Chairman's Statement
Highlights for the period
· Net Asset Value total return -3.6% vs Benchmark +4.3%
· Share Price total return -6.0%
· Annualised volatility 5.3% compared with 11.0% for the FTSE All-Share Index
· Quarterly Dividend increased by 3.8% to 1.64p
· Discount Control Mechanism – issuance £2.8m; buy-ins £3.0m
· Shares traded very closely around Net Asset Value for the whole period
· AGM approved all Resolutions by over 99% majority
Performance
Seneca Global Income & Growth Trust plc ('SIGT' or 'the Company'), generated a net asset value ('NAV') per share total return of -3.6% for the six months to 31 October 2018. This was inferior to the CPI + 6% annualised Benchmark, which over the six months provided a return of +4.3%, but occasional underperformance over short periods is an inevitable consequence of the volatility of underlying financial markets as well as SIGT's high conviction investment approach. The Board much prefers judging SIGT's performance over longer periods and, for example, over the three years to 31 October 2018, SIGT's NAV per share total return is +24.4% and the Benchmark return is +18.2%. Though even three years is quite a short period. It should be remembered that, strictly speaking, the Benchmark is measured over a 'typical investment cycle', though of course it is important to monitor current form and to keep Shareholders abreast of such. As for the six months under review, SIGT's high conviction positions that detracted included the material exposure to UK mid-caps, which underperformed their larger counterparts, and the zero weight in US equities, which performed well, largely on the back of a small number of technology companies. SIGT's returns are also intended to be achieved with relatively low volatility and the Board is very satisfied with the Company's risk adjusted performance over reasonable time frames.
The Manager's Review provides more detailed analysis on performance for the period.
Dividends
The Company paid two interim dividends of 1.64p per share for the period, an increase of 3.8% on the equivalent dividends last year thus achieving SIGT's objective of growing dividends at least in line with inflation. It is the Board's intention, barring unforeseen circumstances, that it will at least maintain the quarterly rate of 1.64p per share for the full year to 30 April 2019.
Discount Control Mechanism ('DCM')
The Company's DCM became fully effective from 1 August 2016, and in the six months under review, it bought-in 1,846,000 shares and issued 1,615,000 shares, for a net bought-in of 231,000 shares. The Board is pleased to have been able to demonstrate its commitment to the DCM by both buying-in and issuing shares. The liquidity and very low discount volatility that the DCM provides is, the Board believes, of real value to Shareholders. Since becoming fully effective, the operation of the DCM has resulted in a net issuance of 7,494,000 shares and as shares issued are done so at a small premium, and bought-in at a small discount, the NAV of the Company has been enhanced by £94,710 after all applicable costs.
Gearing
SIGT has available to it a debt facility of £14m of which £7m was drawn down during the period. The actual average net gearing level for the period was 2.4% as some of the drawn facility was held in cash, or similar, reflecting the Manager's caution and also to allow virtually instant access to funds should the need arise. The undrawn element of the facility is in place largely to assist with the operation of the DCM, enabling gearing levels to be maintained as the DCM results in the issuance of new shares, and/or providing short term working capital, if necessary, when shares are bought-in.
Investment Manager
The Manager's investment team comprises five fund managers, all of whom contribute to the management of the Company, led by Peter Elston. In April, the Manager recruited Gary Moglione and, recently, he has taken joint responsibility for portfolio oversight with Peter. Gary has nearly twenty years' investment experience, much of it involving multi-asset mandates and is an excellent, experienced addition to the team.
Annual General Meeting ('AGM')
At the AGM held on 13 July, Shareholders approved all the Resolutions, each by a majority of over 99%, including those that help with the effective management of the DCM specifically allowing the Company to issue shares equivalent to 30% of its equity and to buy-in up to 14.99%. Shareholders also approved the removal of the requirement to propose the Company's continuation on an annual basis.
The Packaged Retail and Insurance-based Investment Products Regulation ('PRIIPs')
All investment trusts were impacted by the PRIIPs regulation that came into force on 1 January 2018. It introduced a new disclosure document known as a Key Information Document ('KID') that must be prepared and made available to retail investors before they invest. The purpose of the KID is to enable retail investors to compare different products across a common standard. The regulation sets down rules on the format and content of the KID and its provision to retail investors. There has been widely reported concern about these KIDs, not least that expressed by the Association of Investment Companies (the 'AIC') in their publication of September entitled 'Burn before reading'. As Chairman, I have written to the Financial Conduct Authority (the 'FCA') strongly supporting the AIC's views and emphasizing a number of points. The Board hopes the relevant regulators will heed the industry's concerns but meantime, will continue to ensure SIGT's KID complies with the PRIIPs regulation. Indeed, a recent update of the KID has been made available as required.
Post Period End Event
On 27 November 2018, AJ Bell plc announced a price range for its planned initial public offering, of between £1.54 and £1.66 per share. The equivalent carrying value for the Company's holding in AJ Bell as at 31 October 2018 was £0.865 per share. There can be no certainty that the initial public offering of AJ Bell will proceed and further announcements will be made as appropriate.
Investment Outlook
About a year ago, the Manager began a gradual process of reducing the Company's equity exposure. This caution has proved prescient and helped protect SIGT from the worst of equity markets', particularly recent, weakness. One of the strengths of the Company's Multi-Asset Value Investment policy is that it provides transparent and straight-forward exposure to a range of assets, which together provide lower volatility (i.e. lower risk) returns than equity only portfolios.
Richard Ramsay
Chairman
3 December 2018
Manager's Review
Overview
It was a difficult six months, both for financial markets and for the Company. October lived up to its reputation and saw equity markets fall significantly. Furthermore, the months leading up to October had seen a big rise in government bond yields. The Company had been reducing equities for some time, and by the beginning of October the equity target stood at 52.5% (this compared with 66% back in August 2016). Furthermore, the Company held no developed market government bonds. In other words, the Company should have been nicely positioned.
However, some of the portfolio positioning at a more granular level hindered performance. The main detractor was the large exposure to UK mid-caps, which substantially underperformed their large-cap equivalents over the six months. The Company has a strategic asset allocation to UK equities of 35%, and our approach at Seneca is to focus on mid-caps. These we believe should, over time, outperform large-caps. Furthermore, mid-caps are under-researched, so there is, we think, more scope to find hidden value. There will always be the occasional period in the short term when mid-caps fare poorly in relation to large-caps. The period under review was one of those, and although from a tactical perspective the Company had much less than 35% strategic weight in UK mid-caps, it still suffered.
Performance
The share price total return over the period was -6.0% with a net asset value total return of -3.6%.
There was a strongly diverse range of returns across major indices. The US market was the clear driver of positive performance and sterling weakening against the dollar enhanced those returns in GBP. Emerging Markets and Asia posted the largest losses which were as a result of escalating trade war tensions. The contrast between US and Emerging Markets returns is discussed in more detail below.
Negative returns were driven primarily by the exposure to equities. From a style perspective this was a very poor period for value and yield. Most equity markets were dominated by growth stocks. The UK equity exposure struggled as the UK market was negative and mid-caps also underperformed large caps. Our exposure to specialist assets was the only positive contributor with infrastructure being the more lucrative sub-sector after some takeover activity boosted valuations.
Outlook
We do not think the sharp falls in markets in October are the start of a pronounced bear market. Yield curves in the US and the UK are still positive, albeit close to being flat, and long-term interest rates in the Eurozone and Japan are still very low. These factors suggest that the global economy still has scope to grow for the next year or two, and thus are not the sort of conditions one sees at the beginning of a bear market.
That said, employment conditions are now getting quite tight across the developed world and are putting upward pressure on wages and inflation. Trade tariffs and a rising oil price are also causing inflation pressures to build. Thus, it is very likely in the months ahead that central banks in the UK and US will continue to raise interest rates while those in Europe and Japan will end their bond buying programs. This will only serve to reduce further the attractiveness of equities and other so-called risky assets.
While the next recession and thus the next bear market are not yet within sight, they are getting closer. In this environment, market volatility is likely to continue, even if the overall trend in markets remains positive.
As for bonds, it is possible that the next recession will not be accompanied by the usual decline in inflationary pressures. Should the trade war intensify, inflation pressures may rise not fall. In other words, the possibility of a stagflationary environment looms large.
The vulnerability of traditional asset classes in the next few years is only too apparent. We believe the Company, with its substantial exposure to non-traditional asset classes and ability to reduce equity exposure much further, will provide a way for shareholders to navigate what could be a difficult future for financial markets. After all, the last 40 years have been easy ones.