PERFORMANCE HIGHLIGHTS
|
Total return performance to 31 December 2020 |
One year % |
Five years % |
|
Benchmark 1 |
-6.3 |
30.2 |
|
NAV 2 |
-11.4 |
18.3 |
|
Share price3 |
-17.6 |
8.0 |
|
|
2020 |
2019 |
|
NAV per share4 |
157.25p |
189.76p |
|
Mid-market price per share |
147.00p |
191.75p |
|
Revenue return per share |
8.58p |
10.59p |
|
Net assets |
£211.4m |
£251.1m |
|
Dividend for the year |
9.90p |
9.80p |
|
Dividend yield5 |
6.7% |
5.1% |
|
Ongoing charge for the year |
0.93% |
0.80% |
|
Gearing
|
22.9% |
21.5% |
1 The benchmark is a composite of 80% of the FTSE All-Share Index (total return) and 20% of the ICE BofAML Sterling Non-Gilts Index (total return) rebalanced annually
2 Net asset value with debt at fair value per ordinary share total return (including dividends reinvested and excluding transaction costs)
3 Includes dividends reinvested
4 Net asset value with debt at fair value as published by the AIC
5 Based on the dividends paid or announced for the year and the share price at the year-end
Sources: Morningstar for the AIC, Janus Henderson and Refinitiv DataStream. All data is either as at 31 December 2020 or for the year-ended 31 December 2020 .
CHAIRMAN'S STATEMENT
2020 is a year that none of us will forget. The rapid spread of COVID-19 across the globe has radically changed the way that we live and work in ways that we could never have imagined at the start of the year. These have been very challenging and isolating times and, above all, I hope that you have remained well and coped with the pressures of the various lockdowns and restrictions.
Performance
Whilst 2019 saw a very strong performance from the FTSE All-Share Index, delivering a total return of 19.2%, 2020 could not have been more different, finishing this eventful year down by 9.8%. Once the news emerged that COVID-19 was not limited to China but had started to spread globally, world markets experienced extreme volatility. Daily swings in major indices of 5% or more were quite common. From peak to trough during 2020, the FTSE All-Share Index fell 35%. Many other major markets suffered similar dramatic declines, but thereafter, they rallied considerably, boosted by the massive coordinated stimulus from both central banks and governments. The early successes in vaccine developments and their subsequent approvals and roll-outs towards the end of the year gave investors confidence in the prospect of a return to more normal times. In addition, the uncertainties created by the elections in the US and by the prospect of a “no-deal” Brexit in the UK subsided by the end of the year and helped support equities. However, there was a large disparity in the total returns of different markets over this 12 month period; the UK equity market was the only major equity market to record an overall fall for the year, while the US market, for example, ended the year up 16%. The FTSE All-Share Index has a heavy weighting to oil and resources stocks and high exposure to many of the more traditional business sectors, including retail, hospitality, travel and leisure, which were greatly impacted by the pandemic. Unlike the S&P 500, the FTSE All-Share Index also has very few technology stocks which have generally thrived as consumers and businesses adapted to social distancing by making more on-line purchases and working from home.
Against this difficult UK market backdrop, the Company's portfolio underperformed its benchmark in 2020, with its NAV total return falling 11.4% versus the benchmark's decline of 6.3%. Both the equity and bond portfolios performed broadly in line with the respective components of the Company's benchmark, but the Company's equity gearing and its underweight position in bonds in relation to the benchmark both detracted from relative performance. In this falling equity market, the Company's gearing naturally exacerbated losses, while bonds performed better than anticipated, as a result of central banks' increased stimulus in response to COVID-19, with ten year gilt yield falling from 0.8% to 0.2%. The Company's bond portfolio represented 12.5% of the overall portfolio at the close of the year, while the Company's benchmark has a 20% allocation to its chosen bond index. The Company's shares on a total return basis fell by 17.6%, as the share price moved from a small premium to NAV (with debt at fair value) at the beginning of the year to a discount of 6.5% at the end of 2020. This discount reflected in large part the UK market's lack of attraction to investors last year.
While the Company's absolute and relative capital performance has been disappointing, our Fund Manager, David Smith, has successfully protected the Company's income from some of the worst dividend cuts experienced by the market as a whole: the Company's earnings per share fell 19% (including special dividends) from their 2019 level, while total dividends from the FTSE All-Share Index fell 44%. The preservation of income in these challenging conditions has been a priority for the Company, appreciating, as we do, the importance of a regular and reliable stream of income for our shareholders. David has remained committed to this goal and has managed to mitigate some of the worst effects of COVID-19. In particular, he has done this through careful stock selection and the investment of a portion of the portfolio in bonds (albeit a reduced amount in 2020) and increased the exposure to overseas equities. The inclusion of bonds in the portfolio, which help to stabilise the revenue account, remains a differentiating feature of your Company from other UK equity income investment trusts.
Dividends
At the interim stage, the Board reiterated its intention to use its revenue reserves where necessary to maintain its quarterly dividend of 2.475p per share for the remainder of the year. I am pleased now to report that four interim dividends of 2.475p per share have been paid to shareholders, totalling 9.90p per share for the full financial year-ended 31 December 2020. This represents a small increase of 1.0% over the previous year, modestly above the rise in the consumer price index (CPI) of 0.9% for the same period. The dividend yield on the Company's share price as at year-end was 6.7%, considerably higher than the FTSE All-Share Index yield of 3.4%.
The Company is in the fortunate position of being structured as an investment trust and, as such, has the ability to add surplus income to its revenue reserves in the good years and to draw on these reserves to smooth its dividend payments in the more difficult years. 2020 was an extreme example of a difficult year. Unsurprisingly, COVID-19 has impacted the level of dividends received from the Company's portfolio companies in 2020, but as explained earlier, not by as much as the overall market. The Company has needed to draw only £1.7 million from its revenue reserves to contribute to its full year dividend of 9.90p per share.
The Company had been building up its revenue reserves in each of the last nine years. At the end of 2019 revenue reserves exceeded £10 million, representing nearly 10 months' worth of dividend cover. Having utilised a small portion of these reserves to contribute to the dividend shortfall in 2020, we retained a very healthy balance of almost £9 million, well over 8 months' worth of dividend cover at the end of the year.
During the course of the year we have been monitoring the level and sustainability of dividends received from our portfolio companies. David has run frequent stress tests of the Company's revenue account under different scenarios looking several years ahead. Although the outlook for dividends is gradually improving, it is clear that it will take time for income to return to the levels enjoyed in 2019 and we anticipate a continued shortfall this year. Nonetheless, David's medium-term forecasts and the relative robustness of the Company's current reserves gives the Board reassurance that, barring unforeseen circumstances, the Company's dividend can be maintained at the current level, utilising revenue reserves where necessary. It remains, therefore, our intention to continue to pay at least the current level of dividend for the foreseeable future.
As we emerge from COVID-19, the Board's ambition remains to increase the Company's dividend gradually, but it will be subject to investment conditions at the time and whether we determine such an increase to be sustainable in the future.
Gearing
Gearing was reduced in the first quarter of 2020, principally by selling US investment grade bonds. At the end of 2020 we had drawn down approximately £30 million of our multicurrency revolving facility. This represented a net reduction in borrowings of about £8 million. Investment of this floating rate facility, combined with the long-term fixed rate senior unsecured note of £20 million, helps to generate additional income and potentially increases the Company's total return to shareholders. Nearly 65% of the Company's borrowings have been used to fund additional investment in bonds within the portfolio and the average yield achieved generated a profitable margin over the Company's average cost of borrowing. The level of gearing allocated to equities (9.0% as at the end of 2020) was therefore considerably lower than the reported headline gearing figure of 22.9%.
In December we negotiated an amendment to, and extension of our existing floating rate revolving facility of £45 million with Scotiabank, due to expire in June 2021. The renewed two-year multicurrency facility is available until December 2022 and, like the previous arrangement, includes the option to increase it to £57 million.
Responsible Investing
Responsible investing relates to how environmental, social and corporate governance (ESG) factors impact a company's long-term sustainability. Analysis of the sustainability of a business and its profits has always been at the core of the Company's investment strategy, and ESG factors are fully integrated into the investment processes employed by the Fund Manager.
The Board believes that voting the Company's shareholdings at general meetings is essential to corporate stewardship and is an effective means of expressing its views on the policies and practices of its investee companies. Voting decisions reflect the provisions of Janus Henderson's ESG Corporate Statement and ESG Investment Principles which are publicly available at www.janushenderson.com and records the high standards of corporate behaviour that are expected. Ultimately, however, our Fund Manager makes the final decision on any controversial votes, after any necessary consultation with the Board. Janus Henderson will actively engage with those companies that fall below such expectations to encourage improvement over time. However, the final sanction is the divestment of those holdings that fail to make an acceptable transition and adapt sufficiently. The Board monitors the process by reviewing on an annual basis a report on the Company's voting pattern.
Succession Planning
Having chaired the Board since 2016 and having served as a director since 2008, I will be retiring at the AGM in May 2021. This will conclude the Board's five-year process of succession and refreshment. Five new directors have now joined the Board since 2016 and their appointments have been phased annually to ensure the Board retains the required mix of skills, experience and corporate knowledge during the recruitment process. The most recent addition to the Board is Penny Lovell who was appointed on 1 January 2021. Penny is CEO of Sanlam Private Wealth and has extensive experience in wealth management and financial advice for private investors, having held several senior positions in sales and marketing in the asset management industry.
I am delighted that my colleagues have chosen Jeremy Rigg to succeed me as Chairman. Jeremy has over 25 years of investment management experience and his three years of valuable service as a director of the Company have proven to the Board that he will make an excellent and committed Chairman.
I would like to take this opportunity to thank shareholders, my fellow directors and the team at Janus Henderson for the support that they have given to me over many years. It has been an honour and privilege to serve the Company as both a director and Chairman and a very enjoyable and stimulating experience.
AGM
In light of the ongoing COVID-19 pandemic and with a view to making the AGM as safe and accessible for shareholders as possible, we are inviting you to register to attend our virtual AGM this year, which will be held on Monday 24 May 2021 at 12.30pm, as a webinar using the conferencing software Zoom. This will allow you to be present for the usual presentation from our Fund Manager, David Smith, and will enable you to ask questions of the Fund Manager and Board, as you would at a physical AGM.
To attend the AGM, please register in advance using the link below. You will then receive a dedicated invitation to join the webinar.
https://jhi.zoom.us/webinar/register/WN_l8zVel1VQgyTDPd6PLdB8w
Due to technological restrictions, voting will be conducted on a poll, rather than on a show of hands, with the Chairman of the AGM holding the proxy votes. We therefore request all shareholders to submit their votes by proxy, ahead of the deadline of Thursday 20 May 2021, to ensure that their vote counts at the AGM, where there will be no live voting. If you hold your shares in a nominee account, such as through a share dealing service or platform, you will need to contact your provider and ask them to submit the proxy votes on your behalf.
Non-Routine Business of the AGM
In addition to the regular business conducted at this year's AGM, a resolution will be put to shareholders to approve an increase in the limit upon overseas holdings in the portfolio from 20% to 30% of gross assets. Doing so would provide the Fund Manager with additional flexibility to invest from time-to-time in overseas opportunities that may not be available in the UK market. The Company's ability to invest a small portion of its portfolio in bonds and equities in developed markets abroad proved beneficial in 2020. It further diversified the portfolio and preserved income by accessing reliable dividend payers beyond the concentrated UK market. David Smith will continue to conduct his own due diligence on potential overseas investments, ably supported by the wider team of specialist investment managers within Janus Henderson. Regardless of this proposed increase in overseas exposure, the portfolio will remain predominantly invested in the UK equity market.
A resolution will also be put to shareholders to amend the company's Articles of Association to allow for hybrid and/or virtual-only General Meetings and Annual General Meetings. This is simply to enable the Company in the future to adapt to extreme circumstances where physical meetings are prohibited, as was the case in 2020. I would like to stress, however, that it will always be the Company's intention to hold face to face meetings with shareholders whenever possible as we value highly the opportunity this provides for engagement with our shareholders.
Prospects and Outlook
The experience of 2020 has taught all of us the difficulties of making predictions in such an uncertain world. Unfortunately, COVID-19 is likely to remain the dominant theme for 2021 with concerns about the duration and severity of its legacy on the global economy. The rapid roll-out of vaccines, particularly in the UK, has prompted cautious optimism, acknowledging that there may still be setbacks on the path to the “new normal” as variants of the virus start to emerge. Nonetheless, some of the other uncertainties raised in my interim statement have now been resolved, namely the US elections in November with the subsequent appointment of Joe Biden as US President, and the agreement of a last minute trade deal between the UK and the European Union at the end of 2020. Monetary and fiscal policy is still expected to remain very supportive during the coming year, given the likely long-term economic hangover caused by the pandemic. The worst of the dividend cuts may now be over as those businesses most affected by lockdowns have learned to adapt although we should not anticipate a rapid bounce back to their pre-pandemic dividend levels in 2021.
During 2020 the Company's income has proven relatively resilient in comparison to the UK market, thanks to our Fund Manager's careful construction of a well-diversified portfolio. We are confident that David Smith will make every effort in the year ahead to continue to protect our shareholders' crucial wish for income while balancing this with the opportunity for capital appreciation in the future.
Margaret Littlejohns
Chairman
31 March 2021