Half-year Report

RNS Number : 0033M

abrdn Equity Income Trust plc

19 May 2022

 

abrdn EQUITY INCOME TRUST PLC

Legal Entity Identifier (LEI): 21380015XPT7BZISSQ74

HALF-YEARLY FINANCIAL REPORT

FOR THE SIX MONTHS ENDED 31 MARCH 2022

Performance Highlights

Net asset value total return per Ordinary shareA			Share price total return per Ordinary shareA
Six months ended 31 March 2022			Six months ended 31 March 2022
+2.5 %			+8.6%
Year ended 30 September 2021	+39.9%		Year ended 30 September 2021	+47.1%
FTSE All-Share Index total return			Discount to net asset valueA
Six months ended 31 March 2022			As at 31 March 2022
+4.7%			2.9%
Year ended 30 September 2021	+27.9%		Year ended 30 September 2021	8.4%
Revenue return per Ordinary share			Ongoing charges ratioA
Six months ended 31 March 2022			Forecast for year ending 30 September 2022
8.75p			0.88%
Six months ended 31 March 2021	7.74p		Year ended 30 September 2021	0.93%
A Considered to be an Alternative Performance Measure.

Investment Portfolio by Sector as at 31 March 2022

Portfolio weightings

Financials	32.7%
Basic Materials	18.1%
Energy	11.8%
Consumer Discretionary	10.8%
Industrials	10.1%
Consumer Staples	5.2%
Utilities	5.1%
Real Estate	3.3%
Health Care	1.9%
Telecommunications	1.0%

Financial Calendar, Dividends and Highlights

1.  Expected payment dates of interim dividends for the remainder of the financial year to 30 September 2022	June 2022 September 2022 December 2022
2.  Financial year end	30 September 2022
3.  Expected announcement of results for year ended 30 September 2022	December 2022
4.  Annual General Meeting (London)	February 2023

Financial Highlights

Capital return	31 March 2022	30 September 2021	% change
Total assetsA (m)	£207.09	£207.88	-0.4%
Equity Shareholders' funds (m)	£182.12	£182.93	-0.4%
Net asset value per Ordinary share	379.16p	380.84p	-0.4%
Market capitalisation (m)	£176.76	£121.79	+45.1%
Share price per Ordinary share	368.00p	349.00p	+5.4%
Discount of Ordinary share price to net asset valueB	2.9%	8.4%
FTSE All-Share Index	4,187.78	4,058.96	+3.2%
Revenue return per Ordinary shareC	8.75p	7.74p	+13.0%
Gearing - netB	13.6%	13.5%
Ongoing charges ratioBD	0.88%	0.93%
A Defined as total assets per the Statement of Financial Position less current liabilities (before deduction of bank loans).
B Considered to be an Alternative Performance Measure as defined on pages 28 to 30 of the half yearly report.
C Figure for 31 March 2022 is for the six months to that date. Figure for 30 September 2021 is for the six months to 31 March 2021.
D The ongoing charges ratio for the current year includes a forecast of costs and net assets for the six months to 30 September 2022.

Chairman's Statement

Performance

In the six months to 31 March 2022 the Company delivered an NAV total return of 2.5% and the share price total return was 8.6%.  The total return of the FTSE All-Share Index was 4.7%.

These muted returns followed the very strong performance recorded during the year ended 30 September 2021. There has been much written about the rotation from growth stocks into value stocks at the start of 2022 and a renewed focus on fundamentals. The Company benefitted from this rotation and performed well in the first three months of 2022. The underperformance over the period under review can largely be attributed to poor performance in November 2021.

The Investment Manager's Review provides a  detailed explanation of the drivers of this performance.

Revenue

Dividend income in the six months was £4.7 million compared to £4.2 million for the same period last year, an increase of 11.8%. Management fees and administrative expenses charged to revenue rose by 7.5%, at around £385,000 compared to approximately £358,000 in 2021. This should be set against an average asset base that is almost 17% higher than at the same point last year.  After interest costs and tax, net earnings increased by 12.3% to £4.2 million and the revenue per Ordinary share was 8.75 pence compared to 7.74 pence for the first six months of the previous financial year.

The Board has outlined its priorities to the Investment Manager with regard to income generation. After two years where income has been severely diminished, the Board has indicated that it expects the Investment Manager to focus on (in order of priority):

1.  Covering the dividend for the financial year with revenue earnings from the same period;

2.  Delivering real growth in dividends; and

3.  Rebuilding the revenue reserves.

Dividends

The Board has declared a second interim dividend of 5.4 pence per Ordinary Share which will be paid on 17 June 2022 to shareholders on the Register on 27 May 2022, with an associated ex-dividend date of 26 May 2022.

The Board declared its plans for the dividend for the current year in February 2022, when it announced that the first quarterly dividend for the year ending 30 September 2022 would be 5.4 pence per Ordinary Share. This was paid to shareholders on 18 March 2022. 

The Board's stated intention is that the third quarterly dividend will also be 5.4 pence per Ordinary Share, payable in September 2022 and the final dividend, of at least 5.6 pence per share, will be paid in January 2023. This will result in a dividend for the financial year of 21.8 pence per share which will be 2.8% higher than the dividend paid in relation to the year ended 30 September 2021.

The Board will keep the matter under review and will confirm the final payment when the accounts for the year ending 30 September 2022 are finalised in December 2022.

Gearing

As at 31 March 2022, £25 million of the £30 million facility was drawn down and net gearing amounted to 13.6% of assets, compared to 13.5% in September 2021. The borrowing is in the form of a revolving credit facility which cost 1.35% at the end of the period under review.

Discount and Buy Backs

There have been no changes to the Company's share capital structure during the six month period. The Board is pleased to be able to report that the share price discount to NAV, on a cum income basis, has narrowed steadily from 10.2% at the beginning of the period to 2.9% at 31 March 2022. Since December 2021, the discount has typically traded between 2% and 6%.

The Board continues to monitor the discount in both absolute terms and relative to the discount of other UK equity income investment trusts with a view to minimising both the absolute level of the discount and its volatility.

Name Change

On 8 April 2022 the Company changed its name to abrdn Equity Income Trust plc.  This was to align the Company's name with that of its Manager which, in 2021, changed from Standard Life Aberdeen to abrdn.  The Board considers this alignment is important to maintain market awareness of the Company.

The Company's ticker changed to AEI.

Board

I joined the Board on 1 November 2013 and so by the time we get to the Annual General Meeting ("AGM") of the Company in 2023, I will have served for over nine years. It is therefore my intention, in accordance with the Financial Reporting Council's UK Corporate Governance Code, to retire from the Board at the conclusion of that AGM.

As part of our succession planning the Board has carefully considered my successor and I am delighted to report that Sarika Patel will be appointed as Chair with effect from the conclusion of the 2023 AGM.  Sarika has served as a non-executive Director since November 2019 and is currently the Chair of the Audit Committee.  She has been a strong contributor since she joined the Board and has significant business experience that will make her an ideal successor.

Accordingly, we have commenced the process of recruiting an additional director and Chair of the Audit Committee. The intention is that the successful candidate will be appointed to enable an orderly transfer of responsibilities before February 2023.

Outlook

Since my last report, the global outlook has darkened in almost every respect: geopolitics, monetary conditions, economic growth and even the improved Covid-19 situation in the West is tempered by grave concerns about the handling of the situation in China. However, despite all this gloom, you will see from his report that Thomas Moore, our investment manager, remains confident that he will be able to achieve the objective we have set him for this financial year, namely, to cover the proposed dividend. In addition, with interest rates rising, the attractions of the higher yielding 'value' stocks that we tend to hold are likely to increase relative to their low yielding 'growth' counterparts which bodes well for our relative performance.  Thomas is also confident that the companies in which we invest will be able to continue growing their dividends despite the twin challenges of lower growth and higher inflation. This, in turn, should enable us to continue increasing our own dividend distributions while gradually rebuilding our revenue reserves.  I hope that by the time I come to write my final Chairman's statement at the end of the year, light will have started to emerge from at least some aspects of the general situation. 

Mark White
Chairman
18 May 2022

Interim Management Report and Directors' Responsibility Statement

Principal Risks and Uncertainties

The Board has an ongoing process for identifying, evaluating and managing the principal and emerging risks and uncertainties of the Company and has carried out a robust review. The process is regularly reviewed by the Board. Most of the Company's principal risks and uncertainties are market related and are no different from those of other investment trusts that invest primarily in the UK listed market.  These are set out within the Strategic Report contained within the Annual Report for the year ended 30 September 2021 and comprise the following risk categories:

· Strategy;

· Investment Performance;

· Exogenous risks such as health, social, financial, economic and geopolitical;

· Operational Risk;

· Governance Risk;

· Discount / Premium to NAV;

· Financial obligations; and

· Legal and Regulatory Risks.

The Board continues to note that there are a number of contingent risks which continue to stem from the Covid-19 pandemic that may impact the operation of the Company and world markets.

The Board is also very conscious of the risks emanating from increasing Environmental, Social and Governance ("ESG") challenges together with climate change and continues to monitor, through its Investment Manager, the potential risk that investee companies may fail to keep pace with the rates of ESG and Climate Change adaptation required.  The Board is also monitoring closely the current political and economic uncertainties which could affect markets, particularly to heightened interest rate risk and the volatility associated with the conflict in Ukraine, which the Board anticipates will persist over the six months to 30 September 2022.  The Company has made enquiries of its Manager and third party service providers in relation to compliance with sanctions measures enacted by the UK in response to Russia's invasion of Ukraine.

In all other respects, the Company's principal risks and uncertainties have not changed materially since the date of the 2021 Annual Report.

Going Concern

In accordance with the FRC's Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern.

The Company's assets consist substantially of equity shares in companies listed on recognised stock exchanges and in most circumstances are realisable within a short timescale. The Company has adequate resources to continue in operational existence for the foreseeable future and the ability to meet all its liabilities and ongoing expenses from its assets.

The Directors are mindful of the principal and emerging risks and uncertainties disclosed above, and review on a regular basis forecasts detailing revenue and liabilities and the Company's operational expenses. Having reviewed these matters, the Directors believe that the Company has adequate financial resources to continue its operational existence for the foreseeable future and for at least 12 months from the date of this Half Yearly Report. Accordingly, they continue to adopt the going concern basis in preparing the Half Yearly Report.

Related Party Transactions

There have been no material changes in the related party transactions described in the 2021 Annual Report. 

Responsibility Statement of the Directors in respect of the Half-Yearly Financial Report

The Disclosure Guidance and Transparency Rules require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements.

The Directors confirm that to the best of their knowledge:

The condensed set of financial statements contained within the Half Yearly financial report has been prepared in accordance with FRS 104 Interim Financial Reporting and gives a true and fair view of the assets, liabilities, financial position and return of the Company for the period ended 31 March 2022. 

The Interim Management Report, together with the Chairman's Statement and Investment Manager's Report, includes a fair review of the information required by:

a)  DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and

b)  DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the financial year and that have materially affected the financial position or performance of the Company during that period, and any changes in the related party transactions described in the last Annual Report that could do so.

The Half-Yearly Financial Report was approved by the Board and the above Directors' Responsibility Statement was signed on its behalf by the Chairman.

For abrdn Equity Income Trust plc
Mark White
Chairman
18 May 2022

Our Strategy

Business Model

The Company is an investment trust with a premium listing on the London Stock Exchange.

Investment Objective

The Company's objective is to provide shareholders with an above average income from their equity investment, while also providing real growth in capital and income. 

Investment Policy

The Directors set the investment policy, which is to invest in a diversified portfolio consisting mainly of quoted UK equities which will normally comprise between 50 and 70 individual equity holdings.

In order to reduce risk in the Company without compromising flexibility:

a)  no holding within the portfolio should exceed 10% of total assets at the time of acquisition; and

b)  the top ten holdings within the portfolio will not exceed 50% of net assets.

The Company may invest in convertible preference shares, convertible loan stocks, gilts and corporate bonds.

The Directors set the gearing policy within which the portfolio is managed.  The parameters are that the portfolio should operate between holding 5% net cash and 15% net gearing.  The Directors have delegated responsibility to the Investment Manager for the operation of the gearing level within the above parameters.

Delivering the Investment Objective

The Board delegates investment management to abrdn plc ("abrdn"). The team within abrdn managing the Company's portfolio of investments has been headed up by Thomas Moore since 2011.

Our Strategy

The portfolio is invested on an index-agnostic basis. The process is based on a bottom-up stock-picking approach where sector allocations are a function of the sum of the stock selection decisions, constrained only by appropriate risk control parameters. The aim is to apply the "Focus on Change" process by evaluating changing corporate situations and identifying insights that are not fully recognised by the market.

Idea Generation and Research

The vast majority of the investment insights are generated from information and analysis from one-on-one company meetings. Collectively, more than 6,000 company meetings are conducted annually by abrdn. These meetings are used to ascertain the company's own views and expectations of its future prospects and the markets in which it operates. Through actively questioning the senior management and key decision makers of companies, the portfolio managers and analysts look to uncover the key changes affecting the business and the materiality of their impact on company fundamentals within the targeted investment time horizon.

ESG considerations are at the heart of this engagement. Understanding a company's attitudes towards ESG issues helps to mitigate risks and actively enhance returns. As part of the company research, analysts evaluate the ownership structures, governance and management quality of the companies. Potential environmental and social risks that these companies may face are also assessed. The Investment Manager employs dedicated ESG specialists who sit within each regional investment team, providing industry-leading expertise and insight at the company level. These specialists also mediate the insights of the central team to the stock analysts, as well as interpret and contextualise sector and company insights. The central ESG team provides thought leadership, thematic and global sector insights, as well as event-driven research.

Investment Process in Practice

The index-agnostic approach allows the weightings of holdings to reflect the conviction levels of the investment team, based on an assessment of the management team, the strategy, the prospects and the valuation metrics. The Focus on Change process recognises that some of the best investment opportunities come from under-researched parts of the market, where the breadth and depth of the analyst coverage that the Portfolio Manager can access provides the scope to identify a range of investment opportunities.

The consequence of this is that the Company's portfolio often looks very different from other investment vehicles which aim to provide their investors with access to UK equity income. This is because the process focuses on conviction levels rather than index weightings. This means that the Company may provide a complementary portfolio to the existing portfolios of investors who prefer to make their own decisions and manage their ISAs, SIPPs and personal dealing accounts themselves. Currently 57% (30 September 2021: 60%) of the Company's portfolio is invested in companies outside the FTSE 100 Index.

The index-agnostic approach, and Focus on Change process, further differentiates the portfolio because it allows the Portfolio Manager to take a view at a thematic level, concentrate the portfolio's holdings in certain areas and avoid others completely. The effect of this approach is that the weightings of the portfolio can be expected to differ significantly from that of any index, and the returns generated by the portfolio may reflect this divergence, particularly in the short term.

Investment Manager's Review

Market Review

The UK equity market was resilient during the period under review despite a range of headwinds including new Covid-19 outbreaks, the Russia-Ukraine war, supply chain issues, rising inflation and interest rate hikes.

The discovery of the Omicron variant in November 2021 caused global stock markets to fall, as investors feared the imposition of new restrictions which could hamper economic growth. These fears were allayed in December 2021 as it became clear that while this latest variant was easily transmissible, its virulence was low, reducing the risk of another lockdown. Attention turned to the Russian invasion of Ukraine in February 2022, causing global equity markets to drop sharply. This drove a surge in commodity prices, adding to existing inflationary pressures caused by the tightness of labour markets and the global supply-chain bottlenecks in the aftermath of Covid-19 lockdowns. The UK Consumer Price Inflation rate hit 7.0% in March 2022, the highest level since 1992. The Bank of England ("BoE") responded by hiking its base rate three times during the period, from 0.15% to 0.75%.

The resilience of the UK equity market during the period stands in contrast to the weakness seen in other major stock markets, many of which posted heavy declines.  The FTSE 100 Index outperformed, in GBP terms, the Dow Jones in the US, the DAX Index in Germany, the Nikkei 225 in Japan and the Hang Seng Index in Hong Kong.  This is largely explained by the sector composition of the UK market, with heavy weightings in traditional large cap sectors, such as resources and banks, which tend to perform relatively well in an environment of rising inflation and interest rates. Sector composition also explains the significant divergence in performance between the FTSE 100 index, which generated a positive total return of +7.8%, and the more domestically-orientated FTSE 250 and Small Cap indices, which fell by -7.3% and -5.6% respectively on fears over the impact of rising inflation on consumer spending.

Portfolio Performance

During the period, the portfolio delivered a total return of 2.5% while the total return of the Company's reference index, the FTSE All-Share Index (the "Index") was 4.7%.  As we have previously noted, we use an index-agnostic approach, which means that we weight our holdings according to our conviction levels, rather than their index weightings. We see this approach as most beneficial to shareholders over time, allowing us to construct a differentiated portfolio that can deliver on our objectives throughout the investment cycle.

While the constituents of the FTSE 100 Index typically account for around 80% of the total value of the Index, it is a measure of our process that the portfolio's exposure to the FTSE 100 Index is below 60%.  This highlights the flexibility of the portfolio in allowing us to invest where we consider the best opportunities to be whilst not being committed to the Index weightings. 

Portfolio performance was impacted during the first three months of the financial year as many of our holdings were affected by nervousness about a new strain of the Covid-19 virus. Performance picked up as the period progressed, as many of our holdings recovered sharply.

Pulling together the key drivers of our performance relative to the Index:

1.   We benefited from heavy exposure to Resources, both Basic Materials and Energy companies, which generated nearly 5% of relative performance. At the stock level, the largest contributors were BHP, Thungela Resources, Rio Tinto and Glencore. Resource companies had been amongst our largest purchases during the last financial year as we anticipated the potential benefit to the revenue account of their growing dividends, backed by surging cash flows. This is an example of a sector where income and capital growth go hand in hand. 

2.   Offsetting the benefit of our Resources holdings, we lost a similar amount of relative performance from our positioning in the Financials sector. Close Brothers gave up the gains it had made in the previous financial year as Winterflood volumes slowed sharply. Premier Miton and Ashmore fell back on signs of slowing fund flows. Among companies not held, the benefit of avoiding Prudential was more than offset by the impact from not owning HSBC during a period of rising interest rate expectations.

3.   The portfolio lost just under 2% of relative performance in the Consumer Discretionary sector, as the positive impact of incoming bids for Vivo Energy and Playtech was offset by the under-performance of housebuilding stocks, Vistry and Bellway, on uncertainty over liabilities faced for cladding remediation, and Entain and 888 on slowing growth in online gaming revenues.

4.  The gearing position, averaging 12.9% over the six month period, contributed just over 0.5% of relative performance.

Revenue Account

Dividends distributed by our portfolio holdings in the period under review rose by 11.8% to £4.7 million, compared to the £4.2 million received in the same six month period last year. This compares favourably to the Index where dividends grew by 2.2% over the same timeframe. The contribution from special dividends was extremely low at less than 1.0% of the dividend income (2021: 4.7%), reflecting the ongoing reduction in the number of special dividends being paid in the wake of the pandemic.

Net revenue was £4.2 million, or 12.3% higher than for the same period last year. Management fees were 7.3% higher, but this is a function of the increase in the value of the portfolio. Total expenditure by the portfolio, including all fees and charges, interest and tax was 7.6% higher than compared with the same period a year ago.

We are forecasting that the portfolio is currently delivering a gross dividend yield, before costs, of 5.7% based on the income expected to be generated by the portfolio over the financial year divided by the average portfolio value, representing a significant premium to the effective monthly average dividend yield of the Index of 3.1% for the same six month period.

The results for the period reflect our actions in meeting the first of the Board's priorities, as set out in the Chairman's Statement, in respect of income generation to cover the dividend for the financial year from the portfolio's revenue earnings for that year.  The first six months of the financial year have seen continued progress in growing portfolio income, increasing our confidence in our ability to cover the dividend fully with earnings for the year ending 30 September 2022 and thereby paving the way for an acceleration in our dividend per share.  This is made possible by the abundance of higher yielding opportunities available following a prolonged period of macro dislocation. Sectors that stand out as delivering higher than expected dividends include Mining and Oil & Gas, both of which saw cash flows surge due to higher commodity prices and disciplined capital management.

For the wider UK equity market, the outlook for dividends has improved significantly since the pandemic, with dividend cover recovering to 2.0x in 2021. There are variations in the dividend outlook, stock by stock and sector by sector, which we will continue to navigate, but overall we are increasingly confident in our ability to achieve our income objectives.

Activity

Purchases

We remain mindful of the need to position the portfolio in stocks that can thrive in an inflationary environment. The tightening conditions that were already driving inflation higher in 2021 have intensified since the beginning of the Russia-Ukraine war as sanctions begin to bite. While there will be some impact on economic growth as demand is curbed by rising living costs, we remain confident in our ability to identify businesses that will deliver operational gearing, as revenues grow faster than costs. Our focus on cash flows is helping us to grow the revenue account and, in so doing, protect our shareholders against inflation.

Our primary focus is to look for companies undergoing positive change, supporting dividend growth that will drive a rapid return towards full dividend coverage. Over time, the companies that surprise positively on cash flows and dividends are the ones that tend to be rewarded with rising share prices.

Our largest purchases can be grouped into the following categories:

1.  We increased our exposure to the Energy sector, starting a new holding in Harbour Energy and adding to BP, anticipating a surge in cash flows. The global oil market is very tight, as reflected in low inventory levels, following a period of depressed capital expenditure. This sets the scene for a benign period for shareholders as dividend growth resumes.

2.  We also increased our weighting in Banks by starting a new holding in NatWest and adding to our holding in Standard Chartered, both of which are beneficiaries of rising base rates, putting upwards pressure on net interest income due to the stickiness of deposit pricing. In both cases, we expect credit quality to remain benign and costs to remain controlled. Improving momentum should drive a narrowing of the discount to NAV.

3.  We selectively bought new holdings in small and mid-cap companies where we believe that positive change is being overlooked by the wider stock market. One example is retailer Halfords which is successfully implementing a strategy of increasing exposure to motoring services, acquiring the National Autocentres business, which will further increase the proportion of their revenues that are recurring. Another example is insurer Hiscox whose investment in brand and digital technology is set to drive rapid growth in their retail insurance business, particularly in the US.

Sales

Our largest sales can be grouped into the following categories:

1.  This was another busy period for M&A in the portfolio. We sold our holding in Vivo Energy, sold the last of our Zegona Communications and reduced our holding in Playtech. In the Investment Manager's review for the year ended 30 September 2021, I highlighted sales of four other holdings that had received bids. Since the year end two other holdings, River & Mercantile and Randall & Quilter, have entered bid situations. We continue to believe this is a sign of the deep intrinsic value inherent in this portfolio.

2.  We took sizeable profits in Entain following the withdrawal of bid interest from DraftKings. While it was disappointing that the shares fell back following this announcement, we were still able to sell at over double the share price that we paid when we bought into the company in January 2017 (when it was called GVC Holdings).

3.  We reduced some Financials holdings where we felt waning conviction in the investment thesis beyond the attractiveness of the dividend - these included insurance stocks Sabre Insurance and Direct Line where regulatory change has dampened the prospect of an improvement in motor insuring pricing, and Polar Capital where fund flows are at risk from the concentration of assets under management in growth areas.

Outlook

Geopolitical risk has resulted in a number of cross-currents. Inflation expectations have continued to increase as a result of supply-chain bottlenecks and tight labour markets, driving bond yields higher. This has catalysed a market rotation towards value stocks, albeit the impact on our portfolio has been mixed as the value rally has been concentrated in large-cap value sectors with inflation hedge characteristics, at the exclusion of mid and small-cap holdings. This reflects an undertone of nervousness as the rising cost of living drives fears of stagflation. While the weakness of many small and mid-cap stocks was a headwind for the portfolio in the first six months of the financial year, we have historically found that these periods can create valuation opportunities as well managed businesses with solid fundamentals are sold off for spurious reasons. These opportunities can play out in the long sweeps of more stable market conditions in the wake of geopolitical disruption.

We will continue to use our influence to engage actively with management teams in driving positive outcomes on ESG issues. Our experience is that this is not only the right thing to do, but it can also help deliver improved financial returns. Our investment process is centred around the potential for change and it is therefore a natural part of our stock-level analysis to assess the change that companies are capable of achieving. We have recently observed that some of the most attractive valuations and highest dividend yields are available in stocks that other investors might exclude without considering this potential for change. This underlines the benefits of our flexibility, investing across different sectors across the UK market.

Looking ahead, we remain focused on growing portfolio income, as we believe that this creates a clear framework to deliver for shareholders, both in terms of income and capital. From an income perspective, the ongoing improvement in our revenue account makes us increasingly confident in our ability to cover the dividend with earnings for the year ending 30 September 2022 in line with the Board's priorities.  Our confidence in the dividend outlook is in lockstep with our investment process which favours companies that are experiencing upgrades to their earnings and dividend forecasts, especially when this improvement is not priced into valuations. Resources is an example of a sector that offers both positive revisions and low valuations, helping us to achieve our income objectives.

From a capital perspective, we expect the inflationary backdrop to increase the attractions of lowly-rated companies offering a growing stream of cash flows and dividends, as investors recognise the role that these holdings can play in protecting against rising living costs. After a long period of dominance, growth stocks have faded as bond yields rise. As I described in the activity section, a number of our holdings have received bids in the past year, reflecting the widespread mismatch between share prices and underlying corporate fundamentals.

Despite the geopolitical uncertainty, we believe that these market conditions have the potential to be supportive for the portfolio, as we continue to find plenty of holdings that can help us achieve our objectives. We therefore look forward to the rest of the financial year with confidence.

Thomas Moore
Portfolio Manager
18 May 2022

Ten Largest Investments

As at 31 March 2022

BHP		BP
BHP is a diversified resources group with a global portfolio of high quality assets, focusing on iron ore, petroleum and copper.		BP is an oil and petrochemicals company. The Company explores for and produces oil and natural gas, refines, markets, and supplies petroleum products, generates renewable energy, and manufactures and markets chemicals.
Shell		Rio Tinto
Shell explores for, produces and refines petroleum. The Company produces fuels, chemicals, and lubricants, as well as operating gasoline filling stations and developing renewable energy.		Rio Tinto is a leading global mining group that focuses on finding, mining and processing mineral resources, with a focus on iron ore and aluminium.
Glencore		SSE
Glencore is a diversified natural resources company, with production and marketing operations in three groups; metals and minerals, energy products and agricultural products.		SSE engages in the generation, transmission, distribution and supply of electricity and the production, storage, distribution and supply of gas.
Thungela Resources		Close Brothers
Thungela is a leading pure-play producer and exporter of high quality, low-cost thermal coal in South Africa.		Close Brothers is a specialist financial service group which provides loans, trades securities and provides advice and investment management solutions.
Diversified Energy		CMC Markets
Diversified Energy is engaged in conventional natural gas and crude oil production in the Appalachian Basin of the United States.		CMC Markets is a financial derivatives dealer offering online trading in spread betting, contracts for difference and foreign exchange.

Investment Portfolio

At 31 March 2022
		Market	Total
		value	assets
Company	Sector	£'000	%
BHP	Industrial Metals and Mining	9,632	4.6
BP	Oil Gas and Coal	9,182	4.4
Shell	Oil Gas and Coal	8,694	4.2
Rio Tinto	Industrial Metals and Mining	7,561	3.6
Glencore	Industrial Metals and Mining	7,014	3.4
SSE	Electricity	6,565	3.2
Thungela Resources	Industrial Metals and Mining	5,717	2.8
Close Brothers	Banks	5,708	2.8
Diversified Energy	Oil Gas and Coal	5,636	2.7
CMC Markets	Investment Banking and Brokerage Services	5,191	2.5
Top ten investments		70,900	34.2
OSB Group	Finance and Credit Services	4,873	2.4
Vistry	Household Goods and Home Construction	4,792	2.3
British American Tobacco	Tobacco	4,668	2.3
Anglo American	Industrial Metals and Mining	4,578	2.2
Premier Miton	Investment Banking and Brokerage Services	4,195	2.0
River & Mercantile	Investment Banking and Brokerage Services	4,148	2.0
Chesnara	Life Insurance	4,132	2.0
Playtech	Travel and Leisure	4,045	2.0
Standard Chartered	Banks	3,911	1.9
Tyman	Construction and Materials	3,764	1.8
Top twenty investments		114,006	55.1
Legal & General	Life Insurance	3,656	1.8
DWF Group	Industrial Support Services	3,499	1.7
Randall & Quilter	Non-life Insurance	3,465	1.7
Imperial Brands	Tobacco	3,394	1.6
Barclays	Banks	3,293	1.6
DFS Furniture	Retailers	3,276	1.6
Real Estate Investors	Real Estate Investment Trusts	2,918	1.4
Natwest Group	Banks	2,840	1.4
Speedy Hire	Industrial Transportation	2,735	1.2
Mondi	General Industrials	2,530	1.2
Top thirty investments		145,612	70.3
DS Smith	General Industrials	2,448	1.2
BAE Systems	Aerospace and Defence	2,383	1.1
Quilter	Investment Banking and Brokerage Services	2,319	1.1
Petershill Partners	Investment Banking and Brokerage Services	2,307	1.1
Litigation Capital	Investment Banking and Brokerage Services	2,268	1.1
Vodafone	Telecommunications Service Providers	2,152	1.0
National Grid	Gas Water and Multi-utilities	2,086	1.0
GlaxoSmithKline	Pharmaceuticals and Biotechnology	1,983	1.0
Ashmore	Investment Banking and Brokerage Services	1,877	0.9
AstraZeneca	Pharmaceuticals and Biotechnology	1,874	0.9
Top forty investments		167,309	80.7
Phoenix	Life Insurance	1,873	1.0
Contour Global	Electricity	1,863	0.9
Galliford Try	Construction and Materials	1,852	0.9
Direct Line Insurance	Non-life Insurance	1,852	0.9
Bellway	Household Goods and Home Construction	1,816	0.9
Diageo	Beverages	1,779	0.8
International Personal Finance	Finance and Credit Services	1,723	0.8
Conduit Holdings	Non-life Insurance	1,650	0.8
Hays	Industrial Support Services	1,628	0.8
Go-Ahead	Travel and Leisure	1,542	0.7
Top fifty investments		184,887	89.2
888 Holdings	Travel and Leisure	1,499	0.7
Hiscox	Non-life Insurance	1,472	0.7
Centamin	Precious Metals and Mining	1,459	0.7
Industrials REIT	Real Estate Investment Trusts	1,455	0.7
Halfords	Retailers	1,399	0.7
LondonMetric	Real Estate Investment Trusts	1,301	0.6
Hargreaves Lansdown	Investment Banking and Brokerage Services	1,296	0.6
CLS Holdings	Real Estate Investment and Services	1,274	0.6
Persimmon	Household Goods and Home Construction	1,244	0.6
Intermediate Capital Group	Investment Banking and Brokerage Services	1,195	0.6
Top sixty investments		198,481	95.7
Entain	Travel and Leisure	1,024	0.5
Harbour Energy	Oil Gas and Coal	920	0.5
Coca-Cola HBC	Beverages	884	0.4
Redrow	Household Goods and Home Construction	865	0.4
Bridgepoint	Investment Banking and Brokerage Services	821	0.4
MJ Gleeson	Household Goods and Home Construction	819	0.4
Synthomer	Chemicals	766	0.4
Polar Capital	Investment Banking and Brokerage Services	759	0.4
TP ICAP	Investment Banking and Brokerage Services	558	0.3
Total portfolio		205,897	99.4
Net current assetsA		1,190	0.6
Total assets		207,087	100.0
A Excluding bank loan of £24,965,000.

Investment Manager's Case Studies

SSE

SSE represents 3.2% of the portfolio and is the sixth largest portfolio position.  We are supporters of SSE's strategy of focusing on developing, operating and owning assets in regulated networks and renewables. The UK Government's recent announcement of its Energy Security Strategy should prove to be supportive, as it aligns with SSE's drive towards decarbonisation of the economy, electrification of transport and modernisation of critical infrastructure. This improving political backdrop vindicates the repositioning of the business to focus on areas that place SSE at the heart of the UK's energy transition.

The network assets should benefit from the additional investment required in the drive to net zero (such as electric vehicles and heat pumps), setting the scene for decent growth in their regulatory asset base. The renewables business develops, constructs, owns and operates assets that generate electricity from renewable sources (such as wind and water) using turbines to power generators. The bulk of their growth is coming from offshore wind where their approach is to develop a site and then farm it down to retain a minority equity stake, allowing the debt to be held off balance sheet.

We rate the management team highly and expect them to continue to demonstrate their ability to assess a broad range of options to help crystallise value for shareholders. We have continued to add to our holding during the period under review.

BP

BP represents 4.4% of the portfolio and is the second largest position. We see BP as meaningfully under-valued, with a free cash flow yield in the mid-teens according to consensus forecasts. This provides the cash flow to pay down debt, buy back shares and resume dividend growth, while investing in growth projects. While it is necessary to appreciate the ESG challenges faced by the entire sector, it is important to recognise the pace of improvement at BP and its ability to create value from opportunities in clean energy. We expect BP to become seen as part of the solution, rather than the problem, with governments set to become more inclined to approve new permits, including renewables.

As Russian sanctions take hold, efforts will be made to replace Russian gas with alternative solutions, with the knock-on benefit of tightening energy markets. BP will play a role in reducing Europe's dependence on Russian oil, both through their conventional oil and gas assets and their investment in energy transition, including renewable assets. We expect the loss of value from their Russian assets to be more than offset by the tightening in global energy markets which should in time drive an increase in their overall profitability. We took advantage of short term weakness to add to our holding after the news of the accounting charge for the write-down in the value of their Rosneft shareholding.

Condensed Statement of Comprehensive Income (unaudited)

		Six months ended			Six months ended
		31 March 2022			31 March 2021
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Net gains/(losses) on investments at fair value		-	815	815	-	36,891	36,891
Currency losses		-	-	-	-	(3)	(3)
Income	2	4,696	-	4,696	4,201	-	4,201
Investment management fee		(176)	(411)	(587)	(164)	(384)	(548)
Administrative expenses		(209)	-	(209)	(194)	-	(194)
Net return before finance costs and taxation		4,311	404	4,715	3,843	36,504	40,347
Finance costs		(56)	(131)	(187)	(56)	(130)	(186)
Return before taxation		4,255	273	4,528	3,787	36,374	40,161
Taxation	3	(53)	-	(53)	(45)	-	(45)
Return after taxation		4,202	273	4,475	3,742	36,374	40,116
Return per Ordinary share (pence)	4	8.75	0.58	9.33	7.74	75.27	83.01
The total column of this statement represents the profit and loss account of the Company.
A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses are recognised in the Condensed Statement of Comprehensive Income.
All revenue and capital items in the above statement derive from continuing operations.
The accompanying notes are an integral part of the financial statements.

Condensed Statement of Financial Position (unaudited)

		As at	As at
		31 March 2022	30 September 2021
	Notes	£'000	£'000
Fixed assets
Investments at fair value through profit or loss		205,897	207,418
Current assets
Debtors		1,748	1,322
Money-market funds		1,635	3,408
Cash and short-term deposits		-	45
		3,383	4,775
Creditors: amounts falling due within one year
Bank loan		(24,965)	(24,951)
Bank overdraft		(1,406)	-
Other creditors		(787)	(4,311)
		(27,158)	(29,262)
Net current liabilities		(23,775)	(24,487)
Net assets		182,122	182,931
Capital and reserves
Called-up share capital	6	12,295	12,295
Share premium account		52,043	52,043
Capital redemption reserve		12,616	12,616
Capital reserve	7	97,764	97,491
Revenue reserve		7,404	8,486
Equity Shareholders' funds		182,122	182,931
Net asset value per Ordinary share (pence)	8	379.16	380.84
The financial statements were approved by the Board of Directors and authorised for issue on 18 May 2022 and were signed on its behalf by:
Mark White
Chairman

Statement of Changes in Equity (unaudited)

Six months ended 31 March 2022
			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
	Note	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 September 2021		12,295	52,043	12,616	97,491	8,486	182,931
Return after taxation		-	-	-	273	4,202	4,475
Dividends paid	5	-	-	-	-	(5,284)	(5,284)
Balance at 31 March 2022		12,295	52,043	12,616	97,764	7,404	182,122
Six months ended 31 March 2021
			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
	Note	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 September 2020		12,295	52,043	12,616	53,494	8,748	139,196
Return after taxation		-	-	-	36,374	3,742	40,116
Dividends paid	5	-	-	-	-	(4,929)	(4,929)
Balance at 31 March 2021		12,295	52,043	12,616	89,868	7,561	174,383

Notes to the Financial Statements

For the year ended 31 March 2022

1.	Accounting policies
	Basis of accounting. The condensed financial statements have been prepared in accordance with Financial Reporting Standard 104 (Interim Financial Reporting) and with the Statement of Recommended Practice (SORP) for 'Financial Statements of Investment Trust Companies and Venture Capital Trusts', issued in April 2021 (The AIC SORP). They have also been prepared on a going concern basis and on the assumption that approval as an investment trust will continue to be granted.
	The interim financial statements have been prepared using the same accounting policies as the preceding annual financial statements.

2.	Income
		Six months ended	Six months ended
		31 March 2022	31 March 2021
		£'000	£'000
	Income from investments
	UK investment income
	Ordinary dividends	3,615	3,481
	Special dividends	44	106
		3,659	3,587
	Overseas and Property Income Distribution investment income
	Ordinary dividends	1,037	519
	Special dividends	-	93
		1,037	612
	Total income from investments	4,696	4,199
	Other income
	Money-market interest	-	1
	Underwriting commission	-	1
	Total other income	-	2
	Total income	4,696	4,201

3.	Taxation
	The taxation charge for the period, and the comparative period, represents withholding tax suffered on overseas dividend income.
4.	Return per Ordinary share
		Six months ended	Six months ended
		31 March 2022	31 March 2021
		p	p
	Revenue return	8.75	7.74
	Capital return	0.58	75.27
	Total return	9.33	83.01
	The figures above are based on the following figures:
		Six months ended	Six months ended
		31 March 2022	31 March 2021
		£'000	£'000
	Revenue return	4,202	3,742
	Capital return	273	36,374
	Total return	4,475	40,116
	Weighted average number of Ordinary shares in issueA	48,033,474	48,327,960
	A Calculated excluding shares in treasury.

5.	Dividends
		Six months ended	Six months ended
		31 March 2022	31 March 2021
		£'000	£'000
	Ordinary dividends on equity shares deducted from reserves:
	Final dividend for 2021 of 5.60p per share (2020 - 5.00p)	2,690	2,416
	First interim dividend for 2022 of 5.40p per share (2021 - 5.20p)	2,594	2,513
		5,284	4,929

6.	Called-up share capital
		Number	£'000
	Issued and fully paid:
	Ordinary shares 25p each
	Balance at 31 March 2022 and 30 September 2021	48,033,474	12,009
	Treasury shares
	Balance at 31 March 2022 and 30 September 2021	1,145,293	286
	Called-up share capital at 31 March 2022	49,178,767	12,295
	There have been no buybacks of Ordinary shares during the period.

7.	Capital reserve
	The capital reserve figure reflected in the Condensed Statement of Financial Position includes investment holdings gains at 31 March 2022 of £12,281,000 (30 September 2021 - £15,552,000) which relate to the revaluation of investments held on that date and realised gains as at 31 March 2022 of £85,483,000 (30 September 2021 - £81,939,000).

8.	Net asset value per Ordinary share
		As at	As at
		31 March 2022	30 September 2021
	Attributable net assets (£'000)	182,122	182,931
	Number of ordinary shares in issueA	48,033,474	48,033,474
	NAV per ordinary share (p)	379.16	380.84
	A Excludes shares in issue held in treasury.

9.	Transaction costs
	During the period expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within gains/(losses) on investments in the Condensed Statement of Comprehensive Income. The total costs were as follows:
		Six months ended	Six months ended
		31 March 2022	31 March 2021
		£'000	£'000
	Purchases	118	132
	Sales	16	23
		134	155

10.	Loans
	On 28 June 2021, the Company agreed a two year £30 million revolving credit facility with the Royal Bank of Scotland International Limited, which has a maturity date of 25 June 2023.
	At 31 March 2022, £25,000,000 had been drawn down (30 September 2021 - £25,000,000) at a rate of 1.347% (30 September 2021 - 1.155%).
	The loan is shown in the Condensed Statement of Financial Position net of amortised expenses of £35,000 (30 September 2021 - £49,000).

11.	Fair value hierarchy
	FRS 102 requires an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements.  The fair value hierarchy shall have the following classifications:
	Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
	Level 2: inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly (ie as prices) or indirectly (ie derived from prices); and
	Level 3: inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).
	All of the Company's investments are in quoted equities (30 September 2021 - same) that are actively traded on recognised stock exchanges, with their fair value being determined by reference to their quoted bid prices at the reporting date. The total value of the investments has therefore been deemed as Level 1 (30 September 2021 - same).

12.	Half Yearly Report
	The financial information contained in this Half Yearly Report does not constitute statutory accounts as defined in Sections 434-436 of the Companies Act 2006. The financial information for the six months ended 31 March 2022 and 31 March 2021 have not been audited.
	The information for the year ended 30 September 2021 has been extracted from the latest published audited financial statements which have been filed with the Registrar of Companies. The report of the auditors on those accounts contained no qualification or statement under Section 498 (2), (3) or (4) of the Companies Act 2006.
	This Half Yearly Report was approved by the Board on 18 May 2022.

For further information please contact:

Evan Bruce-Gardyne

Client Director, Investment Trusts, abrdn

Tel:  [phone]

 

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