Company Announcements

LEGAL ENTITY IDENTIFIER: 213800B9YWXL3X1VMZ69

 

 

 

      THE BANKERS INVESTMENT TRUST PLC

 

Annual Financial Report for the year ended 31 October 2022

 

This announcement contains regulated information

 

Performance Highlights1	31 October 2022	31 October 2021
Net Asset Value per ordinary share
- With debt at par	105.1p	120.9p
- With debt at market value	105.0p	120.7p
Share price at year end2	96.6p	114.0p
Dividend per share for year3	2.328p	2.176p
	31 October 2022	31 October 2021
Dividend growth	7.0%	1.0%
(Discount)/premium at year end4	(8.1%)	(5.7%)
Net gearing/(cash) at year end5	(5.4%)	(6.6%)
Ongoing Charge for year	0.50%	0.48%

 

 

 

Long term track record to              31 October 2022	1 year %	3 years %	5 years %	10 years %	15 years %
Capital return6
Net asset value7	-13.1	11.1	20.0	124.2	108.7
Share price	-15.3	4.2	13.4	123.0	120.1
FTSE World Index8	-4.9	26.0	40.2	90.8	67.1
Total Return9
Net Asset Value7	-11.3	18.1	33.4	181.9	202.4
Share price	-13.4	10.9	26.3	182.0	226.4
FTSE World Index8	-2.8	34.1	56.9	155.0	168.3
Dividend increase	7.0	11.5	25.3	75.2	109.9
Consumer Price Index	11.1	16.5	21.1	30.1	53.4

 

 

1  A glossary of terms and alternative performance measures can be found in the Annual Report

2   Share price is the mid-market closing price

3  This represents the four ordinary dividends recommended or paid for the year (see the Annual Report for more details)

4  Based on the mid-market closing price with debt at par

5  Net gearing/(cash) is calculated in accordance with the gearing definition in the alternative performance measures in the Annual Report

6  Capital return excludes all dividends

7  The net asset values shown for the periods up to 15 years include debt at market value, whereas for 15 years it is shown

    with debt at par value

8  For the 5, 10 and 15 years, this is a composite of the FTSE World Index and the FTSE All-Share Index

9  Total return assumes dividends reinvested

 

Sources: Morningstar Direct, Janus Henderson, Refinitv Datastream

 

 

 

CHAIR'S STATEMENT

 

Performance

This past year has been one of the most turbulent in recent history. Inflation has surged to levels not seen since the 1980s and the deteriorating economic outlook has resulted in sharp falls in both bond and equity prices. Stock picking has been challenging.

The Company's share price has reflected these uncertain markets. The NAV total return was down 11.3% (2021: an increase of 26.5%) underperforming the FTSE World Index on a relative basis as the index only fell by 2.8% on a total return basis (2021: rise of 32.3%). The share price total return was down by 13.4% (2021: an increase of 18.6%). All returns are in sterling. The principal drivers of underperformance were the lower exposure to the US market when compared to the benchmark combined with weakness in Asian markets as Covid continued to affect trade and travel.

The Managers' report in the Annual Report contains detailed information together with market commentary.

The Company has successfully steered through two world wars, the Great Depression and in the past half century the internet boom, the technology bubble and the financial crisis. These events are part of our economic history and will no doubt be repeated. They have honed the knowledge, insight and resilience needed to invest in periods of high volatility and economic stagnation. The Board is confident that the Manager is well placed to navigate the current market with its global approach.

Revenue, dividends and share buy-backs

One of the Company's key objectives is to achieve long term dividend growth in excess of the UK Consumer Price Index figure ('CPI'). Revenue earnings per share of 2.34p (2021: 2.17p) exceeded expectations for the year which has enabled a greater increase in the dividend than we forecast last year. The Board is therefore recommending a final quarterly dividend of 0.60p per share, resulting in total dividends per share for the year of 2.328p (2021: 2.176p), an increase over last year of 7%. This will be paid on 28 February 2023 to shareholders on the register of members at the close of business on 27 January 2023. This will be the Company's 56th successive year of annual dividend growth.

 

Inflation, as measured by the CPI, was 11.1% for the year to 31 October 2022 (2021: 4.2%). Beating this level of dividend growth was always going to be a challenge, but judged over the past 10 years, dividend distributions are comfortably ahead of inflation.

 

For the current financial year, the Board expects to recommend dividend growth of at least 5%, which would equate to a full year dividend of 2.44p per share.

 

Over the year the discount range of share price to asset value varied from just under par to 8.1% (2021: discount of 5.7%). No shares were issued during the year and 18,219,870 (2021: 2,031,754) shares were bought back and held in treasury, representing 1.5% of the Company's share capital. We will continue to buy-back shares to be held in treasury as appropriate. As at 16 January 2023, being the latest practicable date, the share price was 103.8p and the discount was 8.7%.

 

The Board and Manager

In the half year report, I said that whilst there was no requirement to alter our long-term objectives which had stood the test of time, there were opportunities to tighten up the ways in which the Company operates, communicates and attracts new investors. This process continues and as the shareholder base changes and the proportion of retail investors increases, it is incumbent upon the Board and the Manager to ensure that the key investment narrative, the proposition and story appeal more to the wider shareholder base.

 

In this context shareholders will also note that in the Annual Report our purpose statement has been updated to give a clearer statement of what the Company aspires to achieve. 

 

We said that the search for a new non-executive Director would be completed by the year end. In the event the Board decided to appoint two new Directors, Charlotte Valeur and Hannah Philp. Both appointments increase the skill set and the diversity of the Board. Charlotte worked for many years in the capital markets in Denmark and the UK and is an experienced FTSE Chair and non-executive director. She is currently visiting professor in Governance at the University of Strathclyde and on the advisory board of the Møller Institute at Churchill College, Cambridge. Hannah worked for Edison Investment Research and then became director of marketing at Witan Investment Trust plc. She now sits on the board of JPMorgan Mid Cap Investment Trust plc.

 

Our Manager has made various key appointments to its investment trust team. As mentioned at the half year Mike Kerley has been appointed as Deputy Fund Manager and since the year end Jeremiah Buckley has succeeded Gordon Mackay as the regional portfolio manager for the US portfolio.

 

Management fee

The management fee remains competitive, and for the year was at the rate of 0.45% per annum on net assets up to £750 million, 0.40% per annum on net assets in excess of £750 million and 0.35% per annum on net assets in excess of £1.5 billion. At the timing of writing, the Company had net assets of approximately £1.4 billion.

 

Annual General Meeting ('AGM')

The Company's AGM is scheduled to take place at 12 noon on Thursday, 23 February 2023 at the offices of Janus Henderson Investors at 201 Bishopsgate, London EC2M 3AE and I very much look forward to welcoming you. Light refreshments will be served. All voting will be on a poll and therefore we would ask that you submit your proxy votes in advance of the meeting.

 

If you are unable to attend in person, you can watch the meeting live on the internet by visiting www.janushenderson.com/trustslive. If you have any questions about the Annual Report, the Company's performance over the year, the investment portfolio or any other matter relevant to the Company, please write to us via email at ITSecretariat@janushenderson.com in advance of the AGM.

 

Outlook

The extraordinary economic policies enacted to protect populations and economies against Covid are still unravelling and the war in Ukraine has exacerbated the supply imbalances in the food and energy markets. It has been some considerable time since interest rates have risen as quickly as they have this year and the effects of moving from near zero to a peak, currently forecast around 4-5% in the UK, will undoubtedly cause real pain for many. Share prices have reacted to corrective actions and may be discounting a slow-down or a recession. We have faith in our regional portfolio managers to invest in companies that are both able to withstand more difficult times ahead and well placed to prosper as economies recover.

 

 

Simon Miller

Chair

18 January 2023

 

 

 

 

FUND MANAGER'S REPORT

 

It has been another very eventful year. Exuberance in markets at the start of our financial year soon subsided as inflationary pressures rose, followed by central banks scrambling to raise interest rates. Latterly a more sombre mood descended on investors, fearful of the impact of a possible global recession on share prices.

 

The year started well with Covid cases declining and economies opening up as restrictions on movement were steadily lifted. Economic activity picked up pace and this boosted investor sentiment, with most stock markets reaching new highs in late December. Behind the increasing activity, bottlenecks in supplies and limited transportation led to goods price inflation increasing across a multitude of different items. As economies opened up, consumers started spending the savings they had accumulated during the two years of lockdown. Furloughed employees were reabsorbed into the workforce and the increasing activity created new jobs that were hard to fill. By the end of January inflation in the US was already 7.5%; the highest level since 1982.

 

The Russian invasion of Ukraine unfolded slowly, as troops built up on the border before crossing in multiple places on 24 February 2022. The international response to the war was swift, with trade and financial sanctions imposed on Russia. The resulting impact on energy and food prices was profound. We had not anticipated a full invasion of Ukraine and the portfolio was not positioned for the subsequent increase in gas and fuel prices. We have been trying to catch up with the benchmark index since March when the US Federal Reserve decided to increase interest rates for the first time since 2018. The pressure on goods prices was a global phenomenon as tight supply and labour shortages were compounded by input price inflation, particularly energy costs. The global response from central banks was to increase interest rates, but they were too late to take the 'punch bowl away from the party', and all year their actions have struggled to result in the desired impact of suppressing aggregate demand.

 

A direct consequence of US interest rates rising earlier and quicker than most countries was a resurgence in the strength of the US dollar compared to most major currencies. Other factors such as the flight of capital to the safer haven of the US further compounded the move. Markets inflicted a harsh lesson on the UK in September as Liz Truss' new government enacted a naive set of economic policies, forcing sterling almost to parity with the US dollar. That government did not last long and by the end of our financial year sterling had recovered a little but still fell in value by 16% against the US dollar over the year.

 

This year has been one of the most challenging against the benchmark index, given that over two thirds of the index is US listed, benefitting from the strength of the US dollar. The underperformance of the portfolio by 8.5% was principally down to the underweight exposure to the US market compared to the benchmark. But if the portfolio were rebalanced, it would be challenging to deliver the required level of dividends from the portfolio given the low level of yield and high valuations of the US stocks. The US economy was better shielded from rising energy costs compared to Europe and Asia as energies are priced in US dollars and the US is largely self-sufficient in both oil and food supply. Other contributory factors behind the disappointing year were the overweight exposure to Asia, and China in particular, combined with the low exposure to oil stocks in the portfolio.

 

Our fundamental outlook for oil is a forecast of declining demand as governments, supported by consumer demand, impose measures to mitigate climate change. Furthermore, oil company returns on invested capital are declining as they invest in non-carbon generating assets which tend to be much lower return than traditional oil fields. This long-term view proved wrong this year as the price of gas and oil rose dramatically following Russian supplies being removed from Western Europe. The price of oil has fallen back recently but gas prices could remain elevated for some years to come. However, our long-term view that carbon-based energy will be supplanted by wind, solar and other greener energies has been reinforced by the volatility and uncertainty of supply of carbon-based energies as illustrated this year by the war in Ukraine.

 

Sharply increasing interest rates have had a further impact on the valuations of equities. A growth style of investing benefitted from near zero interest rates in recent years because low discount rates on future earnings resulted in elevated valuations. Value investing has benefitted this year, helped by the energy sector and financials, the latter supported by growing returns on cash following the increase in interest rates. The regional portfolios are more growth orientated in North America, Europe and Japan. All three struggled during the year with this changing dynamic and underperformed their regional benchmarks, but it was most profound in North America. The three-year returns from these regions remain positive.

 

Underperformance in the UK was exclusively down to a lack of exposure to oil companies BP and Shell in the energy sector, while China struggled from continuing strict Covid lockdowns impacting the consumer related stocks in the portfolio. Only Asia Pacific (ex Japan and China) outperformed its benchmark, as exposure to Australian resource stocks and financials helped the portfolio be more resilient. However, all the portfolios fell in value over the year as fears of a recession, created by rapidly rising interest rates, dampened investor sentiment.

 

Regional portfolio managers

In the interim report we announced that Mike Kerley would support me as deputy fund manager and that Sat Duhra would in turn co-manage the Asia Pacific portfolio with Mike. We have also reviewed the North America portfolio management and decided to change manager by appointing Jeremiah Buckley, replacing Gordon Mackay. Gordon has had a fine record since taking over the portfolio in 2019 but we feel that an overall investment style that is more balanced between growth and value is likely to perform better in the coming years. I would like to thank Gordon for his hard work and commitment to the investment team. Our new North America portfolio manager Jeremiah Buckley joined Janus Henderson in 1998 and is based in Denver, where Janus Henderson employs over 40 analysts covering the North American market. The portfolio was transitioned in mid-December and it has retained a similar exposure to growth factors such as forward earnings growth while exhibiting an increased exposure to lower price to earnings and higher dividend yielding companies. I look forward to working with Jeremiah in the coming year.

 

Environmental, social and governance factors ('ESG')

As reported last year, ESG considerations are integrated into our investment decision-making and ownership processes. We do not exclude sectors or stocks purely for ESG reasons, as we believe this will not lead to improvements in their actions. Our preferred route is through engagement with company management to encourage change and investment in safer or more environmentally friendly processes and in societal and governance improvements. A sample of some of the engagement that Janus Henderson conducted on the Company's behalf last year is listed in the Annual Report. The collection of data relating to ESG factors is still developing and companies are improving the quality and scope of this data. Our investment teams consider a wide range of ESG information alongside financial measures when deciding what investment changes to make within the portfolio.

 

Income

Growth in portfolio income led to revenue earnings increasing by 8% over the year. Companies generally increased dividends on the back of better results while we also benefitted from the weakness of sterling when translating back US dollar dividends. The helpful tailwind from weak sterling should continue in the current year. There were fewer special dividends, as most companies that suspended dividends during the Covid pandemic returned to normal regular payments. It is difficult to predict what effect higher levels of inflation will have on dividends. The expected recession should be shallower than past recessions while many high-quality companies should benefit from reduced competition or their ability to pass on higher pricing.

 

Asset allocation and gearing

The issuance of the long-term loan notes in 2021 is now looking very timely as interest rates today for comparable securities are now approximately twice as high. The Company's £15 million 8% debenture stock is due to be repaid at the end of this financial year which will reduce the Company's overall average borrowing cost to 2.7%. The next loan stock is not due for repayment until 2035. There is sufficient cash on deposit to repay the 8% debenture and we do not currently see the need to raise further loan stock. The net gearing at the end of the year was 5.4%. However, this figure fluctuated through the year as investments were sold in the UK and Europe. The UK stock market showed marked resilience during the year and we used the relative strength to direct more investment into other regions.

 

Outlook

The outlook appears bleak if we only read the news headlines. A well flagged recession in Europe, the UK and possibly the US is predicted. This may be combined with increasing inflation and interest rates rising further. Central banks are undoubtedly talking tough to try to influence consumers into curtailing spending and thus reduce both inflation and the likely peak in interest rates. Underlying data is clearly pointing to inflation peaking soon and it is conceivable that interest rates, certainly in Europe, will get cut before the year end. Inflation is by no means a negative for stock prices, with good companies taking opportunities to prosper. 

 

The US stock market has led the way relative to the rest of the world in nine of the last ten years. This relentless performance has resulted in over 70% of the FTSE World index being represented by the US market. For many decades, the Company's philosophy of diversification, investing across the globe and focusing on both capital and income, has benefitted our investors. The growth investment style, so successful in the last decade, has now started to unwind. We are striving for an increased exposure to value stocks within the portfolio, which should help the income generated by the portfolio and reduce exposure to expensive growth stocks that may continue to come under pressure as interest rates stay elevated. There will certainly be more challenges for investors in the coming year but it will also not take much good news to lift the current downbeat mood.

 

 

Alex Crooke

Fund Manager

18 January 2023