New Star Investment Trust PLC: Final Results for the year ended 30th June 2023

NEW STAR INVESTMENT TRUST PLC

This announcement constitutes regulated information.

UNAUDITED RESULTS

FOR THE YEAR ENDED 30TH JUNE 2023

New Star Investment Trust plc (the ‘Company’), whose objective is to achieve long-term capital growth, announces its results for the year ended 30th June 2023.

FINANCIAL HIGHLIGHTS

* The total return figure for the Company represents the revenue and capital return shown in the Statement of Comprehensive Income divided by the net asset value at the beginning of the period.

CHAIRMAN’S STATEMENT

PERFORMANCE

Your Company generated a return of 2.62% over the year to 30th June 2023, leaving the net asset value (NAV) per ordinary share at 176.83p. By comparison, the Investment Association’s Mixed Investment 40-85% Shares Index gained 3.37%. The MSCI AC World Total Return Index gained 11.89% in sterling while the MSCI UK Total Return Index rose 6.78%. Over the year, UK government bonds declined 15.39%. Further information is provided in the investment manager’s report.

Your Company made a revenue profit for the year of £2.12 million (2022: £700,000).

GEARINGS AND DIVIDEND

Your Company has no borrowings. It ended the year under review with cash representing 13.73% of its NAV and is likely to maintain a significant cash position. In respect of the financial year to 30th June 2023, your Directors recommend the payment of a dividend of 1.7p per share bringing the total dividends payable to 2.6p per share (2022: 1.4p).

ALLOCATION OF EXPENSES

Historically, expenses including the investment manager’s fee have been charged to the Revenue account. The Directors have reviewed this policy and concluded that it would be more appropriate to allocate 100% of the investment manager’s direct fees charged to the Company to the Capital account. This policy has been introduced effective from 1 July 2022. One impact of this change will be to increase the revenue profit and amount available for distribution to shareholders.

DISCOUNT

During the year under review, your Company’s shares continued to trade at a significant discount to their NAV. The Board keeps this issue under review.

OUTLOOK

Investors may have to contend with challenging economic conditions over the remainder of 2023. Weakening monetary trends within the Group of Seven major industrial nations, intensifying housing market weakness and falling long-term bond yields relative to short-term interest rates suggest a period of weak or no economic growth extending into the spring of 2024. Inflationary trends, however, were showing signs of moderating over the summer, suggesting that a return to 1970s-style price rises was unlikely and that the interest-rate cycle was at or approaching its peak and that monetary easing by the world’s leading central banks might be on the horizon.

NET ASSET VALUE

Your Company’s unaudited NAV at 30th September 2023 was 176.48p.

INVESTMENT MANAGER’S REPORT

MARKET REVIEW

Inflation rose to a cyclical peak and then declined in many countries over the year under review, implying that interest rates were close to their cyclical highs. Interest rates had increased rapidly to combat inflation, which proved more persistent than “transitory”, confounding some central bankers’ early expectations. The Federal Reserve raised its official rate from near zero in March 2022 to 5.25-5.5% in July 2023. In the eurozone, the European Central Bank’s key deposit rate moved from -0.5% in July 2022 to 3.75% in July 2023 while the Bank of England raised Bank Rate from near zero in December 2021 to 5.25% in August 2023.

US headline inflation fell from its 9.1% peak in June 2022 to 3.0% in June 2023 while eurozone inflation fell from its October 2022 peak of 10.6% to 5.5% in June 2023. UK inflation fell from 11.1% in October 2022 to 6.1% in September 2023 but core inflation remained stubbornly high at 6.7%, raising fears that the BoE might keep rates higher for longer, impeding economic activity. Despite the pound’s 4.69% rise against the dollar, UK stocks underperformed, rising only 6.78% against 11.89% in sterling for global equities, while UK government bonds fell 15.39%.

Lower energy prices contributed to the fall in inflation. Oil prices declined 29.60% in sterling over the year, falling back from the highs reached following Russia’s Ukraine invasion. Natural gas prices also fell but remained elevated in Europe because of its dependence on Russian gas supplies. By contrast, the US was less vulnerable to higher gas prices because it has energy self-sufficiency. Higher housing costs pushed up inflation over the year but may soon abate as higher mortgage rates lead to falling house prices. Food prices have also risen but are unpredictable due to random factors such as the weather and the impact of higher oil prices on transport costs. 

Some major economies proved more resilient than expected in the face monetary tightening. US gross domestic product (GDP) rose in each of the four quarters of your Company’s financial year at annual rates of 3.2%, 2.6%, 2.0% and, according to the second estimate, 2.1% respectively.  In the four quarters to June 2023, eurozone GDP rose 0.4%, fell 0.1%, rose 0.2% and flatlined quarter-on-quarter respectively and thus narrowly avoided a technical recession. UK GDP fell 0.2% for the third quarter of 2022 and flatlined for the fourth quarter. In November 2022, the BoE monetary policy committee said GDP would fall throughout 2023 and the first half of 2024 because of higher energy prices and tighter monetary policy. In the event, UK GDP expanded in the first and second quarters of 2023, rising 0.1% and 0.2% respectively.

Equities in Asia excluding Japan and emerging markets underperformed, falling 5.20% and 2.36% respectively in sterling, with Chinese stocks, which account for the largest proportion of both indices, declining 20.42%. Chinese equities fell because of zero-Covid-19 restrictions, increased regulation in pursuit of “common prosperity” and US restrictions governing exports and investment in China for key technology industries. Vietnamese stocks fell 20.17% as anti-corruption measures coincided with higher interest rates although the economy continues to benefit from high public sector investment and off-shoring from China. By contrast, Indian stocks rose 9.59% as the prime minister, Narendra Modi, pursued pro-business policies.

PORTFOLIO REVIEW

Your Company’s total return over the year was 2.62%. By comparison, the Investment Association Mixed Investment 40-85% Shares sector, a peer group of funds with a multi-asset approach to investing and a typical investment in global equities in the 40-85% range, rose 3.37%. The MSCI AC World Total Return Index rose 11.89% in sterling while the MSCI UK All Cap Total Return Index rose 6.78%. Your Company is invested across asset classes to increase diversification and reduce risk over the longer term. In consequence, performance did not keep pace with strongly rising equity markets as investments in sterling and dollar cash and low-risk multi-asset funds lagged the gains for equities. Global bonds rose 5.73% in sterling. Your Company benefited from holding no direct investments in funds dedicated to UK government bonds, which fell 15.39%.

US technology stocks gained 31.66% in sterling partly because of growing expectations that the Fed would soon ease monetary policy. Lower interest rates typically favour stocks in growth sectors such as technology because their future cash flows tend to be discounted less aggressively. Some larger technology companies also reported stronger-than-anticipated trading including Nvidia, a supplier to the nascent artificial intelligence sector. Polar Capital Global Technology, your Company’s best performer over the year, gained 18.64% but lagged US technology stocks because of its bias to medium-sized companies. Your Company added £1 million in November 2022 to its holding in the iShares S&P 500 exchange-traded fund (ETF), making it the third largest investment in the portfolio at the year end. As a tracker of the US equity market, this ETF benefited from the strong performance of US technology companies, rising 12.48%.

Among your Company’s global equity holdings, Baillie Gifford Global Income Growth also benefitted from technology sector strength, rising 12.10%. At the year end, Microsoft, Apple and Taiwan Semiconductor featured in its top-10 holdings. The global equity allocation within the portfolio increased in October 2022 through a £2 million investment in Redwheel Global Equity Income, which aims to hold quality stocks that yield more than the market while avoiding high-yielding stocks where dividends may be cut.

Despite its relatively-low technology weighting, Fundsmith Equity, your Company’s largest investment, outperformed, rising 13.57% because of strong returns from some consumer and healthcare holdings. Novo Nordisk, a stock owned by Fundsmith and Baillie Gifford Income Growth, rose 39.04% in sterling because of the success of its weight-loss drugs. Novo Nordisk also featured in the top 10 holdings of BlackRock Continental European Income and Crux European Special Situations, which gained 11.90% and 11.0% respectively but lagged equities in Europe excluding the UK, up 20.0% in sterling. Crux European Special Situations was sold in June 2023.

Within your Company’s UK equity allocation, Aberforth Split Level Income and Man GLG UK Income outperformed, up 18.33% and 10.54% respectively, but Trojan Income, up 3.76%, and Chelverton UK Equity Income, down 0.98%, lagged. Aberforth Split Level Income benefited in a rising equity market from the impact of leverage through its zero dividend preference shares.

Falls by some emerging markets provided buying opportunities for longer-term investors such as your Company and an additional £4 million was invested over the year. Of this, a further £1 million was invested both in Vietnam Enterprise Investments and in Somerset Asia Income, which proved more resilient than their respective equity markets, falling 14.05% and gaining 0.32% respectively. In February 2023, £2 million was invested in a new holding in Baillie Gifford Pacific. A bias towards income stocks helped JP Morgan Global Emerging Markets Income Trust and JP Morgan Emerging Markets Income Fund to outperform, up 5.46% and 1.90% respectively. Matthews Asia ex Japan Total Return Equity underperformed, however, falling 15.66% because of poor Chinese stock selection and a relatively high allocation to Vietnam. Matthews Asia shifted its investment mandate from income to total return and it may, in consequence, be sold in favour of holdings that further your Company’s ability to pay dividends. In a strong Indian equity market, Stewart Investors Indian Subcontinent outperformed, rising 15.38%.

Income from sterling and dollar cash increased significantly as interest rates rose. The dollar’s 4.48% fall against the pound, however, led to a negative return for dollar cash in sterling terms.

BlackRock Gold & General, which invests principally in gold securities, rose 3.42% as the gold price rose 1.47% in sterling. Amongst holdings in lower-risk multi-asset investments, Trojan O was the best performer, up 0.90%.

OUTLOOK

Interest rates may be close to their cyclical highs in some countries where inflation has fallen from the recent peak and interest rate cuts may be on the horizon. Equities and bonds should benefit from easier monetary policy. Your Company’s allocation to equity investments increased over the year as buying opportunities arose, particularly in emerging markets trading on low valuations relative to developed economy markets. Emerging markets may benefit from higher economic growth rates, lower debt-to-GDP ratios and dollar weakness, leading to fund inflows should the Fed ease monetary policy. The focus on equity investments with income mandates supports your Company’s ability to pay dividends.

Your Company is committed to remaining diversified across asset classes over the long term. Investments in sterling and dollar cash, gold securities and lower-risk multi-asset funds reduced risk at the expense of performance in a year when equity markets rose but may prove defensive should markets fall.

SCHEDULE OF LARGEST HOLDINGS AT 30TH JUNE 2023