ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 SEPTEMBER 2021
1. CHAIRMAN'S STATEMENT
The objective of the Company is to provide an attractive income yield and the prospect of income and capital growth through investing in a portfolio of predominantly UK equities.
Performance
The Company delivered a Net Asset Value (NAV) total return of +10.2% and share price total return of +9.6% for the year ended 30 September 2021. Over the same period, the FTSE All-Share Index produced a total return of +27.9%. Following the positive vaccine news last November, more economically sensitive areas of the market such as energy, metals & mining, and banks have undergone a sustained period of strong performance. This reflects positive sentiment on economic reopening, along with widespread commodity inflation and expectations of interest rate rises that have dominated markets this year. These conditions have been to the detriment of defensive/quality companies' share prices, which had generally performed strongly in the prior 12 months. Given the Company's overwhelming exposure to the latter category of companies, relative performance has been poor.
It is worth noting that almost all of the relative under-performance took place in the first six months of the financial year. The more recent, second, six-month period was much less difficult, which hopefully gives encouragement of tangible improvement.
The Board remains predominantly interested in long-term performance. Although the impact of this year's relative underperformance is that over three and five years the Company's performance now lags behind the market, over ten years the Company's NAV remains marginally ahead of the FTSE All-Share Index.
A fourth quarterly dividend payment of 0.49p was announced in September. The dividend for the year totalled 1.96p, representing a yield of 2.6% on the year end share price.
Economic and Stock Market Background
My opening statement last year reflected on the extraordinary uncertainty impacting our lives on a global scale, a state of being that had been firmly in favour of the Company's investment style up to that point. Only a month later, news of viable vaccines broke and markets leapt at the promise of some certainty and a path back to normality. Last November was the best month for the UK equity market in over 30 years. Much of the past year has remained supportive of this dynamic, including the eventual signing of a Brexit deal in December – a subject that amidst a pandemic had become something of a secondary headline. Since February, we have witnessed widespread commodity inflation and many eyes are now fixed on central bankers and the timescale of interest rate rises. This backdrop has been highly supportive for more economically sensitive parts of the UK market, including commodity-linked businesses such as mining and oil & gas, as well as those highly sensitive to interest rates, such as banks. Given the Company's typical aversion to these areas of the market, it has significantly lagged the wider market.
The Managers provide discussion on performance in their review, as well as detailing portfolio changes. It will not surprise you to hear that their investment process and policy is unwavering. Short-term trends remain carefully weighted against longer term, structural forces in their thinking. Over the course of the year, several holdings have been divested and new ones begun, all with the aim of underpinning sustainable, attractive returns in capital and income for years to come.
The Managers' Review and the Strategic Report both contain details of the Company's perspective on ESG matters. These are serious and topical issues and brief summaries do not do them justice. The Board encourages Shareholders to review the detail contained in the Annual Report.
Discount Control Mechanism
The Discount Control Mechanism ('DCM'), which has been in place since January 2010, ensures that investors can purchase and sell the Company's shares at a time of their choosing and at a price very close to net asset value. The DCM continues to enhance the NAV per share by consistently issuing shares at a small premium and buying-in shares at a small discount. This is a key differentiating feature of the Company, providing liquidity for both buyers and sellers of the Company's shares and protecting investors from the negative effects of excessive discount volatility. During the year, the Company issued 0.6m shares and bought-in 27.4m shares through the DCM.
Dividends
As announced in last year's Annual Report, the Board set a new and reduced quarterly dividend rate of 0.49p per share for the year to 30 September 2021, recognising both the structural impact of the pandemic on the UK equity dividend landscape and the portfolio changes made by the Managers. The latter involved prioritising lower yield companies with better dividend growth prospects over higher yielding alternatives. A small number of portfolio companies are yet to recommence dividend payments.
As a result of this disruption to the portfolio's income, the Board decided to pay the third interim dividend from the Company's distributable capital reserve for a second year, enabling the Company to continue to bridge the revenue deficit. The Board intends, barring unforeseen circumstances, to at least maintain the quarterly dividend rate of 0.49p per share for the year to 30 September 2022.
Gearing
The Company had a £20 million gearing facility with ING that expired in April 2021. The facility had not been utilised, reflecting the Managers' conservative investment style and the desire to keep the volatility of returns relatively low. The Board and Managers will keep under review the possibility of a new gearing facility but meantime the Company will save the cost of maintaining such a facility.
Board Changes
Jann Brown will be retiring at the AGM in January after nine years of service as a Director and Chair of the Audit Committee. The Board would like to convey its sincere thanks to Jann for the significant contribution she has made to the smooth running of the Company and for her excellent leadership of the Audit Committee.
On 1 August 2021, the Board welcomed Brigid Sutcliffe as a new Director. Brigid is a Chartered Accountant with wide and varied experience. She stands for election at the AGM and the Board is very much looking forward to working with her. Brigid will take over from Jann as Chair of the Audit Committee in January and has been working with Jann on this year's Annual Report and audit, to ensure a smooth hand over of responsibilities.
In accordance with the Board's policy of a maximum of twelve years tenure for the Chair, I plan to retire on or before the AGM in January 2023. The recruitment of a new Director and discussions around the replacement of the Chair position are in progress.
Management Team and Company Secretary Changes
As flagged in the Interim Report, Francis Brooke will be relinquishing his fund management responsibilities on 31 December 2021 to take on a new role as executive Vice-Chairman of Troy Asset Management. Hugo Ure and Blake Hutchins will continue to co-manage the Company after Francis steps back. The Board has been aware and supportive of the succession plans for some time and believes the transition has been well-managed by Troy.
The Board is very grateful to Francis for his strong and consistent stewardship of the Company's portfolio since Troy became Manager in 2009 and wishes him well in his new role.
The Company Secretary had a change of ownership in 2020 and has changed its name from PATAC Limited to Juniper Partners Limited. There has been no change to the team at Juniper Partners and it continues to provide the Company with excellent service, including company secretarial, administration and discount control services and to act as the Alternative Investment Fund Manager.
Annual General Meeting
As at previous AGMs, the Board will again ask Shareholders to approve resolutions it believes are vital to the effective management of the DCM. Specifically, the Board is seeking permission to allow the Company to issue shares on a non pre-emptive basis equivalent to 20% of its equity and to buy-in up to 14.99%. There are two separate resolutions concerning the issue of shares. The first resolution seeks permission to issue 10%, and the second (extra) resolution seeks permission to issue up to a further 10% solely in connection with the DCM; for an aggregate of 20%.
The Board believes this approach to seeking non pre-emption authorities is shareholder friendly. It gives any Shareholder who may be unhappy that the aggregate authority sought is higher than that recommended by corporate governance guidelines the ability to express their concern via the second resolution, whilst still allowing their approval for the first and more conventional resolution dealing with 10% issuance. While the Board appreciates some Shareholders' reticence about non pre-emption authorities, it strongly believes that in the circumstances of the NAV enhancing impact of the DCM's operations, the overall 20% authority sought is in the best interests of Shareholders, and so is continuing to seek such authority at the upcoming AGM.
Outlook
With good reason, the UK market has been more sanguine and certain over the past year. But looking ahead, it remains a noisy and unusual investment backdrop, with many measures and dynamics distorted by the unprecedented events of the past 19 months or so. The interplay of inflation, interest rates, and global debt burdens will play a central role in markets over the coming months, as will the ongoing disequilibrium in supply chains and commodities, especially energy.
It can often seem that an investment process emphasising resilience and lower cyclicality requires a pessimistic outlook. But conversely, the Managers are natural optimists; more than anything they are looking for companies capable of sustainable growth and durable competitive advantage over an indefinite timeframe – something that truly requires a positive perspective. Despite a challenging period for the Company, the Board similarly sees scope for optimism and believes that the investment process and philosophy being pursued by the Managers remains capable of delivering attractive returns through these unusual times and beyond.