TIDMATST
Alliance Trust PLC
25 February 2022
Robust results including 32.5% dividend increase
Results for the year ended 31 December 2021
Performance Highlights
-- In 2021 the Company's Total Shareholder Return1 (TSR) amounted to 16.5%;
its Net Asset Value (NAV) Total Return1 was 18.6% while the Company's
benchmark index returned 19.6%.
-- Performance in the year was significantly ahead of the Company's
benchmark index until the fourth quarter when the index became dominated
by the performance of a few of the largest US technology companies.
-- The Investment Manager and your Board are confident that the fundamental
characteristics of the portfolio mean that it is expected to generate
outperformance over the longer term.
-- A significant increase in dividends was introduced for the third and
fourth interim dividends resulting in a year-on-year total increase of
32.5%; had we increased the first and second interim dividends to the
same level, this would have resulted in an annual dividend yield of
2.3%2.
-- We expect to continue extending our 55-year track record of increasing
dividends.
Gregor Stewart, Chairman of Alliance Trust PLC, commented:
"The Company has delivered a strong absolute performance with a
Total Shareholder Return of 16.5%. Against the backdrop of new
Covid-19 variants, increasing inflation and a few large technology
companies dominating returns, this was a robust result although
behind our benchmark. A significant increase in dividends was
introduced for the third and fourth interim dividends resulting in
a year-on-year total increase of 32.5%. Had we applied the same
increased level of interim dividend throughout 2021, this would
have resulted in an annual dividend yield of 2.3%.(2) From here, we
expect to continue extending our 55-year track record of annual
dividend increases."
About Alliance Trust PLC
Alliance Trust aims to deliver long-term capital growth and
rising income from investing in global equities at a competitive
cost. We blend the top stock selections of some of the world's best
active managers, as rated by Willis Towers Watson, into a single
diversified portfolio designed to outperform the market while
carefully managing risk and volatility. Alliance Trust is an AIC
Dividend Hero with 55 consecutive years of rising dividends.
https://www.globenewswire.com/Tracker?data=igA4aGvK0kzHEmZf3DyejGPkq0qup7h4IGBEceqCIMLbBKgKq1clVxTAc4_TwejMizTYkhDc1EwS4vKHxGrara2wls93_Ir1TJsepU1pIA9SILdLiskmpv0xR5Kw_pb6
https://www.alliancetrust.co.uk
For more information, please
contact:
Mark Atkinson
Head of Marketing and Investor Sarah Gibbons-Cook
Relations Quill PR
Alliance Trust PLC Tel: 020 7466 5050
Tel: 07918 724303 AllianceTrust@quillpr.com
1 Alternative Performance Measure
2 This is based on the Company's share price on 31 December
2021
-S-
CHAIRMAN'S STATEMENT
The Company has delivered a strong absolute performance with
Total Shareholder Return of 16.5%. Against the backdrop of new
Covid-19 variants, increasing inflation and a few large technology
companies dominating returns, this was a robust result although
behind our benchmark. A significant increase in dividends was
introduced for the third and fourth interim dividends resulting in
a year-on-year total increase of 32.5%. Had we applied the same
increased level of interim dividend throughout 2021, this would
have resulted in an annual dividend yield of 2.3%.(1) From here, we
expect to continue extending our 55-year track record of annual
dividend increases."
-- In 2021 the Company's Total Shareholder Return (TSR) amounted to 16.5%;
its Net Asset Value (NAV) Total Return was 18.6% while the Company's
benchmark index returned 19.6%.
-- Performance in the year was significantly ahead of the Company's
benchmark index until the fourth quarter when the index returns became
dominated by the performance of a few of the largest US technology
companies.
-- The Investment Manager and your Board are confident that the fundamental
characteristics of the portfolio mean that we expect it to generate
outperformance over the longer term.
-- A significant increase in dividends was introduced for the third and
fourth interim dividends resulting in a year-on-year total increase of
32.5%; had we increased the first and second interim dividends to the
same level, this would have resulted in an annual dividend yield of
2.3%.1
-- We expect to continue extending our 55-year track record of increasing
dividends.
1. This is based on the Company's share price on 31 December
2021.
Stock markets generally posted strong gains in 2021, led once
again by the US, as the global economy initially continued its
recovery from the impact of the Covid-19 pandemic. However, in the
fourth quarter, with volatile markets, inflation pressures building
and further variants of the virus emerging, there was new
uncertainty about the outlook for 2022. As a result, valuations of
many stocks suffered in this period and most of the performance of
the benchmark index in the final quarter of the year was generated
by a very small number of large US technology stocks. Overall
performance and the effect of the concentration of market returns
is further analysed in the report of our Investment Manager, WTW,
on pages 11 to 15 of the Annual Report.
As a result of the above factors, the performance of the
Company's portfolio relative to its benchmark declined materially
during the final quarter of the year. For the first nine months of
the year, as the vaccine-fuelled market recovery broadened in
impact, the Company's NAV Total Return outperformed the benchmark
by 3.4%. Although the Company's portfolio included some of the
large US technology stocks it did not mirror the degree of
concentration of such stocks in the benchmark index. This resulted
in NAV Total Return underperformance relative to the index of 4.0%
in the fourth quarter. To illustrate the extreme nature of this
concentration, if the portfolio had included Apple and Tesla at the
same weight as the benchmark, the portfolio's performance would
have improved by approximately 1.0% in the fourth quarter.
This concentration factor has harmed the performance of the
Company relative to the benchmark for significant periods over
recent years. This has resulted in the portfolio underperforming
relative to the benchmark index, and against our target, since 1
April 2017 when WTW was appointed as the Company's Investment
Manager. In this period, excluding the effect of non-equity
investments previously held by the Company, the Company's
annualised NAV Total Return was 0.45% per annum below its benchmark
return.
In the past year we have seen encouraging signs that when the
individual stock returns from global markets are less concentrated
and focus on long-term company fundamentals, returns from our
portfolio exceed those of the market index. The Board and WTW
remain confident that over the longer term the Company's
diversified but high conviction portfolio is well placed to provide
the level of outperformance we target.
We announced a number of changes to our Stock Pickers during the
year. Following the termination of Lomas Capital Management's
mandate in February we appointed Sands Capital Management and
Metropolis Capital. If and when any further changes are made, we
will announce these once the transition of assets to the relevant
Stock Pickers has been completed.
The discount remained stable for most of the year closing at
5.3% (2020: 3.5%) and averaging 5.9%. The Company bought back just
over 4% of its issued share capital during the year. The widening
of the discount is consistent with many other global equity
investment trusts.
DIVID SIGNIFICANTLY INCREASED
During 2021 the Board completed a review of the level and
funding of the Company's dividend. After taking account of the
Company's projected investment income and significant accumulated
distributable reserves, enhanced by the conversion of the merger
reserve, the Board determined it was appropriate and prudent to
increase significantly the Company's dividend. This has been
implemented without changing the Company's investment objective or
strategy. Before making this decision, the Board sought views from
individual shareholders, institutional investors and wealth
managers.
The total dividend paid for 2021 will be 19.05p (2020: 14.38p),
representing an increase of 32.5% on that paid for 2020. For
illustration, if the Company had paid all interim dividends during
the year at the same level as the increased third and fourth
interim dividends, the annual dividend yield would have been
2.3%(1) . Following this increase, through a combination of its
investment income and the use of its significant distributable
reserves, the Board expects to continue extending the Company's
55-year track record of dividend increases. Of the Company's
GBP3.3bn distributable reserves at 31 December 2021, the Board
anticipates that GBP10.5m (2020: GBP10.1m) will be utilised to
support the total dividend declared for 2021. The Board believes
that delivering a higher, but still sustainable, level of dividend
will benefit existing shareholders and enhance the attractiveness
of the Company's shares.
INVESTING RESPONSIBLY
In 2021 we reaffirmed our focus on Environmental, Social and
Governance (ESG) factors through announcing a formal commitment,
along with our Investment Manager, that the Company's portfolio
will be managed to target net zero greenhouse gas emissions by
2050. In addition, the aim is to reduce emissions over the medium
term on a pathway which may not necessarily show year-on-year
improvements but one that will still be consistent with the goals
of the Paris Agreement. You can read more about the practical
implications of these commitments in our Investment Manager's
report on page 24 of the Annual Report.
While we would much rather encourage positive change through the
Company's stewardship and engagement activities, we will consider
excluding certain types of stocks from its portfolio. For example,
in July we decided to exclude stocks with significant exposure to
thermal coal or producing oil from tar sands. Thermal coal is by
far the most carbon-emitting source of energy in the global fuel
mix, and tar sands are among the most carbon-intensive means of
crude oil production. If we believe that positive change cannot be
brought about by engagement alone, we may decide to impose further
restrictions on the stocks in which the portfolio may be
invested.
BOARD CHANGES AND SUCCESSION PLANNING
I was pleased to welcome Sarah Bates and Dean Buckley to the
Board in March 2021. These appointments added to the Board's
existing skills and expertise. Sarah took on the role of Senior
Independent Director when Karl Sternberg, who joined the Board in
2015, stood down in June 2021 as part of the Company's succession
plans. Chris Samuel, who became a Director at the same time as
Karl, will not seek re-election at the 2022 Annual General Meeting
(AGM) and Anthony Brooke, the third of our Directors appointed in
2015, will complete his tenure at the 2023 AGM. I would like to
reiterate my thanks to Karl and to thank Chris for the significant
and continuing contribution he has made to the Board over the last
six and half years.
We are mindful that the Board is currently all white and all
British. As we refresh the Board, in addition to ensuring that we
have a diverse range of individuals with the necessary skills and
knowledge, we are aiming to achieve a more ethnically diverse Board
by 2024 or earlier. This is in line with the recommendations of the
Parker Review.
In accordance with our succession plan, we anticipate recruiting
at least one further Director during 2022, which will both enhance
the Board's existing skills and help us achieve this aim.
ENGAGING WITH SHAREHOLDERS
The increased use of online meetings and webinars allowed the
Company to continue to engage with its stakeholders throughout the
year. During 2021 we conducted three online webinars and the number
of shareholders receiving regular updates increased to over
14,000.
It was disappointing that due to Covid-related government
restrictions I was again unable to welcome shareholders to the
Company's AGM. I am hoping that will not be the case in 2022. We
will be holding our AGM in Dundee and, subject to there being no
restrictions in place at the time, shareholders will be welcome to
attend. In any event we will stream the AGM live to shareholders
and they will be able to submit questions in advance or during the
meeting. If we are unable to address all questions during the
meeting, we will answer them in writing afterwards and details of
all the questions and answers will be published on the Company's
website. Full details of how to view the meeting and submit
questions will be sent to all shareholders and will be on our
website. After the formal
meeting we will be holding a webinar where shareholders will be
able to hear presentations from not just WTW but also from
Metropolis Capital and Vulcan Value Partners, two of the Company's
Stock Pickers.
We will keep shareholders updated on arrangements for the AGM,
webinar and other investor events through our website. You can also
sign up to receive details of events and the Company's monthly
factsheet and quarterly newsletter via the website.
OUTLOOK
We note with concern the events in Ukraine taking place as we
write this report and the potential consequences this will have. It
is difficult to predict how this will impact on global markets.
At its core, our portfolio in aggregate, contains companies that
are now cheaper and have stronger and more stable earnings
potential than the benchmark. The Board and WTW believes that as
Omicron-variant related fears recede, and provided that longer-term
fundamentals come back into focus, this will provide the
environment for our portfolio to outperform. We have seen some
evidence of this in early 2022 with the broadening of index
returns. WTW believes that the domination of the market by so few
companies is unlikely to persist over the longer term. This should
provide further opportunities for our Stock Pickers and portfolio
to deliver outperformance.
Gregor Stewart
Chairman
24 February 2022
INVESTMENT MANAGER'S REPORT
INVESTMENT YEAR 2021
2021 was a strong year for equity returns. It began on a
positive tone for global markets as vaccine rollouts gained pace
and the reopening of economies boosted investor sentiment. The
broad economic recovery meant that value stocks, small to mid-cap
areas of the market, and stocks which are more cyclical fared
better than the large-cap US-based growth companies, which had
dominated returns for much of the pandemic. However, this market
rotation and move away from 'big tech' was short-lived, as US
large-cap growth stocks rebounded in June leaving value stocks and
smaller and mid-cap companies lagging again. This reversal was, in
part, due to comments from the US Federal Reserve suggesting it
might act sooner to control inflation, causing investors to pile
back into long-duration growth names under the assumption that
inflation would be temporary. The trend towards large-cap US stocks
was significantly amplified in the last quarter by concerns over
the new Omicron variant.
A mix of additional worries emerged: fears of further lockdowns,
global supply-chain problems and regulatory shocks in China.
Emerging markets equity returns were weighed down by China's
cataclysmic sell-off in the second quarter during their
government's regulatory crackdown on Chinese private education and
technology companies. This was later amplified by fears that
Chinese real estate giant, Evergrande Group, might default. Our
portfolio's exposure to some Chinese companies detracted value
during this period.
Inflation as an ongoing theme continued throughout the year,
with increases leading the market to debate whether this was
transitory or stickier in nature. By its final meeting of 2021, the
Federal Open Market Committee announced that it would end the
emergency quantitative easing programme a few months earlier than
had been expected, in a bid to curb elevated levels of inflation.
Fears of rising interest rates pushed investors out of growth
stocks in December, impacting some, but not all growth players as
many large technology stocks continued to outperform.
Arguably one of the biggest impacts on markets in 2021 was the
growing influence of retail investors. This was particularly true
in the US, where individuals' stimulus cheques(1) were used to
support the equity markets. This became big news in the early part
of the year, as GameStop share price volatility hit headlines, and
remained a key presence throughout. Another example was the special
purpose acquisition company (SPAC)(2) , Digital World Acquisition
Corp., that saw shares soaring nearly 1,000% following the
announcement of a merger with Trump Media & Technology Group
Corp. Retail investors strongly supported the rally in the stock,
and it was one of the most mentioned stocks on social media sites
such as Reddit and Twitch. These investors relied on social media
platforms to define and coordinate their portfolio strategies,
often focused on shorter-term speculative momentum, and markets saw
a rise in volatility and trading volumes. This was magnified by the
leverage taken over the year by individual investors and led to
some already expensive stocks becoming even more expensive.
We believe that it is long-term company fundamentals such as
earnings growth, that drive returns over time. Overall, markets
finished the year with the MSCI ACWI returning 19.6% over 2021 in
sterling terms, and although our portfolio lagged its benchmark, we
remain confident that it is very well positioned for strong future
returns that, most importantly, are sustainable.
US LARGE-CAP STOCKS DOMINATE THE FINAL QUARTER OF 2021
Equity market returns (%)
Q1 Q2 Q3 Q4
---------------------------- --- --- ---- ---
MSCI US Large Cap 300 Index 4.1 8.9 3.0 9.9
---------------------------- --- --- ---- ---
MSCI ACWI ex-USA Large Cap
Index 2.6 5.3 -0.9 1.7
---------------------------- --- --- ---- ---
MSCI ACWI Large Cap Index 3.4 7.4 1.3 6.7
---------------------------- --- --- ---- ---
MSCI ACWI SMID Cap Index 6.1 6.2 1.2 2.8
---------------------------- --- --- ---- ---
Past performance is not indicative of future returns. MSCI ACWI
SMID Cap Index is the MSCI ACWI Small and Mid Cap index. The MSCI
US Large Cap 300 Index is designed to measure the performance of
the large-cap segment of the US equity market. This index had 303
constituents as of 31 December 2021.
Source: eVestment Alliance LLC and MSCI Inc.
THE PORTFOLIO
Our portfolio has delivered strong absolute returns, both over
2021 and since our appointment in April 2017. However, returns
relative to the MSCI ACWI have been disappointing over both
periods. What appeared to be a broadening of market conditions in
the earlier part of 2021, ended up being a continuation of the
challenging market conditions we have seen over the last few years,
where market leadership has remained very narrow in a handful of
very large growth companies.
Our Stock Pickers' focus on the longer-term fundamentals of the
companies they hold was not sufficiently rewarded by the market.
This was largely a result of the last quarter, where the Company's
portfolio lagged the benchmark significantly after being ahead over
the first three quarters of the year. The 2021 market environment
was challenging for many active equity managers, as illustrated in
the AJ Bell 'Manager versus Machine' report for 2021.(3) Based on
that report, 25% of active global equity managers outperformed
their passive alternatives last year.
Over the full year, the Company's Total Shareholder Return was
16.5%. The discount widened from 3.5% as of the end of 2020 to 5.3%
as of 31 December 2021, consistent with what was seen in other
global equity investment trusts. The Company's Net Asset Value
(NAV) Total Return was 18.6%, 1% below the MSCI ACWI return of
19.6%, but was 7.8% above the MSCI ACWI Equal-Weighted Index which
returned 10.8%.
The Board set us a high bar when we were appointed in April 2017
with an outperformance target of 2% per annum after costs over
rolling three-year periods. The large-cap skewed, and challenging,
market environment experienced since 2018, has meant that our focus
on finding the best companies in a wide global universe, regardless
of benchmark biases or company size, has resulted in our being
behind our target. We have a long track record in identifying
quality Stock Pickers. By asking them to pick only their best stock
ideas for the Company, and constructing a risk managed portfolio,
we believe we are enhancing our portfolio's alpha potential. We
have been managing funds based on our multi-manager, concentrated
approach for many years and have experienced tough market
environments in the past. Despite temporary drawbacks, markets
eventually normalise and long-term fundamentals come back into
focus, leading to strong relative returns for our strategies. We
therefore have conviction in the fundamental strength of our
portfolio and believe it will deliver attractive returns once the
narrow leadership of the market dissipates.
Since our appointment, the Company has delivered a Total
Shareholder Return of 64.2% (11.0% per annum) and a NAV Total
Return of 63.6% (10.9% per annum). If, however, the impact of the
Company's now sold legacy Non-core Assets and subsidiaries is
excluded, the Company delivered a NAV (Excluding Non-core Assets)
Total Return(1) of 66% (11.3% per annum). All these measures are
quoted after all costs. The MSCI ACWI returned 69.2% (11.7% per
annum) and the MSCI ACWI Equal-Weighted Index 38.1% (7.0% per
annum) over the same period. The MSCI ACWI Equal-Weighted Index
gives all the stocks in the MSCI ACWI index an equal weighting
rather than, as the MSCI ACWI does, weighting them by company size.
As a result, it is a better indicator of how the average-sized
stock performed and reduces the impact of mega-cap growth names
that dominated.
The table below, illustrates the performance of the MSCI ACWI
index relative to the MSCI ACWI Equal Weighted Index, on a 12-month
rolling basis, along with the performance of the Company's NAV
(Excluding Non-core Assets) Total Return relative to the MSCI ACWI
index on the same bases. The MSCI ACWI Equal Weighted Index, is an
indicator of how the average stock performed rather than the small
number of large-cap companies that dominated the market
capitalisation weighted index. In many ways, the equal weighted
index is more reflective of how our Stock Pickers think about their
portfolios - focusing on their best ideas from anywhere and
ignoring short-term risks relative to the benchmark. From the
table, you can note that the Company's portfolio performs better
when a broader set of stocks share in the market momentum and
underperforms when a few large-cap stocks dominate. In 2021 the
bulk of our underperformance occurred in the final quarter when the
size bias in the market was largest.
1.
https://www.cnbc.com/2020/05/21/many-americans-used-part-of-their-coronavirus-stimulus-check-to-trade-stocks.html
2. Also known as 'blank check companies', SPACs have no
commercial operations and are set up to raise capital in the public
markets for the purpose of acquiring or merging with an existing
company.
3.
https://www.ajbell.co.uk/news/aj-bell-active-v-passive-report-2021
COMPARING RETURNS
Performance from 1 April 2017 to 31 December 2021 (%)
Alliance
Trust Total Shareholder Return 64.2
---------- -------------------------------- ----
NAV Total Return 63.6
------------------------------------------- ----
NAV (Excluding Non-core Assets)
Total Return(1) 66.0
------------------------------------------- ----
Benchmark MSCI ACWI 69.2
---------- -------------------------------- ----
Others MSCI ACWI Equal Weighted Index 38.1
---------- -------------------------------- ----
Passive alternative -- iShares
ETF 68.8
------------------------------------------- ----
Peer Group Median(2) 68.6
------------------------------------------- ----
Notes: All figures are measured from 1 April 2017 with data
provided as at 31 December 2021. All figures may be subject to
rounding differences. The benchmark shown is the MSCI ACWI Net
Dividends Reinvested. The passive alternative iShares is the
BlackRock iShares MSCI ACWI ETF. The peer group is the Morningstar
universe of UK retail global equity funds (open ended and closed
ended). The performance of the passive alternative iShares ETF and
peer group is after fees. The NAV Total Return and NAV (Excluding
Non-core Assets) Total Return are after all manager fees (including
Willis Towers Watson's fees) and allow for any tax reclaims when
they are achieved. The NAV Total Return and NAV (Excluding Non-core
Assets) Total Return are based on NAV including income with debt at
fair value. The Company's NAV Total Return reflects the impact of
holding Non-core investments and Alliance Trust Savings until 30
June 2019. The NAV (Excluding Non-core Assets) Total Return
excludes the impact of Non-core investments and Alliance Trust
Savings. Sources: Investment performance data is provided by BNY
Mellon Performance & Risk Analytics Europe Limited, Morningstar
and MSCI Inc. The peer group source is Morningstar.
1. NAV (Excluding Non-core Assets) Total Return is a measure of
the performance of the Company's Net Asset Value (NAV) that
excludes the impact of the Non-core Assets held by the Company. 2.
Calculated as the median stock return.
OUTPERFORMANCE MUCH MORE DIFFICULT IN TIMES OF NARROW MARKET
LEADERSHIP
Alliance Trust NAV (Excluding
MSCI ACWI Total Return Non-core Assets) Total
less MSCI ACWI Equal Weighted Return less MSCI ACWI
Index Total Return Index Total Return
--------- ------------------------------ -----------------------------
Mar 2018 -0.7% 3.5%
--------- ------------------------------ -----------------------------
Jun 2018 4.3% 1.1%
--------- ------------------------------ -----------------------------
Sep 2018 7.6% -0.7%
--------- ------------------------------ -----------------------------
Dec 2018 4.8% -1.7%
--------- ------------------------------ -----------------------------
Mar 2019 6.0% -2.1%
--------- ------------------------------ -----------------------------
Jun 2019 4.2% -2.1%
--------- ------------------------------ -----------------------------
Sep 2019 2.9% -3.2%
--------- ------------------------------ -----------------------------
Dec 2019 5.7% 1.9%
--------- ------------------------------ -----------------------------
Mar 2020 7.1% -4.3%
--------- ------------------------------ -----------------------------
Jun 2020 6.7% -3.2%
--------- ------------------------------ -----------------------------
Sep 2020 5.5% -1.4%
--------- ------------------------------ -----------------------------
Dec 2020 3.4% -4.2%
--------- ------------------------------ -----------------------------
Mar 2021 0.8% 6.3%
--------- ------------------------------ -----------------------------
Jun 2021 0.6% 4.6%
--------- ------------------------------ -----------------------------
Sep 2021 -0.1% 4.0%
--------- ------------------------------ -----------------------------
Dec 2021 8.9% -1.0%
--------- ------------------------------ -----------------------------
All figures may be subject to rounding differences. Past
performance is not a reliable indicator of future returns.
Source: FactSet, MSCI Inc., Bank of New York Mellon Performance
& Risk Analytics Europe Limited and WTW. Data to 31 December
2021.
While the current narrowness of markets could clearly continue
for a while longer (it has already lasted longer than we
anticipated was likely), we are confident that at some point there
will be a reversal in this trend, as we saw briefly in the first
half of 2021. We believe that this reversal could take hold for a
much longer period. That would be extremely beneficial for our
portfolio and is one of the reasons we are so excited about it
today. In the meantime, we are comforted that we own a number of
high-quality businesses that are growing faster than the market
(have higher earnings per share growth), with more stable earnings
and which are cheaper than the market (have a lower Price to
Earnings ratio).
PORTFOLIO IS ATTRACTIVELY VALUED WITH STRONG EARNINGS
POTENTIAL
Portfolio fundamentals at 31 December 2021
Alliance Trust
Portfolio MSCI ACWI Index
----------------------------------- -------------- ---------------
Price to Earnings (Trailing) 21.5 23.1
----------------------------------- -------------- ---------------
Price to Earnings (Forward 1 Year) 17.1 19.1
----------------------------------- -------------- ---------------
Earnings per Share Growth (5 Year) 14.5 13.9
----------------------------------- -------------- ---------------
Earnings per Share Growth (Forward
1 Year) 21.9 19.8
----------------------------------- -------------- ---------------
Earnings per Share Stability (5
Year) 28.4 24.5
----------------------------------- -------------- ---------------
All figures may be subject to rounding differences.
Notes: The Price to Earnings ratio, also called the P/E ratio,
is an indication of the worth of a company. It is the amount per
share that an investor will pay for each GBP1 of that company's
earnings. One way to calculate the P/E ratio is to use actual
reported earnings over the past 12 months. This is referred to as
the trailing P/E ratio. The P/E ratio can also be calculated using
an estimate of future earnings (the forward P/E). The lower the P/E
ratio the better value that company should be.
Earnings per Share is an indicator of how much money a company
makes for each share of its stock, it is a measure of a company's
profitability. Earnings per Share Growth gives a good picture of
the rate at which a company has grown its profitability over a
given period, with higher levels suggesting a company has products
or services in strong demand and is able to grow its earnings
faster. Earnings per Share Stability is a measure of the level of
fluctuation in a company's Earnings per Share over a given time
period, the higher the value the more predictable future earnings
should be.
Source: BNY Mellon Performance & Risk Analytics Europe
Limited. Data as of 31 December 2021.
STOCK PERFORMANCE
The main reason for our underperformance was that we held more
mid and small-cap stocks and less large-cap stocks than the index.
The table below show that, based on company size alone, our size
positioning cost us approximately 3% in performance terms. This was
partially offset by good stock selection which improved performance
by approximately 0.8%. This negative effect of the size allocation
impacted our stock selection and allocation across the regional and
sector level attributions. If we look at the sectors in which we
invested, our overweight in Communication Services, which tends to
have less large-cap companies in it and which did less well than
the index, detracted some value leading to a negative sector
allocation effect. Our overweight is a result of our Stock Pickers'
company selections as opposed to a macro view on the sector
overall. In addition, stock selection was negative as the smaller
and mid-cap companies we held in each sector did less well than
their larger cap peers. Looking at the regions in which we invest
we benefited from being underweight in Asia and the Emerging
Markets, this benefit was outweighed by the choice of stocks which
reduced performance by 2.8%. This negative stock selection impact
was largest in the US, with our underweight to US large-caps
significantly penalising the portfolio. In the following section we
explain this in more detail and give examples of the stock
selections that contributed, both negatively and positively, to
performance during the year.
Allocation
Effect Selection Effect
---------------------- ---------- ----------------
ATTRIBUTION BY SIZE -3.0 0.8
---------------------- ---------- ----------------
ATTRIBUTION BY SECTOR -0.8 -1.4
---------------------- ---------- ----------------
ATTRIBUTION BY REGION 0.6 -2.8
---------------------- ---------- ----------------
Data to 31 December 2021. Past performance is not a reliable
indicator of future returns. Estimated attribution metrics
calculated using the Brinson methodology. All figures may be
subject to rounding differences. Source: FactSet, MSCI Inc., Bank
of New York Mellon Performance & Risk Analytics Europe Limited
and WTW.
Key detractors to performance:
-- Certain emerging markets stocks, particularly, Chinese stocks, with our
holdings in Baidu and New Oriental Education alone detracting -0.9%
-- In the US, we did not hold Apple and Tesla which detracted -0.7% and some
US stocks that were held such as Charter Communications, Fleetcor
Technologies and Visa, lagged the market
-- Some stocks held within the Information Technology and Consumer
Discretionary sectors together with negative allocation impacts from our
slight overweight in Communication Services (one of the worse performing
sectors) also impacted performance
With the Chinese government regulatory crackdown and market
turmoil around Evergrande, several Chinese stocks detracted value
over the year.
The two key detractors were Baidu and New Oriental Education.
Baidu, China's internet search and online community leader, was
held in the portfolio by both River and Mercantile Asset Management
and Black Creek Investment Management. Despite solid fundamentals,
shares have suffered with the general sell-off in Chinese equities,
with the stock down 30% over the year. Nonetheless, these Stock
Pickers remain favourable to Baidu and view the loss as short-term
volatility within the context of their long-term investment
horizon. Baidu is a technology-driven company and is considered a
leader in artificial intelligence (AI) research, including
technology for autonomous vehicles. It is also growing its cloud
computing service offerings in China and Southeast Asia and is
considered a leader in AI cloud services in China. With Baidu's
only modest direct exposure to the areas of increased regulation,
its core market of internet advertising is competitive and its
areas of growth, such as AI and autonomous vehicles, are strongly
supported by the Chinese Communist Party, both Stock Pickers'
outlooks for the company are favourable, in particular given its
attractive valuation.
The other significant detractor was New Oriental Education, the
Chinese for-profit education business, a company that was held by
Sustainable Growth Advisers (SGA). SGA had owned New Oriental
Education for a long time. It had generated significant value for
investors as its share price multiplied. SGA sold down the
company's shares in February 2020 at a significant profit from
their original acquisition cost. More recently, regulation in the
sector has been expected and SGA's view was that ultimately
regulation would benefit the strongest players as they would be
best able to navigate the regulations, absorb the cost and gain
market share. SGA bought shares in the company after the share
price fell approximately 50% from its peak but, as it became clear
the regulatory clampdown was going to materially change the
profitability allowed in the sector, SGA quickly exited the
position, at a loss. Despite being a major negative contributor to
performance over the year, SGA's holding in New Oriental added
value since April 2017.
The next biggest detractor to performance was not holding Apple
which rallied by more than 35% over the year. Not holding Tesla
also hurt relative performance, with the stock up 51% over the
year. Last year, many active growth managers underperformed(1) ,
being underweight both stocks. Tesla is valued at more than all
other key auto manufacturers in the world combined, despite
accounting for just over 1% of global car sales. Over 2021, the
company's market cap increased by over half a trillion dollars,
essentially the equivalent of a new JP Morgan, or a Procter &
Gamble, whereas Apple added approximately the same amount to its
market capitalisation in just 6 weeks from mid-November 2021.
1.
https://www.ft.com/content/d1f96d83-1a72-47d7-a4af-2483bd49b024
Key contributors to performance:
-- Stock selection within the Communication Services sector was positive.
Our holding in Alphabet and Interpublic Group of Companies added value,
as did being underweight Tencent and Verizon Communications Inc.
-- Stock selection within the Health Care sector with a number of our
holdings performing strongly such as CVS Health Corporation, UnitedHealth
Group and Novo Nordisk
-- Our underweight in Emerging Markets, which was the worst performing
region over the period
Internet search leader Alphabet Inc. was the largest contributor
to performance during the year, up 66%. Alphabet's reported
revenues grew significantly over the year, largely on the back of
strong growth in advertising revenues, including solid growth in
YouTube revenues. Google Cloud, another business segment of the
tech giant, also delivered solid results despite still being loss
making.
The company is held across five Stock Pickers as at the 31
December 2021, with many impressed by the company's execution and
growth potential while remaining cognisant of valuation and rising
regulatory risks.
The second largest contributor to performance was Nvidia
Corporation (Nvidia), up an impressive 127% over the year. Nvidia
designs graphics processing units (GPUs) for the gaming and
professional markets, as well as 'system on a chip' (SoC) units for
the mobile computing and automotive market. The company is
benefitting from a sustained increase in demand for its products,
driven in part by gaming consoles that use Nvidia's GPUs (which
constitute more than half of its revenue) and in part by
cryptocurrency infrastructure. Evergrowing demand for the company's
cloud storage has also fuelled robust spending by Nvidia's largest
customers and has been a source of high margin revenue strength.
Continued growth in the firm's large gaming sector business and a
growing automotive pipeline are other key factors in the positive
outlook for the company. Nvidia was held in the portfolio by both
GQG Partners and Vulcan Value Partners over 2021.
KKR & Co. Inc., an American global investment company held
by Vulcan Value Partners, was the third largest contributor to
performance for the year. KKR is a global investment firm that
manages multiple alternative asset classes. It has stable capital
with a stable client base and predictable earnings. KKR has enjoyed
the favourable tailwind of increasing allocations by investors to
private and alternative investments.
STOCK PICKER PERFORMANCE
In the 12 months to 31 December 2021, only three out of our ten
global Stock Pickers outperformed the benchmark index. GQG
Partners' emerging markets mandate which has a lower exposure to
China outperformed the MSCI Emerging Markets Index over the
year.
The cyclical rotation at the beginning of the year allowed our
value-based Stock Pickers to recover some of the previous years'
losses, with Lyrical Asset Management (Lyrical) posting the
strongest returns in the first half of the year. In contrast, the
portfolio's large-cap, growth-oriented Stock Pickers, such as
Sustainable Growth Advisers (SGA), were amongst the poorer
performers. As concerns over inflation diminished somewhat
mid-year, growth-oriented managers recovered ground and the
recovery in value-oriented managers' momentum faltered, until
December, when value rebounded again. In the 12-month period, which
saw fluctuations in terms of style and size dominance, Vulcan Value
Partners and Lyrical were the best performing managers, with River
and Mercantile Asset Management, the deep-value recovery manager,
the biggest underperformer.
The volatility and rotation in markets this year illustrate the
importance of maintaining a mixture of different Stock Pickers
whose different investment styles allow the portfolio to gain
upside in different market scenarios and deliver smoother
returns.
OUTLOOK
Despite disappointing relative returns in the fourth quarter of
2021, we are very excited by the current portfolio's fundamentals
and how these are helping to position the portfolio for 2022. As of
the end of 2021, the portfolio looks better value than the
benchmark, with stronger and more stable earnings growth. Although
long-term fundamentals were less of a focus in 2021, we believe
they will come back into the limelight, as they are the driver of
long-term equity returns.
Some of our stocks have been hurt on a relative basis by the
sentiment-driven market, being overly penalised by short-term
considerations despite maintaining very strong long-term
credentials. Our Stock Pickers stand by these firms. They include
names such as Booking.com, other consumer discretionary names such
as Adidas, or payments companies such as MasterCard or Visa. These
companies were all hit by the Omicron variant-related uncertainty
as well as occasional idiosyncratic concerns. Despite the
short-term impacts of the Omicron variant, companies such as
Booking.com, with dominant market positions, should flourish over
the long term.
With the threat of persistent inflation now present, those
growth companies with particularly lofty valuations are most
vulnerable to the associated impact of tightening financial
conditions, particularly once Omicron fears recede, and as
longer-term fundamentals come back into focus. We have already seen
volatility in the early part of 2022 as markets weigh up the impact
of rising inflation and increasing costs of capital.
We believe the overall growth rate of corporate profits is set
to slow in 2022, relative to the recovery levels of growth seen in
2021, returning to pre-pandemic trend growth perhaps as early as
the end of 2022. While the outcome is uncertain, we expect
inflation rates to slow as commodity prices stabilise, workers
continue to return to the workforce after Covid pressures abate;
and some of the global supply constraints currently disrupting
industry continue to ease.
However, there are risks to the upside in terms of inflation
trends and equity market returns. The increased geopolitical
tensions surrounding Ukraine and Russia's recent actions are
further fuelling volatility and compounding concerns around
inflationary impacts on energy prices associated with this
escalating conflict. We could also see elevated price pressures
persisting for longer given continued risks of supply-side
constraints and the impact of very tight labour markets. As such, a
fundamental bottom-up analysis of the resiliency of each company to
inflationary pressures is required. Valuations continue to compress
driven by rising discount rates and continued recovery in earnings
for Covid-hit sectors. We expect margins to be the deciding factor
for equity returns (particularly in the US where the economy is
further along in the business cycle). Companies best able to pass
on (or avoid) rising input prices whilst navigating the impact of
rising yields across many developed markets may be set to navigate
this environment well. Our Stock Pickers have been actively
evaluating the impacts of higher inflation on their companies to
ensure they can weather that storm.
Regarding China, recent regulatory changes have dominated 2021
for the region. Navigating these changes may be the main challenge
for investors in the short term against a global backdrop of rising
inflation in the West and prevailing US-China tensions. Overall,
whilst uncertainty does cloud the region, we continue to believe
the long-term case for Chinese equities remains and the region
provides selective investment opportunities, potentially broadening
sources of diversity available to investors.
As current global constraints start to ease, and concerns over
the Omicron variant continue to dissipate, we believe we will see a
continuation of market recovery, providing great opportunities.
PORTFOLIO CASE STUDY:
CLOUD COMPUTING
Demand for cloud computing is growing rapidly driven by the
constantly increasing amount of global data produced, and the need
for complex and flexible computation. Cloud solutions are also
offering enhanced employee flexibility -- which is critically
important due to the increasing permanence of remote working and
adaptability companies will need in the future. Covid-19 has
accelerated these trends. Cloud has also helped transform software
by allowing for a more subscription and consumption-based business
model, enabling more frequent and seamless software updates,
significantly improving customer profitability, ease of use and
functionality.
We hold several stocks that benefit both directly and indirectly
from the migration of businesses toward greater cloud computing.
From the well known mega-caps such as Alphabet, Amazon, Microsoft
or Baidu, to other names such as Oracle, Dell, Western Digital,
ServiceNow, Twilio, Autodesk and salesforce.com, these are just a
few of the stocks held that benefit from cloud computing.
Ultimately, cloud computing companies are seeing more recurring
revenues via longer-term relationships with businesses which has
been the source of attractive growth for the segment. While the
growth opportunity is massive, selectivity will be increasingly
critical.
PORTFOLIO CASE STUDY:
SEMICONDUCTORS
Semiconductors are an essential component of electronic devices,
enabling advances in communications, computing, healthcare,
military systems, transportation, clean energy and countless other
applications. Due to their role in the fabrication of electronic
devices, semiconductors are a high growth segment of the market
which will benefit from increasing digitalisation of the economy.
One of our Stock Pickers expects annualised industry revenue growth
to accelerate from 5% over the past decade to more than 10% over
the next 10 years. Historically, the semiconductor industry has
been largely driven by devices per human. In the future, it is
likely the industry will benefit from trends not limited by human
use (The Internet-of-Things), and new technologies that demand
greater processing power than traditional smartphone devices (e.g.
virtual and augmented reality).
We hold many semiconductor companies, including Nvidia, Qorvo,
Skyworks Solutions, ASML Holdings, Taiwan Semiconductor
Manufacturing Company and Broadcom, to name but a few. Current
demand for semiconductor chips is vastly outstripping supply,
impacting production across a number of industries from car
manufacturers to consumer appliance producers -- a trend that is
likely to continue into 2022. The semiconductor industry is also
benefitting from the transition to a world aligned with a 2degC
climate target, being critical components in electric vehicles
(EVs) and other products that form part of the climate
solution.
The concentrated market, coupled with demand outstripping
supply, has caused our Stock Pickers to focus on the best-in-class
companies in the semiconductor space where they see the highest
likelihood of sustainable earnings growth going forward.
PORTFOLIO CASE STUDY:
CLIMATE SOLUTIONS
Climate change is one of the biggest issues facing investors
today and both we and our Stock Pickers, are actively looking at
climate-related risks within the portfolio. But the climate
transition also offers opportunities by investing in those
companies that are providing solutions to others in this space.
The portfolio includes a number of companies that are working on
solutions to help the economy reduce climate-related risks,
including Bureau Veritas, Schneider Electric, Owens Corning,
ANDRITZ and many more.
Bureau Veritas is a global leader in the provision of carbon and
energy consultancy, verification and certification services. Their
team of experts support the development of bespoke energy and
carbon management strategies to set objectives, targets and
management plans, helping companies in their decarbonisation
journey.
Schneider Electric SE is a French multinational company
providing energy and automation digital solutions for efficiency
and sustainability. It addresses homes, buildings, data centres,
infrastructure and industries, by combining energy technologies,
real-time automation, software and services. It was ranked the
world's most sustainable corporation by Corporate Knights in
2021.(1) Schneider Electric helps customers reduce their carbon
footprints via products and software tools that optimise energy
management and industrial processes.
Owens Corning is a global building and industrial materials
leader. The company's three integrated businesses are dedicated to
the manufacture and advancement of a broad range of insulation,
roofing and fibreglass composite materials. Owens Corning provides
innovative products and sustainable solutions that address energy
efficiency, product safety, renewable energy, durable
infrastructure and labour productivity.
ANDRITZ is an international technology group providing plants,
systems, equipment and services for various industries. ANDRITZ
Hydro is a global supplier of electromechanical systems and
services ('from water-to-wire') for hydropower plants and one of
the leaders in the world market for hydraulic power generation.
ANDRITZ offers technologies for producing steam and electricity
from renewable fuels as well as the efficient use of traditional
fossil fuels.
In addition to the above stocks, we also hold a number of energy
companies. Although their carbon footprint might be significant
now, we believe they are also part of the solution, not only
because they have plans to align their carbon reduction trajectory
with the Paris Agreement, but also through researching and
investing in alternative energy sources and carbon capture
technology. Our Stock Pickers incorporate an ESG lens in their
evaluation of these companies and also, along with EOS at Federated
Hermes (EOS), actively engage with them to steer them towards
better practices, reinforcing their engagement via voting activity.
We provide a BP engagement case study by EOS via the Climate Action
100+ initiative in our Responsible Investment section on page 25 of
the Annual Report.
1. Corporate Knights is a media, financial information and
research company.
Source:
https://www.corporateknights.com/leadership/top-company-profile-schneider-electric-leads-decarbonizing-megatrend25289/
WHERE WE INVEST
During 2021 we maintained a balanced exposure to sectors,
regions, and styles, ensuring we took no significant bets against
the benchmark on any of these macro factors. Stock selection
remains the key driver of performance and of the portfolio's risk
profile. The portfolio maintained a regional and sector allocation
approximately in line with that of the benchmark as a result.
By far the largest country weighting is to the US, which saw
strong returns throughout 2021. At 57.6% of the portfolio as at 31
December 2021, this represents a slight underweight to the
benchmark weight which was 61.2%. The portfolio had an allocation
to the UK of 10.5% as at 31 December 2021, an overweight of 6.9%
versus the MSCI ACWI, and our biggest regional overweight position.
Most UK investments are opportunities selected by our value Stock
Pickers and, whilst many of these companies are based in the UK,
they tend to be global in nature.
The best performing sector over the period was Energy, up 38%
for the year, with our allocation of 3.4% within the portfolio
being in line with the index weight. The sector was boosted by
soaring energy prices throughout the year. Consumer Discretionary
was the worst performing sector over the year and the portfolio was
slightly underweight, with a position of 10.8% as of 31 December
2021 versus a weight of 12.4% in the MSCI ACWI.
REGIONAL AND SECTOR WEIGHTS
Region
Portfolio Weight
-------------------------
North America 59.8%
------------------ -----
Europe 14.3%
------------------ -----
Asia & Emerging
Markets 13.0%
------------------ -----
UK 10.5%
------------------ -----
Stock Picker Cash 2.4%
------------------ -----
All figures may be subject to rounding differences.
Source: The Bank of New York Mellon (International) Ltd and MSCI
Inc., data as at 31 December 2021.
Sector
Portfolio Weight
------------------------------
Information Technology 24.6%
----------------------- -----
Communication Services 15.4%
----------------------- -----
Financials 12.1%
----------------------- -----
Health Care 11.1%
----------------------- -----
Consumer Discretionary 10.8%
----------------------- -----
Industrials 10.6%
----------------------- -----
Consumer Staples 4.8%
----------------------- -----
Materials 4.3%
----------------------- -----
Energy 3.4%
----------------------- -----
Utilities 0.5%
----------------------- -----
Real Estate 0.0%
----------------------- -----
Stock Picker Cash 2.4%
----------------------- -----
All figures may be subject to rounding differences.
Source: The Bank of New York Mellon (International) Ltd and MSCI
Inc., data as at 31 December 2021.
INVESTMENT RISK AND POSITIONING
The Company has both long-term and short-term borrowing
facilities to provide it with flexibility to manage gearing. In
2021, we maintained a gross level of gearing of between 9.2% and
10.2%, reflecting our positive view of equity markets. Given the
strong equity returns in 2021, gearing added value over the period.
In December we recommended the Company increase its short-term
borrowing facility by up to GBP100m. At 31 December 2021 the
Company has unsecured long-term loans amounting to GBP160.0m. In
addition the Company had drawn GBP180.5m of its approved borrowing
facilities of GBP250.0m plus an accordion option of a further
GBP50.0m.
Portfolio turnover was 65.7% for the 12 months to December 2021.
The level of turnover was higher than might otherwise be expected,
in part due to the addition of Sands Capital Management and
Metropolis Capital as Stock Pickers and the termination of Lomas
Capital Management's mandate during the year.
Annualised expected volatility was 19% p.a. for the portfolio
and 18.3% p.a. for the benchmark as at 31 December 2021. Active
Share, the measure of how different the portfolio is to the
benchmark, was 75%, with Active Risk (or tracking error) at 2.7%
p.a. as at 31 December 2021. We have retained a broadly balanced
exposure to styles, sectors, and geographical regions in 2021
relative to the benchmark. This is in line with our process and has
been an appropriate method to manage risk, as performance of the
different investment styles, markets and sectors differed
significantly, in another particularly volatile year. During 2021,
we did not implement any currency hedging for the portfolio. Our
reference benchmark is unhedged, and our currency exposure is in
line with our country allocations. As part of our portfolio risk
management, we monitor and manage country and currency exposure,
aiming not to diverge significantly from the benchmark allocations.
However, we can hedge currency risk as required, depending on our
view of the risk profile.
Risk summary
Active Risk 2.7%
Active Share 75.0%
Beta 1.03
Portfolio volatility 19.0%
Benchmark volatility 18.3%
Number of Companies as at 31 December
2021*
Portfolio 213
Benchmark 2,965
All figures may be subject to rounding differences.
The Glossary on page 114 of the Annual Report explains the
meaning of the above terms.
*The figures shown in the Number of Companies table above for
Portfolio and Benchmark are different from those used for the
calculation of the corresponding risk analysis. This is due to the
classification of stocks for risk purposes, as we may invest in
more than one class of share in a company and limited data coverage
for certain stocks.
Source: FactSet and MSCI Inc.
OUR STOCK PICKERS
OUR PICK OF THE BEST*
A list of all Stock Pickers as of 31 December 2021 is provided
below. We monitor and continuously review the performance of each
Stock Picker. Changes can be made at any time if we believe there
is the potential to improve expected risk-adjusted returns. Changes
in our views on the Stock Pickers are driven by factors that impact
on their sustainability of competitive advantage, such as changes
to key personnel or company culture and to corporate activity or
investment style drift. The Company will usually announce any
changes of Stock Pickers once the transition of assets to the new
appointee(s) has been completed.
Stock Picker Background Investment Style % of portfolio by
value at 31 December
2021
Black Creek Investment Black Creek is based Long-term contrarian 11% (11% at 31 Dec
Management in Toronto and was value-orientated 2020)
founded in 2004. buyers of leading
Assets under management businesses across
as at 31 December the
2021 were $11.3bn. market cap spectrum.
---------------------- ------------------------- --------------------------- ---------------------
GQG Partners GQG is a boutique Seeks high-quality 19% (18% at 31 Dec
investment management sustainable businesses 2020) (Includes
firm focused on at reasonable prices both global and
global and emerging whose strengths emerging markets
markets equities. should outweigh mandates)
Headquartered in the macro environment.
Fort Lauderdale,
Florida, USA, it
managed assets of
around $91.2bn as
at 31 December 2021.
---------------------- ------------------------- --------------------------- ---------------------
Jupiter Asset Jupiter was established Looks for out-of-favour 7% (7% at 31 Dec
Management(1) in London in 1985 and undervalued 2020)
as a specialist businesses with
investment boutique. prominent franchises
Since then it has and sound balance
expanded beyond sheets.
the UK and managed
GBP60.7bn as at
30 September 2021
(latest available
figure).
---------------------- ------------------------- --------------------------- ---------------------
Lyrical Asset Lyrical Asset Management Looks for US companies 7% (10% at 31 Dec
Management is a boutique advisory in 2020)
firm based in New cheapest decile
York, with 250 clients of valuation
and discretionary with high returns
assets under management on invested capital
(AUM) of over $8.7bn and ability to grow
as at 31 December profitability.
2021.
---------------------- ------------------------- --------------------------- ---------------------
Metropolis Capital(2) Metropolis is a Focuses on long-term 10% (nil at 31 Dec
UK-based firm with market recognition 2020)
a value-based investment of the fundamental
style. It had $2.5bn value of their investments
assets under management and income generated
at 31 December 2021. from those investments.
---------------------- ------------------------- --------------------------- ---------------------
River and Mercantile River and Mercantile Seeks smaller companies 6% (8% at 31 Dec
Asset Management Group was formed and recovery situations 2020)
in 2014 and is based where it can identify
in London. Its advisory value at different
and investment solutions stages of a company's
serve a large client lifecycle.
base predominantly
in the UK. As at
30 September 2021
(latest available
figure), they managed
GBP4.6bn.
---------------------- ------------------------- --------------------------- ---------------------
Sands Capital Sands is an independent, Focuses on finding 8% (nil at 31 Dec
Management(2) employee-owned firm high-quality businesses 2020)
based in Greater that are innovative
Washington DC, USA. and can sustain
As at 31 December above-average growth
2021, it had assets over the long term.
under management
of $73.1bn.
---------------------- ------------------------- --------------------------- ---------------------
Sustainable Growth SGA is based in Seeks differentiated 11% (14% at 31 Dec
Advisers (SGA) Stamford, USA, and companies that have 2020)
manage US, global, strong
emerging markets pricing power, recurring
& international revenue generation
large-cap growth and long runways
portfolios. It had of growth.
client assets of
$26.9bn as at 31
December 2021.
---------------------- ------------------------- --------------------------- ---------------------
Veritas Asset Veritas was established Aims to grow real 13% (14% at 31 Dec
Management in 2003 and is run wealth 2020)
with a partnership over five-year periods
structure and culture. by
They have offices researching thematic
in London and Hong trends
Kong. As at 31 December that drive medium-term
2021 it managed growth.
GBP25bn.
---------------------- ------------------------- --------------------------- ---------------------
Vulcan Value Partners Vulcan is based Focuses on protecting 8% (9% at 31 Dec
in Birmingham, USA, capital by investing 2020)
and was founded in companies with
in 2007. As at 31 high-quality business
December 2021 it franchises trading
managed $20.7bn at attractive prices.
for a range of clients
including endowments,
foundations, pension
plans and family
offices.
*As rated by Willis Towers Watson. 1. 'JUPITER' and the Jupiter
logo are the trade marks of Jupiter Investment Management Group
Ltd. 2. Appointed 16 April 2021.
Lomas Capital Management was a Stock Picker until 3 February
2021.
HOW WE MANAGE THE COMPANY'S PORTFOLIO
We have overall responsibility for the management of the
Company's portfolio. We have built and manage a team of diverse,
best-in-class* Stock Pickers, each of whom invest in a bespoke
selection of typically 10-20 of their 'best ideas'. 'Investing For
Generations' is the backbone of the philosophy of the Company. It
brings long-term principles into how we invest your money,
including ESG considerations. This helps us define our investment
approach, ensuring that the Stock Pickers' thinking and practices
are aligned with the core beliefs of the Company and that they
invest responsibly. We consider this a key factor for long-term
success.
HOW WE CHOOSE OUR STOCK PICKERS
We aim to forge abiding partnerships with our Stock Pickers,
enabling them to focus on what they do best. Our Stock Pickers are
focused on the long term and do not necessarily look at volatility
as a risk, but more as an opportunity: risk is more associated with
the permanent loss of capital.
After a number of years where no significant manager changes
were made, this year saw a number of changes. Following the
termination of Lomas' mandate in February, due to the surprise
decision of the firm to wind down its business, we appointed two
new Stock Pickers: Sands Capital Management, LLC (Sands) and
Metropolis Capital Limited (Metropolis). Sands is a growth manager.
It seeks out opportunities in businesses offering sustainable,
above-average earnings growth with leadership positions and
significant competitive advantages, clear value-add and financial
strength. Metropolis adopts a value-based approach to investing. It
looks to identify mispriced opportunities across a broad universe.
This ranges from high-quality companies in industries with poor
economics or out-of-favour sectors, to ones where its assessment of
growth differs to the market or where growth investors are selling
due to decelerating growth momentum.
We invest significant time, research and effort in identifying
Stock Pickers for the Company's portfolio, leveraging our extensive
research network, robust process and expertise. Our approach
involves identifying the skills and characteristics we believe are
essential in good Stock Pickers. We believe the key to identifying
tomorrow's high-performing Stock Pickers lies in extensive due
diligence combined with qualitative and quantitative analysis. This
due diligence focuses on:
-- the investment processes, resources and decision-making that make up the
Stock Picker's competitive advantage;
-- the culture and alignment of the organisation that leads to
sustainability of that competitive advantage;
-- their approach to responsible investment. We expect our Stock Pickers to
have a demonstrable process in place that identifies and assesses
material ESG factors; we aim to appoint Stock Pickers who actively engage
with the companies in which they invest and have an effective voting
policy. When necessary, we engage with the Stock Pickers and guide them
towards better practices; and
-- the operational infrastructure that minimises risk from a compliance,
regulatory and operational perspective.
We do not believe that quantitative assessments on their own
provide enough information to give us an advantage in assessing the
potential of a Stock Picker to outperform. Our Manager Research
team formulates a view on each Stock Picker we seek to rate over a
series of meetings. We look beyond past performance numbers to try
to understand what 'competitive edge' each Stock Picker has and
whether that edge is likely to be sustainable in the future. We dig
deeper into the investments made by each Stock Picker using a case
study methodology to understand the depth of fundamental analysis
involved in investment decisions. We look at matters such as the
team's process for selecting stocks, adherence to this process
through different market conditions, relevant team dynamics,
training and experience as well as performance track record. We see
the track record as just a single data point and, without the
context of the additional data we assess, it is unlikely to
persuade us that a Stock Picker is skilled. Our expectation of
success further rises where we engage with Stock Pickers to
structure bespoke high conviction, concentrated strategies usually
of 10 to 20 stocks, at an attractive cost and we believe portfolios
are more robust when we diversify across Stock Pickers with
differing approaches. High active share and concentrated portfolios
are advantageous. Academic research supports this(.1) The broadest
opportunity set is provided by unrestricted global mandates, to
allow skilled Stock Pickers the widest scope.
1. Sebastian & Attaluri, Conviction in Equity Investing, The
Journal of Portfolio Management, Summer 2014.
RESPONSIBLE INVESTMENT
OUR APPROACH TO RESPONSIBLE INVESTMENT
A core part of our manager research, selection and monitoring
procedure is an assessment of ESG risks and opportunities. We
require our Stock Pickers to have a demonstrable process in place
that identifies and assesses material ESG factors. We expect our
Stock Pickers to act where they determine an ESG risk is likely to
affect the performance of an investee company and that this risk is
outweighing any potential financial reward. Although we consider
the 'E', 'S' and 'G' factors within our approach, in our report for
this year we have focused more on the 'E' component and, in
particular, climate risk.
E IS FOR THE ENVIRONMENT
Whilst climate-related risk is first and foremost a physical
environmental risk, it is also a financial risk. It is one of the
key areas that we require our Stock Pickers to identify and assess
when they select stocks for the portfolio.
In 2021, both we and the Board recognised the impact that
climate-related risks could have, and made a commitment to a target
of net zero greenhouse gas emissions from the portfolio by 2050
and, on the way, to halve them by 2030. In addition to playing a
part in the necessary transition to a low-carbon world, we believe
that this will be beneficial to the expected returns of the
portfolio, ensuring we reduce the transition risks in the portfolio
and investing ahead of other investors moving in this
direction.
This means that, by the middle of the century, the amount of
greenhouse gases across the portfolio must overall net off to zero,
taking account of the emissions arising from the day-to-day
operations of the companies held in the portfolio.
This target is consistent with the goals of the Paris Agreement
and meets the principles of the Institutional Investors Group on
Climate Change (IIGCC), Net Zero Investing Framework (NZIF)(1) and
the Net Zero Asset Managers Initiative (NZAMI) of which we are
signatories. We have always recognised the power of collaboration
and that it is particularly important in the area of ESG. WTW is a
signatory to the Principles for Responsible Investment and the 2020
UK Stewardship Code, signalling the robustness of our approach to
stewardship, including our partnership with EOS, a stewardship
specialist, which provides our Stock Pickers with voting
recommendations and engages with companies, legislators,
regulators, and industry bodies on our and the Company's
behalf.
Climate risk is a key consideration and engagement priority for
EOS as well as our Stock Pickers. EOS and a number of our Stock
Pickers are involved in Climate Action 100+, a collaborative
engagement initiative which aims to ensure the world's largest
corporate greenhouse gas emitters take necessary action on climate
change. We illustrate a case study of their engagement with BP
below.
TARGET NET ZERO: OUR CARBON JOURNEY PLAN
Plotting the net zero journey, is a developing science;
identifying what data we should collect and how best to measure and
analyse it is part of our evolving Carbon Journey Plan methodology.
This will include a rigorous framework with which to measure and
evaluate our progress, along with controls to help keep the
portfolio on track.
Our aim is to align our Carbon Journey Plan to limiting global
temperature increases well below 2degC above pre-industrial levels.
We have also set a mid-way milestone where, by 2030, we plan to
have achieved a 50% reduction in portfolio emissions relative to
2019. This provides the Company with a strategic framework to
manage and monitor the reduction in carbon exposure over time. Our
triggers and intermediate targets will be developed and shared as
we report, in the years to come, on our progress on this
journey.
1. The Net Zero Investment Framework, published in March 2021,
provides a common set of recommended actions, metrics and
methodologies through which investors can maximise their
contribution to achieving global net zero global emissions by 2050
or sooner.
EOS CASE STUDY:
BP plc
Climate Action 100+
In the 2019 Annual Report we described EOS and Climate Action
100+ engagement with BP which culminated with the 2019 shareholder
resolution calling for the company to set out a business strategy
that is consistent with the goals of the Paris Agreement on climate
change. The resolution gained management support and was co-filed
by nearly 10% of the shareholder base, passing with a very large
majority at the shareholder meeting in 2019.
In early 2020, the newly-appointed CEO, Bernard Looney,
announced a new ambition for the company to transition to net zero
by 2050 or sooner, supported by 10 underpinning corporate aims. The
company has since laid out a detailed strategy by which it intends
to transition the energy it produces from high carbon to low
carbon, including short, medium and long-term targets and aims on
the journey to net zero. The company also has market-leading
disclosures demonstrating how it evaluates new material capex
investments for consistency with the Paris Agreement goals.
EOS further intervened at the 2020 shareholder meeting, asking
the company to reconsider its assumptions for Paris-consistent
investment and its long-term oil-and-gas price assumptions in light
of the coronavirus pandemic. During its Q2 2021 results, BP reduced
the long-term oil-and-gas price assumptions used in its financial
statements, giving shareholders greater visibility about the firm's
climate-related risks.
EOS continue to engage with BP to seek assurances that it has in
place a rigorous investment process, with economic criteria
consistent with the company's purpose and a range of price
scenarios including assumptions consistent with the Paris goals.
They are also requesting that BP extends its net zero goal beyond
the energy produced by the company to apply also to the energy
products it markets and sells to customers.
Note: BP plc is held by Jupiter Asset Management.
Source: FactSet and EOS at Federated Hermes.
APPROACH: LOOK FORWARD AND AVOID OVERSIMPLIFICATION
Divestment from carbon intensive industries can often be
self-defeating. We want to encourage corporates, industries and
countries to move towards low-carbon solutions. Starving them of
investment can potentially discourage them from making a positive
change. Many climate solutions are being developed by companies
that are currently highly carbon intensive but which will provide a
path for the whole economy to decarbonise more quickly.
It might not always be in the Company's shareholders' financial
interests to be ahead of the pathway to net zero. This year, some
of our Stock Pickers found attractive opportunities in the Energy
sector, leading to an increase in the portfolio's carbon footprint.
These stocks contributed positively to the portfolio, as energy
prices sky-rocketed, driven by supply chain issues. Many of these
companies are, however, on a decarbonisation path that is
consistent with the Paris Agreement, something that we and our
Stock Pickers monitor. Often they are heavy investors in green
energy and will be a key part of the solution.
This approach means that we place greater importance on
effective stewardship and, more specifically, voting and engagement
as a means to support the transition to a low-carbon economy.
We provide an illustration of the carbon emissions and Weighted
Average Carbon Intensity (WACI) of the current holdings in the
portfolio and the index, as well as the trend in the emissions and
WACI of these stocks through time. Carbon emissions for the
portfolio is higher than for the benchmark, due to some of our
Stock Pickers having
increased their allocation to energy stocks earlier in the year.
Our exposure will depend on opportunities that arise and, at any
given point in time, we will not necessarily always be ahead of the
pathway to net zero. The weighted average carbon intensity, a
measure of a portfolio's exposure to carbon-related potential
market and regulatory risks, is however lower than the benchmark.
Critically, in terms of both measures, the carbon emissions of the
stocks in the portfolio are reducing at a faster rate than the
stocks in the benchmark.
PORTFOLIO'S WEIGHTED AVERAGE CARBON INTENSITY IS LOWER THAN THE
BENCHMARK
Carbon Emissions Trend of Current Holdings
Metric Tons CO2/$M Invested
Alliance
Trust MSCI ACWI
------------- -------- ---------
2014 146.8 93.0
------------- -------- ---------
2015 137.0 88.2
------------- -------- ---------
2016 128.5 85.3
------------- -------- ---------
2017 127.8 86.7
------------- -------- ---------
2018 128.3 87.8
------------- -------- ---------
2019 122.8 84.3
------------- -------- ---------
Most recent* 109.3 79.0
------------- -------- ---------
Weighted Average Carbon Intensity (WACI) Trend of Current
Holdings
Weighted Average Carbon Intensity
Alliance
Trust MSCI ACWI
------------- -------- ---------
2014 148.3 177.6
------------- -------- ---------
2015 155.2 184.3
------------- -------- ---------
2016 153.2 184.0
------------- -------- ---------
2017 131.0 166.3
------------- -------- ---------
2018 128.1 160.4
------------- -------- ---------
2019 121.6 151.9
------------- -------- ---------
Most recent* 121.6 151.1
------------- -------- ---------
*The timeline charts compare the historical and most recent
emissions and weighted carbon intensity of the portfolio to the
benchmark, based on the constituents and weights of each, as of the
31 December 2021. The most recent data point is based on the most
recently available data for each company on the date of running the
report (10 January 2022). When reported data is not available for a
company, Scope 1 & 2 carbon emissions are estimated using
MSCI's proprietary carbon estimation model.
Source: MSCI ESG Research, portfolio as at 31 December 2021.
ENGAGEMENT
EOS engaged with 128 companies on 571 issues and objectives
There are numerous 'layers' of engagement within the Company's
portfolio. These include our engagement with the Stock Pickers in
order to assess how well climate-related issues, as well as wider
sustainability issues, are factored into their investment process
and stewardship activities and when needed, steering them towards
better practices. We also engage with the asset management industry
at large regarding sustainability and stewardship practices, and
with industry bodies, governments, regulators, and policy makers,
both individually and via several collaborative initiatives.
In addition, we partner with EOS, who engages with companies,
regulators, and governments on our and the Company's behalf. Our
Stock Pickers and EOS regularly engage with companies to ensure
they improve disclosure and change behaviours to enhance their
climate resilience. This includes collaborative initiatives such as
Climate Action 100+. Over the course of 2021, EOS engaged with 128
companies held within the Company's portfolio on 571 issues and
objectives. Of these engagements within the environmental category,
which accounted for 25% of total engagement, 74% of environmental
engagements related to climate change.
MANDATE CHANGES
We excluded companies with significant exposure to tar sands and
thermal coal
Exclusion can be warranted in situations where, for example,
exposure to climate risk cannot be resolved via other means such as
engagement. Where a company's business relies heavily on activities
that are likely to be phased out in the 'net zero world',
engagement is unlikely to be fruitful. In 2021, the Board decided
to exclude companies with significant revenue exposure to tar sands
and thermal coal from the portfolio.
CLIMATE SOLUTIONS
Our Stock Pickers will hold companies trying to develop more
energy efficient alternatives and new technology solutions
Finally, we should note that climate change also presents
attractive investment opportunities for our Stock Pickers. Many
companies are involved in addressing climate resilience and our
Stock Pickers actively invest in a number of them. This includes
companies in some traditionally 'dirty' sectors, working on
developing more energy efficient alternatives, as well as new
innovative companies offering new technology and/or solutions.
S IS FOR SOCIAL
Whilst this year we report more on climate risk, we do not
forget other factors that appear closer to home. Social and ethical
topics regularly represent approximately a quarter of EOS's
engagement activity.
During the last couple of years, EOS has recognised how the
pandemic has put key workers in supermarkets, retail pharmacies,
logistics and the caring professions under acute pressure -- but
the ongoing pandemic has also demonstrated their true value to
society more clearly than ever. As a result, EOS has engaged
closely with companies on how they have treated their employees,
given their importance to overall business performance.
In their engagements with companies, EOS recognised that
companies in certain sectors faced unenviable choices -- between
making workers redundant or going out of business, for example.
Hospitality, travel and high street retail were all badly hit,
triggering thousands of job losses. EOS wrote an open letter to the
CEOs of the companies in its engagement programme, asking how they
were making difficult decisions in relation to their employees,
supply chains, customers and other stakeholders. Companies that
made workers redundant after benefitting from taxpayer-funded
bailouts or furlough schemes have attracted public criticism,
particularly if they had spent the pre-crisis years using surplus
cash for share buybacks. EOS has encouraged a responsible approach
to the use of government furlough schemes, and fairness between
executive and staff pay.
In addition to the engagement activity undertaken by EOS, our
Stock Pickers also engage on social issues with their companies.
SGA, for instance, engaged with Walt Disney on the topic of modern
slavery risk within the supply chain of their licensed merchandised
goods.
MANAGER ENGAGEMENT CASE STUDY:
SGA ENGAGEMENT WITH WALT DISNEY
Walt Disney is one of the world's largest licensors with brands
spanning Walt Disney Studios, DisneyPixar, Marvel, ESPN and more.
Given the company's broad exposure to its suppliers, Disney takes a
risk-based approach to auditing suppliers with the vast majority of
audits conducted by third parties in high-risk areas. If corrective
issues are identified, suppliers are given one chance to remedy the
issue before termination of the relationship. Audits currently
prioritise the health and safety of the manufacturing environment
and while forced labour is an area of audit, it is not currently a
significant feature. Disclosures into Walt Disney's supply chain
are limited and the company has opportunities to increase
transparency, particularly into its suppliers further down the
chain. SGA encouraged management to take action and publicly map
these supply chains; they will continue to monitor the company's
progress in these areas of risk.
Source: Sustainable Growth Advisers.
G IS FOR GOVERNANCE
Good governance gets great results
Stock Pickers are expected to promote good governance by
exercising their investor rights and by engaging with companies on
issues of governance and shareholder value and in the long-term
interest of the Company's shareholders.
It is no surprise that the majority of voting activity and a
significant proportion of engagement activity therefore continues
to relate to Governance-related issues. This can be on a number of
issues such as Board Diversity, Board Independence, Executive
Remuneration, Shareholder Rights and Succession Planning.
Voting: Stock Pickers voted on 3,290 resolutions
In addition to engagement, EOS provides voting recommendations
to our Stock Pickers, who exercise the voting rights in respect of
the stocks they hold. Over the course of 2021 the Stock Pickers
voted on all voteable proposals, casting votes on 3,290 resolutions
at company meetings. Of these, they voted against company
management on 323 and abstained from voting on 59. Of the votes
against management, the key issues voted on were governance-related
issues such as remuneration and Directors-related topics. Voting
against management, and in particular, against the re-election of
certain Directors or on specific climate-related resolutions,
allows the Stock Pickers to communicate dissatisfaction following a
lack of progress achieved via engagement.
HOW WE VOTED
Number of votes with management 88.4%
----------------------------------- -----
Number of votes against management 9.8%
----------------------------------- -----
Number of votes abstained 1.8%
----------------------------------- -----
Source: EOS at Federated Hermes, data to 31 December 2021
REASONS FOR VOTING AGAINST MANAGEMENT
Anti-takeover Related 0.6%
------------------------------------ -----
Capitalisation 10.5%
------------------------------------ -----
Director Related 34.7%
------------------------------------ -----
Non-Salary Comp. 23.5%
------------------------------------ -----
Reorganisation and Mergers 1.9%
------------------------------------ -----
Routine/Business 5.0%
------------------------------------ -----
Shareholder -- Compensation 0.9%
------------------------------------ -----
Shareholder -- Corporate Governance 1.5%
------------------------------------ -----
Shareholder -- Director Related 5.0%
------------------------------------ -----
Shareholder -- Health/Environment 2.2%
------------------------------------ -----
Shareholder -- Other/Miscellaneous 7.4%
------------------------------------ -----
Shareholder -- Routine/Business 4.0%
------------------------------------ -----
Shareholder -- Social Proposal 2.8%
------------------------------------ -----
Percentage figures above are of the eligible votes exercised
that were against management.
Note: vote categories starting with 'Shareholder' indicate
resolutions brought forward by shareholders.
Source: EOS at Federated Hermes, data to 31 December 2021
DIVID
AN INCREASED DIVID
The Company has significantly increased its total dividend for
2021, up 32.5% from 14.38p in 2020 to 19.05p in 2021. This was
achieved by increasing the third and fourth interim dividends for
2021 by 62.0% from that paid at the same time last year. Had we
increased the first and second interim dividends to the same level
this would have resulted in an annual dividend yield of
2.3%.(1)
The increase in the Company's dividend was implemented by the
Board after a review of the level and funding of the dividend which
included obtaining and listening to the views of shareholders. The
Board believes that the increased level of dividend is both
sustainable and affordable and it expects to extend the Company's
55-year track record of annual dividend increases for many
years.
The Company's Dividend Policy and its investment objective (see
page 2 of the Annual Report) and investment strategy remain
unchanged.
The aim is to continue delivering a rising dividend year after
year as well as capital growth.
1. This is based on the Company's share price at 31 December
2021.
DIVID POLICY
Subject to market conditions and the Company's performance,
financial position and outlook, the Board will seek to pay a
dividend that increases year on year. The Company expects to pay
four interim dividends per year, on or around the last day of June,
September, December and March, and will not, generally, pay a final
dividend for a particular financial year.
In determining the level of future dividends, the Board will
take into account factors such as any anticipated increase or
decrease in dividend cover, projected income, inflation and yield
on similar investment trusts.
The Board will continue to take advantage of the Company's
structure as an investment trust and will use both its investment
income and its significant accumulated distributable reserves to
fund dividend payments.
The Company policy of paying quarterly interim dividends means
that shareholders have certainty of the date on which they will
receive their income but means they are not asked to approve the
final dividend. However, each year shareholders are given the
opportunity to share their views on the Company's dividend by being
asked to approve the Company's Dividend Policy.
DISTRIBUTABLE RESERVES
The Company's distributable reserves at 31 December 2021,
including the merger reserve which was converted into a
distributable reserve in July 2021, were GBP3.3bn (2020: GBP2.3bn).
Of these, the Company's revenue reserve was GBP95.2m (2020:
GBP99.2), realised capital reserves were GBP2.8bn (2020: GBP1.9bn)
and unrealised capital reserves were GBP0.5bn (2020: GBP0.4bn).
Both elements of the capital reserves are readily convertible to
cash. The Board expects to utilise GBP10.5m (2020: GBP10.1m) to
support the total dividend declared for 2021. Details of the
Company's reserves can be found on page 90 of the Annual
Report.
DIVID DECLARATION
The Ordinary Dividend for 2021 will increase by 32.5% to
19.054p. A fourth interim dividend of 5.825p will be paid on 31
March 2022 to shareholders who are on the register on 11 March
2022. The payment dates for the 2022 financial year can be found on
page 119 of the Annual Report.
INCOME & COSTS
INCOME
The Company's income from dividends in 2021 saw a significant
increase to GBP61.9m from GBP45.6m, also above the GBP58.7m
received in 2019.
COSTS
The Company's Ongoing Charges Ratio (OCR) was 0.60% (2020:
0.64%). Total administrative expenses were GBP5.9m (2020: GBP6.0m).
Investment management expenses were GBP14.1m (2020: GBP12.0m). The
Company incurred property and other costs not connected with the
ongoing investment business of the Company for the year of GBP0.5m
(2020: GBP0.4m). The main contributor to the lower OCR was an
increase in the average daily NAVs. This meant that the Company's
fixed costs became a smaller proportion of its expenses.
The Board has a policy of adopting a one-quarter revenue and
three-quarters capital allocation for management fees, financing
costs and other indirect expenses where this is consistent with the
Association of Investment Companies (AIC) Statement of Recommended
Practice: Financial Statements of Investment Trust Companies and
Venture Capital Trusts.
The Company's costs remain competitive for an actively managed
multi-manager global equity fund.
DISCOUNT & SHARE BUYBACKS
-- A stable discount
-- 4.2% of our share capital bought back in 2021
DISCOUNT AND SHARE BUYBACKS
The discount remained stable for most of the year except for one
day in March 2021 when it rose to 9.3% before returning to the
range of between 7.0% and 4.5% that it occupied for most of the
year. The discount at 31 December 2021 was 5.3% (2020: 3.5%) and
the average for the year was 5.9% (2020: 5.6%). The widening of the
discount is consistent with what was seen in other global equity
investment trusts.
The Company bought back 4.2% of its issued share capital during
the year, purchasing 13,480,500 shares and adding GBP8.0m to the
Net Asset Value for remaining shareholders. The total cost of the
share buybacks was GBP131.0m. The weighted average discount of
shares bought back in the year was 6.1%. All the shares bought back
were cancelled.
Share buybacks, combined with the effect of the change in the
discount, contributed a total of 0.3% to the Company's performance
in the year.
The table below the high level of discount that persisted in the
years prior to the adoption of the current investment strategy in
2017 and the stability of the average discount since. It also shows
that the cost of share buybacks since 2017 to maintain a stable
discount have been roughly equal to the cost in the years
immediately prior to that date. The Board will continue to monitor
the stability of the discount and will take advantage of any
significant widening of the discount to produce additional return
for shareholders.
BUYBACKS BOOSTED RETURNS AND KEPT DISCOUNT STABLE
Discount and share buybacks (2021)
Discount %
Average Share
for the buybacks
Month month (%) (000's)
------ ---------- ---------
Jan 5.11 7,355.71
------ ---------- ---------
Feb 7.35 18,668.55
------ ---------- ---------
Mar 5.74 17,438.73
------ ---------- ---------
Apr 5.50 955.00
------ ---------- ---------
May 5.73 2,396.17
------ ---------- ---------
Jun 6.73 21,230.92
------ ---------- ---------
Jul 5.58 9,174.79
------ ---------- ---------
Aug 6.00 2,014.32
------ ---------- ---------
Sep 5.45 17,676.40
------ ---------- ---------
Oct 6.42 22,210.76
------ ---------- ---------
Nov 4.97 9,414.30
------ ---------- ---------
Dec 5.32 2,422.00
------ ---------- ---------
Source: WTW, Investec and BNY Mellon.
Cost of share buybacks versus average discount (2021)
Cost of share buybacks (GBP000m)
Average Cost of
discount buybacks
Year (%) (GBP000m)
----- --------- ----------
2012 15.79 112
----- --------- ----------
2013 13.57 7
----- --------- ----------
2014 12.51 30
----- --------- ----------
2015 11.78 136
----- --------- ----------
2016 9.76 195
----- --------- ----------
2017 5.19 1,013
----- --------- ----------
2018 5.79 102
----- --------- ----------
2019 5.03 35
----- --------- ----------
2020 5.59 60
----- --------- ----------
2021 5.93 131
----- --------- ----------
Source: Alliance Trust
RESPONSIBILITY STATEMENT
The Directors confirm to the best of their knowledge:
The financial statements have been prepared in accordance with
the applicable set of accounting standards and give a true and fair
view of the assets, liabilities, financial position and profit and
loss of the Company.
The Annual Report includes a fair review of the development and
performance of the business and the financial position of the
Company, together with a description of the principal risks and
uncertainties that they face.
Gregor Stewart
Chairman
24 February 2022
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEARED 31 DECEMBER 2021
Year to 31 December
2021 Year to 31 December 2020
--------------------------------- ---------------------------------
GBP000 Revenue Capital Total Revenue Capital Total
-------------------------------- --------- ---------- ---------- --------- ---------- ----------
Income 62,282 - 62,282 46,244 - 46,244
Change in the fair value
through profit or loss - 500,959 500,959 - 230,268 230,268
Profit /(loss) on fair value
of debt - 11,957 11,957 - (13,142) (13,142)
--------- ---------- ---------- --------- ---------- ----------
Total revenue 62,282 512,916 575,198 46,244 217,126 263,370
--------------------------------- --------- ---------- ---------- --------- ---------- ----------
Investment management fees (3,532) (10,595) (14,127) (2,991) (8,973) (11,964)
Administrative expenses (5,003) (919) (5,922) (5,227) (762) (5,989)
Finance costs (1,958) (5,876) (7,834) (1,798) (5,322) (7,120)
Foreign exchange losses - (3,999) (3,999) - (8,378) (8,378)
Profit before tax 51,789 491,527 543,316 36,228 193,691 229,919
Taxation (3,110) (183) (3,293) 147 - 147
--------- ---------- ---------- --------- ---------- ----------
Profit for the year 48,679 491,344 540,023 36,375 193,691 230,066
--------------------------------- --------- ---------- ---------- --------- ---------- ----------
All profit for the year is attributable
to equity holders.
-------------------------------------------------------- ---------- --------- ---------- ----------
Earnings per share attributable
to equity holders
Basic (p per share) 15.48 156.23 171.71 11.16 59.42 70.58
Diluted (p per share) 15.48 156.22 171.70 11.16 59.40 70.56
As the Company does not have any other comprehensive income, the
profit for the year, as disclosed above, is the same as the
Company's total comprehensive income.
STATEMENT OF CHANGES IN EQUITY FOR THE YEARED 31 DECEMBER 2021
Distributable reserves
Capital Realised Unrealised
Share redemption Merger capital capital Revenue Total distributable Total
GBP000 capital reserve reserve reserve reserve reserve reserves Equity
At 1 January
2020 8,227 10,771 645,335 1,863,282 242,613 109,164 2,215,059 2,879,392
Total Comprehensive
income:
Profit for
the year - - - 46,554 147,137 36,375 230,066 230,066
Transactions
with owners,
recorded
directly
to equity:
Ordinary
dividend
paid - - - - - (46,514) (46,514) (46,514)
Unclaimed
dividends
returned - - - - - 149 149 149
Own shares
purchased (187) 187 - (59,793) - - (59,793) (59,793)
------------- ----------- --------------------- -----------
At 31 December
2020 8,040 10,958 645,335 1,850,043 389,750 99,174 2,338,967 3,003,300
--------------------- -------- ------------- --------- ----------- ---------- -------- --------------------- -----------
Total Comprehensive
income
Profit for
the year - - - 399,917 91,427 48,679 540,023 540,023
Transactions
with owners,
recorded
directly
to equity:
Ordinary
dividend
paid - - - - - (52,680) (52,680) (52,680)
Unclaimed
dividends
returned - - - - - 49 49 49
Own shares
purchased (337) 337 - (131,512) - - (131,512) (131,512)
Transfer
to capital
reserves
* - - (645,335) 645,335 - - 645,335 -
At 31 December
2021 7,703 11,295 - 2,763,783 481,177 95,222 3,340,182 3,359,180
--------------------- -------- ------------- --------- ----------- ---------- -------- --------------------- -----------
*Following the approval by shareholders at the Company's Annual
General Meeting held on 22 April 2021 to convert its GBP645.3m
Merger reserve into a distributable reserve, the Court on 8 July
2021 approved the reduction of the bonus shares. The Court Order
became effective on 9 July 2021 completing the process such that
the former Merger reserve is now distributable. At this time the
Merger reserve was transferred into Capital reserves.
The GBP481.2m of capital reserve arising on the revaluation of
investments is subject to fair value movements and may not be
readily realisable at short notice, as such it may not be entirely
distributable.
BALANCE SHEET AS AT 31 DECEMBER 2021
GBP000 2021 2020
------------------------------------------ ----------- ----------
Non-current assets
Investments held at fair value 3,650,282 3,269,556
Right of use asset 504 594
3,650,786 3,270,150
Current assets
Outstanding settlements and
other receivables 14,624 25,357
Cash and cash equivalents 88,579 112,730
103,203 138,087
Total assets 3,753,989 3,408,237
Current liabilities
Outstanding settlements and
other payables (15,863) (49,397)
Bank loans (180,500) (145,000)
Lease liability (251) (228)
(196,614) (194,625)
Total assets less current liabilities 3,557,375 3,213,612
Non-current liabilities
Unsecured fixed rate loan notes
held at fair value (197,823) (209,780)
Lease liability (372) (532)
(198,195) (210,312)
Net assets 3,359,180 3,003,300
Equity
Share capital 7,703 8,040
Capital redemption reserve 11,295 10,958
Merger reserve - 645,335
Capital reserve 3,244,960 2,239,793
Revenue reserve 95,222 99,174
Total Equity 3,359,180 3,003,300
All net assets are attributable to equity holders.
Net Asset Value per ordinary share attributable to equity holders
Basic and diluted (GBP) GBP10.90 GBP9.34
Cash flow statement for the year ended 31 December 2021
GBP000 2021 2020
------------------------------------------ --------- ---------
Cash flows from operating activities
Profit before tax 543,316 229,919
Adjustments for:
Gains on investments (500,959) (230,268)
(Gains)/losses on fair value of debt (11,957) 13,142
Foreign exchange losses 3,999 8,378
Depreciation 203 203
Finance costs 7,834 7,120
Scrip dividends (854) (279)
Operating cash flows before movements
in working capital 41,582 28,215
(Increase)/decrease in receivables (1,074) 887
Decrease in payables (1,206) (1,318)
Net cash inflow from operating activities
before income tax 39,302 27,784
Taxes paid (3,454) (3,652)
Net cash inflow from operating activities 35,848 24,132
Cash flows from investing activities
Proceeds on disposal at fair value
of investments through profit and
loss 3,817,847 2,878,460
Purchases of fair value through profit
and loss investments (3,717,464) (2,845,677)
Net cash inflow from investing activities 100,383 32,783
Cash flows from financing activities
Dividends paid - Equity (52,680) (46,514)
Unclaimed dividends returned 49 149
Purchase of own shares (131,512) (59,793)
Drawdown of bank debt 35,500 80,000
Principal paid on lease liabilities (250) (251)
Interest paid on lease liabilities (25) (31)
Finance costs paid (7,465) (6,853)
Net cash outflow from financing activities (156,383) (33,293)
Net (decrease)/increase in cash and
cash equivalents (20,152) 23,622
Cash and cash equivalents at beginning
of year 112,730 97,486
Effect of foreign exchange rate changes (3,999) (8,378)
-----------------------------------------------
Cash and cash equivalents at end
of year 88,579 112,730
The financial information set out above does not constitute the
Company's statutory financial statements for the years ended 31
December 2021 or 2020, but is derived from those financial
statements. Statutory accounts for 2020 have been delivered to the
Registrar of Companies and those for 2021 will be delivered
following the Company's Annual General Meeting. The auditors have
reported on those accounts; their reports were unqualified, did not
draw attention to any matters by way of emphasis without qualifying
their report and did not contain statements under s498(2) or (3)
Companies Act 2006.
The same accounting policies, presentations and methods of
computation are followed in these financial statements as were
applied in the Company's last annual audited financial statements,
other than those stated in the Annual Report.
Basis of accounting
While the financial information included in this preliminary
announcement has been prepared in accordance with the recognition
and measurement criteria of UK-adopted international accounting
standards (IASs), this announcement does not itself contain
sufficient information to comply with IASs. The Company will
publish full financial statements that comply with IASs on its
website.
1. Income
An analysis of the Company's revenue is as follows:
GBP000 2021 2020
---------------------------- ------ ------
Income from investments
Listed dividends - UK 12,961 7,511
Listed dividends - Overseas 48,913 38,041
61,874 45,552
---------------------------- ------ ------
Other income
Property rental income 321 318
Mineral rights income - 20
Other interest 54 246
Other income 33 108
408 692
---------------------------- ------ ------
Total income 62,282 46,244
------------------------------ ------ ------
2. Total Company expenses of GBP20,049k (GBP17,953k) consist of
investment management fees of GBP14,127k (GBP11,964k) and
administrative expenses of GBP5,922k (GBP5,989k). Administrative
expenses include property and other costs not connected to the
ongoing investment business of the Company of GBP471k
(GBP394k).
3. The diluted earnings per share is calculated using the
weighted average number of ordinary shares, which includes 1,611
(22,331) shares held in a trust that was set up to satisfy awards
made under historic share award schemes. The basic earnings per
share is calculated by excluding these shares. The basic Net Asset
Value per share calculation also excludes these shares.
4. All expenses are accounted for on an accruals basis. Where
there is a connection with the maintenance or enhancement of the
value of the Company's investments and it is consistent with the
AIC SORP, the Company attributes indirect expenditure including
management fees and finance costs, 25% to revenue and 75% to
capital profits. Specific exceptions to this general principle
are:
-- Expenses which under the AIC SORP are chargeable to revenue profits are
recorded directly to revenue.
-- Expenses connected with rental income and mineral rights income are
included as administrative expenses.
ANNUAL REPORT
The Annual Report will be available in due course on the
Company's website www.alliancetrust.co.uk. It will also be made
available to the public at the Company's registered office, River
Court, 5 West Victoria Dock Road, Dundee DD1 3JT and at the offices
of the Company's Registrar, Computershare Investor Services PLC,
Edinburgh House, 4 North St Andrew Street, Edinburgh EH2 1HJ after
publication. Due to Covid-19 restrictions these offices may not
currently be open or may have restricted opening hours.
In addition to the full annual report, up-to-date performance
data, details of new initiatives and other information about the
Company can be found on the Company's website.
ANNUAL GENERAL MEETING
The 134th Annual General Meeting (AGM) of the Company will be
held at 11am on Thursday 21 April 2022 at the Apex City Quay Hotel,
1 West Victoria Dock Road, Dundee, DD1 3JP. Subject to there being
no restrictions in place at the time, shareholders will be welcome
to attend in person. In any event we will stream the AGM live to
shareholders and they will be able to submit questions in advance
or during the meeting. Full details of how to view the meeting and
submit questions will be sent to all shareholders and will be on
the Company's website. Shareholders are recommended to lodge
proxies for their votes before the meeting so that they can be
certain their votes will be counted.
(END) Dow Jones Newswires
February 25, 2022 02:00 ET (07:00 GMT)
Copyright (c) 2022 Dow Jones & Company, Inc.
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