Yahoo Finance BlackRock Sustainable American Income Trust Plc - Half-year Report
BlackRock Sustainable American Income Trust plc
LEI: 549300WWOCXSC241W468
Half Yearly Financial Report 30 April 2024
Performance record
| As at | As at | |
Net assets (£’000)1 | 168,333 | 154,789 |
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Net asset value per ordinary share (pence) | 218.40 | 193.51 |
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Ordinary share price (mid-market) (pence) | 197.50 | 174.00 |
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Discount to cum income net asset value2 | 9.6% | 10.1% |
|
Russell 1000 Value Index | 1989.40 | 1733.58 |
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| ========= | ========= |
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| For the six | For the | |
Performance (with dividends reinvested) |
|
|
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Net asset value per share2 | 15.0% | -5.6% |
|
Ordinary share price2 | 15.9% | -8.1% |
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Russell 1000 Value Index | 14.8% | -5.0% |
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| ========= | ========= |
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| For the period | For the period | |
Performance since inception (with dividends reinvested) |
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|
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Net asset value per share2 | 243.5% | 198.7% |
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Ordinary share price2 | 210.4% | 167.8% |
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Russell 1000 Value Index | 302.5% | 250.7% |
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| ========= | ========= |
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| For the six | For the six | |
Revenue |
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|
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Net profit on ordinary activities after taxation (£’000) | 1,254 | 1,604 | -21.8 |
Revenue earnings per ordinary share (pence)3 | 1.59 | 2.00 | -20.5 |
| --------------- | --------------- | --------------- |
Dividends (pence) |
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|
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1st interim | 2.00 | 2.00 | – |
2nd interim | 2.00 | 2.00 | – |
| --------------- | --------------- | --------------- |
Total dividends payable/paid | 4.00 | 4.00 | – |
| ========= | ========= | ========= |
1 The change in net assets reflects portfolio movements, shares bought back into treasury and dividends paid during the period.
2 Alternative Performance Measures, see Glossary in the half yearly report and financial statements.
3 Further details are given in the Glossary in the half yearly report and financial statements.
Sources: BlackRock and LSEG Datastream.
Performance figures have been calculated in Sterling terms with dividends reinvested.
Chair’s Statement
Dear Shareholder
Market overview
I am pleased to report that our portfolio delivered a strong positive return over the six months to 30 April 2024. During 2023 inflation across developed markets fell from its previous highs as economies avoided recession which had been predicted by many leading economists to restore price stability. Instead, financial markets confounded gloomy expectations with stocks rallying as recession fears were replaced by growing confidence that US policymakers would achieve an economic soft landing.
Although markets were volatile throughout 2023, with geopolitics casting a shadow, they closed the year on a high note with a stock market rally which began in November as falling inflation spurred hopes of interest rate cuts on both sides of the Atlantic. In December, investors were further buoyed by a signal from the Federal Reserve that borrowing costs had peaked and it planned to cut interest rates in 2024. During the first part of this year, the US economy continued expanding but at a more restrained pace than in 2023. Despite this, the S&P 500 Index surpassed its previous all-time highs once again on the back of continued investor optimism regarding the impact of Artificial Intelligence (AI). The fact that markets have been driven by a small number of mega-cap technology companies has remained a headwind for income investors.
Performance
Over the six-months under review to 30 April 2024, the Company’s net asset value per share (NAV) increased by 15.0%, marginally outperforming its reference index, the Russell 1000 Value Index, which returned 14.8%. Over the same period, your Company’s share price rose by 15.9% (all figures are in Sterling terms with dividends reinvested). The S&P 500 Index increased by 17.2% during the period.
Since the period end and up to close of business on 26 June 2024, the Company’s NAV has increased by 0.1% and the share price has risen by 1.0% (both percentages in Sterling terms with dividends reinvested).
Earnings and dividends
The Company’s earnings per share for the six-month period ended 30 April 2024 amounted to 1.59p compared with 2.00p for the corresponding period in 2023. This reflects the changing mix in the underlying portfolio selection, as the portfolio managers see more opportunities in lower yielding stocks. On 14 March 2024, the Board declared the first quarterly dividend of 2.00p per share which was paid on 26 April 2024. A second quarterly dividend of 2.00p per share has been declared and will be paid on 5 July 2024 to shareholders on the register on 7 June 2024. These are in line with payments made in prior years.
Gearing
The Board's view is that 5% of NAV is the neutral level of gearing over the longer term and that gearing should be used in an approximate range of 0% to 10% of NAV. The Board has encouraged the portfolio managers to be more active in using gearing but over the period they remained cautious and gearing remained below 1%. This is due to their view that the US economy is in the late phase of the business cycle with slower economic growth, a tight labour market and recessionary risk.
Management of share rating
Investor sentiment and discounts have been influenced by various external factors and uncertainties, including rising interest rates, and discounts have widened generally across the closed-end funds sector. The Company’s discount was not immune to market pressures, with the shares trading at a discount to NAV ranging from 6.3% to 13.6% over the period under review. The Board monitors the Company’s share rating closely and, as the discount widened and following consultation with the Manager and Company’s corporate broker, Cavendish Securities, determined that it was in shareholders’ interests to buy back shares with the objective of ensuring that an excessive discount to NAV did not arise.
Over the six-month period to 30 April 2024, the Company purchased 2,912,231, 3.6% of the ordinary shares, at an average price of 191.64p per share for a total cost of £5,581,000. All shares were bought back at a discount to NAV, delivering an uplift to the NAV per share of 0.40% for continuing shareholders. Since the period end up to 26 June 2024, a further 1,580,148 ordinary shares have been bought back at an average price of 198.89p per share for a total cost of £3,151,000. All shares have been placed in treasury. No shares were issued during the period.
The Company’s discount on 26 June 2024 was 8.9%. The Board will continue to use its authorities to issue and buy back shares when it considers it is in shareholders’ interests to do so.
Sustainability Disclosure Requirements (SDR)
The SDR regime introduced by the Financial Conduct Authority comprises a comprehensive package of measures including rules addressing fund naming and marketing, fund labelling, anti-greenwashing and disclosure requirements. The new labelling regime is different from the European Union Sustainable Finance Disclosure Regulation which was the relevant regulatory regime when the Company adopted its sustainability mandate in July 2021. In summary, as one of the few investment trusts with 'Sustainable' in its name, the Company will either have to adopt an investment approach that enables us to apply one of the four sustainable labels under SDR or change the Company's name. In considering whether to adopt a sustainable label under SDR, the Board has, with the Investment Manager, analysed the implications for the current investment approach whilst at the same time considering the potential restrictions that compliance with the SDR labelling regime may place on our investable universe.
The Board continues to believe that embedding an environmental, social and governance approach in the investment process, as part of an actively managed US income and value strategy, remains attractive. We continue to engage with the Investment Manager, on what is a complex and evolving area, and will make a further announcement before 2 December 2024 which is the deadline for implementing (if any) one of the four sustainability labels under SDR.
Outlook
The US stock market continues to outstrip broader global markets and economic activity remains resilient. US consumer spending has held up remarkably well despite higher prices, and tight labour markets continue to support employment and therefore income levels. It is good news that inflation on both a headline and core basis moderated significantly in 2023 despite not falling as fast as some investors expected. It appears that the hiking cycle is now over, leaving interest rates on hold and, if inflation continues on its moderating trajectory, it should allow the Federal Reserve to start gradually transitioning rate policy back to a more normal setting over time.
The market outlook remains mixed. The main upside potential stems from non-inflationary growth supported by a robust labour market and stronger productivity from efficiency improvements and generative artificial intelligence. Downside risks include elevated tensions in the Middle East which could make an energy price shock more likely and could bring a combination of higher inflation and lower growth. Meanwhile the risks of renewed supply chain disruptions remain significant. With these factors in mind, your portfolio managers continue to position the portfolio in high quality but attractively priced companies that are well placed to weather short-term market volatility and provide good returns for shareholders over the long term.
ALICE RYDER
Chair
1 July 2024
Investment Manager’s Report
Market overview
Over the six months to 30 April 2024, the Company’s NAV returned 15.0% and the share price returned 15.9%. This compares with a return of 14.8% in the Russell 1000 Value Index (all percentages in Sterling terms with dividends reinvested). Over the same period, US large cap stocks as represented by the S&P 500 Index, advanced by 20.9% in US Dollar terms. In Sterling terms, US stocks returned 17.2% for the period.
The final quarter of 2023 began with relatively low expectations as rising interest rates remained. By October, US equity markets reached new lows as investor sentiment and confidence continued to wane. Inflation data softened faster than expected, keeping the Federal Reserve quite neutral on monetary policy and simultaneously increasing investor confidence. Slowly but surely, as positive economic data and better-than expected corporate earnings were released, the markets began to turn. Consumer spending and economic growth remained strong in the fourth quarter thanks to a resilient jobs market, indicating the US consumer remains relatively healthy. The majority of 2023 was certainly difficult to navigate with inflation, recession fears and heightened volatility, yet in the end, we experienced a powerful rally in the US equity market to close out the year. In terms of style, growth stocks outperformed value stocks as the Russell 1000 Growth Index returned 14.2% and the Russell 1000 Value Index returned 9.5% during the fourth quarter.
After a banner year in 2023, US markets, defined as the S&P 500 Index, continued their momentum in 2024 returning 10.6% during the first quarter, the best Q1 since 2019. Key drivers of performance may be attributed to a strong macro backdrop and above average earnings. The US economy continues to demonstrate a high level of resilience relative to the rest of the world. Gross domestic product (GDP) grew at 3.4%1 while employment remained stable. However, sticky inflation led to falling rate cut expectations, with consensus for cuts in 2024 falling from 6.5% in December to 3% at the end of March2. This supportive macro environment has translated into strong earnings for most sectors in the S&P 500 Index, with the median company posting 3.8% earnings growth year-over-year during Q4 2023. Cyclical sectors led the way including energy, consumer discretionary and real estate3.
Looking to the “Magnificent 7”4, it is worth noting that while Nvidia5 has continued its strong run, the others have seen a high degree of performance divergence. For example, Tesla was one of the worst performers in the S&P 500 Index during Q1, while Apple struggled as well. Lastly, the first quarter was notably strong when compared to other election years, when markets typically rally as policy clarity increases. This year’s unusual set up with each candidate having a presidential track record adds a degree of perceived clarity not usually found this early in election years. While the market rally broadened, growth outperformed value in the first quarter of 2024 with the Russell 1000 Growth Index returning 11.4% versus 9.0% for the Russell 1000 Value Index.
Portfolio overview
The largest contributor to relative performance was stock selection in health care. Within the sector, our investment decisions within the pharmaceuticals industry accounted for the majority of relative outperformance. In industrials, an overweight allocation to the building products industry boosted relative returns. Furthermore, stock selection in consumer discretionary proved beneficial mainly due to stock selection within the automobiles industry.
The largest detractor from relative performance was stock selection in energy, a sector to which we allocate selectively, where companies demonstrate strong transition/sustainability credentials. Our selection decisions in the oil, gas and consumable fuels industry accounted for the majority of underperformance. In utilities, stock selection within the electric utilities industry proved costly. Other detractors from relative results included selection decisions within materials and the average cash allocation of 0.56% during a broadly strong period for equities.
Below is a comprehensive overview of our allocations (in Sterling terms) at the end of the period.
Consumer Discretionary: 5.7% overweight (10.5% of the portfolio)
Within the sector, our preferred areas of investment include leisure products and firms with auto-related exposure. In leisure products, we believe Hasbro (2.2% of the portfolio) which trades at a significant discount to peers but has a wide catalogue of strong franchises, offers nice upside for an extremely steady business. Disruption risks persist in the sector and we believe these risks are best mitigated through identifying stock specific investment opportunities that either trade at discounted valuations or have business models that are able to take advantage of possible disruptions. For example, we believe companies such as General Motors (1.9% of the portfolio) and Aptiv (1.7% of the portfolio) offer investors exposure to underappreciated franchises at discounted valuations from the perspective of General Motors and an opportunity to benefit from the further electrification of cars with Aptiv.
Information Technology (IT): 4.5% overweight (13.5% of the portfolio)
An increasing number of companies in the technology sector are what we refer to as “industrial tech”. These firms are competitively insulated from disruptors, well-positioned to take advantage of long-term secular tailwinds and exhibit growth in earnings and free cash flow (FCF). Strong earnings growth and FCF generation is also translating to an increasing number of companies paying growing dividends to shareholders. This is in stark contrast to the dot-com era where growth was often prioritised over shareholder return. We believe this trend is poised to continue. Our preferred exposures in the sector include technology hardware, storage and peripherals and communications equipment companies with sticky revenue streams such as Cisco Systems (1.5% of the portfolio). We also continue to invest in IT services like long-term holding Cognizant Technology Solutions (1.5% of the portfolio). IT broadly scores well on ESG metrics given the generally lower environmental impact than other sectors, with our selection of companies including a mix of ESG leaders and ESG improvers.
Health Care: 3.3% overweight (17.3% of the portfolio)
Secular growth opportunities in health care are a by-product of demographic trends. Older populations spend more on health care than younger populations. In the US, a combination of greater demand for health care services and rising costs facilitates a need for increased efficiency within the health care ecosystem. We believe innovation and strong cost control can work together to address this need and companies that can contribute to this outcome may be poised to benefit. On the innovation front, we are finding opportunities in pharmaceuticals and among companies in the health care equipment and supplies industry. We prefer to invest in pharma companies with a proven ability to generate high research and development productivity versus those that focus on one or two key drugs and rely upon raising their prices to drive growth. Outside of pharma, our search for attractively priced innovators is more stock specific; we recently initiated a position in Baxter International (2.4% of the portfolio) a health care company focused on products to treat kidney disease and other chronic medical conditions. We believe the company is poised to do well as margin pressures from temporary inflation (logistics and shipping) suppress and the economy continues to reopen. From a cost perspective, health maintenance organisations (HMOs) have an economic incentive to drive down costs as they provide health insurance coverage to constituents. These efforts ultimately help to make health care insurance affordable to more people and the HMOs also play a substantial role in improving the access to and quality of health care its members receive. Fundamentally, we believe our holdings in the space can benefit from downward pressure on cost-trend, new membership growth and further industry consolidation over time. Furthermore, they trade at meaningfully discounted valuations versus peers, offering us an attractive risk versus reward opportunity.
Communication Services: 2.4% overweight (6.9% of the portfolio)
The portfolio has an overweight to communication services, particularly the media and diversified telecom services industries. Notable portfolio holdings include Verizon Communications (2.2% of the portfolio) and Comcast (1.8% of the portfolio). Verizon Communications trades at a reasonable price relative to the quality and stability of its business and acts as a key enabler for smart cities, with potential to reduce energy consumption, increase safety and provide other social benefits. Comcast also trades at a very reasonable valuation due to competition in broadband and in media. As the leading broadband provider in the US, Comcast is a key enabler of digital interactions and provides some of the key infra-structure that enables remote work (which reduces commuting related emissions).
Utilities: 0.4% overweight (5.4% of the portfolio)
The portfolio currently invests in only two utility stocks and we have a slight overweight in the sector relative to the reference index. Portfolio exposures are stock specific as we are finding pockets of investment opportunity among US regulated utilities, which add a level of stability and defensiveness to the portfolio through their durable earnings and dividend profiles. Our investments in the sector primarily focus on ESG leaders that have specific targets for reduction in carbon emissions and maintain significant exposure to renewables or generate power through cleaner means such as natural gas.
Materials: 0.7% underweight (4.1% of the portfolio)
Our exposure to the materials sector is stock specific as we are only invested in the containers and packaging and chemicals industries. Within the containers and packaging industry, our position in Sealed Air (1.4% of the portfolio) offers a relatively stable growth outlook. Sealed Air operates a high return business and has good pricing power. From a sustainability standpoint, plastic packagers generally score poorly on waste and water stress. The key issue for plastic is how to improve circularity and management has pledged to have 100% recyclable/reusable solutions and 50% average recycled/renewable content by 2025, which is well ahead of peers. Within the chemicals industry, we have a position in International Flavors & Fragrances (1.4% of the portfolio) a global supplier of inputs into food, consumer items and health care solutions. International Flavors & Fragrances is a dominant player in every market it participates in, making it a consistent earnings compounder.
Energy: 0.9% underweight (7.5% of the portfolio)
The portfolio currently invests in four energy stocks and we have a slight underweight in the sector relative to the reference index. Our focus on sustainability places a high hurdle for energy companies to be included in the portfolio, but we believe the sector remains investable as more traditional oil and gas operators are critical in the energy transition towards less carbon intensive sources. For example, natural gas is 40-60% less carbon intensive to produce and combust versus coal and oil. We view natural gas as a key “bridge fuel” and like companies such as Shell (2.9% of the portfolio) and Cheniere Energy (2.0% of the portfolio). Fundamentally, we generally seek to invest in attractively priced operators with good resource assets that have the opportunity to improve upon environmental issues or demonstrate clear leadership in sustainability (i.e. through their exposure to renewables or commitments to net zero/carbon neutral outcomes). We also prefer to target companies with experienced management teams, low financial leverage and disciplined capex spending plans, as these elements can contribute to positive FCF generation over time.
Consumer Staples: 2.5% underweight (5.5% of the portfolio)
The consumer staples sector is a common destination for the conservative equity income investor. Historically, many of these companies have offered investors recognisable brands, diverse revenue streams, exposure to growing end markets and the ability to garner pricing power. These characteristics, in turn, have translated into strong and often stable FCF and growing dividends for shareholders. Notable portfolio holdings include Kraft Heinz (2.7% of the portfolio) and Dollar Tree (2.6% of the portfolio). Kraft Heinz is historically among the strongest franchises in food products but has also continued to innovate its product mix to meet the changing demands of modern consumers. Kraft Heinz is an ESG improver as the company has committed to a 50% reduction in GHG emissions across all 3 scopes by 2030 and net zero by 2050.
Real Estate: 2.8% underweight (1.6% of the portfolio)
The portfolio has an underweight allocation to real estate, as we are finding few companies in the sector with both attractive valuations and strong or improving fundamentals. For example, retail Real Estate Investment Trusts (REIT) are facing challenges due to e-commerce and its negative impact on traditional brick and mortar retailers. Meanwhile, data center and logistics companies have strong fundamentals, but we view their valuations as unattractive. Our lone recent holding is a specialised REIT company, Crown Castle (1.6% of the portfolio). The company owns cell towers, fibre, and collects rent from carriers who collocate their equipment on the infrastructure. Crown Castle is trading at a wide discount relative to peers and is a leader in labour management and corporate governance practices.
Financials: 3.1% underweight (19.5% of the portfolio)
Financials represent our portfolio’s largest absolute sector allocation and we prefer companies in the banks, insurance and consumer finance. We believe the large US banks offer investors a combination of strong balance sheets (their capital levels are meaningfully higher post financial crisis), attractive valuations and the potential for relative upside versus the broader market from inflation and higher interest rates. Secondly, we continue to like insurers and insurance brokers as these companies operate relatively stable businesses and trade at attractive valuations. We categorise most of our holdings in this space as ESG improvers, with opportunities for company managements to enact stronger corporate governance and human capital development policies. Lastly, we have also identified stock specific investments in consumer finance with an opportunity in American Express (1.5% of the portfolio) whose business is geared to high-net-worth consumer spending, which is a much more stable business as the clientele is generally more insulated to economic cycles relative to other consumer segments.
Industrials: 6.3% underweight (8.2% of the portfolio)
The portfolio is meaningfully underweight to the industrials sector. Our selectivity is driven by relative valuations which we view as expensive, in many cases, versus other cyclical value segments of the US equity market. Notable positions include Johnson Controls International (2.5% of the portfolio) and Allegion (1.7% of the portfolio). We view both companies as ESG leaders in their respective domains. Allegion’s products enhance public safety and increase building efficiency. Additionally, Allegion’s MSCI ESG score is top decile, both relative to the investment universe and Allegion’s peer group.
Market outlook
While the economy and stock market are not always linked, the strong run of economic data has led to renewed optimism for the US economy in 2024 which has translated into strong stock returns. While our team believes that the US economy can continue to be resilient and grow, we also see a narrow path for sustained growth at the current pace. In our view, the key measure to consider is “productivity”. If new technologies, such as generative artificial intelligence (AI) can help increase productivity at both the personnel and business level, this may help the US economy maintain its growth prospects barring other factors. However, if productivity growth expectations are not met or AI adoption proves volatile, we think the economy could struggle to maintain its strong growth.
This helps drive conviction in our view that we continue to be “late-cycle” in the US. Additionally, many indicators remain indicative of a “late-cycle” economy such as: unemployment remaining generationally low and set to rise over time, savings rates among consumers continuing to be near all-time lows and the yield curve6 continuing to be inverted. We continue to believe this is an environment best suited for “quality” companies, i.e. those which demonstrate consistent earnings, have strong balance sheets and have savvy management teams among other characteristics. These companies should be well positioned to manage through the economic cycle, especially compared to companies with financially difficult positions, such as levered balance sheets. In addition to seeking out quality companies, we feel valuation discipline is key given higher than average forward price-to-earnings ratios for equity markets. Lastly, while the election will get more airtime as the campaigns heat up, our team prefers to focus on more secular themes which may offer more attractive investment opportunities, such as reshoring and AI/digitalisation.
TONY DESPIRITO, DAVID ZHAO AND LISA YANG
Blackrock Investment Management LLC
1 July 2024
Source: BlackRock Fundamental Equities, as of 30 April 2024.
1 Bureau of Economic Analysis.
2 Federal Reserve of Atlanta.
3 S&P Global Market Intelligence.
4 Magnificent 7 defined as Meta, Amazon, Apple, Nvidia, Microsoft, Tesla, Alphabet.
5 Reference of the company names mentioned is merely for explaining the market and should not be construed as investment advice or investment recommendation of the company.
Source: BlackRock Fundamental Equities, as of 31 March 2024.
6 As defined as the spread between the yields of 2 year and 10 year US Treasury Bonds.
Ten largest investments
Together, the ten largest investments represent 26.0% of the Company’s portfolio as at 30 April 2024 (31 October 2023: 28.0%)
1 + Citigroup (2023: 8th)
Sector: Financials
Market value: £5,733,000
Share of investments: 3.4% (2023: 2.7%)
Citigroup (Citi) is a multinational investment bank and financial services corporation with a larger international footprint and smaller US retail footprint compared to its large US bank peers. Citi generates returns significantly below its peers due to numerous issues, including higher funding costs, business mix and weak operating performance. We believe there is a multi-year opportunity to close the gap over time, as they continue to cut costs. Citi scores similarly to its large US bank peers with a strong score in Financing Environmental Impact, which will be increasingly important.
2 - Shell (2023: 1st)
Sector: Energy
Market value: £4,922,000
Share of investments: 2.9% (2023: 3.3%)
Shell is one of the largest integrated energy companies globally with five main operating segments: Integrated Gas, Upstream, Marketing, Chemicals and Products and Renewables and Energy Solutions. The company has a high-quality, gas/liquefied natural gas (LNG)-weighted portfolio with marketing and optimisation opportunities superior to most of its oil major peers. With better fundamentals the name still trades at a significant relative discount to its US peers, making this a nice opportunity for long-term appreciation. Shell is an ESG leader, having adopted an internal net-zero strategy by 2050 to be Paris-aligned, which is not adopted by most US-based oil major peers. Shell also owns the largest portfolio of LNG supplies (equity and marketing) in the world, which is a critical long-term bridge to help the world abate from highly polluting coal power generation. Under its ‘Powering Progress’ strategy, Shell is committing more than a third of its capital expenditure into renewables and energy solutions including electrical charging platforms, wind power generation and nature-based carbon offsetting.
3 + American International Group (2023: 5th)
Sector: Financials
Market value: £4,813,000
Share of investments: 2.8% (2023: 2.8%)
American International Group (AIG) is a diversified insurance company with half the book value allocated to P&C (property & casualty) and the other half to life insurance. AIG has experienced challenges, but management has spent the last few years addressing the issues by expanding margins, improving reserves, lowering expenses, managing catastrophe losses and more recently working on separating their life business. Despite the improvements, the business continues to trade at a discount to book value. AIG’s business model revolves around pooling and diversifying risk which includes key issues such as climate change and impacted risks like hurricanes.
4 + Kraft Heinz (2023: 9th)
Sector: Consumer Staples
Market value: £4,521,000
Share of investments: 2.7% (2023: 2.6%)
Kraft Heinz is a leading US packaged food manufacturer with brands including Oscar Mayer, Kraft, Lunchables, Philadelphia and more. The company trades at a large discount to US packaged food peers despite similar return and long-term growth rates. Kraft Heinz has also committed to a 50% reduction in its greenhouse gas emissions across all three scopes by 2030 and net zero by 2050.
5 + Dollar Tree (2023: 28th)
Sector: Consumer Discretionary
Market value: £4,316,000
Share of investments: 2.6% (2023: 1.7%)
Dollar Tree runs two dollar stores, the eponymous Dollar Tree brand and the Family Dollar brand. The company is generally positioned well to weather economic downturns as they offer affordable merchandise that low-income individuals can rely on. The company also offers a turnaround opportunity as there have been execution errors in the last few years. As a result, the stock trades at a discount valuation even as they show improvement in their Family Dollar business specifically.
6 + Johnson Controls International (2023: n/a)
Sector: Industrials
Market value: £4,189,000
Share of investments: 2.5% (2023: n/a)
Johnson Controls International (JCI) is a leading global provider of heating, ventilation and air conditioning (HVAC), building controls and fire and security equipment. As a dominant force in many of the spaces they compete in, JCI offers a solid outlook for consistent growth over the long run. Relative to HVAC companies, the firm is also trading at a 5-year discount, marking nice upside moving forward. JCI is an ESG leader, as they are on the front end of optimising building energy efficiency.
7 + Baxter International (2023: 16th)
Sector: Health Care
Market value: £4,003,000
Share of investments: 2.4% (2023: 2.2%)
Baxter International markets devices and drugs used to treat kidney disease and other chronic and acute medical conditions. The company is the number one player in Peritoneal Dialysis (PD) with dominant positions in medical fluids/delivery systems and strong market positions across a wide range of medical equipment and devices. The company’s PD technology helps improve access to care for high-risk patients with kidney disease. They are focused on driving higher penetration rates of PD therapy globally to address the needs of dialysis patients in a more cost-effective manner.
8 + Cardinal Health (2023: 12th)
Sector: Health Care
Market value: £3,892,000
Share of investments: 2.3% (2023: 2.4%)
Cardinal Health is one of three leading pharmaceutical wholesalers in the US engaged in sourcing and distributing of branded, generic and specialty pharmaceutical products to pharmacies (retail chains, independent and mail order), hospitals networks and health care providers. Over the long term, the fundamental outlook for the drug distribution industry looks extremely positive, driven by an aging population and increased utilisation of prescription drugs. We believe at the current valuation, Cardinal Health gives the best opportunity to capture this secular tailwind.
9 + Hasbro (2023: n/a)
Sector: Consumer Discretionary
Market value: £3,674,000
Share of investments: 2.2% (2023: n/a)
Hasbro is a global designer and distributor of traditional toys and games, television programming, motion pictures, digital gaming and licensed products. The company offers products in four principal categories: Boys, Games, Girls and Preschool, through its various owned and third-party franchises. Long term, we like the prospects with a strong entertainment slate and continued innovation across its owned brand portfolio driving enhanced bottom line performance.
10 - Verizon Communications (2023: 6th)
Sector: Communication Services
Market value: £3,647,000
Share of investments: 2.2% (2023: 2.7%)
Verizon Communications (Verizon) is the leading wireless company in the United States. We believe the company trades at a reasonable price relative to the quality and stability of the business due to competitive dynamics that have somewhat abated, as T-Mobile has pivoted to a margin growth strategy (from a share gain strategy). Verizon also has some optionality on new types of revenue enabled by 5th generation networks with telecommunication networks being key enablers for smart cities, with the potential to reduce energy consumption, increase safety and provide other social benefits.
All percentages reflect the value of the holding as a percentage of total investments.
Percentages in brackets represent the value of the holdings as at 31 October 2023.
Arrows indicate the change in relative ranking of the position in the portfolio compared to its ranking as at 31 October 2023.
Portfolio analysis as at 30 April 2024
Sector Exposure
| 2024 portfolio1 | 2023 portfolio2 | 2024 reference index1,3 |
Communication Services | 6.9% | 4.5% | 4.5% |
Consumer Discretionary | 10.5% | 9.6% | 4.8% |
Consumer Staples | 5.5% | 7.2% | 8.0% |
Energy | 7.5% | 9.3% | 8.4% |
Financials | 19.5% | 19.6% | 22.6% |
Health Care | 17.3% | 18.4% | 14.0% |
Industrials | 8.2% | 9.0% | 14.5% |
Information Technology | 13.5% | 13.5% | 9.0% |
Materials | 4.1% | 3.6% | 4.8% |
Real Estate | 1.6% | 1.3% | 4.4% |
Utilities | 5.4% | 4.0% | 5.0% |
1 Represents exposure as at 30 April 2024.
2 Represents exposure as at 31 October 2023.
3 Russell 1000 Value Index as at 30 April 2024.
Geographic Exposure1
As at 30 April 2024
United States | 88.5% |
United Kingdom | 5.6% |
Other2 | 2.1% |
France | 2.1% |
South Korea | 1.7% |
As at 31 October 2023
United States | 86.8% |
United Kingdom | 4.8% |
Other3 | 3.7% |
Japan | 2.8% |
France | 1.9% |
1 Based on the principal place of operation of each investment.
2 Consists of Australia and Switzerland.
3 Consists of Australia, Canada and Denmark.
Investments as at 30 April 2024
| | | | Market | |
Citigroup | United States | Financials | Ordinary shares | 5,733 | 3.4 |
Shell | United Kingdom | Energy | Ordinary shares | 4,922 | 2.9 |
American International Group | United States | Financials | Ordinary shares | 4,813 | 2.8 |
Kraft Heinz | United States | Consumer Staples | Ordinary shares | 4,521 | 2.7 |
Dollar Tree | United States | Consumer Discretionary | Ordinary shares | 4,316 | 2.6 |
Johnson Controls International | United States | Industrials | Ordinary shares | 4,189 | 2.5 |
Baxter International | United States | Health Care | Ordinary shares | 4,003 | 2.4 |
Cardinal Health | United States | Health Care | Ordinary shares | 3,892 | 2.3 |
Hasbro | United States | Consumer Discretionary | Ordinary shares | 3,674 | 2.2 |
Verizon Communications | United States | Communication Services | Ordinary shares | 3,647 | 2.2 |
Fidelity National Information Services | United States | Information Technology (IT) | Ordinary shares | 3,611 | 2.1 |
Wells Fargo | United States | Financials | Ordinary shares | 3,602 | 2.1 |
Sony | United States | Consumer Discretionary | Ordinary shares | 3,574 | 2.1 |
Willis Towers Watson | United States | Financials | Ordinary shares | 3,536 | 2.1 |
Sanofi | France | Health Care | Ordinary shares | 3,501 | 2.1 |
Western Digital | United States | IT | Ordinary shares | 3,417 | 2.0 |
Cheniere Energy | United States | Energy | Ordinary shares | 3,400 | 2.0 |
Thermo Fisher Scientific | United States | Health Care | Ordinary shares | 3,361 | 2.0 |
First Citizens BancShares | United States | Financials | Ordinary shares | 3,258 | 1.9 |
General Motors | United States | Consumer Discretionary | Ordinary shares | 3,169 | 1.9 |
Wabtec | United States | Industrials | Ordinary shares | 3,147 | 1.9 |
Fortrea Holdings | United States | Health Care | Ordinary shares | 3,108 | 1.8 |
Comcast | United States | Communication Services | Ordinary shares | 3,041 | 1.8 |
Raymond James | United States | Financials | Ordinary shares | 3,028 | 1.8 |
Allegion | United States | Industrials | Ordinary shares | 2,884 | 1.7 |
Cigna | United States | Health Care | Ordinary shares | 2,877 | 1.7 |
Samsung Electronics | South Korea | IT | Ordinary shares | 2,823 | 1.7 |
Aptiv | United States | Consumer Discretionary | Ordinary shares | 2,819 | 1.7 |
Crown Castle | United States | Real Estate | ... Ordinary shares | 2,756 | 1.6 |
Elevance Health | United States | Health Care | Ordinary shares | 2,627 | 1.6 |
Exelon | United States | Utilities | Ordinary shares | 2,626 | 1.6 |
Cognizant Technology Solutions | United States | IT | Ordinary shares | 2,616 | 1.5 |
Cisco Systems | United States | IT | Ordinary shares | 2,604 | 1.5 |
American Express | United States | Financials | Ordinary shares | 2,563 | 1.5 |
Sempra | United States | Utilities | Ordinary shares | 2,552 | 1.5 |
Electronic Arts | United States | Communication Services | Ordinary shares | 2,538 | 1.5 |
Diageo | United States | Consumer Staples | Ordinary shares | 2,510 | 1.5 |
WPP | United Kingdom | Communication Services | Ordinary shares | 2,418 | 1.4 |
Sealed Air | United States | Materials | Ordinary shares | 2,406 | 1.4 |
Microsoft | United States | IT | Ordinary shares | 2,370 | 1.4 |
Kosmos Energy | United States | Energy | Ordinary shares | 2,352 | 1.4 |
International Flavors & Fragrances | United States | Materials | Ordinary shares | 2,323 | 1.4 |
Crown Holdings | United States | Materials | Ordinary shares | 2,235 | 1.3 |
Public Service Enterprise Group | United States | Utilities | Ordinary shares | 2,233 | 1.3 |
Unilever | United States | Consumer Staples | Ordinary shares | 2,229 | 1.3 |
Prudential | United Kingdom | Financials | Ordinary shares | 2,162 | 1.3 |
Humana | United States | Health Care | Ordinary shares | 2,150 | 1.3 |
Woodside Energy Group | Australia | Energy | Ordinary shares | 1,983 | 1.2 |
Avnet | United States | IT | Ordinary shares | 1,964 | 1.2 |
Avantor | United States | Health Care | Ordinary shares | 1,932 | 1.1 |
CNH Industrial | United States | Industrials | Ordinary shares | 1,820 | 1.1 |
Texas Instruments | United States | IT | Ordinary shares | 1,811 | 1.1 |
Eli Lilly | United States | Health Care | Ordinary shares | 1,746 | 1.0 |
HP | United States | IT | Ordinary shares | 1,706 | 1.0 |
Sensata Technologies | United States | Industrials | Ordinary shares | 1,682 | 1.0 |
PG&E | United States | Utilities | Ordinary shares | 1,662 | 1.0 |
Citizens Financial Group | United States | Financials | Ordinary shares | 1,614 | 1.0 |
UBS | Switzerland | Financials | Ordinary shares | 1,594 | 0.9 |
Fidelity National | United States | Financials | Ordinary shares | 1,178 | 0.7 |
|
|
|
| --------------- | --------------- |
Portfolio |
|
|
| 168,828 | 100.0 |
|
|
|
| ========= | ========= |
All investments are in ordinary shares unless otherwise stated. The number of holdings as at 30 April 2024 was 59 (31 October 2023: 60).
At 30 April 2024, the Company did not hold any equity interests comprising more than 3% of any company’s share capital.
Interim Management Report and Responsibility Statement
The Chair’s Statement and the Investment Manager’s Report above give details of the important events which have occurred during the period and their impact on the financial statements.
Principal risks and uncertainties
The principal risks faced by the Company can be divided into various areas as follows:
Market;
Investment performance;
Operational;
Legal & Regulatory Compliance;
Counterparty;
Financial; and
Marketing.
The Board reported on the principal risks and uncertainties faced by the Company in the Annual Report and Financial Statements for the year ended 31 October 2023. A detailed explanation can be found in the Strategic Report on pages 43 to 46 and in note 15 on pages 102 to 108 of the Annual Report and Financial Statements which are available on the website maintained by BlackRock at www.blackrock.com/uk/brsa.
In the view of the Board, there have not been any changes to the fundamental nature of the principal risks and uncertainties since the previous report and these are equally applicable to the remaining six months of the financial year as they were to the six months under review.
Going concern
The Directors, having considered the nature and liquidity of the portfolio, the Company’s investment objective and the Company’s projected income and expenditure, are satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future and is financially sound. The Board is mindful of the continuing uncertainty surrounding the current environment of heightened geopolitical risk given the war in Ukraine and conflict in the Middle East. The Board believes that the Company and its key third-party service providers have in place appropriate business continuity plans and these services have continued to be supplied without interruption.
The Company has a portfolio of investments which are predominantly readily realisable and is able to meet all its liabilities from its assets and income generated from these assets. Accounting revenue and expense forecasts are maintained and reported to the Board regularly and it is expected that the Company will be able to meet all its obligations. Borrowings under the overdraft facility shall at no time exceed £20 million or 20% of the Company’s net assets (calculated at the time of draw down) although the Board intends only to utilise borrowings representing 10% of net assets at the time of draw down and this covenant was complied with during the period. Ongoing charges for the year ended 31 October 2023 were 1.03% of net assets.
Based on the above, the Board is satisfied that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.
Related party disclosure and transactions with the Manager
BlackRock Fund Managers Limited (BFM) was appointed as the Company’s AIternative Investment Fund Manager (AIFM) with effect from 2 July 2014. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Both BFM and BIM (UK) are regarded as related parties under the Listing Rules. Details of the fees payable are set out in note 4 and note 12 below.
The related party transactions with the Directors are set out in note 11 below.
Directors’ responsibility statement
The Disclosure Guidance and Transparency Rules (DTR) of the UK Listing Authority require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements.
The Directors confirm to the best of their knowledge that:
the condensed set of financial statements contained within the Half Yearly Financial Report has been prepared in accordance with applicable International Accounting Standard 34 – ‘Interim Financial Reporting’; and
the Interim Management Report, together with the Chair’s Statement and Investment Manager’s Report, include a fair review of the information required by 4.2.7R and 4.2.8R of the FCA’s Disclosure Guidance and Transparency Rules.
This Half Yearly Financial Report has not been audited or reviewed by the Company’s auditors.
The Half Yearly Financial Report was approved by the Board on 1 July 2024 and the above responsibility statement was signed on its behalf by the Chair.
ALICE RYDER
For and on behalf of the Board
1 July 2024
Statement of Comprehensive Income for the six months ended 30 April 2024
| | Six months ended | Six months ended | Year ended | ||||||
| | Revenue | Capital | Total | Revenue | Capital | Total | Revenue | Capital | Total |
Income from investments held at fair value through profit or loss | 3 | 1,855 | – | 1,855 | 2,265 | – | 2,265 | 4,252 | – | 4,252 |
Other income | 3 | 5 | – | 5 | 3 | – | 3 | 11 | – | 11 |
|
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
Total income |
| 1,860 | – | 1,860 | 2,268 | – | 2,268 | 4,263 | – | 4,263 |
|
| ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= |
Net profit/(loss) on investments and options held at fair value through profit or loss |
| – | 21,487 | 21,487 | – | (8,581) | (8,581) | – | (11,550) | (11,550) |
Net (loss)/profit on foreign exchange |
| – | (19) | (19) | – | 6 | 6 | – | 50 | 50 |
|
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
Total |
| 1,860 | 21,468 | 23,328 | 2,268 | (8,575) | (6,307) | 4,263 | (11,500) | (7,237) |
|
| ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= |
Expenses |
|
|
|
|
|
|
|
|
|
|
Investment management fee | 4 | (145) | (436) | (581) | (145) | (435) | (580) | (286) | (858) | (1,144) |
Other operating expenses | 5 | (240) | (3) | (243) | (238) | (1) | (239) | (521) | (4) | (525) |
|
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
Total operating expenses |
| (385) | (439) | (824) | (383) | (436) | (819) | (807) | (862) | (1,669) |
|
| ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= |
Net profit/(loss) on ordinary activities before finance costs and taxation |
| 1,475 | 21,029 | 22,504 | 1,885 | (9,011) | (7,126) | 3,456 | (12,362) | (8,906) |
Finance costs |
| – | (1) | (1) | (13) | (38) | (51) | (13) | (39) | (52) |
|
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
Net profit/(loss) on ordinary activities before taxation |
| 1,475 | 21,028 | 22,503 | 1,872 | (9,049) | (7,177) | 3,443 | (12,401) | (8,958) |
Taxation |
| (221) | – | (221) | (268) | – | (268) | (498) | – | (498) |
|
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
Profit/(loss) for the period/year |
| 1,254 | 21,028 | 22,282 | 1,604 | (9,049) | (7,445) | 2,945 | (12,401) | (9,456) |
|
| ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= |
Earnings/(loss) per ordinary share (pence) | 7 | 1.59 | 26.63 | 28.22 | 2.00 | (11.28) | (9.28) | 3.67 | (15.46) | (11.79) |
|
| ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= |
The total columns of this statement represent the Company’s Statement of Comprehensive Income, prepared in accordance with UK-adopted International Accounting Standards (IAS). The supplementary revenue and capital accounts are both prepared under guidance published by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the period. All income is attributable to the equity holders of the Company.
The Company does not have any other comprehensive income/(loss) (30 April 2023: £nil; 31 October 2023: £nil). The net profit/(loss) for the period disclosed above represents the Company’s total comprehensive income/(loss).
Statement of Changes in Equity for the six months ended 30 April 2024
| | Called | Capital | | | | |
For the six months ended 30 April 2024 (unaudited) |
|
|
|
|
|
|
|
At 31 October 2023 |
| 1,004 | 1,460 | 82,540 | 69,201 | 584 | 154,789 |
Total comprehensive income: |
|
|
|
|
|
|
|
Net profit for the period |
| – | – | – | 21,028 | 1,254 | 22,282 |
Transactions with owners, recorded directly to equity: |
|
|
|
|
|
|
|
Ordinary shares bought back into treasury |
| – | – | (5,560) | – | – | (5,560) |
Share buyback costs |
| – | – | (21) | – | – | (21) |
Dividends paid | 6 | – | – | – | (1,508) | (1,649) | (3,157) |
|
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
At 30 April 2024 |
| 1,004 | 1,460 | 76,959 | 88,721 | 189 | 168,333 |
|
| ========= | ========= | ========= | ========= | ========= | ========= |
For the six months ended 30 April 2023 (unaudited) |
|
|
|
|
|
|
|
At 31 October 2022 |
| 1,004 | 1,460 | 82,963 | 84,940 | 719 | 171,086 |
Total comprehensive (loss)/income: |
|
|
|
|
|
|
|
Net (loss)/profit for the period |
| – | – | – | (9,049) | 1,604 | (7,445) |
Transactions with owners, recorded directly to equity: |
|
|
|
|
|
|
|
Dividends paid | 6 | – | – | – | (1,195) | (2,015) | (3,210) |
|
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
At 30 April 2023 |
| 1,004 | 1,460 | 82,963 | 74,696 | 308 | 160,431 |
|
| ========= | ========= | ========= | ========= | ========= | ========= |
For the year ended 31 October 2023 (audited) |
|
|
|
|
|
|
|
At 31 October 2022 |
| 1,004 | 1,460 | 82,963 | 84,940 | 719 | 171,086 |
Total comprehensive (loss)/income: |
|
|
|
|
|
|
|
Net (loss)/profit for the year |
| – | – | – | (12,401) | 2,945 | (9,456) |
Transactions with owners, recorded directly to equity: |
|
|
|
|
|
|
|
Ordinary shares bought back into treasury |
| – | – | (421) | – | – | (421) |
Share buyback costs |
| – | – | (2) | – | – | (2) |
Dividends paid |
| – | – | – | (3,338) | (3,080) | (6,418) |
|
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
At 31 October 2023 |
| 1,004 | 1,460 | 82,540 | 69,201 | 584 | 154,789 |
|
| ========= | ========= | ========= | ========= | ========= | ========= |
For information on the Company’s distributable reserves, please refer to note 9 below.
Statement of Financial Position as at 30 April 2024
| | 30 April | 30 April | 31 October |
Non current assets |
|
|
|
|
Investments held at fair value through profit or loss | 10 | 168,828 | 158,000 | 154,212 |
Current assets |
|
|
|
|
Current tax asset |
| 92 | 132 | 130 |
Other receivables |
| 233 | 348 | 2,614 |
Cash and cash equivalents |
| 671 | 3,450 | 1,092 |
|
| --------------- | --------------- | --------------- |
Total current assets |
| 996 | 3,930 | 3,836 |
|
| ========= | ========= | ========= |
Total assets |
| 169,824 | 161,930 | 158,048 |
|
| ========= | ========= | ========= |
Current liabilities |
|
|
|
|
Current tax liability |
| – | (6) | (6) |
Other payables |
| (1,491) | (1,493) | (3,253) |
|
| --------------- | --------------- | --------------- |
Total current liabilities |
| (1,491) | (1,499) | (3,259) |
|
| ========= | ========= | ========= |
Net assets |
| 168,333 | 160,431 | 154,789 |
|
| ========= | ========= | ========= |
Equity attributable to equity holders |
|
|
|
|
Called up share capital | 8 | 1,004 | 1,004 | 1,004 |
Capital redemption reserve |
| 1,460 | 1,460 | 1,460 |
Special reserve |
| 76,959 | 82,963 | 82,540 |
Capital reserves |
| 88,721 | 74,696 | 69,201 |
Revenue reserve |
| 189 | 308 | 584 |
|
| --------------- | --------------- | --------------- |
Total equity |
| 168,333 | 160,431 | 154,789 |
|
| ========= | ========= | ========= |
Net asset value per ordinary share (pence) | 7 | 218.40 | 199.97 | 193.51 |
|
| ========= | ========= | ========= |
Cash Flow Statement for the six months ended 30 April 2024
| Six months | Six months | Year |
Operating activities |
|
|
|
Net profit/(loss) on ordinary activities before taxation | 22,503 | (7,177) | (8,958) |
Add back finance costs | 1 | 51 | 52 |
Net (profit)/loss on investments and options held at fair value through profit or loss (including transaction costs) | (21,487) | 8,581 | 11,550 |
Net loss/(profit) on foreign exchange | 19 | (6) | (50) |
Sale of investments held at fair value through profit or loss | 74,765 | 52,732 | 98,933 |
Purchase of investments held at fair value through profit or loss | (67,890) | (43,888) | (89,270) |
(Increase)/decrease in other receivables | (28) | (103) | 61 |
Increase in other payables | 82 | 353 | 195 |
Decrease in amounts due from brokers | 2,409 | 3,042 | 612 |
Decrease in amounts due to brokers | (1,918) | (2,829) | (911) |
| --------------- | --------------- | --------------- |
Net cash inflow from operating activities before taxation | 8,456 | 10,756 | 12,214 |
Taxation paid | (189) | (255) | (483) |
| --------------- | --------------- | --------------- |
Net cash inflow from operating activities | 8,267 | 10,501 | 11,731 |
| ========= | ========= | ========= |
Financing activities |
|
|
|
Interest paid | (1) | (51) | (52) |
Payments for ordinary shares bought back into treasury | (5,511) | – | (423) |
Dividends paid | (3,157) | (3,210) | (6,418) |
| --------------- | --------------- | --------------- |
Net cash outflow from financing activities | (8,669) | (3,261) | (6,893) |
| --------------- | --------------- | --------------- |
(Decrease)/increase in cash and cash equivalents | (402) | 7,240 | 4,838 |
Effect of foreign exchange rate changes | (19) | 6 | 50 |
| --------------- | --------------- | --------------- |
Change in cash and cash equivalents | (421) | 7,246 | 4,888 |
Cash and cash equivalents at start of period/year | 1,092 | (3,796) | (3,796) |
| --------------- | --------------- | --------------- |
Cash and cash equivalents at end of period/year | 671 | 3,450 | 1,092 |
| ========= | ========= | ========= |
Comprised of: |
|
|
|
Cash at bank | 95 | 273 | 213 |
Cash Fund1 | 576 | 3,177 | 879 |
| --------------- | --------------- | --------------- |
| 671 | 3,450 | 1,092 |
| ========= | ========= | ========= |
1 Cash Fund represents funds held on deposit with the BlackRock Institutional Cash Series plc – US Dollar Liquid Environmentally Aware Fund.
Notes to the Financial Statements for the six months ended 30 April 2024
1. Principal activity
The principal activity of the Company is that of an investment trust company within the meaning of Section 1158 of the Corporation Tax Act 2010.
2. Basis of presentation
The half yearly financial statements for the period ended 30 April 2024 have been prepared in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the Financial Conduct Authority and with the UK-adopted International Accounting Standard 34 (IAS 34), Interim Financial Reporting. The half yearly financial statements should be read in conjunction with the Company’s Annual Report and Financial Statements for the year ended 31 October 2023, which have been prepared in accordance with UK-adopted International Accounting Standards (IAS) in conformity with the requirements of the Companies Act 2006.
Insofar as the Statement of Recommended Practice (SORP) for investment trust companies and venture capital trusts, issued by the Association of Investment Companies (AIC) in October 2019 and updated in July 2022, is compatible with UK-adopted IAS, the financial statements have been prepared in accordance with the guidance set out in the SORP.
Adoption of new and amended International Accounting Standards and interpretations:
IFRS 17 – Insurance contracts (effective 1 January 2023). This standard replaced IFRS 4 and applies to all types of insurance contracts. IFRS 17 provides a consistent and comprehensive model for insurance contracts covering all relevant accounting aspects.
This standard is unlikely to have any impact on the Company as it has no insurance contracts.
IAS 12 – Deferred tax related to assets and liabilities arising from a single transaction (effective 1 January 2023). The IASB has amended IAS 12 Income Taxes to require companies to recognise deferred tax on particular transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. According to the amended guidance, a temporary difference that arises on initial recognition of an asset or liability is not subject to the initial recognition exemption if that transaction gave rise to equal amounts of taxable and deductible temporary differences. These amendments might have a significant impact on the preparation of financial statements by companies that have substantial balances of right-of-use assets, lease liabilities, decommissioning, restoration and similar liabilities. The impact for those affected would be the recognition of additional deferred tax assets and liabilities.
The amendment of this standard is unlikely to have any significant impact on the Company.
IAS 8 – Definition of accounting estimates (effective 1 January 2023). The IASB has amended IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to help distinguish between accounting policies and accounting estimates, replacing the definition of accounting estimates.
IAS 1 and IFRS Practice Statement 2 – Disclosure of accounting policies (effective 1 January 2023). The IASB has amended IAS 1 Presentation of Financial Statements to help preparers in deciding which accounting policies to disclose in their financial statements by stating that an entity is now required to disclose material accounting policies instead of significant accounting policies.
IAS 12 – International Tax Reform Pillar Two Model Rules (effective 1 January 2023). The IASB has published amendments to IAS 12 Income Taxes to respond to stakeholders’ concerns about the potential implications of the imminent implementation of the OECD pillar two rules on the accounting for income taxes. The amendment is an exception to the requirements in IAS 12 that an entity does not recognise and does not disclose information about deferred tax assets as liabilities related to the OECD pillar two income taxes and a requirement that current tax expenses must be disclosed separately to pillar two income taxes.
Relevant International Accounting Standards that have yet to be adopted:
IAS 1 – Classification of liabilities as current or non current (effective 1 January 2024). The IASB has amended IAS 1 Presentation of Financial Statements to clarify its requirement for the presentation of liabilities depending on the rights that exist at the end of the reporting period. The amendment requires liabilities to be classified as non current if the entity has a substantive right to defer settlement for at least 12 months at the end of the reporting period. The amendment no longer refers to unconditional rights.
IAS 1 – Non current liabilities with covenants (effective 1 January 2024). The IASB has amended IAS 1 Presentation of Financial Statements to introduce additional disclosures for liabilities with covenants within 12 months of the reporting period. The additional disclosures include the nature of covenants, when the entity is required to comply with covenants, the carrying amount of related liabilities and circumstances that may indicate that the entity will have difficulty complying with the covenants.
None of the standards that have been issued, but are not yet effective, are expected to have a material impact on the Company.
3. Income
| Six months | Six months | Year |
Investment income: |
|
|
|
UK dividends | 206 | 196 | 334 |
Overseas dividends | 1,557 | 2,048 | 3,839 |
Overseas REIT1 dividends | 77 | – | 34 |
Interest from Cash Fund | 15 | 21 | 45 |
| --------------- | --------------- | --------------- |
Total investment income | 1,855 | 2,265 | 4,252 |
Deposit interest | 5 | 3 | 11 |
| --------------- | --------------- | --------------- |
Total income | 1,860 | 2,268 | 4,263 |
| ========= | ========= | ========= |
1 Real Estate Investment Trust.
Dividends and interest received in cash during the period amounted to £1,567,000 and £24,000 (six months ended 30 April 2023: £1,888,000 and £12,000; year ended 31 October 2023: £3,724,000 and £51,000).
No special dividends have been recognised in capital during the period (six months ended 30 April 2023: £nil; year ended 31 October 2023: £nil).
4. Investment management fee
| Six months ended | Six months ended | Year ended | ||||||
| Revenue | Capital | Total | Revenue | Capital | Total | Revenue | Capital | Total |
Investment management fee | 145 | 436 | 581 | 145 | 435 | 580 | 286 | 858 | 1,144 |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
Total | 145 | 436 | 581 | 145 | 435 | 580 | 286 | 858 | 1,144 |
| ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= |
The investment management fee is payable in quarterly arrears, calculated at the rate of 0.70% of the Company’s net assets.
The investment management fee is allocated 25% to the revenue account and 75% to the capital account.
There is no additional fee for company secretarial and administration services.
5. Other operating expenses
| Six months | Six months | Year |
Allocated to revenue: |
|
|
|
Custody fee | 1 | 1 | 2 |
Auditors’ remuneration – audit services1 | 26 | 17 | 39 |
Registrar’s fee | 9 | 11 | 28 |
Directors’ emoluments | 69 | 68 | 142 |
Broker fees | 20 | 20 | 40 |
Depositary fees | 8 | 8 | 16 |
Printing fees | 27 | 18 | 31 |
Legal and professional fees | 9 | 18 | 14 |
Marketing fees | 21 | 26 | 94 |
AIC fees | 6 | 6 | 13 |
FCA fees | 5 | 5 | 11 |
Write back of prior year expenses2 | (3) | (11) | (11) |
Other administration costs | 42 | 51 | 102 |
| --------------- | --------------- | --------------- |
| 240 | 238 | 521 |
| ========= | ========= | ========= |
Allocated to capital: |
|
|
|
Custody transaction charges3 | 3 | 1 | 4 |
| --------------- | --------------- | --------------- |
| 243 | 239 | 525 |
| ========= | ========= | ========= |
1 No non-audit services were provided by the Company’s auditors for the six months ended 30 April 2024 (six months ended 30 April 2023: none; year ended 31 October 2023: none).
2 Relates to Directors’ expense accruals written back during the period.
3 For the six month period ended 30 April 2024, an expense of £3,000 (six months ended 30 April 2023: £1,000; year ended 31 October 2023: £4,000) was charged to the capital account of the Statement of Comprehensive Income. This relates to transaction costs charged by the custodian on sale and purchase trades.
The transaction costs incurred on the acquisition of investments amounted to £13,000 for the six months ended 30 April 2024 (six months ended 30 April 2023: £7,000; year ended 31 October 2023: £18,000). Costs relating to the disposal of investments amounted to £10,000 for the six months ended 30 April 2024 (six months ended 30 April 2023: £6,000; year ended 31 October 2023: £13,000). All transaction costs have been included within capital reserves.
6. Dividends
On 29 May 2024, the Directors declared a second quarterly interim dividend of 2.00p per share. The dividend will be paid on 5 July 2024 to shareholders on the Company’s register on 7 June 2024. This dividend has not been accrued in the financial statements for the six months ended 30 April 2024 as, under IAS, interim dividends are not recognised until paid. Dividends are debited directly to reserves.
Dividends paid on equity shares during the period were:
| Six months |
Fourth interim dividend for the year ended 31 October 2023 of 2.00p per ordinary share paid on 2 January 2024 | 1,597 |
First interim dividend for the year ended 31 October 2024 of 2.00p per ordinary share paid on 26 April 2024 | 1,560 |
| --------------- |
| 3,157 |
| ========= |
Second interim dividend for the year ended 31 October 2024 of 2.00p per ordinary share payable on 5 July 20241 | 1,519 |
| --------------- |
| 4,676 |
| ========= |
1 Based on 75,966,247 ordinary shares in issue on 6 June 2024 (the ex-dividend date).
7. Earnings and net asset value per ordinary share
Revenue, capital earnings/(loss) and net asset value per ordinary share are shown below and have been calculated using the following:
| Six months | Six months | Year |
Net revenue profit attributable to ordinary shareholders (£’000) | 1,254 | 1,604 | 2,945 |
Net capital profit/(loss) attributable to ordinary shareholders (£’000) | 21,028 | (9,049) | (12,401) |
| --------------- | --------------- | --------------- |
Total profit/(loss) attributable to ordinary shareholders (£’000) | 22,282 | (7,445) | (9,456) |
| --------------- | --------------- | --------------- |
Equity shareholders’ funds (£’000) | 168,333 | 160,431 | 154,789 |
| ========= | ========= | ========= |
The weighted average number of ordinary shares in issue during the period on which the earnings per ordinary share was calculated was: | 78,970,614 | 80,229,044 | 80,225,591 |
The actual number of ordinary shares in issue at the period end on which the net asset value per ordinary share was calculated was: | 77,076,813 | 80,229,044 | 79,989,044 |
| --------------- | --------------- | --------------- |
Earnings per ordinary share |
|
|
|
Revenue earnings per share (pence) – basic and diluted | 1.59 | 2.00 | 3.67 |
Capital earnings/(loss) per share (pence) – basic and diluted | 26.63 | (11.28) | (15.46) |
| --------------- | --------------- | --------------- |
Total earnings/(loss) per share (pence) – basic and diluted | 28.22 | (9.28) | (11.79) |
| ========= | ========= | ========= |
| As at | As at | As at |
Net asset value per ordinary share (pence) | 218.40 | 199.97 | 193.51 |
Ordinary share price (pence) | 197.50 | 193.50 | 174.00 |
| ========= | ========= | ========= |
There were no dilutive securities at the period end (six months ended 30 April 2023: none; year ended 31 October 2023: none).
8. Called up share capital
| Ordinary | | | |
Allotted, called up and fully paid share capital comprised: |
|
|
|
|
Ordinary shares of 1 pence each: |
|
|
|
|
At 31 October 2023 | 79,989,044 | 20,372,261 | 100,361,305 | 1,004 |
Ordinary shares bought back into treasury | (2,912,231) | 2,912,231 | – | – |
| --------------- | --------------- | --------------- | --------------- |
At 30 April 2024 | 77,076,813 | 23,284,492 | 100,361,305 | 1,004 |
| ========= | ========= | ========= | ========= |
During the six months ended 30 April 2024, the Company bought back and transferred 2,912,231 (six months ended 30 April 2023: none; year ended 31 October 2023: 240,000) shares into treasury for a total consideration including costs of £5,581,000 (six months ended 30 April 2023: £nil; year ended 31 October 2023: £423,000).
Since 30 April 2024 and up to the date of this report, 1,580,148 shares have been bought back and transferred into treasury for a total consideration including costs of £3,151,000.
9. Reserves
The capital redemption reserve is not a distributable reserve under the Companies Act 2006. In accordance with ICAEW Technical Release 02/17BL on Guidance on Realised and Distributable Profits under the Companies Act 2006, the special reserve and capital reserve may be used as distributable reserves for all purposes and, in particular, the repurchase by the Company of its ordinary shares and for payments such as dividends. In accordance with the Company’s Articles of Association, the special reserve, capital reserve and revenue reserve may be distributed by way of dividend. The gain on the capital reserve arising on the revaluation of investments of £8,780,000 (six months ended 30 April 2023: no gain; year ended 31 October 2023: no gain) is subject to fair value movements and may not be readily realisable at short notice, as such it may not be entirely distributable. The investments are subject to financial risks, as such capital reserves (arising on investments sold) and the revenue reserve may not be entirely distributable if a loss occurred during the realisation of these investments.
The Company’s share premium account was cancelled pursuant to shareholders’ approval of a special resolution at the Company’s Annual General Meeting on 22 March 2022 and Court approval on 19 July 2022. The share premium account which totalled £44,873,000 was transferred to a special reserve. This action was taken, in part, to ensure that the Company had sufficient distributable reserves.
10. Financial risks and valuation of financial instruments
The Company’s investment activities expose it to the various types of risk which are associated with the financial instruments and markets in which it invests. The risks are substantially consistent with those disclosed in the previous annual financial statements with the exception of those outlined below.
Market risk arising from price risk
Price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk) whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting similar financial instruments traded in the market. Local, regional or global events such as war, acts of terrorism, the spread of infectious illness or other public health issues, recessions, climate change or other events could have a significant impact on the Company and the market price of its investments and could result in increased premiums or discounts to the Company’s net asset value.
Valuation of financial instruments
Financial assets and financial liabilities are either carried in the Statement of Financial Position at their fair value (investments and derivatives) or at an amount which is a reasonable approximation of fair value (due from brokers, dividends and interest receivable, due to brokers, accruals, cash at bank and bank overdrafts). IFRS 13 requires the Company to classify fair value measurements using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The valuation techniques used by the Company are explained in the accounting policies note 2(g) as set out on page 94 of the Company’s Annual Report and Financial Statements for the year ended 31 October 2023.
Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset.
The fair value hierarchy has the following levels:
Level 1 – Quoted market price for identical instruments in active markets
A financial instrument is regarded as quoted in an active market if quoted prices are readily available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The Company does not adjust the quoted price for these instruments.
Level 2 – Valuation techniques using observable inputs
This category includes instruments valued using quoted prices for similar instruments in markets that are considered less than active, or other valuation techniques where all significant inputs are directly or indirectly observable from market data.
Valuation techniques used for non-standardised financial instruments such as options, currency swaps and other over-the-counter derivatives include the use of comparable recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants making the maximum use of market inputs and relying as little as possible on entity specific inputs.
Level 3 – Valuation techniques using significant unobservable inputs
This category includes all instruments where the valuation technique includes inputs not based on market data and these inputs could have a significant impact on the instrument’s valuation.
This category also includes instruments that are valued based on quoted prices for similar instruments where significant entity determined adjustments or assumptions are required to reflect differences between the instruments and instruments for which there is no active market. The Investment Manager considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary and provided by independent sources that are actively involved in the relevant market.
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement.
Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability, including an assessment of the relevant risks including but not limited to credit risk, market risk, liquidity risk, business risk and sustainability risk. The determination of what constitutes ‘observable’ inputs requires significant judgement by the Investment Manager and these risks are adequately captured in the assumptions and inputs used in measurement of Level 3 assets or liabilities.
Fair values of financial assets and financial liabilities
The table below sets out fair value measurements using the IFRS 13 fair value hierarchy.
| Level 1 | Level 2 | Level 3 | Total |
Equity investments at 30 April 2024 (unaudited) | 168,828 | – | – | 168,828 |
Equity investments at 30 April 2023 (unaudited) | 158,000 | – | – | 158,000 |
Equity investments at 31 October 2023 (audited) | 154,212 | – | – | 154,212 |
| ========= | ========= | ========= | ========= |
There were no transfers between levels for financial assets and financial liabilities recorded at fair value as at 30 April 2024, 30 April 2023 and 31 October 2023. The Company did not hold any Level 3 securities throughout the financial period under review or as at 30 April 2023 and 31 October 2023.
For exchange listed equity investments, the quoted price is the bid price. Substantially all investments are valued based on unadjusted quoted market prices. Where such quoted prices are readily available in an active market, such prices are not required to be assessed or adjusted for any business risks, including climate change risk, in accordance with the fair value related requirements of the Company’s financial reporting framework.
11. Related party disclosure
Directors’ emoluments
The Board consists of four non-executive Directors, all of whom are considered to be independent of the Manager by the Board. None of the Directors has a service contract with the Company. The Chair receives an annual fee of £44,000, the Audit Committee Chairman receives an annual fee of £38,000 and each of the Directors receives an annual fee of £31,500. At 30 April 2024, an amount of £12,000 (30 April 2023: £14,000; 31 October 2023: £12,000) was outstanding in respect of Directors’ fees.
At 30 April 2024, interests of the Directors in the ordinary shares of the Company are as set out below:
| Six months | Six months | Year |
Alice Ryder (Chair) | 9,047 | 9,047 | 9,047 |
David Barron | 5,000 | 5,000 | 5,000 |
Melanie Roberts | 10,000 | 10,000 | 10,000 |
Solomon Soquar | nil | nil | nil |
| ========= | ========= | ========= |
Since the period end and up to the date of this report, Mr Soquar has purchased 10,000 ordinary shares in the Company. There have been no other changes in Directors’ holdings.
Significant Holdings
The following investors are:
a. funds managed by the BlackRock Group or are affiliates of BlackRock Inc. (Related BlackRock Funds); or
b. investors (other than those listed in (a) above) who held more than 20% of the voting shares in issue in the Company and are, as a result, considered to be related parties to the Company (Significant Investors).
| | Total % of shares held by | Number of Significant Investors |
As at 30 April 2024 | nil | n/a | n/a |
As at 31 October 2023 | 0.8 | n/a | n/a |
As at 30 April 2023 | 0.9 | n/a | n/a |
| ========= | ========= | ========= |
12. Transactions with the Investment Manager and AIFM
BlackRock Fund Managers Limited (BFM) provides management and administration services to the Company under a contract which is terminable on six months’ notice. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Further details of the investment management contract are disclosed on page 53 of the Directors’ Report in the Company’s Annual Report and Financial Statements for the year ended 31 October 2023.
The investment management fee due for the six months ended 30 April 2024 amounted to £581,000 (six months ended 30 April 2023: £580,000; year ended 31 October 2023: £1,144,000). At the period end, £854,000 was outstanding in respect of the investment management fee (six months ended 30 April 2023: £1,186,000; year ended 31 October 2023: £837,000).
In addition to the above services, BIM (UK) has provided the Company with marketing services. The total fees paid or payable for these services to 30 April 2024 amounted to £21,000 excluding VAT (six months ended 30 April 2023: £26,000; year ended 31 October 2023: £94,000). Marketing fees of £144,000 excluding VAT (30 April 2023: £56,000; 31 October 2023: £123,000) were outstanding as at 30 April 2024.
The Company has an investment in the BlackRock Institutional Cash Series plc - US Dollar Liquid Environmentally Aware Fund of £576,000 (30 April 2023: £3,177,000; 31 October 2023: £879,000) as at 30 April 2024, which is a fund managed by a company within the BlackRock Group.
The ultimate holding company of the Manager and the Investment Manager is BlackRock, Inc., a company incorporated in Delaware, USA.
13. Contingent liabilities
There were no contingent liabilities at 30 April 2024 (six months ended 30 April 2023: none; year ended 31 October 2023: none).
14. Publication of non statutory accounts
The financial information contained in this Half Yearly Financial Report does not constitute statutory accounts as defined in Section 435 of the Companies Act 2006. The financial information for the six months ended 30 April 2024 and 30 April 2023 has not been audited.
The information for the year ended 31 October 2023 has been extracted from the latest published audited financial statements which have been filed with the Registrar of Companies. The report of the auditors on those financial statements contained no qualifications or statement under Sections 498(2) or 498(3) of the Companies Act 2006.
15. Annual results
The Board expects to announce the annual results for the year ending 31 October 2024 in late January 2025.
Copies of the annual results announcement can be obtained from the Secretary on 0207 743 3000 or cosec@blackrock.com. The Annual Report and Financial Statements should be available by the beginning of February 2025 with the Annual General Meeting being held in March 2025.
FOR FURTHER INFORMATION, PLEASE CONTACT:
Charles Kilner, Director, Investment Trusts, BlackRock Investment Management (UK) Limited - Tel: 020 7743 3000
Press enquiries:
Lansons Communications – Tel: 020 7294 3689
E-mail: BlackRockInvestmentTrusts@lansons.com
1 July 2024
12 Throgmorton Avenue
London EC2N 2DL
END
