the medium term, driven by the investment required to decarbonise the UK and US energy networks and is a critical enabler of the energy transition. We part funded this purchase with a reduction in the holding in SSE, which benefits from similar drivers. National Grid has a superior shareholder distribution return and so is helpful from an income perspective.

Outlook

Signs are emerging that the actions taken by central banks to manage the high levels of inflation in the UK and Europe are having their desired effect. While inflation is decelerating, geopolitical risk and wage growth remain el evated, together making the path to monetary easing a challenge to predict. Global growth is expected to slow and the UK and Eurozone are already in recession-like conditions. The US economy has remained more resilient than many feared, however household savings and corporate balance sheets are finite. Chinese growth has stabilised amid easing but household confidence and the real estate sector weigh on the economy. Despite this backdrop, we remain positive on the potential long-term returns available from the portfolio. Fundamental company analysis supports our conviction in the high quality businesses in the portfolio, and we see attractive opportunities that are underappreciated by the market.

There are reasons to be optimistic. The Company should benefit from the focus on higher quality companies with less reliance on the economic cycle, given our attention to diversification, balance sheet strength, and resilience of income. The UK equity market remains highly attractive in terms of valuation, both on an absolute basis and relative to global markets. This view is supported by the increased frequency of mergers and acquisitions across the market which, in our view, will act as a catalyst to address the mispricing.

Overall, we will continue to maintain a balanced approach to the positioning of the portfolio, giving it the potential to perform in a range of market environments. Our primary attention is on protecting capital, but we will continue to look to participate in opportunities where share prices in good companies with attractive long-term prospects have been oversold. Simultaneously, we will concentrate on those UK and overseas companies committed to creating a more sustainable future.

Performance table

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 before 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.

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