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Interim Report 2020 - Chairman’s Statement

23 July 2020Corporate Updates, Results, Performance8 mins read

Gregor Stewart


Chairman’s Statement


The Covid-19 pandemic has had terrible consequences and I hope that you are staying safe and well. I would like to thank our Executive team and our service providers who have met the operational challenges of the pandemic and have transferred seamlessly to working remotely. The Board has met regularly throughout the period using video and telephone conferencing. This also facilitated more frequent reports from our Investment Manager about the adjustments it was making to control risk during the period.

The first six months of 2020 have been extremely turbulent. The pandemic has triggered the greatest economic contraction since the Second World War. Through this period of uncertainty and volatility, we saw the Company’s total net assets fall from £2.9bn at the end of 2019 to £2.3bn at the end of March. Global markets subsequently rallied and our total net assets at the end of the period were £2.7bn.

Since our Investment Manager, Willis Towers Watson (WTW), was appointed on 1 April 2017, our NAV Total Return was 22.7% and TSR was 21.5% to 30 June 2020 against 26.2% for our benchmark index. The Equity Portfolio Total Return, which does not include the negative impact of non-core investments that have now been sold, was 25.9%, broadly in line with our benchmark index and better than the median of our peers which returned 22.6%. However, for the first six months of 2020 against a particularly difficult market backdrop, the Company delivered a NAV Total Return of -3.5% and a TSR of -5.8%. The total return of the MSCI ACWI was 0.5% over this period and the median return of our peers -0.8%. The performance of the MSCI ACWI has been skewed in the six month period by very strong returns from the largest stocks in the index whereas our Stock Pickers saw more opportunities outside the largest index constituents.


In the first six months of 2020, consistent with global markets, we have seen our income fall as companies have stopped paying dividends or reduced their level as a result of the impact of Covid-19. We anticipate companies will continue to pay out lower levels of dividends at least until the global economy begins to recover.

As an investment trust, we have over many years been able to build up significant distributable reserves from which we can draw to pay dividends to shareholders even if there were to be a shortfall in the income from our portfolio in any year; the Company currently has £109.1m of revenue reserves and a further £1,962.4m of distributable capital reserves. In addition, as I explained in our Annual Report, we were seeking to obtain shareholder approval at our Annual General Meeting (AGM) to convert our Merger Reserve into a distributable reserve. This would provide a further £645.3m that could be used to support the payment of future dividends. As a result of the Covid-19 outbreak, and the consequent difficulties of getting Court approval, we decided to withdraw that resolution from the meeting. However, we intend to bring the resolution back to our AGM next year and, if approved, this will significantly bolster our already strong distributable reserves. Even with an income stream that may fall in the short term, we expect to continue to pay an increasing dividend and to extend our current record of year-on-year increasing dividends to 54 years and beyond.

In April, we announced a 3% increase in our first interim dividend for 2020 compared with the payment for the same time last year and we have today announced the same level of increase for our second interim dividend. Unless we suffer greater market volatility than expected in the second half of the year, we anticipate using our strong revenue reserves to maintain that level of increase for the remaining interim dividends for 2020. If necessary we can also use our distributable reserves in future years, to ensure that we continue to meet the expectations of our shareholders who approved our progressive dividend policy at our AGM in April.


The Company started 2020 with gross gearing of around 7.8%. The gearing levels were managed effectively within the guidelines set by the Board throughout the market volatility of the first six months of 2020. Gearing has been reduced to 5.8% at the period end reflecting our Investment Manager’s view that there remains a significant level of uncertainty about the impact of the pandemic on the global economy and the timing of its recovery.


We have maintained expenses at around the same level as this point last year. Investment management fees are slightly higher reflecting a higher average NAV for the period. Other ongoing costs are slightly lower reflecting cost savings we have achieved. Where possible, we are continuing to seek ongoing savings as a result of the simplification of the Company.


We started the year with our discount at 4.1% and at 30 June it was 6.5%. Our average discount for the period was 5.8%. There were some extreme movements in March when over three days the discount moved from 2.5% to 17.6%. In the second quarter, as such extreme movements abated, we resumed share buybacks in order to reduce and stabilise the discount and, in the period, we purchased 2.3m shares at a cost of £17.5m.


We continue to believe that effective stewardship and the integration of environmental, social and governance (ESG) factors into the Company’s investment process can help protect and grow the value of our investments. We aim to be a responsible investor and details of our approach can be found on our website.

We have not placed any ethical or value-based restrictions on the types of stocks in which our Stock Pickers can invest other than they are prohibited from investing in companies which illegally manufacture armaments under international law via the Inhuman Weapons Convention, and those weapons covered by standalone conventions. We also prohibit investment in other UK listed investment trusts and in Willis Towers Watson stock. We are keeping the need for further restrictions under review as our approach to responsible investment evolves.


I chaired my first AGM of the Company in April this year. I was disappointed that, due to necessary Government restrictions, the meeting took place with only myself and our Company Secretary present. I had very much wished to see as many of our shareholders as possible attending, so that I could meet with you and hear your views in person. It currently remains difficult for individuals to travel and we do not know when we will be able to host ‘normal’ public meetings. We plan to hold a number of virtual meetings in the course of this year to allow you to hear directly from our Investment Manager. We will provide details of these events on our website

We had also hoped to hold an investor forum later this year. It is now doubtful that we will be able to do this. When it becomes possible, I, and my fellow Directors, look forward to meeting with you at such an event.


I am delighted that shareholders confirmed Jo Dixon’s appointment as a Director at our AGM. Jo chairs our Audit and Risk Committee. The Board has 33% female representation, but we are mindful that there remains work to do in order to address other areas of diversity.


Looking ahead, there are still significant risks and uncertainties. As the economic recovery from the Covid-19 pandemic broadens out, our Investment Manager expects to see a significant pick up in performance through following the approach that has worked successfully for its institutional clients over the last 10 years. At this time, possibly more than any other, investors need a core investment that is designed to outperform, better reduce the risk and volatility normally associated with a single manager portfolio and is able to deliver a sustainable and increasing dividend.

Gregor Stewart, Chairman

22 July 2020


*Alternative Performance Measure (refer to Glossary on page 32).