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BIT - Half Year Report

Monday 27th June 2022

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INVESTMENT OBJECTIVE

Over the long term, the Company aims to achieve capital growth in excess of the FTSE World Index and dividend growth greater than inflation, as measured by the UK Consumer Price Index (‘CPI’), by investing in companies listed throughout the world.

 

INVESTMENT POLICY

The following investment ranges apply:

• Equities: 80% to 100%

• Debt securities and cash investments: 0% to 20%

• Investment trusts, collective funds and derivatives: 0% to 15%

 

To achieve an appropriate spread of investment risk the portfolio is broadly diversified by geography, sector and company. The Manager (‘Janus Henderson’) has the flexibility to invest in any geographic region and any sector with no set limits on individual country or sector exposures and, therefore, the make-up and weighting of the portfolio may differ materially from the FTSE World Index.

 

The Manager primarily employs a bottom-up stock picking investment process, across six regional portfolios, to identify suitable opportunities. While each regional portfolio manager employs their own investment style, they all pay particular regard to cash generation and dividend growth over the medium term.

 

The Company can, but normally does not, invest up to 15% of its gross assets in any other investment companies (including listed investment trusts).

 

Derivatives

The Company may use financial instruments known as derivatives for the purpose of efficient portfolio management while maintaining a level of risk consistent with the risk profile of the Company.

 

Gearing

The Company can borrow to make additional investments with the aim of achieving a return that is greater than the cost of the borrowing. The Company can borrow up to 20% of net assets at the time of draw down.

 

PERFORMANCE HIGHLIGHTS

 

30 April 2022

Net asset value (‘NAV’) per share: 113.0p

Share price: 105.9p

Revenue return per share: 1.08p

Dividends paid or declared in respect of the period1: 1.128p

 

30 April 2021

Net asset value (‘NAV’) per share: 114.3p

Share price: 114.2p

Revenue return per share: 0.97p

Dividends paid or declared in respect of the period1: 1.076p

 

Total return performance to 30 April 2022 (including dividends reinvested and excluding transaction costs)

 

% 6 months

% 1 year

% 3 years

% 5 years

% 10 years

 

NAV2 -5.6 0.8 29.6 58.2 205.4

Index3 -2.6 6.1 40.6 66.6 164.2

Share price4 -6.3 -5.6 24.2 53.9 226.2

 

1. The first interim dividend for 2022 was paid on 31 May 2022; the second interim dividend has been declared and will be paid on 31 August 2022

2. Net asset value total return per share with income reinvested and with debt at par

3. Composite of FTSE All-Share Index for the period to 31 October 2017 and FTSE World Index from 1 November 2017 to 30 April 2022

4. Share price total return using mid-market closing price

 

Sources: Janus Henderson, Morningstar Direct and Refinitiv Datastream

 

INTERIM MANAGEMENT REPORT

 

Review

In February I became Chair and I look forward to working with the Board and the Investment Manager, and to meeting many of our shareholders over the coming years. Founded in 1888, Bankers has a distinguished history. It has experienced a variety of financial and economic crises as well as, of course, its share of bull markets. Its strength has been its ability to adapt to changing circumstances and to grow. I have been involved in the investment trust sector for 30 years and Bankers struck me as interesting for a variety of reasons. First it is an old established and substantial trust. Second it has a sound record on both income and capital growth. Third it is unique in the way in which it manages separate portfolios under the same roof. As a result, it has the ability to appeal to a wide range of investors.

 

We have entered a more uncertain period for markets, with inflationary pressures everywhere and interest rates being raised to counter price demand for goods and services. Over the six months ended 30 April 2022, the NAV total return was -5.6% and the share price total return was -6.3%, both underperforming the FTSE World Index total return of -2.6%. The underperformance was due to mixed performance from stock selection in various regional sleeves combined with weakness in Asia, particularly China. The accompanying Fund Manager’s Report contains more information together with a useful market commentary.

 

Dividends

The Company’s income has continued to recover this year and our investment income for the six months ended 30 April 2022 was £17.8 million compared to £15.6 million for the same period last year, an increase of 14.1%. This increase reflects continued dividend growth, the strengthening US dollar and a resumption in dividends from the few remaining companies who suspended dividends. Our net revenue for the six months was £14.2 million (2021: £12.6 million), equivalent to 1.08p per share (2021: 0.97p).

 

A first interim dividend of 0.55p per share (2021: 0.538p) was paid on 31 May 2022. The Board has declared a second interim dividend of 0.578p (2021: 0.538p) per share, which will be payable on 31 August 2022 to shareholders on the register on 29 July 2022.

 

The Company aims over the long-term to grow dividends in excess of inflation, as measured by the UK Consumer Price Index (‘CPI’). This year has seen the highest level of CPI inflation in a generation and while it will not be possible to grow our payments in line with inflation this year, Bankers’ long-term record is healthy. Over the past 10 years, to 31 October 2021, dividends have grown by 71% compared to a 20% increase in CPI. The improving outlook for our investment income combined with the revenue reserve leads us to increase our forecast for dividend growth for the current financial year, from at least 3% to at least 5%.

 

Share buy-backs

The market uncertainty has led to the Company’s shares trading at a discount which has offered an opportunity to buy back shares from the market. This activity is beneficial to ongoing shareholders, as shares are only purchased below net asset value. A total of 4,243,874 shares were bought back at an average discount of 6% to the net asset value in the six months ended 30 April 2022 (30 April 2021: nil), for a total consideration of £4.5 million. The discount at 30 April 2022 was 6.3% (2021: 0.1%). Since the period end, a further 4,256,126 shares have been bought back, for a total consideration of £4.3 million.

 

There have been no share issues in the financial year to date.

 

The Board and Investment Manager

 

Sue Inglis stepped down from the Board at the Annual General Meeting in February 2022, after nine years on the Board and three years as Chair. I should like to thank her on behalf of the Board for her outstanding contribution. The Board will miss her deep knowledge, experience and understanding of the investment trust world. The search for a new non-executive director has begun and will conclude before the end of the year.

 

A change in Chair allows the Board to reflect on the operation of the Company. The timing of this is prescient, given the market volatility. In the Board’s view there is no requirement to alter our long-term objectives but rather there are opportunities to tighten up the way in which the Company operates, communicates and attracts new investors.

 

As part of this process the Company’s Manager, Janus Henderson, has decided to appoint Mike Kerley as deputy to Alex Crooke. This appointment recognises the size and importance of the Company to Janus Henderson and the provision of this additional resource is welcomed by the Board. Mike has been in the investment management business for 37 years and he has been managing the Bankers’ Pacific (ex Japan and China) portfolio since 2006. To support Mike with his portfolio role, Sat Duhra will co-manage the Pacific portfolio. Sat joined Janus Henderson in 2011 and has over 22 years of experience in financial markets. We are fortunate to have access to such experienced and knowledgeable investment professionals within Janus Henderson.

 

Outlook

 

Events this past year were impossible to predict. The rapid economic recovery from Covid restrictions created rising demand when there were still supply bottlenecks of goods. The war in the Ukraine places further restrictions on the provision of energy and food supplies. There are some parallels to the economic conditions in the 1970’s and 80’s but, as is often the case, there are also key differences. Activity will slow this year but market share prices are adjusting to this outturn and, with the banking sector and corporates well capitalised, there should be a solid foundation to rebuild investors’ confidence.

 

Simon Miller

Chair

24 June 2022

 

FUND MANAGER’S REPORT

 

Market review

 

The highest level of price inflation for over 30 years and potential central bank reactions have dominated markets throughout the past half year under review. The reasons for inflation touching 10% in the UK are manyfold but stem from disruption to both labour movement and supply chains throughout the Covid lockdowns. Goods price inflation has been compounded by rising service prices and, more recently, energy and food prices following the invasion of Ukraine. The equity markets have fallen in value since the end of December, with inflation proving far from transitory as central banks assured investors last year. Historically, such levels of inflation would provoke central banks to raise interest rates rapidly to curtail demand and bring prices back down but investors fear that the increase in rates has been too slow.

 

Longer term bond yields have also risen over the period, signalling unusual conditions where both bonds and equities have fallen in value. Essentially, market prices are signalling that central banks will not contain inflation quickly and that it is increasingly likely that a recession will follow. Growth equities, especially technology companies, have been especially hard hit, while energy and other defensive sectors such as utilities and healthcare have been relatively better performers. Ironically, corporate profits are proving resilient and are even rising, but the market valuation of those earnings by investors has been derated because of their cautious outlook. Typically, markets derate stocks well ahead of actual earnings falling.

 

The most resilient stock market has been the UK which has risen in value over the period under review. This has less to do with the strength of the UK economy but rather the high weighting of oil and mining companies and those with large overseas earnings within the market. The US dollar has appreciated by almost 9% over the period against sterling reflecting a flight to quality and the expectation that the Federal Reserve will raise interest rates quicker than the UK. The remaining major markets, the US, Japan and Europe have broadly fallen by the same amount in local currencies, approximately 10% but in sterling terms the US has delivered the better underlying return despite the sell-off in technology shares. China has been a notable laggard in terms of market performance as the policy of zero Covid cases in the community is having a detrimental impact on economic growth. It is proving challenging to understand when this policy will be overturned.

 

Performance

 

Overall, the portfolio has lagged the FTSE World Index by 3% which is largely attributable to a lower exposure to the US market and the poor performance of the China portfolio. There has also been underperformance in the US and European portfolios that has impacted the return, as both of these portfolios have a significantly higher weight to growth stocks which have derated in current market conditions. The UK and Asian portfolios have delivered performance ahead of their respective benchmarks attributable to good stock picking and the more value based, cash generative and dividend emphasis of the respective managers. Higher yielding stocks have been a noticeable outperformer in Asian markets this year. Unusually, quality as a factor in stock selection has performed poorly during this period which emphasises how macroeconomic events have driven stock market returns rather than fundamentals.

 

The portfolio’s income has continued to recover with almost all companies reinstating dividends that were withheld through Covid restrictions. The banking and consumer services sectors were the last to return to normal patterns of dividend payments. The challenging economic outlook combined with many companies facing rising labour and input inflation is likely to limit further dividend growth this year. Similarly, the receipt of special dividends is trending lower than last year.

 

Outlook

 

While we desperately hope that there will be an end to the conflict in Ukraine, it is clear that energy and food prices are likely to be elevated for some time to come as supply shortages persist. While there is a real risk that economic activity contracts in Europe and elsewhere, purely through demand falling as consumers pay more for basic goods and services, shares are already pricing in a slowing growth outlook. The resilience of the UK stock market should continue despite the uncertainty stemming from UK politics. US interest rates are forecast to rise to over 2% by December, which will have a cooling effect on the US economy, but we still expect US growth to remain positive and therefore US corporate earnings to grow this year. Stock markets will remain volatile until there is a clear downward direction in inflationary pressures and investors can gain confidence in stock valuations.

 

Alex Crooke

Fund Manager

24 June 2022

 

For further information contact:

Alex Crooke

Fund Manager

The Bankers Investment Trust PLC

Telephone: 020 7818 4447

 

Simon Miller

Chair

The Bankers Investment Trust PLC

Telephone: 020 7818 4233

 

Dan Howe

Deputy Head of Investment Trusts

Janus Henderson Investors

Telephone: 020 7818 4458

 

Harriet Hall

PR Manager, Investment Trusts

Janus Henderson Investors

Telephone: 020 7818 2636



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