New Star Investment Trust PLC (NSI)
NEW STAR INVESTMENT TRUST PLC
HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 31st DECEMBER 201 9
The Company's objective is to achieve long - term capital growth .
* The total return figure for the Group represents the revenue and capital return shown in the consolidated statement of comprehensive income plus dividends paid (the alternative performance measure).
CHAIRMAN ' S STATEMENT
Your Company generated a positive total return of 4.02% over the six months to 31st December 2019, taking the net asset value (NAV) per ordinary share to 165.52p. By comparison, the Investment Association's Mixed Investment 40-85% Shares Index rose 4.41%. The MSCI AC World Total Return Index rose 4.89% while the MSCI UK Total Return Index rose 3.03%. Over the same period, UK government bonds returned 2.05%. Further information is provided in the investment manager's report.
Your Company made a revenue profit for the six months of £792,000 (2018: £607,000).
GEARING AND DIVIDENDS
Your Company has no borrowings and ended the period under review with cash representing 14.28% of its NAV. Your Company has small retained revenue reserves and your Directors do not recommend the payment of an interim dividend (2018: nil). Your Company paid a dividend of 1.4p per share (2018: 1.0p) in November 2019 in respect of the previous financial year.
In November 2019, your Company announced that the current performance fee arrangement was not appropriate in a low interest rate environment. The current performance fee arrangements ceased from 1 January 2020. A performance fee of £622,000 (2018: £nil) was payable in respect of the period under review.
Risky assets fell sharply in the early spring of 2020 as the Covid-19 virus spread. Equity markets bore the brunt but corporate bonds and property als o registered declines. Central B anks have responded with unprecedented interest rate reductions, increased quantitative easing and measures to stimulate lending.
Monetary policy alone, however, is unlikely to be sufficient to address the downturn because the virus impact is a supply-side shock, causing work place closures and supply chain disruption. As a result, governments have moved to alleviate the impact on businesses and families to shield the economy from serious long-term harm.
Risky assets are likely to remain weak and volatile until the Covid-19 outbreak moderates. Your Company, however, entered this difficult period with substantial cash holdings. Over the coming weeks, your Company's defensive assets may provide some capital protection. There should also be opportunities for your Company to deploy cash in investments with attractive long-term potential, including in equity markets.
Your Company's unaudited NAV per share at 29th February 2020 was 156.62p. Your Company's unaudited NAV per share at 1 9 th March 2020 was 13 6 . 12 p.
Geoffrey Howard- Spink
20 th March 2020
Global equities rose 4.89% and bonds fell 2.77% in sterling over the six months to 31st December 2019 as central banks maintained policies of monetary easing. Returns in overseas stock markets were stronger but sterling investors were adversely affected as the pound rose against the euro, yen and dollar by 5.60%, 4.99% and 4.09% respectively.
The Federal Reserve reduced interest rates by three-quarters of a percentage point to 1.5-1.75%. Jobs data were strong but inflation remained below its 2% target. The European Central Bank increased further its negative interest rate by 10 basis points to -0.5%, said interest rates would not rise until inflation was closer to 2% and resumed asset purchases. The Bank of England left its bank rate unchanged. UK government and sterling corporate bonds rose 2.05% and 3.52% respectively over the period. Gold and gold securities rose 3.07% and 10.92% respectively in sterling as the opportunity cost of holding this nil-yielding asset remained low.
The Conservatives won December's UK election, averting a shift to the left. UK stocks rose 3.03% but smaller companies, typically more sensitive to domestic conditions, outperformed, rising 13.28%. Sterling briefly rose above $1.35 but retreated as investors decided the risk of a "no deal" Brexit had not disappeared, with the government legislating that a trade deal had to be agreed during 2020, setting a demanding timetable. UK assets are likely to prove sensitive to news about the talks.
Progress in Sino-US trade talks was confirmed when an interim deal was signed in January 2020. Equities in emerging markets and Asia excluding Japan benefited from end-of-year optimism but still lagged, up 3.11% and 2.74% respectively in sterling. Under the deal, China will increase purchases of US goods and improve the protection of intellectual property. In return, December's planned tariff increases were cancelled. The thornier issues of national security and technology are outside the deal's scope and may never be resolved. Protectionism is likely to remain a feature of US trade policy.
US equities outperformed, rising 6.56% in sterling, with technology stocks, up 13.57%, leading the way. Steady US jobs data supported consumer spending but business investment and exports were weak. The Sino-US agreement may, however, provide a fillip to exports in the longer term. China's economy expanded 6% year-on-year during the period, the lowest growth rate since 1992.
Your Company's total return over the period under review was 4.56% before performance fees and 4.02% after performance fees. By comparison, the Investment Association's Mixed Investment 40-85% Shares sector, comprising a peer group of multi-asset funds that typically invest 40-85% of their assets in global equities, rose 4.41%. The MSCI AC World Total Return Index rose 4.89% in sterling while the MSCI UK Total Return Index rose 3.03%. Your Company benefited from investments in funds invested in UK smaller companies, gold securities and technology stocks. The high allocation to dollar cash, however, hurt performance as sterling strengthened.
The Aberforth Split Level Income investment trust was the portfolio's best performer, rising 26.09%, partly as a result of the leverage provided by its zero-dividend preference shares. The manager takes a value-oriented approach to investing in UK smaller companies. Such companies performed strongly as the Tories' election victory reduced domestic political risk and strengthened the government's hand in its EU trade negotiations. Chelverton UK Equity Income, which also invests in smaller companies, rose 14.67%. Your Company's holding was increased in November. The Aberforth and Chelverton funds have above-average dividend yields and their income is derived from a broad range of sectors in contrast to the income from the FTSE 100 Index, which is dominated by financial and resources stocks. Man GLG UK Income and MI Brompton UK Recovery outperformed, benefitting from gains among small and medium-sized companies. Trojan Income and Schroder Income focus on larger companies but both outperformed, gaining 7.79% and 5.32% respectively.
During the period, your Company had no direct investments in US equity funds. This hurt performance because US equities outperformed, driven by the technology sector. Within your Company's global holdings, Polar Capital Global Technology rose 9.73%, benefitting from its holdings in US technology companies such as Microsoft, Alphabet, Apple and Facebook. Fundsmith Equity underperformed, however, rising 2.79%.
Amongst your Company's emerging market equity holdings, the HSBC Russia Capped exchange-traded fund did best, rising 11.68% in line with the gain from Russian stocks. Stewart Investors Indian Subcontinent was, however, the weakest holding, falling 3.22% as Indian stocks fell 4.04% in sterling in response to slower economic growth. Emerging market debt outperformed global bonds over the period. Franklin Templeton Emerging Markets Bond lagged, however, down 5.24% as a result of its holdings in Argentine bonds, which fell as politics shifted to the left.
Bond market weakness held back returns within EF Brompton Global Conservative, which returned 3.37%, while the Aquilus Inflection hedge fund returned 0.61%.
Risky assets fell sharply across the world in the early spring of 2020 as the Covid-19 virus spread outside China. Equity markets bore the brunt of the falls but other asset classes including corporate bonds and commercial property also registered significant decl ines. Major Central B anks across the developed world and in emerging markets have responded to the economic shock with sweeping measures. These included unprecedented interest rate reductions in the US and the UK, as official rates were cut to near zero. Other initiatives included increased quantitative easing and measures designed to stimulate bank lending. Monetary policy alone, however, is unlikely to be sufficient to address the global downturn because the virus impact is a supply-side shock, with work places closing and supply chains disrupted. Government measures targeted at alleviating the economic impact on businesses and families are, therefore, likely to be critical in ensuring the economy emerges strongly once this temporary shock subsides. In the meantime, equities and other risky assets are likely to remain weak and volatile until the numbers of new coronavirus cases moderate across the world. This may take some months.
Your Company entered this period of turmoil with substantial investments in cash, in particular in dollars. Some of the defensive assets in your Company's portfolio such as gold and lower-risk multi-asset funds may provide some capital protection over the coming weeks. There should also be opportunities for long-term investors such as your Company to deploy its cash in investments with attractive long-term potential, in particular in equity markets.
Brompton Asset Management LLP , 20 th March 2020
DIRECTORS ' REPORT
In the six months to 31st December 201 9 the total return per Ordinary share was 4.0% (2018: negative 4.6% ) and the NAV per ordinary share increased to 165.52 p, whilst the share price increased by 5.4 % to 1 17 .00p. This compares to a n in crease of 4.4 % in the IA Mixed Investment 40-85% Shares Index.
The Company's investment objective is to achieve long-term capital growth.
The Company's investment policy is to allocate assets to global investment opportunities through investment in equity, bond, commodity, real estate, currency and other markets. The Company's assets may have significant weightings to any one asset class or market, including cash.
The Company will invest in pooled investment vehicles, exchange traded funds, futures, options, limited partnerships and direct investments in relevant markets. The Company may invest up to 15% of its net assets in direct investments in relevant markets.
The Company will not follow any index with reference to asset classes, countries, sectors or stocks. Aggregate asset class exposure to any one of the United States, the United Kingdom, Europe ex UK, Asia ex Japan, Japan or Emerging Markets and to any individual industry sector will be limited to 50% of the Company's net assets, such values being assessed at the time of investment and for funds by reference to their published investment policy or, where appropriate, their underlying investment exposure.
The Company may invest up to 20% of its net asset value in unlisted securities (excluding unquoted pooled investment vehicles) such values being ass essed at the time of investment. The Company will not invest more than 15% of its net assets in any single investment, such values being assessed at the time of investment.
Derivative instruments and forward foreign exchange contracts may be used for the purposes of efficient portfolio management and currency hedging. Derivatives may also be used outside of efficient portfolio management to meet the Company's investment objective. The Company may take outright short positions in relation to up to 30% of its net assets, with a limit on short sales of individual stocks of up to 5% of its net assets, such values being assessed at the time of investment. The Company may borrow up to 30% of net assets for short-term funding or long-term investment purposes. No more than 10%, in aggregate, of the value of the Company's total assets may be invested in other closed-ended investment funds except where such funds have themselves published investment policies to invest no more than 15% of their total assets in other listed closed-ended investment funds.
The Company's share capital comprises 305,000,000 Ordinary shares of 1p each, of which 71,023,695 (201 8 : 71,023,695) have been issued and fully paid. No Ordinary shares are held in treasury, and none were bought back or issued during the six months to 31st December 201 9 .
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks identified by the Board, and the steps the Board takes to mitigate them, are as follows:
Investment strategy : Inappropriate long-term strategy, asset allocation and fund selection could lead to underperformance. The Board discusses investment performance at each of its meetings and the Directors receive reports detailing asset allocation, investment selection and performance.
Business conditions and general economy : The Company's future performance is heavily dependent on the performance of different equity and currency markets. The Board cannot mitigate the risks arising from adverse market movements. However, diversification within the portfolio will reduce the impact. Further information is given in portfolio risks below.
Portfolio risks - market price, foreign currency and interest rate risks: The twenty la rgest investments are listed above. Investment returns will be influenced by interest rates, inflation, investor sentiment, availability/cost of credit and general economic conditions in the UK and globally. A proportion of the portfolio is in investments denominated in foreign currencies and movements in exchange rates could significantly affect their sterling value. The Investment Manager takes all these factors into account when making investment decisions but the Company does not normally hedge against foreign currency movements. The Board's policy is to hold a spread of investments in order to reduce the impact of the risks arising from the above factors by investing in a spread of asset classes and geographic regions.
Net asset value discount: The discount in the price at which the Company's shares trade to net asset value means that shareholders cannot realise the real underlying value of their investment. For a number of years the Company's share price has been at a significant discount to the Company's net asset value. The Directors review regularly the level of discount, however given the investor base of the Company, the Board is very restricted in its ability to influence the discount to net asset value.
Investment Manager: The quality of the team employed by the Investment Manager is an important factor in delivering good performance and the loss of key staff could adversely affect returns. A representative of the Investment Manager attends each Board meeting and the Board is informed if any changes to the investment team employed by the Investment Manager are proposed.
Tax and regulatory risks: A breach of The Investment Trust (Approved Company) (Tax) Regulations 2011 (the 'Regulations') could lead to capital gains realised within the portfolio becoming subject to UK capital gains tax. A breach of the UKLA Listing Rules could result in suspension of the Company's shares, while a breach of company law could lead to criminal proceedings, financial and/or reputational damage. The Board employs Brompton Asset Management LLP as Investment Manager, and Maitland Administration Services Limited as Secretary and Administrator, to help manage the Company's legal and regulatory obligations.
Operational : D isruption to, or failure of, the Investment Manager's or Administrator's accounting, dealing or payment systems or the Custodian's records could prevent the accurate reporting and monitoring of the Company's financial position. The Company is also exposed to the operational risk that one or more of its suppliers may not provide the required level of service. The Company receives regular reports from its contracted third parties.
INVESTMENT MANAGEMENT ARRANGEMENT AND RELATED PARTY TRANSACTIONS
In common with most investment trusts the Company does not have any executive directors or employees. The day-to-day management and administration of the Company, including investment management, accounting and company secretarial matters, and custodian arrangements are delegated to specialist third party service providers.
Details of related party transactions are contained in the Annual Report. There have been no unusual material transactions with related parties during the period which have had a significant impact on the performance of the Company.
GOING CONCERN AND VIABILITY
The Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the accounts as the assets of the Company consist mainly of securities that are readily realisable or cash and it has no significant liabilities. Investment income exceeds annual expenditure and current liquid net assets cover current annual expenses for many years. Accordingly, the Company is of the opinion that it has adequate financial resources to continue in operational existence for the foreseeable future which is considered to be in excess of five years. Five years is considered a reasonable time for investors when making their investment decisions. In reaching this view the Directors reviewed the anticipated level of annual expenditure against the cash and liquid assets within the portfolio. The Directors have also considered the risks the Company faces.
The Directors confirm that to the best of their knowledge:
- The financial statements contained within the half year financial report to 31st December 201 9 has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting';
- The Chairman's statement, Directors' report or the Investment Manager's report include a fair review of important events that have occurred during the first six months of the financial year and their impact on the financial statements;
- The Chairman's statement, Directors' report or the Investment Manager's report include a fair review of the potential risks and uncertainties for the remaining six months of the year; and
- The Director's report and note 8 to the half year financial report include a fair review of the information concerning transactions with the investment manager and changes since the last annual report.
By order of the Board
Maitland Administration Services Limited, 20 th March 2020
SCHEDULE OF TOP TWENTY INVESTMENTS at 31 st December 201 9
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME f or the six months ended 31 st December 201 9 (unaudited)
The total return column of this statement represents the Group's profit and loss account, prepared in accordance with IFRS. The supplementary Revenue Return and Capital Return columns are both prepared under guidance published by the Association of Investment Companies. 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 parent company. There are no minority interests.
CONSOLID ATED STATEMENT OF COMPREHENSIVE INCOME
for the six months ended 31 st December 201 8 and the year ended 30th June 201 9
The total return column of this statement represents the Group's profit and loss account, prepared in accordance with IFRS. The supplementary Revenue Return and Capital Return columns are both prepared under guidance published by the Association of Investment Companies. All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the periods.
All income is attributable to the equity holders of the parent company. There are no minority interests.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the six months ended 31 st December 201 9 (unaudited)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the six months ended 31 st December 201 8 (unaudited)