Rights and Issues Investment Trust PLC: ACS-Annual Financial Report

RIGHTS AND ISSUES INVESTMENT TRUST PLC

Annual Results for the year to 31st December 2022

The following text is extracted from the Company’s financial statements for the year ended 31st December 2022.  Page numbers refer to the full financial statements.

CHAIRMAN’S STATEMENT

During 2022 the UK economy suffered from a number of headwinds which impacted heavily on the performance of smaller companies.

The war in Ukraine and its resultant effect on energy and commodity prices have led to supply shortages and high inflation which, in turn, have caused central banks to ratchet up interest rates to levels not seen since before the 2008 financial crisis. Post Brexit, the UK has been particularly prone to staff shortages; COVID-19 appears to have reduced the available labour pool still further.

After a satisfactory 34.4% increase in net asset per share in 2021, 2022 saw a 24.8% reduction from 3036.6p to 2283.2p. During this period the FTSE All Share fell by 3.2%; however as noted in previous reports, the FTSE All Share is dominated by energy and commodity companies which have benefitted from soaring inflation and global supply shortages. Over 5 years the Company has underperformed the FTSE All Share by 0.3% but over 10 years it has generated a 237.3% return compared with 31.7% in the FTSE All Share.

Following Simon Knott’s decision to retire as the Company’s investment manager, the Board carried out a thorough review of potential replacement managers, resulting in the appointment of Jupiter Unit Trust Managers (“JUTM”) with effect from 3rd October 2022. The Board is grateful to Simon for his 39 years’ tenure and for the outstanding returns for shareholders generated over that period.

Lead investment manager, Dan Nickols, and co-manager, Matt Cable, are responsible for managing the Company’s portfolio and are part of Jupiter’s UK Small and Mid-Cap (“SMID”) team. They are supported by Jupiter’s wider investment platform and operational infrastructure, more details of which are provided in the Investment Manager’s report.

Dan has an outstanding long term investment track record, being active in UK smaller companies since 1997; Matt has managed UK Smaller Companies portfolios since 2002, both Dan and Matt will be presenting at the forthcoming AGM which will be held at Jupiter's head office in London.

The Board expects continuity of investment style but also a reduction in the historic concentration of the portfolio with interesting new opportunities being added; we have already seen the beginnings of this process.

Jupiter will also be responsible for increasing the marketing of the Company to a wider audience of investors and potential investors including private individuals, wealth managers and professional fund managers through a variety of traditional and digital marketing activities.

In common with other smaller company investment trusts, the Company has seen an increase in the discount during the year and at year-end this stood at 17.2% despite having bought back 1.2m shares at a total cost of £25.9m, including £15.1m as part of the tender offer made to shareholders in September in connection with the change of fund managers. Share buy-backs may succeed in narrowing the discount between the Company’s share price and net asset value per share or in limiting its volatility, but their influence is inevitably subject to broader stock market conditions. Irrespective of their effect on the discount, buy-backs at the margin provide an increase in liquidity for those shareholders seeking to crystallise their investment and at the same time deliver an economic uplift for those shareholders wishing to remain invested in the Company. The Company’s current share buy-back programme runs until July 2023.

In order to help increase liquidity, given that the share price trades around £18-£20 per share, the Board is proposing, subject to shareholder approval, that each existing ordinary share be subdivided into 10 new ordinary shares. This subdivision will not itself affect the value of any shareholder’s holding in the Company and should benefit all shareholders, particularly those who seek to invest on a regular basis or re-invest their dividends. Please see resolution 13 in the notice of AGM on page 4 and the accompanying explanation on page 7 of this Annual Report for further details.

The Directors are equally conscious of the importance of income to shareholders and are proposing a final dividend of 29.25p which, if approved at the forthcoming AGM, would result in a total payment of 40p per share to shareholders, a 15.1% increase over the prior year’s dividend.

There have been changes to the Board of Directors during the year. Whilst retiring as investment manager Simon Knott continues his involvement with the Company as a non-executive director. David Bramwell retired as Chairman at the end of December after a 20-year involvement with the Company. We thank David for his significant contribution over this period. At the same time, we extend a warm welcome to Helen Vaughan who joined the Board on 1st January 2023, both as a non-executive director and Chair of the Audit, Risk and Compliance Committee.

The war in Ukraine will likely continue in an unpredictable manner for some time yet causing uncertainty in the financial markets. There are tentative signs that inflation may be peaking and that increases in base rates may not be as high as the Bank of England previously indicated. However, it is likely to be some time before this filters through to consumer confidence.

Whilst there is expected to be continued volatility in the markets, this does present a significant opportunity to buy into companies operated by high quality management teams with robust balance sheets which are fundamentally mispriced. We believe the Jupiter team has the expertise to identify these opportunities and continue the long term success of the Company.

Mr D. M. BEST

Chairman

15th February 2022

INVESTMENT MANAGER’S REPORT

Introduction

We are delighted to present our first report to the shareholders of the Company following our appointment as investment managers on 3rd October. We are conscious of the responsibility we are taking on after the remarkable and highly successful 39 year tenure of our predecessor Simon Knott. We are likewise extremely pleased that Mr Knott has agreed to remain on the Board as a non-executive director and continues to be a significant shareholder in the Company.

Given the relatively short period since we took over as managers of the Company, we do not propose to report in detail on performance for the year just ended (please see the Chairman’s introduction). Instead, we would like to take this opportunity to introduce ourselves, our investment philosophy and process, and our immediate plans for the portfolio.

Your new investment managers

Following Mr Knott’s decision to step down as the Company’s in-house investment manager, the Board undertook a process to select a new external manager. We, Dan Nickols and Matt Cable, were appointed to manage the portfolio with effect from 3rd October 2022. With 25 and 15 years’ experience in UK smaller companies investing respectively, we are both part of Jupiter’s SMID investment team. In turn, our team forms part of Jupiter’s wider investment department which is responsible for the management of £48bn of client funds across a wide range of asset classes, regions and strategies. We are further supported by Jupiter’s wider investment and business infrastructure including state-of-the-art systems, well invested operational functions, risk management, data science and governance and sustainability teams.

Key people

Dan Nickols is co-head of Jupiter’s SMID team, having joined the company in 2020 following Jupiter’s acquisition of Merian. His career in the UK Smaller Companies sector started in 1997 at Old Mutual. Dan has a degree in Modern & Medieval Languages from Cambridge University and is an Associate of the Society of Investment Professionals.

Matt Cable joined Jupiter in 2019 as UK smaller companies fund manager after holding a similar role at M&G for almost ten years. Prior to his time at M&G, Matt worked in a variety of roles across financial services firms including Travelex, Bank of America and Capital One. He has a degree in Natural Sciences from Cambridge University and is a CFA Charterholder.

The Small and Midcap team

Jupiter’s SMID team consists of eight investment professionals researching and investing in UK listed businesses outside the FTSE 100. Each member of the team has responsibility for researching specific industry sectors. The team manages £4bn of client funds in 11 portfolios across six investment strategies.

The team operates in a highly collaborative manner, interacting daily but formally meeting weekly to discuss individual stocks and monthly to debate macro-economic and other ‘top-down’ matters.

Investment philosophy and process

As a team, we are fundamental investors who look at companies and markets from both a bottom-up and top-down perspective. We aim to combine these two views, alongside careful risk management, to construct portfolios designed to deliver outperformance for our clients over the long term.

Investment philosophy

We believe that operating in the small to mid-sized part of the equity market offers the opportunity for well resourced, diligent research to generate insights that other market participants sometimes miss. We know, for example, that smaller companies are generally less well researched by both sell-side and buy-side firms. We believe that by doing a lot of our bottom-up research in-house, for example through meeting management, visiting sites and building our own financial models, we can gain an ‘edge’ over the wider market and exploit this to generate outperformance for our clients.

At the same time, we recognise that we will never know everything. In order to the manage the risks of individual mistakes, we therefore pay great attention to portfolio construction and risk management, ensuring that funds are appropriately diversified and balanced across a range of factors.

Investment process

The core of our investment process is the synthesis of top-down views and bottom-up stock-specific research. Top-down factors we consider include macro-economic indicators such as GDP growth, interest rates and inflation as well as secular trends that may impact investments. These may include technological, political or cultural changes (for example the way people choose to shop). We also consider the impact of major global events such as wars and natural disasters on our investment universe. The purpose of this work is not so much to predict the future in detail (which is not our area of expertise) but to ensure that we align our portfolios with thematic market leadership – i.e. the trends that tend to define the types of stocks that do well over moderate to long periods.

Our bottom-up research is detailed and granular. We regularly meet management teams from both current and prospective holdings, often combined with visits to their premises. We make regular use of expert networks and other third-party sources of information and insight. We have close relationships with sell-side analysts but also build and maintain our own financial models so that we are not relying on ‘consensus’ views to make decisions. Much of the value in this process is the synthesis of these various elements. Our team-based approach means that assumptions can be tested and opinions challenged in a collaborative environment in order to arrive at robust decisions that are ‘owned’ by the whole group.

Stock selection

Our stock selection process focused on three factors that we believe are key to generating outperformance:

Sustainable above market growth – we look for businesses that we think can generate sustained growth above that of the wider market. These may be businesses aligned to secular change, those with strong intellectual property that can take market share or those with disruptive business models.

Scope for positive surprises – we look for businesses that have the potential to deliver consistent positive surprises to the market. In practice this often means companies that are consistently under-forecast by sell-side consensus.

Potential for re-rating – we look for businesses that appear to be fundamentally undervalued by the market and therefore have the scope to deliver returns ahead of their own growth.

In practice, our best ideas often display aspects of all three of these elements. A business with strong fundamentals that is growing fast will often exceed anchored market expectations and earn a re-rating in the process.

Plans for your Company and progress to date

The Company has delivered exceptionally strong returns for investors over the last 39 years under the management of Mr Knott. Our overall approach for the future therefore seeks to retain the best of the Company’s established philosophy, combined with the significantly greater resources available to it under the management of Jupiter’s SMID team.

What will stay the same

The portfolio will remain a concentrated, long-term investor in UK small and mid-sized companies. The portfolio consisted of 24 holdings when we took over management and we expect to hold a broadly similar number in the future. We will always make decisions based on our view of likely performance and valuation, but our working assumption on making an investment is that we will be holders for the medium to long term. We will continue to be responsible and engaged owners of businesses. We will meet management regularly, always vote our shares and carefully consider governance matters relating to companies we invest in on your behalf, such as remuneration, succession and Board independence.

What we plan to change

Although we expect to hold a broadly similar number of stocks in the portfolio, we do anticipate reducing the degree of concentration among the very largest positions. We believe that the highly active and differentiated nature of the Company can be retained while mitigating the risk of having very large position sizes. We therefore expect to reduce the size of some of the Trust’s very large positions in the portfolio while adding additional holdings at similar weights. Over time this will make it less likely that the Trust will invest in very small (in market capitalisation terms) stocks as it is not practical to hold them at meaningful position sizes.

Given access to the Jupiter SMID team’s wider research coverage we are likely to add holdings from a broader range of industries and sectors. Over time we would expect the portfolio to be more balanced in this regard and closer to the weights of different industries in the market and economy. We will also aim to hold stocks that are clearly small/mid in size to ensure that we capture the higher growth rates we believe are available in this part of the market.

Progress to date

In our discussions with the board, we have been very clear that we have responsibility for performance of the portfolio from day one of our management. There is no concept of a ‘transition period’ so every decision we have made from the start has been made with shareholders’ interests in mind. This will continue to be our guiding philosophy and will always be more important than making changes over an arbitrary timescale.

With that said, and as detailed above, we do plan to make some changes to the portfolio over time. We have made a start on these over our first few months as managers. In particular we have sold some smaller holdings that are not part of our longer term plans and reduced the size of our units in some larger companies in order to release capital for new holdings.

Between taking over management of the Company and the end of the year, we made three new investments:

Gamma Communications is a provider of internet telephony and related services to corporates of all sizes. It has a strong long term track record of growth driven by multi-year transition from fixed-line to internet-based infrastructure. Close to 90% recurring revenue and inherent operational gearing drive attractive and predictable earnings growth.

Trading as Utility Warehouse, Telecom Plus is a multiservice provider of energy, telecoms and insurance services to UK customers. Growth is delivered by a unique network of c.50k ‘partners’ and competitive pricing is assured by long-term wholesale supply agreements and discounts for taking multiple services. Following the demise of the unsustainable ‘challenger’ energy providers, Utility Warehouse now has an unrivalled customer proposition in terms of breadth and value. With only c.2% market share and a plan to double customer numbers over 4-5 years, this should drive attractive earnings growth.

Alpha Group International (formerly Alpha FX) is a founder led provider of FX, banking and payment solutions to corporates and investment funds. It takes an innovative approach focused on providing long-term ‘sticky’ services based on a highly scalable technology platform. The model drives long term visible growth as new clients are ‘layered’ onto a recurring base. A well invested platform facilitates operational gearing and cash generation which can be reinvested to drive further growth.

In addition, from the start of 2023 to the time of writing we have started further positions in technology business Spirent Communications and specialist lender OSB Group. We look forward to discussing these in more detail in future reports.

Conclusion

We are delighted to have been appointed as your Company’s new investment managers and excited about the opportunities ahead of us. While you should expect to see further carefully considered changes over the coming months, this will only ever happen with your best interests as shareholders in mind.

Dan Nickols

Lead Manager

Matt Cable

Fund Manager

15th February 2023

SHARE SPLIT

The price of the Company’s existing ordinary shares of 25p each (“Existing Ordinary Shares”) has increased substantially over recent years and as at 13th February 2023 (being the latest practicable date prior to publication of this document), the closing share price was £20.80. To assist monthly savers and those who reinvest their dividends or are looking to invest smaller amounts the Directors believe that it is appropriate to propose the sub-division of each Existing Ordinary Share into 10 new ordinary shares of 2.5p each (“New Ordinary Shares”). The Directors believe that the sub-division (the “Share Split”) may also improve the liquidity in and marketability of the Company’s shares which would benefit all shareholders. Following the Share Split, each shareholder will hold 10 New Ordinary Shares for each Existing Ordinary Share that they held immediately prior to the Share Split. Whilst the Share Split will increase the number of ordinary shares the Company has in issue, upon the Share Split becoming effective the net asset value, share price and dividend per share can be expected to become one-tenth of their respective values immediately preceding the Share Split.

A holding of New Ordinary Shares following the Share Split will represent the same proportion of the issued ordinary share capital of the Company as the corresponding holding of Existing Ordinary Shares immediately prior to the Share Split. The Share Split will not affect, therefore, the overall value of a shareholder’s holding in the Company. By way of example, taking the net asset value (including current year revenue) and share price as at 13th February 2023 of £24.51 and £20.80 respectively per Existing Ordinary Share, if the Share Split had become effective as at that date, each holder of one Existing Ordinary Share would receive 10 New Ordinary Shares each with an aggregate net asset value and share price of £2.45 and £2.08 respectively immediately following the Share Split. The New Ordinary Shares will rank pari passu with each other and will carry the same rights and be subject to the same restrictions as the Existing Ordinary Shares, including the same rights to participate in dividends paid by the Company.

The ex-dividend date for the final dividend in respect of the year ended 31st December 2022 is before the date of the Share Split and so dividends payable in March 2023 will not be affected. In future years, dividends per share will be one-tenth of the level that they would otherwise have been but a shareholder who neither buys nor sells shares will continue to receive the same amount in dividends as they would otherwise have received. Communication preferences and mandates and other instructions for the payment of dividends via CREST or in paper form will, unless and until revised, continue to apply to the New Ordinary Shares.

The Share Split will not itself give rise to any liability to UK income tax (or corporation tax on income) for shareholders. For the purposes of UK capital gains tax and corporation tax on chargeable gains, the receipt of the New Ordinary Shares will be treated as the same asset as the shareholder’s holding of Existing Ordinary Shares and as having been acquired at the same time, and for the same consideration, as the shareholder’s holding of Existing Ordinary Shares.

The Share Split requires the approval of shareholders and, accordingly, Resolution 13 at this year’s Annual General Meeting seeks such approval. The Share Split is conditional on the New Ordinary Shares being admitted to the Official List of the Financial Conduct Authority and to trading on the London Stock Exchange’s main market for listed securities. Application for such admissions will be made and, if they are accepted, it is proposed that the last day of dealings in the Existing Ordinary Shares will be 23rd March 2023 (with the record date for the Share Split being 6.00pm on that date) and that dealings in the New Ordinary Shares will commence on 24th March 2023. If Resolution 13 is passed, the Share Split will become effective on admission of the New Ordinary shares to the Official List, which is expected to be at 8.00am on 24th March 2023. The aggregate nominal value of the Company’s issued share capital as at 13th February 2023 comprised 6,088,670 ordinary shares of 25p each. If the Share Split is applied to the issued share capital as at 13th February 2023, the total aggregate nominal value of the share capital will remain at £1,522,167.5 but will comprise 60,886,700 ordinary shares of 2.5p each in issue.

The New Ordinary Shares may be held in uncertificated or certificated form. Following the Share Split becoming effective, share certificates in respect of the Existing Ordinary shares will cease to be valid and will be cancelled. New certificates in respect of the New Ordinary Shares will be issued to those shareholders who hold their Existing Ordinary Shares in certificated form and are expected to be dispatched not later than 24th 2023. No temporary documents of title will be issued. Transfers of New Ordinary Shares between 24th 2023 and the dispatch of new certificates will be certified against the Company’s register of members held by the Company’s Registrars. It is expected that the ISIN (GB0007392078) of the Existing Ordinary Shares will be disabled in CREST at the close of business on 23rd March 2023 and the New Ordinary Shares will be credited to CREST accounts on 24th March 2023.

PORTFOLIO STATEMENT

Details of the investments held within the portfolio as at 31st December 2022 are given below by market value: