Highlights
- Company delivers on its objective of providing a high level of income and capital growth
- Net Asset Value ("NAV") total return of 6.8%
- Share price total return of 14.5%
- Dividend yield of 5.9% (based on the period end share price)
Review of the Period
In my first statement to shareholders as Chairman of your Company, I am pleased to report a period of positive performance, with the Company delivering on its objective of providing a high level of income and capital growth.
The Net Asset Value ("NAV") total return was 6.8%, which compares to a wider market return of 6.1% as measured by the FTSE All-Share Index. The share price total return was 14.5%, resulting from a narrowing of the discount of share price to NAV, which was 7.4% at the end of the period.
Based on the current annual rate of dividend, the dividend yield on the share price at the end of the period was 5.9%, a material premium to the FTSE All-Share Index which yields approximately 3.7%.
Following a period of relatively high inflation and increased interest rates, there were signs of economic improvement during the period under review. Inflation has moderated and interest rates have started to fall, with further reductions expected in the months ahead. This backdrop has been helpful to equity markets and the UK market in particular, which remains undervalued relative to other developed markets. The positive factors are, however, over-shadowed by a number of continuing global geo-political risks, most notably the continuing conflicts in Ukraine and the Middle East. The recent UK Budget will also impact on savers and their choice of savings, with increasing taxes (including National Insurance, Capital Gains Tax and Inheritance Tax) all having an unquantifiable impact on the UK market.
Earnings and Dividends
The revenue earnings per share for the period were 8.15p, an increase of 6.4% compared to the 7.66p of earnings generated in the equivalent period last year.
As stated in the recent Annual Report, with effect from 1 April 2024 management fees and finance costs have been charged 40% to Revenue and 60% to Capital in the Statement of Comprehensive Income (compared to an historic allocation of 50% to Revenue and 50% to Capital), which accords with the anticipated long-term split of returns from the portfolio. This resulted in a benefit to revenue earnings of 0.20p per share for the period, with some additional cost being applied against capital.
A first interim dividend of 3.2p per Ordinary share in respect of the year ending 31 March 2025 was paid on 31 October 2024 (2024: first interim dividend 3.2p). The Board is declaring a second interim dividend of 3.2p per Ordinary share, payable on 31 January 2025 to shareholders on the register at close of business on 3 January 2025. Subject to unforeseen circumstances, it is proposed to pay a further interim dividend of 3.2p per Ordinary share prior to the Board deciding on the rate of final dividend at the time of reviewing the full year results. From time to time the Company recalibrates the level of interim dividend payable, but typically has three equal interim dividends and a higher balance being applied to the final dividend, which is subject to shareholder approval at the AGM.
The Company continues to generate a high level of income and to deliver a material yield premium to the market. The current annual rate of dividend is 14.40p per Ordinary share which represented a dividend yield of 5.9% based on the share price at the end of the period. The Board considers the Company's high level of dividend to be one of its key attractions and recognises that, in the current economic environment, with a falling yield on cash investments, there is likely to be a continuing demand for an attractive and reliable level of income. We have a very high proportion of our investors invested through retail platforms and many of those will be 'tax protected' in ISAs or SIPPs. Some will have elected for periodic saving into the shares of the Company and some for reinvestment of dividends, both historically good ways of obtaining a long-term return on investments made in income funds, especially if held through ISAs.
Discount and Share Buy Backs
As stated above, the discount at which the price of the Company's Ordinary shares traded relative to the NAV narrowed during the period, to 7.4% as at 30 September 2024 (31 March 2024: 13.3%). With the discount narrowing during the period, the Company did not buy back any shares. The Board will, however, continue to monitor the discount level carefully and make use of the share buyback authority granted by shareholders at the Company's last AGM, if we consider it in the best interests of shareholders to do so. It has been disappointing to see the entire investment company sector de-rated, including income funds, but it does potentially provide a buying opportunity where shares are trading materially below their intrinsic NAV, if there is a prospect of the discount narrowing at some point in the future.
Gearing
The Company has a £20 million loan facility of which £19 million was drawn down at the period end. Net of cash, this represented gearing of 16.4%, unchanged since the start of the period. The weighted average borrowing cost at the period end was 5.2% (31 March 2024 - 5.3%).
The Board monitors the level of gearing regularly. Although the absolute level of gearing may look high relative to some other investment trusts, strategically we take the view that the borrowings are notionally invested in the less volatile fixed income part of the portfolio which generates a high level of income (namely the preference share part of the portfolio), giving the Investment Manager greater ability to invest in a range of equity stocks with lower yields and higher growth prospects. The Board believes that this combination should enable the Company to achieve a high and potentially growing level of dividend, and also deliver some capital appreciation for shareholders – as has been the case in the past.
Cancellation of Share Premium Account
Following shareholder approval at the Company's AGM on 5 July 2024, the Company received court approval by way of a court order dated 13 August 2024 for cancellation of the Share Premium Account. The court order was registered at Companies House on 16 August 2024 at which point cancellation of the Share Premium Account became effective. Consequently, the amount of approximately £50 million previously standing to the credit of the Share Premium Account has been transferred to a newly created distributable reserve which is available to fund the cost of share buy backs and dividend payments. The Board considers that it is in shareholders' interests for the Company to have this flexibility, although it has no current intention of making use of the new reserve for dividend payments which will continue to be resourced through net revenue and revenue reserves.
Board
The Company focuses on having a relatively small and engaged board of individuals with experience in the closed-ended sector and more widely. This works well, as has the succession planning in introducing new members to the Board over recent years, without impairing the chemistry and cohesion of the Board. I want to pay tribute to Robert Talbut's chairmanship during my tenure on the Board and his oversight of various constructive changes in how the Company operates, as well as during the combination with abrdn Smaller Companies Income Trust, which completed last year. We wish Robert well in his other roles and thank him for his contribution to the Company.
Outlook
With inflation now seemingly under control and interest rates starting to fall, there are reasons to be optimistic about the prospects for economic stability. However, the conflicts in the Middle East and Ukraine continue to create significant geopolitical risk, and the recent UK budget and result of the US presidential election both create economic uncertainties that could have an impact on financial markets.
Further reductions in interest rates should be beneficial for equity markets and the investment company sector, and the UK Equity Income sector in particular. However, as always, good stock selection will be key and the Board has confidence in the ability of the Manager to continue to deliver the Company's objective of delivering a high level of income for shareholders, together with the potential for growth of both income and capital.
Investment objective
The Company’s investment objective is to provide shareholders with a high level of income, together with the potential for growth of both income and capital from a diversified portfolio substantially invested in UK equities but also in preference shares, convertibles and other fixed income securities.
Cumulative performance (%)
| as at 31/10/24 | 1 month | 3 months | 6 months | 1 year | 3 years | 5 years | |
|---|---|---|---|---|---|---|---|
| Share Price | 232.5p | (4.0) | (4.2) | 5.4 | 12.5 | 7.8 | 13.4 |
| NAV (A) | 260.5p | (0.8) | (3.4) | 1.6 | 18.4 | 9.5 | 27.2 |
| FTSE All-Share | (1.6) | (2.5) | 1.8 | 16.3 | 19.7 | 31.9 |
Discrete performance (%)
| 31/10/24 | 31/10/23 | 31/10/22 | 31/10/21 | 31/10/20 | |
|---|---|---|---|---|---|
| Share Price | 12.5 | (2.0) | (2.2) | 35.5 | (22.4) |
| NAV (A) | 18.4 | 2.2 | (9.5) | 33.8 | (13.2) |
| FTSE All-Share | 16.3 | 5.9 | (2.8) | 35.4 | (18.6) |
Total return; NAV cum income, with 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.
(A) Including current year revenue
Source: abrdn Investments Limited, Lipper and Morningstar.
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.
- 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.
- 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.
- 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 ‘subinvestment 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 will 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. The company is authorised and regulated by the Financial Conduct Authority in the UK.
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