REG - Schroder Inc Growth - Half-year Report
14/05/2025 07:00
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RNS Number : 5344I Schroder Income Growth Fund PLC 14 May 2025
Schroder Income Growth Fund plc
Half year report
For the six months ended 28 February 2025
Schroder Income Growth Fund plc (the "Company") hereby submits its half year
report for the six months ended 28 February 2025 as required by the Financial
Conduct Authority's Disclosure Guidance and Transparency Rule 4.2.
Ewen Cameron Watt, Chairman of the Company, commented:
"The aim of your Company is to deliver excellent long-term performance to
shareholders. In this respect, costs, the volatility of any discount to NAV,
and the fact we can use leverage to raise returns and reserves to support
dividend growth are all tools to boost shareholder outcomes."
Key highlights
* The Company has reduced its investment management services fee from 0.45% to
0.40% with effect from 1 September 2025. Furthermore, such fees will be
charged on the lesser of market capitalisation or NAV of the Company. In
addition, the separate fee for secretarial and administration services will be
eliminated. The positive effect of these moves, all other things being equal,
will be an annual cost reduction of over £300,000(1) (at an assumed
prevailing 10% discount to NAV) or 0.4p per share.
* The Company has adopted an increasingly active attitude to managing the
volatility and level of any discount of share price to NAV. The objective is
to reduce the discount's volatility and look to maintain the discount to NAV
within a single-digit range, in normal market conditions. The Board believes
this best reflects the underlying strength of the portfolio and is in the
shareholders' long-term interests.
* Matt Bennison has been promoted to Co-Manager of the Company, bringing his
experience to work alongside Sue Noffke, Head of UK Equities, effective
immediately. Matt began his investment career at Schroders in 2012 and has
worked with Sue since 2015 as part of the Schroders' UK Prime team. For eight
years, since 30 September 2017, he has supported the Company's portfolio and
that same year expanded his role to include fund management responsibilities,
becoming co-manager of the Prime UK Equity strategy. The appointment reflects
our commitment to strengthening the Company's investment management team and
ensuring continuity in our strategy to deliver long-term value for
shareholders.
* The Company's NAV total return in the six months to 28 February 2025 was 2.9%.
This compares to 5.2% for the FTSE All-Share Index.
* The Company has paid first and second interim dividends of 3.25 pence per
share for the year ending 31 August 2025, up from 2.50 pence per share in
2024. The share of the total dividend linked to the first three interim
dividends for FY 2025 is anticipated to be greater than in previous financial
years, with the fourth interim dividend projected to be lower. This reflects
the Board's commitment to providing shareholders with a more consistent
dividend distribution in FY 2025 and beyond.
(1: Based on the market cap and NAV of the Company as at 12 May 2025.)
The Company's half year report is being published in hard copy format and an
electronic copy of that document will shortly be available to download from
the Company's web pages at: www.schroders.com/incomegrowth
(http://www.schroders.com/incomegrowth) .
The Company's half year report will shortly be uploaded to the Financial
Conduct Authority's National Storage Mechanism and will be available for
inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism)
Enquiries:
Schroder Investment Management Limited
Kirsty Preston / Charlotte Banks (Press) 020 7658 6000
Natalia de Sousa (Company 020 7658 6000
Secretary)
Chairman's Statement
I am pleased to present the half year results of your Company for the six
months ended 28 February 2025.
Performance
After a strong financial year to 31 August 2024, it is disappointing that your
Company underperformed the FTSE All-Share Index (the "Index") in the six month
period to 28 February 2025, with a NAV total return of 2.9% compared with 5.2%
for the Index. The share price total return of 1.8% was also lower than the
NAV total return, with the discount to NAV increasing slightly from 10.4% to
11.6%, in line with a generally widening trend for investment trust discounts.
Underperformance reflects certain stock and sector positions, discussed in
detail in your Investment Managers' review on the following pages. It also
reflects an overweight position versus the Index in smaller and medium-sized
companies during a period in which large-cap stocks outperformed. Longer-term,
the track record remains above the Index since the current team took over in
2011 and mid-cap remains a fertile opportunity source.
Between 28 February 2025 to 12 May 2025, the NAV and share price have
delivered total returns of -0.6% and 3.9% respectively, versus the return for
the Index of -1.8%.
Revenue, dividends and a smoother distribution
Your Company has paid a first and second interim dividend for the year ending
31 August 2025 ("FY 2025") of 3.25 pence per share (2024: 2.50 pence per
share). The increase in the first and second interim dividends from 2.50 pence
per share in 2024 to 3.25 pence per share in FY 2025 demonstrates your Board's
intention to provide shareholders with a more consistent dividend distribution
in the 2025 financial year and beyond. As a result, the share of the total
dividend linked to the first three interim dividends for FY 2025 is
anticipated to be greater than in previous financial years, with the fourth
interim dividend projected to be lower.
The income from investments received by your Company during the first half of
the financial year fell by 3.9% compared to the same period last year. This is
because of stock picking decisions made by your Investment Managers, which
have led to the receipt of income being more heavily weighted to the second
half of the financial year. There has also been a clear trend of companies now
considering a wider range of strategies for returning surplus funds to
shareholders, with an increased emphasis on share buybacks over dividends.
This reflects the low absolute valuation of UK companies.
Your Company has revenue reserves of 7.8 pence per share (based on shares
outstanding at the period end) after paying the first and second interim
dividend; equivalent to 57% of the dividends paid last year. These reserves
are available to support the level of dividend you receive, and this
capability continues to be a significant benefit of our investment trust
compared to other saving vehicles.
Your Board was pleased to deliver an increased dividend for the 29th
consecutive year for the year ended 31 August 2024 and continues to aim to
retain AIC "Dividend Hero" status. Your Board remains dedicated to delivering
portfolio income supplemented, when necessary, by using revenue reserves to
provide growing income for our shareholders.
Gearing
Your Company has in place a £30 million revolving credit facility with The
Bank of Nova Scotia, London Branch, expiring in September 2025. The average
gearing during the period was 12.3%. This made a contribution, net of
financing costs, to your Company's income. As of 12 May 2025, gearing was
11.1%.
Discount management
I am acutely aware of the importance shareholders place on the discount of
share price to NAV. Your Board has an active approach to this challenge and
regularly reviews the level and volatility of discount and the effectiveness
of your Company's discount control mechanisms. Your Board is prepared to act
where appropriate, including share buybacks, to help manage the discount in
the interests of shareholders.
Your Board believes that sustained investment performance, clear communication
of the Company's strategy, and effective shareholder engagement are key to
supporting a healthy rating over the long-term.
Your Company's discount to NAV at the period end amounted to 11.6%.
During the six months to 28 February 2025, your Company bought back 211,100
ordinary shares, equating to 0.3% of your Company's issued share capital
(excluding treasury shares), for a sum of £611,204, to be held in treasury.
The average price paid per share was £2.87.
Post period end, and as at 12 May 2025, your Company bought back a further
373,486 ordinary shares into treasury for a sum of £1,099,866. As at 12 May
2025, the discount to NAV was 7.4% compared to 11.6% at the end of the period.
Shareholder engagement
Your Board is aware of the increasing focus across the investment trust sector
on issues such as discount management, capital allocation, and governance,
often driven by more active shareholder engagement. Your Board remains
committed to maintaining high standards of governance and to acting in the
best interests of all shareholders. We regularly review the Company's
structure, performance, and shareholder alignment to ensure it continues to
meet the evolving expectations of the market. In this context, shareholders
are reminded that they will have the opportunity to vote on the continuation
of the Company at the Annual General Meeting this year and every five years
thereafter.
Enhancing shareholder returns
The aim of your Company is to deliver excellent long-term performance to
shareholders. In this respect, costs, the volatility of any discount to NAV,
and the fact we can use leverage to raise returns and reserves to support
dividend growth are all tools to boost shareholder outcomes.
Therefore, I am pleased to announce a series of measures which we hope will
enhance returns per share.
One of the largest elements of costs is the fee paid for investment management
services provided by Schroders. I am pleased to announce that this will be
reduced from 0.45% to 0.40% with effect from 1 September 2025. Furthermore,
such fees will be charged on the lesser of market capitalisation or NAV of
your Company. In addition, the separate fee for secretarial and administration
services will be eliminated. The positive effect of these moves, all other
things being equal, will be an annual cost reduction of over £300,000(1) (at
an assumed prevailing 10% discount to NAV) or 0.4p per share.
Furthermore, your Board are adopting an increasingly active attitude to
managing the volatility and level of any discount of share price to NAV. Our
objective is to reduce the discount's volatility and look to maintain the
discount to NAV within a single-digit range, in normal market conditions, that
we believe reflects the underlying strength of the portfolio and is in the
shareholders' long-term interests.
I am also pleased to announce the promotion of Matt Bennison to Co-Manager of
your Company, bringing his experience to work alongside Sue Noffke, Head of
UK Equities, effective immediately. Matt began his investment career at
Schroders in 2012 and has worked with Sue since 2015 as part of the Schroders'
UK Prime team. For eight years, since 30 September 2017, he has supported your
Company's portfolio and that same year expanded his role to include fund
management responsibilities, becoming co-manager of the Prime UK Equity
strategy. The appointment reflects our commitment to strengthening your
Company's investment management team and ensuring continuity in our strategy
to deliver long-term value for shareholders.
I am very happy with the support we have received from Schroders in agreeing
to our proposals. Such support allied to an investment team which has produced
added value over index returns and dividend growth above the market average
across many years should encourage shareholders to believe your interests are
paramount in the running of your Company.
Outlook
The underperformance against the FTSE All-Share Index during the period under
review was concentrated on stock selection in several sectors, most notably
consumer discretionary, industrials and consumer staples. This more than
offset positive positioning and stock selection in the financial sector, which
was the largest contributor to relative performance. Mid- and small-cap
exposure, which had contributed to your Company's outperformance in the last
financial year, proved a drag against a backdrop of higher macroeconomic and
geopolitical risk. However, the freedom to invest across the market
capitalisation spectrum has been a key driver of your Investment Managers'
longer-term total return outperformance of the Index and could also prove
positive in the future if the new UK government can succeed in its mission to
return the country to a stable path of economic growth.
Returning to the reporting period, the six months under review and in
particular the period since the half year completed in February, have been
nothing if not eventful on both the domestic and the geopolitical stage. The
half year began on an optimistic note, with UK interest rates falling from
post-Covid highs and businesses hopeful of a boost from the incoming
government's growth agenda. However, reality failed to match up to
expectation, and the employers' National Insurance increases announced in the
October Budget, along with a rise in the National Minimum Wage, led to further
weakness in the share prices of the UK market's domestic stocks. Additionally,
this weighed on GDP growth forecasts and put upward pressure on inflation,
leading to a likelihood of fewer and slower further cuts in interest rates.
President Trump's election in November for a second term initially boosted
enthusiasm for larger UK-listed companies exposed to the US economy, although
actions taken since his inauguration in January have unsettled global markets.
At the time of writing, the imposition of tariffs on nations that trade with
the US has caused a widespread loss of business and consumer confidence and
material stock market volatility. Your Manager and Board continue to believe
that sustainable business models backed by strong balance sheets represent the
best long-term value for shareholders.
Ewen Cameron Watt
Chairman
13 May 2025
1: Based on the market cap and NAV of your Company as at 12 May 2025.
Investment Manager's Review
"The UK equity market has been long unloved. At current prices it trades at
valuations which are at a 20% discount to both its own long run history and
other international equity markets. It would not take much, for even a small
move out of US equities were it to be redirected towards the UK equity market,
to move the dial on valuations."
Introduction
The six months under review have been eventful including numerous elections
notably in the US, a far-reaching budget in the UK, and heightened tensions
surrounding Ukraine and the Middle East. Against an uncertain backdrop, your
Investment Managers have continued to apply their rigorous and disciplined
investment approach, aiming to take advantage of mispriced opportunities while
delivering a sustainable stream of income alongside the potential for capital
appreciation.
Your Company's NAV total return in the six months to 28 February 2025 was
2.9%. This compares to 5.2% for the FTSE All-Share Index. The share price
total return was 1.8%, as the discount to NAV increased slightly from 10.4% to
11.6%, in line with a generally widening trend for investment trust discounts.
Revenue after tax decreased by 7.1% versus the same period last year.
Investment income fell by 3.9% with higher average finance and other costs
weighing on revenues. There were no special dividends received in the period -
the first time in 10 years - as companies which previously may have chosen to
return surplus capital to shareholders in the form of dividends did so instead
via share buybacks. Excluding the impact of special dividends, ordinary
dividend income generated in the period was flat. The environment for dividend
growth remains relatively muted, reflecting a capital allocation preference
for share buybacks amid low equity valuations, and in some cases pursuit of
organic investment opportunities. It is important to note that your Company
receives approximately one third of its income in the first half and around
two thirds in your Company's second half. This is due to the heavy weight of
final dividends concentrated in the March to August period; 11 holdings,
representing 24.4% of assets, pay all their income in the Company's second
half.
Compared to previous periods, a larger proportion of holdings either
maintained their dividends (9.1%) or modestly increased them (31.3%), broadly
keeping pace with inflation. This included companies within a broad set of
sectors from property and financials to consumer and industrials. There was a
small headwind from currency movements on dividends which are declared in US
dollars and then converted to sterling. A handful of portfolio holdings
increased their dividends strongly, by more than 10% - investment company 3i,
pensions consulting business XPS Pensions, food manufacturing company
Cranswick, and business services company Bunzl. A further five holdings
increased their dividends between 5% and 10% including pharmaceutical company
AstraZeneca together with mid-cap holdings in construction company Balfour
Beatty, and defence services business QinetiQ. Luxury goods company, Burberry,
did not pay a dividend in the period, to preserve strength of its balance
sheet as it invests in its operational turnaround. Power utility company,
National Grid, rebased its dividend lower as it pivots its capital allocation
to incorporate a higher investment phase in growth projects - it also raised
£6 billion through a rights issue, which we supported, to pursue these
opportunities. Housebuilder Taylor Wimpey pays an attractive yield of around
9%. However, the dividend for the period was slightly lower than the amount
declared for the same period in the previous year. This is due to the company
calculating dividends as a return of 7.5% of its net assets per annum, which
experienced a slight decrease. Hollywood Bowl paid a reduced final dividend in
the period, although we note that its ordinary dividend for its full year
increased modestly. The company opted to forgo paying a special dividend, as
it has done in many prior years, in favour of a share buyback.
As your Investment Managers have previously noted, there is a continuing
shift in the capital allocation policies of some UK companies, with a greater
focus on total shareholder returns through the use of share repurchases as
well as the payment of dividends. According to Computershare's Q1 2025 report,
the pace of share buybacks accelerated in the second half of 2024. The annual
total for 2024 of £63.2 billion was up almost 6% on levels seen in 2023.
Total shareholder returns in 2024 - dividends plus share buybacks - was
£153.4 billion, giving a shareholder yield of over 6%.
In the six months to 28 February 2025, a total of 24 holdings conducted share
buybacks over the period, representing 60.7% of the portfolio by average
weight. The UK market has been broadly out of favour with international
investors for the best part of a decade, and when shares are trading below
their intrinsic value, it is immediately accretive for companies to deploy
capital in buying back and cancelling some of their shares. All else being
equal, this also has the effect of increasing the dividends per share.
Market background
The first half of your Company's 2025 financial year began with a new Labour
government, which promised to prioritise economic growth. There was a solid
global economic backdrop, dominated by US exceptionalism, which featured
vibrant economic growth and investment. However, in the lead up to October's
main fiscal event, the new UK government highlighted the problems facing the
nation and delivered one of the most far-reaching Budgets in many years, which
included increases in national insurance for employers as well as National
Minimum Wage increases. Consumer and business confidence took a hit and has
led to sustained weakness in share prices of the UK market's domestic stocks,
particularly in small and mid-sized companies.
In the US, Donald Trump's victory in the November election for a second term
initially boosted market sentiment for larger UK-listed companies that were
exposed to the US economy. The strength of the dollar provided a further
tailwind to the performance of those companies with significant international
earnings. However, since President Trump's inauguration in January, the new
President has contributed to an increasingly uncertain geopolitical and
business environment with a slew of executive orders which targeted government
efficiency and tariffs on all countries exporting to the US and particularly
China. In this more uncertain environment, small and mid-sized companies have
struggled to perform, both in the UK and elsewhere in the world.
Your Investment Managers, who have the freedom to invest across the UK market
wherever they see the best opportunities for income and capital growth, have
maintained a significant overweight position in smaller and mid-sized
companies, which has weighed on performance in the period under review.
Valuations remain appealing, and it is your Investment Managers' view that
there are many attractively valued small and mid-sized companies.
Portfolio performance
After outperforming the FTSE All-Share Index return by 2% in NAV total returns
in the year ended 31 August 2024, your Company faced a more challenging
environment in the six months to 28 February 2025. This period saw
underperformance, particularly affecting domestic businesses and those outside
the large-cap FTSE 100 Index. Mid and small-sized companies experienced
declines in share prices, with the FTSE 250 ex Investment Trusts and the FTSE
SmallCap ex Investment Trusts indices falling by 4.2% and 7.3%, respectively.
In contrast, the largest businesses in the FTSE 100 achieved a positive total
return of 6.5% over the same period. This performance divergence by size
impacted your Company's portfolio, which has greater exposure to small and
mid-sized companies, +7.3% relative to benchmark and consequently a
significant underweight position of -8.2% in larger companies.
As well as the impact of size, underperformance was a result of adverse stock
selection in several sectors, most notably consumer discretionary, industrials
and consumer staples. This more than offset positive positioning and stock
selection in the financial sector, which was the largest contributor to
relative performance.
Five top/bottom relative performers
Weight Relative
Portfolio relative perform-
weight(1) to index(2) ance(3) Impact
(%) (%) (%) (%)
Standard Chartered 3.6 +2.8 +57.7 +1.3
Burberry 1.5 +1.3 +57.5 +0.5
Pearson 2.7 +2.3 +23.8 +0.5
3i Group 3.6 +2.2 +20.5 +0.4
Lloyds Banking 3.1 +1.6 +19.6 +0.3
Weight Relative
Portfolio relative perform-
weight(1) to index(2) ance(3) Impact
(%) (%) (%) (%)
Rolls Royce 0.0 -2.0 +44.7 -0.8
QinetiQ 2.8 +2.7 -20.7 -0.6
Pets at Home 1.8 +1.7 -27.4 -0.6
Taylor Wimpey 1.5 +1.3 -32.6 -0.5
Barclays 0.0 -1.6 +33.6 -0.5
Source: Schroders, Aladdin, for Schroder Income Growth investment portfolio,
six months to end February 2025.
(1)Average weights over the period.
(2)Total return of the stock relative to the FTSE All-Share TR over the
period.
(3)Contribution to performance relative to the FTSE All-Share TR. The
securities shown above are for illustrative purposes only and are not to be
considered a recommendation to buy or sell.
At a sector level, the main driver of negative relative returns was stock
selection in the consumer discretionary area, where the portfolio is
overweight compared to the Index. Two significant detractors in this sector
were retail and veterinary business Pets at Home and housebuilder Taylor
Wimpey, Pets at Home, has been affected by a long-running Competition &
Markets Authority investigation into veterinary pricing, and recent increases
in National Insurance contributions and the National Minimum Wage have added
pressure on its share price. Taylor Wimpey must balance the countervailing
factors of a more favourable planning backdrop and a higher-for-longer
interest rate environment, which is putting pressure on mortgage
affordability. Management have retained a policy of paying out a sum
equivalent to 7.5% of net assets, and its dividend yield at the time of
writing is nearly 9%.
Within industrials, stock selection in aerospace and defence businesses was
detrimental. Rolls Royce, which your Company's portfolio does not own, has
performed well throughout the past year, as order books strengthened with a
strong post-Covid pandemic recovery in both civil and defence aerospace end
markets. Defence services business QinetiQ, which is held, disappointed,
despite enjoying some of the same tailwinds. The US election result brought
uncertainty for the defence sector, weighing more on its share price.
An overweight exposure together with stock selection in the utilities sector
also detracted from relative returns. Concerns regarding the UK fiscal
position in the wake of the UK government's budget led to a rise in UK bond
yields which weighed on sectors with 'bond proxy' like characteristics such as
utilities. Your Company's holdings in this area are concentrated in
electricity generation, distribution and supply, through holdings in National
Grid and SSE. The main detractor was SSE. Despite this short-term weakness,
both companies have strong medium to long-term growth outlooks given
significant investment requirements in the UK electricity grid.
On the positive side, the biggest impact came from the overweight position in
the financial sector. Banks have delivered strong dividend increases and share
buybacks, boosting total shareholder return. Standard Chartered, whose core
customer base is in Asia, was the top contributor. The more domestically
focused Lloyds Banking Group and NatWest also performed well. Private equity
investor 3i added to returns, driven by strong performance from its main
holding, European discount retailer Action, which is continuing to expand its
store estate as muted consumer confidence sees shoppers embracing more
budget-friendly options.
Your Company did have some positive positions within consumer discretionary
with luxury goods group Burberry and education publisher Pearson. Burberry's
share price has moved higher from its distressed levels in September 2024.
Your Investment Managers engaged throughout 2024 due to the disappointing
performance and had early access to the new CEO, and also met with the chair
and non-executive directors. Management's clarity on their turnaround
strategy, and your Investment Managers' scenario analysis work, resulted in
adding to the portfolio's holding on this share price weakness. Although
Burberry has yet to reinstate its dividend, its capital performance
illustrates the benefit of owning non-yielding stocks. Meanwhile, education
publisher Pearson has been a beneficiary of dollar strength given its
international footprint, and has seen its operational and financial
performance improve under its new chief executive. Pearson's advances in its
use of digital technology, including embedding AI study tools in some of its
products, lead your Investment Managers to be hopeful that the company can
begin to emulate the success of RELX, which also has its roots in paper-based
publishing but has transformed itself into a digital information business
that is now the UK's fifth-largest listed company.
The use of gearing, a key benefit of your Company's investment trust
structure, was also positive for performance in the period under review, even
once costs were considered.
Portfolio activity
During the period, your Investment Managers sold out of five positions and
added four new holdings.
Exited and trimmed positions
As ever, your Investment Managers have closely monitored existing positions.
Disruption to the automotive industry distribution channels from the export
success of Chinese care manufacturers led to a re-evaluation of the investment
thesis for Inchcape, and its disposal from the portfolio. A reassessment of
the path for UK interest rates led to the disposal of British Land. Elsewhere,
power company Drax Group was sold, and several holdings were trimmed following
strong share price performance, including XPS Pensions, telecoms business BT
Group, and QinetiQ. Although QinetiQ was a detractor for the period, it
initially performed well along with the rest of the defence sector during the
geopolitical uncertainty of early 2025; therefore, the position was trimmed
into share price strength.
Drax Group has performed well but is reliant on government subsidy as one of
the largest developers of BECCS ("Bioenergy with carbon capture and storage")
in both the UK and US. BECCS is one of the key carbon capture technologies
that will be needed to help the UK hit its Net Zero ambitions. However, to
make the economics of biomass work, Drax needs to implement BECCS on a large
scale, which requires government funding. With public finances stretched, your
Investment Managers saw it was difficult to sanction large projects with
unproven returns and this elevated the risk for the holding. US BECCS has been
another growth angle. However, this option looked challenged by the Trump
Administration's preference for traditional fossil fuel energy sources. As a
result, following a strong run in the shares, the position was sold.
Global automotive distributor Inchcape (1.7% of the portfolio at the start of
the period) was another complete exit. The traditional automotive sector is
undergoing a period of notable change, as Chinese carmakers take significant
market share globally, and companies like Tesla have direct-to-market
strategies that bypass traditional distributors. This threatens the "status
quo'" of the industry, creating uncertainty for the Inchcape business model,
which relies upon distribution relationships primarily with more established
"traditional" auto manufacturers. Your Investment Managers sold the holding.
The position in British Land (a new holding in the previous year, and 0.9% of
the portfolio at the start of the period under review) was closed out as it
became clear, following the October Budget, that interest rates would not be
reducing at the pace or to the extent your Investment Managers had previously
expected.
Small positions in gaming company Evoke (previously 888) and industrial
polymer specialist Victrex (both 0.4% of the portfolio at the start of the
period) were also exited.
Within pharmaceuticals, your Investment Managers re-positioned the portfolio's
holdings by reducing GSK in favour of AstraZeneca. While GSK settled most of
the litigation claims in relation to its drug Zantac at a lower cost than many
had expected, disappointment within the group's vaccine franchise for
respiratory syncytial virus and shingles led to earnings downgrades,
undermining the valuation appeal. In addition, there are fewer pipeline
catalysts in 2025 compared with AstraZeneca to generate interest in the
investment case.
New holdings and additions
The capital from these divestments has been recycled into opportunities your
Investment Managers believe are more compelling. Additions to existing
holdings where your Investment Managers have conviction for their long-term
prospects include banks, notably HSBC, and other financials such as asset
manager ICG, inter-dealer broker TP-ICAP, as well as consumer healthcare
business Haleon, and luxury retailer Burberry.
Burberry was an example of your Investment Managers' active engagement process
in action. The stock was a major detractor in the prior year, with poorly
timed and executed strategic shifts as well as a profit warning and the
cancellation of its dividend. The team engaged with the company on four
separate occasions in 2024, helping to encourage changes such as the
appointment of a new CEO, Josh Schulman, who has experience of steering
corporate turnarounds in the luxury sector. After a detailed scenario
analysis, modelling both downside risks and upside potential, your Investment
Managers materially added to the position in September (having previously
reduced it on the back of poor performance), a stance that was swiftly
vindicated as the share price rallied by circa 90% between early September and
the end of the period under review.
Housebuilder Taylor Wimpey was another significant addition after share price
weakness following the Budget (with sustained higher interest rates putting
pressure on mortgage affordability). Your Investment Managers believe it
should be a beneficiary of the Government's pledge to increase the number of
houses being built. Meanwhile, with the share price barely above the levels
seen at the start of the Covid pandemic or the Truss/Kwarteng mini-Budget of
2022, the medium-term value opportunity looks compelling.
New to the portfolio is International Airlines Group, which is well-positioned
within a robust airline industry. The impact of the Covid pandemic has led to
reduced capacity, and ongoing supply chain challenges are limiting the
availability of new aircraft. This supply constraint coincides with increasing
demand for air travel, driven by rising consumer spending on holidays and a
recovery in business travel, especially long-haul flights. As a result,
airlines, including IAG, are enjoying strong pricing power. IAG also benefits
from an appealing geographical footprint, a solid portfolio of brands, strong
cash generation, and significant opportunities for improvement through
technology upgrades. These factors should enable the company to deliver
earnings growth earnings and free cash flow in the coming years.
Also, among the buys, global drinks giant Diageo was perhaps not so 'new' as a
modest position was held in the portfolio during the previous year but then
exited on fears that the destocking cycle would be more damaging than
expected. Having reassessed the thesis in recent months, your Investment
Managers bought back in to the company. This followed a rebasing of profits
expectations for the near term, further underperformance of the shares
(meaning they offered compelling value) and the appointment of an experienced
and well-regarded chief financial officer who could drive efficiencies. With
the destocking cycle now more advanced, sales could be close to a trough,
pointing to the possibility of a recovery; meanwhile, Diageo has increased its
dividend payments by more than 15% year-on-year in the past 12 months.
Your Investment Managers also initiated a holding in premium drinks mixer
brand Fevertree Drinks (an AIM-listed mid-cap stock), which has teamed up with
Molson Coors to undertake a capital-light distribution arrangement for the US
that should underpin cash generation coming back to shareholders.
Your Investment Managers commenced buying a position in Telecom Plus, which
operates as a Utility Warehouse, a provider of bundled home services including
energy, broadband, mobile and insurance into one monthly bill. Customers save
money through deals that the company is able to strike with its suppliers.
Outlook
US exceptionalism, riding high at the turn of the calendar year, has been
replaced by policy uncertainty of unprecedented levels. President Trump 2.0
has sought to change the world order on both trade, and security and defence.
There are truths at the heart of both these issues - that the US has borne
more than its fair share of costs but also benefitted from buying goods
cheaply from the rest of world, whilst the rest of the world funded the
US government through purchases of US Treasury bonds and US dollars.
President Trump's so called "reciprocal tariffs" were larger and more wide
ranging than had been anticipated. This resulted in significant volatility in
global equity markets and the US bond market during April, together with
weakness in the US dollar.
The impact of President Trump's approach to defence spending, and attempts to
resolve the ongoing conflict between Russia and Ukraine, has succeeded in
spurring European countries to commit to future increased spend on defence, in
absolute terms and as a proportion of their GDP. The newly elected German
government has released its fiscal debt brake and looks set to spend
significant sums on defence and infrastructure projects which could, all other
things being equal, provide a boost to the German and European economy.
Bond markets tested the US administration's resolve. Sharply rising yields
provoked a U-turn from Trump when on 9 April he announced a 90 day pause on
tariffs for all but China. This, together with moves to carve out specific
sectors with targeted tariffs, such as consumer electronics and autos, may be
sufficient to have cut the tail risks of a major recession, however many
possible outcomes, and risks remain. At the time of writing, there are signs
of a thaw in US - China relations, as well a proposed deal between the US and
Ukraine on minerals.
President Trump's "Liberation Day" was followed by a blizzard of
announcements, U-turns, 90 day reprieves, and escalation of tariffs against
China. The situation is fluid and ongoing, we anticipate there could be
several more twists and turns and that de-escalation is likely. There will
likely be much debate over the path of the US and thus global economy. In the
shorter-term, inflation expectations have increased, consumer and business
sentiment has declined and slower growth is expected. The rest of world could
see a slowdown in the rate of inflation - from falling energy costs, exchange
rate movements, and as goods previously destined for the US get redirected to
other countries. Interest rates outside of the US could fall further and
faster than previously anticipated. Your Investment Managers anticipate that
central banks around the world stand ready to respond with accelerated rate
cuts, as necessary. The markets are currently pricing between three and four
cuts, of one quarter of a percent, in Europe, the UK, and the USA. The US
Federal Reserve will likely tread more carefully until the US economic
situation becomes clearer.
It is too early to know whether the events of the past few weeks of President
Trump's presidency will lead to a reassessment of asset allocation on the part
of investment managers seeking to diversify from their portfolio concentration
in US assets.
Meanwhile flows out of UK equities have continued at pace over the first
quarter of 2025. These outflows have continued to weigh on valuations,
particularly at the small and mid-cap end of the market spectrum. This has
spurred a wide range of companies to use their surplus cash to commence or
extend buying their own shares for cancellation. As stated in previous
reports, your Investment Managers view UK equity market valuations as having
more cushion to absorb disappointment than the more highly valued US equity
market - where downside risk is neither priced into market earnings
expectations nor valuation multiples. By contrast, the UK equity market has
been long unloved. At current prices it trades at valuations which are a 20%
discount to both its own long run history and other international equity
markets. It would not take much, for even a small move out of US equities were
it to be redirected towards the UK market, to move the dial on valuations.
The UK economic backdrop has remained one of sluggish growth and moderating
inflation. Increased employment costs, including the National Minimum Wage and
National Insurance costs from April 2025, are an inflationary pressure.
However, sterling's strength against the US dollar, together with falls in oil
prices and energy costs, and an element of redirected goods no longer destined
for the large US consumer market, if sustained, could provide an offset.
Corporate and consumer balance sheets are in good health with household
savings rates of 12% at 25-year highs, except for the Covid period. According
to Computershare, UK dividend prospects for 2025 are "relatively muted" with
lower special dividends but median growth at the company per share level
expected to continue around 4%. Exchange rate movements, if sustained, would
moderate that growth from the market. Your Investment Managers continue to see
attractive long-term opportunities in under owned and under researched areas
of the UK equity market - particularly in domestic and smaller sized companies
where share price performance has lagged that of larger sized companies and
other equity markets.
While there are many uncertainties to consider, in such circumstances your
Investment Managers draw on past experiences of market dislocations and
economic uncertainty (Covid pandemic, LDI/Truss Crisis, Brexit, Global
Financial Crisis), and tread carefully. Your Investment Managers use their
tried and tested investment process that shape their investment decisions. The
focus is on the fundamentals of the portfolio companies and taking a
longer-term view. Your Investment Managers evaluate upside as well as downside
risks, as well as seek out potential opportunities. It is vital to avoid
reacting to short-term share price pressures and back portfolio holdings where
your Investment Managers believe the investment thesis is intact. Sticking
with portfolio holdings where your Investment Managers believe the
fundamentals offer longer-term shareholder value is how they have achieved
consistency in their long-term track record. Your Investment Managers see the
longer-term outlook for your portfolio holdings as very encouraging but accept
that the near term is especially uncertain.
Your Investment Managers' activity across the portfolio since the end of
February has been to balance the twin objectives of your Company. Firstly, a
focus on generating dividend income from the portfolio over the key period for
holdings paying their large final dividends and secondly, a focus on capital
returns for shareholders over the longer-term.
Mining exposures have been switched (Glencore to Rio Tinto) and then reduced
(Rio Tinto exited) following dividend payments being secured. Industrials
exposures, already underweight, have been moderated further (we exited Bunzl
and Johnson Matthey and reduced QinetiQ). Within the broad industrial sector
group, your Investment Managers have used the market volatility to add higher
quality names where share prices offered attractive entry points for investors
with longer-term horizons; (testing and assurance company, Intertek and
defence contractor, BAE Systems). Within financials, holdings have been
broadened with new positions taken in higher yielding companies - speciality
insurance provider, Lancashire Holdings and Italian bank Intesa Sanpaolo,
after exiting investment group M&G following payment of its dividends.
Your Investment Managers further increased their overweight position in the UK
utilities sector with additions to National Grid and SSE.
Sales of various higher yielding holdings, post their dividend payments, has
increased cash in the portfolio and moderated the level of gearing.
Investments are focused on strongly positioned and financed companies, trading
at attractive valuations, and offering in aggregate, attractive levels of
dividend yield with the prospects of growth in that income stream over the
longer-term.
Schroder Investment Management Limited
13 May 2025
Interim Management Statement
Principal risks and uncertainties
The principal risks and uncertainties with the Company's business fall into
the following risk categories: strategic; investment management; economic and
market; custody; gearing; accounting, legal and regulatory; service provider;
cyber; and ESG and climate change. A detailed explanation of the risks and
uncertainties in each of these categories can be found on pages 24 to 26 of
the Company's published annual report and financial statements for the year
ended 31 August 2024.
The Company's principal risks and uncertainties have not materially changed
during the six months ended 28 February 2025.
Going concern
Having assessed the principal risks and uncertainties, and the other matters
discussed in connection with the viability statement as set out on page 27 of
the published annual report and financial statements for the year ended 31
August 2024, the Directors consider it appropriate to adopt the going concern
basis in preparing the financial statements.
Related party transactions
There have been no transactions with related parties that have materially
affected the financial position or the performance of the Company during the
six months ended 28 February 2025.
Directors' responsibility statement
In respect of the half year report for the six months ended 28 February 2025,
the Directors confirm that, to the best of their knowledge:
- the condensed set of Financial Statements contained within have been
prepared in accordance with the United Kingdom Generally Accepted Accounting
Practice in particular with Financial Reporting Standard 104 "Interim
Financial Reporting" and with the statement of Recommended Practice,
"Financial Statements of Investment Companies and Venture Capital Trusts"
issued in July 2022 and give a true and fair view of the assets, liabilities,
financial position and profit and loss of the Company as at 28 February 2025,
as required by the Disclosure Guidance and Transparency Rule 4.2.4R; and
- the half year report includes a fair review of the information
as required by the Disclosure Guidance and Transparency Rules 4.2.7R and
4.2.8R.
The half year report has not been audited or reviewed by the Company's
Auditor.
Ewen Cameron Watt
Chair
For and on behalf of the Board
13 May 2025
Statement of Comprehensive Income
for the six months ended 28 February 2025 (unaudited)
(Unaudited) (Unaudited) (Audited)
For the six months For the six months For the year
ended 28 February 2025 ended 29 February 2024 ended 31 August 2024
Revenue Capital Total Revenue Capital Total Revenue Capital Total
Note £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Gains on investments held at fair
value through profit or loss - 5,098 5,098 - 2,500 2,500 - 30,756 30,756
Net foreign currency gains - - - - 23 23 - 23 23
Income from investments 2,878 - 2,878 2,995 - 2,995 9,742 275 10,017
Other interest receivable and
similar income - - - - - - 142 - 142
Gross return 2,878 5,098 7,976 2,995 2,523 5,518 9,884 31,054 40,938
Management fee (227) (341) (568) (205) (307) (512) (436) (654) (1,090)
Administrative expenses (329) - (329) (282) - (282) (585) - (585)
Net return before finance costs and taxation 2,322 4,757 7,079 2,508 2,216 4,724 8,863 30,400 39,263
Finance costs (350) (524) (874) (385) (578) (963) (779) (1,168) (1,947)
Net return before taxation 1,972 4,233 6,205 2,123 1,638 3,761 8,084 29,232 37,316
Taxation 3 - - - - - - - - -
Net return after taxation 1,972 4,233 6,205 2,123 1,638 3,761 8,084 29,232 37,316
Return per share (pence) 4 2.84 6.10 8.94 3.06 2.36 5.42 11.64 42.09 53.73
The "Total" columns of this statement is the profit and loss account of the
Company. The "Revenue" and "Capital" columns represent supplementary
information prepared under guidance issued by The Association of Investment
Companies. The Company has no other items of other comprehensive income, and
therefore the net return after taxation is also the total comprehensive income
for the period.
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the period.
Statement of Changes in Equity
for the six months ended 28 February 2025 (unaudited)
Called-up Capital Warrant Share
share Share redemption exercise purchase Capital Revenue
capital premium reserve reserve reserve reserves reserve Total
Note £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
At 31 August 2024 6,946 9,449 2,011 1,596 34,834 166,344 10,381 231,561
Repurchase of ordinary shares into
treasury - - - - (615) - - (615)
Net return after taxation - - - - - 4,233 1,972 6,205
Dividends paid in the period 5 - - - - - - (6,907) (6,907)
At 28 February 2025 6,946 9,449 2,011 1,596 34,219 170,577 5,446 230,244
for the six months ended 29 February 2024 (unaudited)
Called-up Capital Warrant Share
share Share redemption exercise purchase Capital Revenue
capital premium reserve reserve reserve reserves reserve Total
Note £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
At 31 August 2023 6,946 9,449 2,011 1,596 34,936 137,112 11,882 203,932
Net return after taxation - - - - - 1,638 2,123 3,761
Dividends paid in the period 5 - - - - - - (6,113) (6,113)
At 29 February 2024 6,946 9,449 2,011 1,596 34,936 138,750 7,892 201,580
for the year ended 31 August 2024 (audited)
Called-up Capital Warrant Share
share Share redemption exercise purchase Capital Revenue
capital premium reserve reserve reserve reserves reserve Total
Note £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
At 31 August 2023 6,946 9,449 2,011 1,596 34,936 137,112 11,882 203,932
Repurchase of ordinary shares into
treasury - - - - (102) - - (102)
Net return after taxation - - - - - 29,232 8,084 37,316
Dividends paid in the year 5 - - - - - - (9,585) (9,585)
At 31 August 2024 6,946 9,449 2,011 1,596 34,834 166,344 10,381 231,561
Statement of Financial Position
as at 28 February 2025 (unaudited)
(Unaudited) (Unaudited) (Audited)
28 February 29 February 31 August
2025 2024 2024
Note £'000 £'000 £'000
Fixed assets
Investments held at fair value through profit or loss 258,324 229,062 258,409
Current assets
Debtors 633 755 1,909
Cash and cash equivalents 1,773 2,492 1,692
2,406 3,247 3,601
Current liabilities
Creditors: amounts falling due within one year 6 (30,486) (30,729) (30,449)
Net current liabilities (28,080) (27,482) (26,848)
Total assets less current liabilities 230,244 201,580 231,561
Net assets 230,244 201,580 231,561
Capital and reserves
Called-up share capital 7 6,946 6,946 6,946
Share premium 9,449 9,449 9,449
Capital redemption reserve 2,011 2,011 2,011
Warrant exercise reserve 1,596 1,596 1,596
Share purchase reserve 34,219 34,936 34,834
Capital reserves 170,577 138,750 166,344
Revenue reserve 5,446 7,892 10,381
Total equity shareholders' funds 230,244 201,580 231,561
Net asset value per share (pence) 8 332.65 290.20 333.54
Registered in England and Wales as a public company limited by shares.
Company registration number: 03008494
Notes to the Financial Statements
1. Financial Statements
The information contained within the financial statements in this half year
report has not been audited or reviewed by the Company's auditor.
The figures and financial information for the year ended 31 August 2024 are
extracted from the latest published financial statements of the Company and do
not constitute statutory accounts for that year. Those financial statements
have been delivered to the Registrar of Companies and included the report of
the auditor which was unqualified and did not contain a statement under either
section 498(2) or 498(3) of the Companies Act 2006.
2. Accounting policies
Basis of accounting
The financial statements have been prepared in accordance with United Kingdom
Generally Accepted Accounting Practice, in particular with Financial Reporting
Standard 104 "Interim Financial Reporting" and with the Statement of
Recommended Practice "Financial Statements of Investment Trust Companies and
Venture Capital Trusts" issued by the Association of Investment Companies in
July 2022.
All of the Company's operations are of a continuing nature.
The accounting policies applied to these financial statements are consistent
with those applied in the financial statements for the year ended 31 August
2024.
3. Taxation
The Company's effective corporation tax rate is nil, as deductible expenses
exceed taxable income. Taxation on ordinary activities comprises irrecoverable
overseas withholding tax.
4. Return per share
(Unaudited) (Unaudited) (Audited)
For the six For the six For the
months ended months ended year ended
28 February 29 February 31 August
2025 2024 2024
£'000 £'000 £'000
Revenue return 1,972 2,123 8,084
Capital return 4,233 1,638 29,232
Total return 6,205 3,761 37,316
Weighted average number of ordinary shares in issue during the period 69,396,551 69,463,343 69,449,119
Revenue return per share (pence) 2.84 3.06 11.64
Capital return per share (pence) 6.10 2.36 42.09
Total return per share (pence) 8.94 5.42 53.73
5. Dividends paid
(Unaudited) (Unaudited) (Audited)
For the six For the six For the
months ended months ended year ended
28 February 29 February 31 August
2025 2024 2024
£'000 £'000 £'000
2024 fourth interim dividend of 6.7p (2023: 6.3p) 4,651 4,376 4,376
First interim dividend of 3.25p (2024: 2.5p) 2,256 1,737 1,737
Second interim dividend of 2.5p - - 1,737
Third interim dividend of 2.5p - - 1,735
6,907 6,113 9,585
A second interim dividend of 3.25p (2024: 2.5p) per share, amounting to
£2,237,325 (2024: £1,737,000) has been declared payable in respect of the
year ending 31 August 2025.
6. Creditors: amounts falling due within one year
(Unaudited) (Unaudited) (Audited)
At At At
28 February 29 February 31 August
2025 2024 2024
£'000 £'000 £'000
Other creditors and accruals 486 729 449
Bank loan 30,000 30,000 30,000
30,486 30,729 30,449
The bank loan comprises £30.0 million drawn down on the Company's secured
revolving credit facility with The Bank of Nova Scotia, London Branch.
Prior to the start of the new loan agreement with The Bank of Nova Scotia,
London Branch, effective 20 September 2024, the Company had an unsecured
revolving credit facility with SMBC Bank International plc (29 February 2024
and 31 August 2024: £30.0 million).
7. Called-up share capital
(Unaudited) (Unaudited) (Audited)
For the For the For the
Six months six months year
ended ended ended
28 February 29 February 31 August
2025 2024 2024
£'000 £'000 £'000
Opening balance of ordinary shares of 10p each, excluding shares held in 6,942 6,946 6,946
treasury
Repurchase of shares held in treasury (21) - (4)
Subtotal of shares in issue, excluding shares held in treasury 6,921 6,946 6,942
Shares held in treasury 25 - 4
Closing balance of shares in issue of 10p each 6,946 6,946 6,946
Changes to called up share capital during the period/year were as follows:
(Unaudited) (Unaudited) (Audited)
For the For the For the
six months six months year
ended ended ended
28 February 29 February 31 August
2025 2024 2024
£'000 £'000 £'000
Ordinary shares of 10p each, allotted, called-up and fully paid:
Opening balance of shares in issue, excluding shares held in treasury 69,425,343 694,463,343 69,463,343
Repurchase of shares held in treasury (211,100) - (38,000)
Closing balance of shares in issue, excluding shares held in treasury 69,214,243 694,463,343 69,425,343
Shares held in treasury 249,100 - 38,000
Closing balance of shares in issue 69,463,343 694,463,343 69,463,343
8. Net asset value per share
Net asset value per share is calculated by dividing shareholders' funds by the
number of shares in issue at 28 February 2025 of 69,214,243 (29 February
2024: 69,463,343 and 31 August 2024: 69,425,343).
9. Financial instruments measured at fair value
The Company's financial instruments that are held at fair value comprise its
investment portfolio. At 28 February 2025, all investments in the Company's
portfolio were categorised as Level 1 in accordance with the criteria set out
in paragraph 34.22 (amended) of FRS 102. That is, they are all valued using
unadjusted quoted prices in active markets for identical assets (29 February
2024 and 31 August 2024: all valued using unadjusted quoted prices in active
markets for identical assets).
10. Events after the interim period that have not been reflected in
the financial statements for the interim period
The Directors have evaluated the period since the interim date and have not
noted any other events which have not been reflected in the financial
statements.
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