Background
The disparity that so often exists between economic fundamentals and financial market performance proved extremely pronounced in 2023. The impacts of sharply rising interest rates, which had begun in earnest in early 2022, began to have a negative impact on most global economies. Scrutinised by sceptical bond markets, Central Banks remained vigilant about ongoing inflationary pressures. Interest rates continued to rise, debt servicing costs increased further and economic stagnation remained a constant threat. Whilst most countries experienced decelerating rates of inflation, overall prices continued to rise, putting further pressure on already stretched household budgets. With no tangible relief in the cost-of-living crisis throughout the indebted Developed World, it was no surprise that global consumption struggled to support growth. Corporate profit margins also succumbed to input cost increases, revenue declines and general wage pressures. The overall environment of tighter liquidity, constrained earnings and fragile confidence could hardly have been described as positive for financial markets. Yet what transpired most definitely defied expectations. Whilst economic fundamentals generally tend to reflect reality, global financial fundamentals are always open to a variety of interpretations. So it proved once again. Global equity markets treaded water for most of the year, but markets' performance during the final two months of 2023 was nothing short of remarkable. Fuelled by a resurgence in positive sentiment towards a perceived end to interest rate hikes, global equity markets surged higher. Such positive market momentum towards year end, combined with ongoing robustness in the Company's income statement, delivered another year of strong total returns on net assets. It is also pleasing to report that once again the proposed increase in the Company's dividend is fully covered by the net revenue generated from the portfolio.
Performance
The Company's net asset value ("NAV") posted a total return for the year (i.e. with net income reinvested) of 8.6%. Although the Company does not use a benchmark, it is worth noting that over the same period the UK Retail Prices Index rose 5.2% and the Reference Index (the FTSE All World TR Index) increased 15.7%. The share price posted a lower total return of 1.1% (2022: 20.6%), reflecting a widening in the discount to NAV. Revenue return per share generated from the Company's portfolio amounted to 12.1p for the year (2022: 12.0p, restated for the share subdivision in April 2023), enabling the ongoing improvement in the total level of dividend. The Manager's investment focus continues to emphasise both geographical and sector diversification across a broad range of quality companies in order to deliver both income and capital growth. Such characteristics tend not to be represented in more concentrated indices where fashionable growth stocks are inclined to dominate.
Dividends
Three interim dividends of 2.4p per share (2022: three interims of 2.4p as restated) have been declared during the year. Your Board is recommending an increased final dividend of 4.3p per Ordinary 5p share (2022: 4.0p as restated). If approved at the Annual General Meeting, this final dividend will be paid on 20 May 2024 to Shareholders on the register on 26 April 2024 (ex dividend 25 April 2024). If the final dividend is approved, the total Ordinary dividend for the year will amount to 11.5p (2022: 11.2p as restated), an increase over the previous year of 2.7%. This represents the 19th year of dividend increases for the Company, which remains an AIC 'Next Generation Dividend Hero'.
As a long-established investment trust, the Company has the benefit of over £75 million of distributable revenue reserves on its balance sheet at 31 December 2023 (2022: £69.2m), which have been accumulated by the Company over many years from retained earnings. The payment of the final dividend, if approved, will result in the movement of over £4 million to the revenue reserves, to strengthen them for future years, and dividend cover at year end of 1.05x (2022: 1.07x).
The Board intends to maintain the Company's progressive dividend policy. This means that, in some years, revenue will be added to reserves while, in others, some revenue may be taken from reserves to supplement revenue earned during that year, in order to pay the annual dividend. Shareholders should not be surprised or concerned by either outcome as, over time, the Company will aim to pay out what the underlying portfolio earns in sterling terms. Currency fluctuations may also have an impact on income and therefore the level of dividend. The Board, however, is maintaining the present policy not to hedge the sterling translation risk of revenue arising from non-UK assets.
Manager Succession
As we reported in the Half Yearly Report in August 2023, Bruce Stout, the Company's lead investment manager since 16 June 2004, has announced that he will be retiring from abrdn in June 2024.
During his time as lead manager, Bruce has been assisted by Martin Connaghan and Samantha Fitzpatrick who have worked together with Bruce for over 20 years. In recent years, Martin and Samantha's input into the management of the portfolio, and the Company itself, has increased and many of you may have met or heard from them at meetings or presentations, including AGMs and online webinars. We are delighted to confirm that Martin and Samantha have assumed co-managerial responsibility for the Company's investments alongside Bruce in order to ensure the smoothest of handovers and no change in abrdn's approach to the investment management of the Company going forward. On behalf of the Board, I would like to thank Bruce sincerely for all his efforts, expertise and insights. Shareholders will have the opportunity to thank Bruce in person at the forthcoming Annual General Meeting.
Gearing
At the year end, total borrowings amounted to £140 million (2022: £200m), representing net gearing (calculated by dividing the total borrowings less cash by shareholders' funds) of 8.0% (2022: 11.2%), all of which is drawn in sterling. In May 2023, the Company repaid its maturing £60m fixed rate loan using the proceeds of sales from the portfolio. At the time, the Board considered options to replace this loan but acceptable commercial terms were not available.
The Company is now considering options for the next fixed rate loan which is due to expire in May 2024 and amounts to £30m. The Company will update shareholders in due course.
Environmental, Social and Governance ("ESG") and Climate Change
The Company is not an ESG fund. However, as part of its responsible stewardship of shareholders' assets, your Board continues to engage actively with the Manager with regard to the ongoing assessment and further integration of ESG factors into the Manager's investment process. The Board receives regular assessments of the Company's holdings and portfolio, including a MSCI fund ratings report which currently gives the Company's portfolio a rating of 'A'. Further information on the important work undertaken on ESG and climate change by the Manager is provided in the 'ESG and Climate Related Factors' section on pages 114 to 116 of the published Annual Report and Financial Statements for the year ended 31 December 2023.
Board of Directors
As part of the ongoing succession planning Gregory Eckersley joined the Board on 1 May 2023 and Wendy Colquhoun joined on 1 September 2023. With a background in equity investment and a professional career in asset management and leadership roles within the financial sector, Gregory has already contributed significantly to the Board's deliberations. In addition, Wendy's legal background as a former partner in CMS Cameron McKenna with over 25 years' experience in corporate transactional, and regulatory matters places the Board in a strong position following David Hardie's retirement from the Board on 31 December 2023.
The Board recognises the benefits and is supportive of, and gives due regard to, the principle of diversity when recruiting new Directors whilst ensuring that Board appointments are always made on merit. The Company is compliant with the recommendations of the Parker Review on diversity in the UK boardroom.
Outlook
Trying to make sense of financial markets is difficult even at the best of times. Contradictions invariably present themselves, for example, between evaluating historical precedents, considering country-specific dynamics, acknowledging global conflicts of interest and accepting financial constraints from sometimes polarised political priorities. It is not surprising that attempts to predict the future are so often doomed to failure. The outlook for your Company is rooted in the more tangible variables of corporate fundamentals. This means identifying the key drivers of businesses across a broad and diversified range of sectors, focusing on key concepts such as positive cash flows, robust earnings, growing dividends and strong balance sheets, and then investing from a "bottom up" basis, in good quality, growing companies that are held for the long term to maximise potential positive upside. Through the vagaries of numerous business cycles, global catastrophes and financial market dislocations this investment style has served the Company well. Despite mounting global uncertainties in what currently appears to be an increasingly divided and fractious world, the Manager remains deeply committed to the Company's investment strategy, believing such a proven investment process will continue to identify appropriate opportunities to deliver the Company's objectives.
Read the full statement and report here.
Investment objective
The aim of the Company is to achieve an above average dividend yield, with long term growth in dividends and capital ahead of inflation, by investing principally in global equities.
Cumulative performance (%)
| as at 31/01/24 | 1 month | 3 months | 6 months | 1 year | 3 years | 5 years | |
|---|---|---|---|---|---|---|---|
| Share Price | 243.0p | (4.9) | 8.5 | (1.0) | (4.3 | 29.0 | 31.8 |
| NAV | 265.0p | (1.7) | 7.0 | 2.3 | 2.6 | 35.6 | 47.6 |
| Reference Index | 0.7 | 9.7 | 5.4 | 11.3 | 30.7 | 61.2 |
Discrete performance (%)
| 31/01/24 | 31/01/23 | 31/01/22 | 31/01/21 | 31/01/20 | |
|---|---|---|---|---|---|
| Share Price | (4.3) | 18.5 | 13.8 | (3.6) | 6.0 |
| NAV | 2.6 | 12.5 | 17.5 | 1.8 | 6.9 |
| Reference Index | 11.3 | 0.9 | 16.4 | 7.7 | 14.5 |
Source: abrdn Investments Limited, Lipper and Morningstar. Past performance is not a guide to future results.
Important information:
Risk factors you should consider prior to investing:
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
- The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
- The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
- The Company may charge expenses to capital which may erode the capital value of the investment.
- Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
- There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
- As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
- With funds investing in bonds there is a risk that interest rate fluctuations could affect the capital value of investments. Where long term interest rates rise, the capital value of shares is likely to fall, and vice versa. In addition to the interest rate risk, bond investments are also exposed to credit risk reflecting the ability of the borrower (i.e. bond issuer) to meet its obligations (i.e. pay the interest on a bond and return the capital on the redemption date). The risk of this happening is usually higher with bonds classified as ‘sub investment grade’. These may produce a higher level of income but at a higher risk than investments in ‘investment grade’ bonds. In turn, this may have an adverse impact on funds that invest in such bonds.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
- The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
Other important information:
Issued by abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Authorised and regulated by the Financial Conduct Authority in the UK.