MURRAY INTERNATIONAL TRUST PLC

Legal Entity Identifier (LEI):  549300BP77JO5Y8LM553

 

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2022

 

Performance Highlights

 

Net asset value total returnAB - 2022			Share price total returnAB - 2022
+8.8%			+20.6%
2021	+14.1%		2021	+7.2%
Reference Index total returnBC - 2022			Premium/(discount) to net asset valueAD - 2022
-7.3%			+3.1%
2021	+20.0%		2021	-6.8%
Dividends per shareBE - 2022			Revenue return per shareB - 2022
56.0p			60.1p
2021	55.0p		2021	51.7p
Retail Price IndexB - 2022			Ongoing charges ratioAD
+13.4%			0.52%
2021	7.5%		2021	0.59%
A Alternative Performance Measure
B For the year to 31 December.
C Reference Index is FTSE All World TR Index.
D As at 31 December.
E Dividends declared for the year to which they relate.

Financial Calendar

Payment dates of future quarterly dividends	5 May 2023 16 August 2023 17 November 2023 16 February 2024
Financial year end	31 December
Online Shareholder Presentation	Monday 3 April 2023 at 11.00 a.m.
Annual General Meeting (Glasgow)	Friday 21 April 2023 at 12:30 p.m.
Record date for the Share Split and disablement in CREST of the existing ISIN for settlement	6:00 p.m. on 21 April 2023
Listing and Admission of the New Ordinary Shares expected to commence	8:00 a.m. on 24 April 2023
Expected date for crediting CREST accounts with New Ordinary Shares (where applicable)	24 April 2023
Expected date by which certificates in respect of New Ordinary Shares are to be dispatched to certificated shareholders	By 5 May 2023

 

Dividends

	Rate	Ex-dividend date	Record date	Payment date
1st interim	12.0p	7 July 2022	8 July 2022	16 August 2022
2nd interim	12.0p	6 October 2022	7 October 2022	18 November 2022
3rd interim	12.0p	5 January 2023	6 January 2023	17 February 2023
Proposed final	20.0p	6 April 2023	11 April 2023	5 May 2023
Total dividends	56.0p

Financial Highlights

	31 December 2022	31 December 2021	% change
Total assetsA	£1,816.6m	£1,760.9m	+3.2
Net assets	£1,616.8m	£1,561.1m	+3.6
Market capitalisation	£1,667.7m	£1,455.0m	+14.6
Net Asset Value per Ordinary shareB	1,293.3p	1,240.3p	+4.3
Share price per Ordinary share (mid market)B	1,334.0p	1,156.0p	+15.4
Premium/(discount) to Net Asset Value per Ordinary shareC	3.1%	-6.8%
Net gearingC	11.2%	12.2%
Revenue return per share	60.1p	51.7p	+16.3
Dividends per shareD	56.0p	55.0p	+1.8
Dividend cover (including proposed final dividend)C	1.07x	0.94x
Dividend yieldC	4.2%	4.8%
Revenue reservesE	£69.2m	£63.0m
Ongoing charges ratioC	0.52%	0.59%
A The total assets less current liabilities as shown in the balance sheet with the addition of prior charges.
B Capital values.
C Considered to be an Alternative Performance Measure
D The figure for dividends per share reflects the years to which their declaration relates (see note 8) and assuming approval of the final dividend of 20.0p (2021 - final dividend of 19.0p).
E The revenue reserve figure does not take account of the third interim and final dividends amounting to £15,002,000 and £25,003,000 respectively (2021 - third interim dividend of £15,103,000 and final dividend of £23,813,000).

STRATEGIC REPORT

 

Chairman's Statement

Performance

I am pleased to report that, despite the well-reported and widespread turbulence of global financial markets during 2022, the Company's net asset value ("NAV") posted a total return for the year ended 31 December 2022 (i.e. with net income reinvested) of +8.8%. The Company has no benchmark but this performance compares favourably with a total return for the Reference Index, the FSTE ALL World TR Index, of -7.3%. However, the Company's performance could not match an abnormal rise over the same period of +13.4% for the UK Retail Price Index (RPI). The share price posted a higher total return of +20.6%. Increased income per share amounted to 60.1p for the year (2021: 51.7p), enabling an ongoing improvement in the level of dividend and a return to a fully covered dividend.

It is also satisfying to note that the longer-term picture has improved.  Over three years, RPI has increased +23.5%, the Reference Index has returned +19.0% and the Company's NAV total return stands at +25.3%.

The Manager's investment focus continues to emphasise both geographical and sector diversification across a broad range of quality companies as we continue to seek both long-term income and capital growth. Such characteristics tend not to be represented in the more concentrated Reference Index where a small number of growth stocks have tended to dominate in recent years. For this reason, relative performance in any shorter time period can, and does, deviate significantly on a comparative basis.

Dividends

Three interim dividends of 12.0p per share (2021: three interims of 12.0p) have been declared during the year. Your Board is now recommending an increased final dividend of 20.0p per Ordinary 25p share (2021: final dividend of 19.0p). If approved at the Annual General Meeting, this final dividend will be paid on 5 May 2023 to holders of Ordinary 25p shares on the register on 11 April 2023 (ex dividend 6 April 2023). If the final dividend is approved, total Ordinary dividends for the year will amount to 56.0p (2021: 55.0p), an increase over the previous year of 1.8%. The level of increase reflects the fact that the Company already pays a competitively high dividend yield which stood at 4.2% at year end. This represents the 18^th year of dividend increases for the Company, which remains an AIC 'Next Generation Dividend Hero'.

As a long-established investment trust, the Company had the benefit of £69.2 million of distributable reserves on its balance sheet at 31 December 2022, which have been accumulated by the Company over many years from retained earnings.  The payment of the final dividend, if approved, will result in the movement of £5.2 million to the revenue reserves to strengthen them for the future.  The dividend cover at year end was 1.07x (2021: 0.94x). The replenishment of reserves this year is in line with the policy that we have highlighted to shareholders in previous years. The Board intends to maintain the Company's progressive dividend policy. This means that, in some years, revenue will be added to reserves while, in others, some revenue may be taken from reserves to supplement revenue earned during that year, in order to pay the annual dividend. Shareholders should not be surprised or concerned by either outcome as, over time, the Company will aim to pay out what the underlying portfolio earns in sterling terms.

Currency fluctuations may also have an impact on income and therefore the level of dividend.  The Board, however, is maintaining the present policy not to hedge the sterling translation risk of revenue arising from non-UK assets.

Gearing

At the year end, total borrowings amounted to £200 million, representing net gearing (calculated by dividing the total borrowings less cash by shareholders' funds) of 11.2% (2021: 12.2%), all of which is drawn in sterling.  In May 2022, the Company utilised part of its £200m Loan Note Shelf Facility, of which £50m had already been drawn down, through the issuance of a £60 million 15 year Senior Unsecured Loan Note at an all-in-rate of 2.83%.  The proceeds of the issue were used to repay the Company's £60 million fixed rate loan that matured at that time.  Under the terms of the Loan Note Agreement, dated May 2021, up to an additional £90 million will also be available for drawdown by the Company until May 2026.  The Board's current intention is to only use this additional amount to repay the Company's existing debt as it falls due over the coming years.

The Company is now considering options to replace the next fixed rate loan which amounts to £60m and is due to expire in May 2023. The Company will update shareholders in due course. 

Ongoing Charges Ratio ("OCR")

The Board remains focused on controlling costs and on delivering value to shareholders.  The OCR for 2022 has continued to trend downwards ending the year on 0.52% (2021: 0.59%).  The continued improvement reflects the benefit of the reduction in management fee agreed with effect from 1 January 2022.

Online Presentation and Annual General Meeting ("AGM")

In 2022 the Board for the second time held an online shareholder presentation in advance of the AGM. It was very well attended again and we hope that shareholders found it informative. It also provided a useful opportunity for the Board to receive feedback and views from shareholders and to answer your questions.  Given the success of the online event, the Board has decided to repeat the exercise again in 2023.  We will hold another interactive online shareholder presentation at 11.00 a.m. on Monday 3 April 2023. This is in addition to the in-person AGM.  At the online presentation, shareholders will receive updates from me, as Chairman, and the Investment Manager, and there will be an interactive question and answer session. Full details on how to join the online shareholder presentation can be found in my accompanying letter and further information on how to register for the event can be found at https://www.workcast.com/register?cpak=4678784364872362.

Following the online presentation, shareholders will still have almost three weeks during which to submit their proxy votes prior to the AGM and I would encourage all shareholders (whether or not they intend to attend the AGM in person) to lodge their votes in advance in this manner.

The AGM has been convened for 12:30 p.m. on 21 April 2023, at the Glasgow Royal Concert Hall, and will be followed by light refreshments and an opportunity to meet the Board and the investment management team.

Ahead of the online presentation and AGM, I would encourage shareholders to send in any questions that they may have for either forum to: murray-intl@abrdn.com.

Management of Discount and Premium

At the AGM held in April 2022, shareholders renewed the annual authorities to issue up to 10% of the Company's issued share capital for cash at a premium and to buy back up to 14.99% of the issued share capital at a discount to the prevailing NAV. During the year, 848,963 Ordinary shares were purchased for Treasury, representing 0.7% of the issued share capital. The Board will be seeking approval from shareholders to renew the buyback authority together with the authority to allot new shares or sell shares from Treasury at the AGM in 2023. As in previous years, new or Treasury shares will only be issued or sold at a premium to NAV and shares will only be bought back at a discount to NAV. Resolutions to this effect will be proposed at the AGM and the Directors strongly encourage shareholders to support these proposals.

Your Board continues to believe that it is appropriate to seek to address temporary imbalances of supply and demand for the Company's shares which might otherwise result in a recurring material discount or premium. The Board believes that this process is in all shareholders' interests as it seeks to reduce volatility in the discount or premium to underlying NAV whilst also making a small positive contribution to the NAV.  At the latest practicable date, the NAV (excluding income) per share was 1339.0p and the share price was 1339.0p, equating to a discount of 0.1% per Ordinary share compared to a premium of 3.1% per Ordinary share at the year end.

Proposed Sub-division of Ordinary Shares

The market price of the Company's existing Ordinary shares ("existing Ordinary shares") has increased in recent years to the point where the Ordinary shares regularly trade at a market price of over 1300 pence. In order to assist monthly savers, those who reinvest their dividends and those who are looking to invest smaller amounts such as younger investors, the Directors believe that it is appropriate to propose the sub-division of each of the existing Ordinary shares of 25 pence each into five new Ordinary shares of 5 pence each (the 'new Ordinary shares') (the "Sub-division"), thereby resulting in a lower market price per Ordinary share. The Sub-division will not itself affect the overall value of any shareholder's holding in the Company.  The Directors believe the Sub-division may also improve the liquidity in and marketability of the Company's Ordinary shares, which will benefit all shareholders.

There will be no interruption to trading in the Ordinary shares on the London Stock Exchange when the Sub-division takes place. The new Ordinary shares will rank equally with each other and will carry the same rights and be subject to the same restrictions (save as to nominal value) as the existing Ordinary shares, including the same rights to participate in dividends paid by the Company.

The Sub-division requires the approval of shareholders and, accordingly, Resolution 12 in the Notice of AGM seeks this approval. The Sub-division 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. If Resolution 12 is passed, the Sub-division will become effective on admission. Further details of the proposed Sub-division are set out in the Directors' Report on pages 61 and 62 of the published Annual Report and financial statements for the year ended 31 December 2022.

Environmental, Social and Governance ("ESG") and Climate Change

The Company is not an ESG fund. However, as part of its responsible stewardship of shareholders' assets, your Board continues to engage actively with the Manager with regard to the ongoing assessment and further integration of ESG factors into the Manager's investment process.  The Board receives regular assessments of the Company's holdings and portfolio, including a MSCI fund ratings report which currently gives the Company's portfolio a rating of 'AA' (2021: 'AA'). Further information on the important work undertaken on ESG and climate change by the Manager is provided in the 'Information About the Manager' section on pages 113 to 115 of the published Annual Report for the year ended 31 December 2022.

Without becoming prescriptive on specific investment criteria, the Board's desire is for the Manager to continue to incrementally improve the portfolio's ESG credentials and to seek to exploit opportunities arising from a net zero economy, in so far as this is consistent with the Company's investment objective. A key ingredient in building such a portfolio is meaningful, regular and continuing dialogue between the Manager and investee companies, with a view not only to understanding the risk exposure and evolving business models better but also to influencing corporate behaviour.

Succession Planning

In June 2022, we welcomed Virginia Holmes to the Board as an independent non-executive Director following the culmination of an extensive search process using the services of an independent recruitment consultant. Virginia is the former CEO of AXA Investment Managers Limited and has brought significant senior asset management expertise and experience to the Board. She is currently Chair of Trustees at the Unilever UK Pension Fund, Senior Independent Director at both Syncona and European Opportunities Trust and Chair of the Remuneration Committee at Intermediate Capital Group plc. She was previously Chair of USS Investment Management and of BA Pension Trustees, a founder Director of the Investor Forum, Non Executive Director of Standard Life Investments plc and Chair of the Investment Committee at Alberta Investment Management Corporation.

This year marks the completion of my period of tenure on the Board following my appointment as a Director in 2014 and subsequent selection as Chairman in 2021, after the sad and untimely death of Simon Fraser. At the time of the AGM, I will have been on the Board of the Company for almost 9 years and the Board has asked me to remain as Chairman for a short while in order to complete the Board's succession planning exercise. 

Excellent progress has been made and we expect to announce two new appointments to the Board over the coming months. I shall be standing down from the Board on 31 December 2023 and I am delighted to report that Virginia Holmes will take on the Chair role from that date. Following these changes, the Board is expected to return to its previous complement of six and is expected to be in compliance with the recommendations of the Parker Review on diversity in the UK boardroom.

abrdn Name Changes

In line with the Manager's ongoing rebranding exercise, during the year our Alternative Investment Fund Manager changed its name from Aberdeen Standard Fund Managers Limited to abrdn Fund Managers Limited, our Investment Manager became abrdn Investments Limited (from Aberdeen Asset Managers Limited) and our Company Secretary changed its name from Aberdeen Asset Management PLC to abrdn Holdings Limited. There is no intention to change the name of the Company.

Outlook

Looking forward, deep-rooted macroeconomic difficulties are likely to continue to impact the direction of financial markets. Seldom has the economic outlook seemed so uncertain. Numerous heavily indebted nations and corporates are confronted with significantly higher borrowing costs that will ultimately constrain future growth. The task of controlling inflation may exert significant damage on already fragile economies, suggesting that policymakers negotiating the treacherous tightrope between recovery and recession have little room for error. Whilst prices of goods and services should moderate as supply / demand dynamics normalise, wage inflation may prove more problematic. Meanwhile, businesses must quickly adapt to the unfolding backdrop of higher input, labour and capital costs occurring simultaneously with softening consumer demand and changes to global supply chains.

From a portfolio perspective, the Company's unconstrained global mandate continues to enable great investment flexibility under constantly changing  circumstances. The past twelve months bears testimony to that. The re-emergence of inflation that unleashed a raft of negative surprises on so many unprepared companies in the West is not so unfamiliar elsewhere in the world. Inevitably attractive investment opportunities will emerge as asset prices readjust. Identifying companies that can exert some degree of pricing power, have favourable industry dynamics and seasoned management familiar with evolving realities will be key. Strict adherence to tried and trusted investment principles as always gives a degree of comfort during periods of such investment flux. The Manager believes strongly in its disciplined investment process as a means by which to identify appropriate opportunities to deliver the capital and income strategies of our mandate. Current portfolio positioning reflects this, with high conviction, diversified exposures designed to deliver the Company's long-term objectives.

Finally, as I wrote last year, your views matter. Your Board greatly values shareholder comments and I encourage you to email me with your views at: DavidHardie.Chairman@abrdn.com.

 

David Hardie
Chairman
2 March 2023

Investment Manager's Review

Background

Thrift and abstinence are rarely recognised as advantageous attributes of contemporary investment management. In the current dynamic, digital world of conspicuous consumption and instant gratification, such pragmatic peculiarities regularly attract sanctimonious scorn from those at the vanguard of innovation and change. Incompatible with justifying the unjustifiable, such 'constraining characteristics' invariably attract maximum vitriol during periods of excessive exuberance when prevailing valuations reach unwarranted levels. Irrational expectations simply cannot entertain the reality of common sense when the next new investment paradigm is being unequivocally venerated. Yet thrift and abstinence feature prominently in long-term sustainable wealth creation. Perhaps even more so in wealth preservation! The sobering reality of the past twelve months simply reinforced that yet again "it's not different this time". Economics, commerce, business, social interaction and lifestyles constantly change and adapt but, when reflected in valuations of equities and bonds, what consistently matters most are ultimately profits, cash flows and interest rates. Unfolding financial events throughout 2022 looked no further than the past for vindication.  Anyone remotely familiar with previous periods of inflation-induced policy tightening understands the consequences such actions have on prevailing market insanities. For seasoned investors well versed in macroeconomic history, the song remained very much the  same. 

With prices rising at the fastest pace in forty years, inflationary pressures were already well established long before the Russian invasion of Ukraine in late February 2022. Escalating conflict between two key global commodity producers undoubtably poured fresh fuel on the fire of soaring food and energy prices, but the Developed World's mutating inflation problem harboured deeper historical heritage. Twenty years of Central Bank-orchestrated financial repression was about to be exposed as the untenable sham it always was. For centuries, printing money bequeaths inflation. Two decades spent doing exactly that, appeasing financial markets, inflating asset prices and abdicating responsibility for managing long-term price stability defines the incompetent legacy of recent Central Bank custodians. Throughout the period, excessive unconventional monetary policy postponed painful adjustment, providing superficial respite from harsh realities. But, having effectively monetised each and every financial crisis of the current century, huge unsustainable debt legacies were about to become increasingly scrutinised through the lens of rising bond yields. With spiralling debt-servicing costs inherent in higher interest rate and inflationary conditions, spending without restraint comes with serious economic and financial consequences. As the penny dropped, the retrospective wisdom of policymakers and politicians alike proved deafening.

Experiencing an epiphany of belated inflation realisation, consensus opinion abruptly disposed of 'temporary' and 'transitory' from the popular lexicon. Hitherto transient inflation was allegedly now in danger of becoming entrenched, so drastic action ensued. As policymakers embarked on the most brutal series of interest-rate hikes for fifty years, it was hardly surprising significant wealth destruction occurred. Both fixed income and equity markets endured a torrid twelve months. Without their buyers of last resort (Governments), bond markets plunged. Investors, fearful of nominal fixed returns being eroded in an inflationary world, exited at seemingly any price. Beyond bond markets, the myth of non-profitable growth companies constantly performing in a rising yield environment crumbled in the face of such adversity. Having boomed for over a decade, speculative asset classes such as unlisted securities, private equity and cash-burning business models of the so-called 'new economy' were confronted with the new reality. The price of money was going up. For those followers of fashion, to whom present valuation is ignored in favour of future growth potential, the crushing weight of history was closing in. When liquidity contracts, such unproven investment requires strong stomachs. We are yet to find out just how strong.  

Refusal to recognise macroeconomic realities and Covid induced distortions remained noticeably absent from progressive policies being pursed elsewhere in the world. Here fiscal and monetary restraint generally prevailed. Indeed the stark contrast between reactive interest rate rises throughout 2022 in the debt dependent Developed World and proactive monetary tightening enacted twelve months previously in 2021 across the Developing World couldn't have been more pronounced. With local interest rates free to price risk accordingly, pre-emptive policy actions in Asia and Latin America prevented undue inflationary concerns, providing a platform for imminent monetary easing. Out-with the arguably over-valued technology sectors in China and Taiwan, most Emerging Markets trod water over the period. International risk appetite remained unsurprisingly paralysed given events unfolding elsewhere, but subdued sentiment can rapidly change.  China's year-end U turn on Covid policy undoubtably enhances  prospects for the country and region, should consumer demand accelerate and domestic property markets stabilise. Unburdened by punitive debt obligations and free from unrealistic expectations, Asia and Latin America emerged relatively unscathed from the financial havoc unfolding elsewhere.

Nurturing high hopes of post Covid normalisation, the year began with investor optimism over promises, progress and prosperity. By period end, conventional wisdom had been battered, bruised and burned by the all too familiar investment bogeymen of inflation, rates and recession. Having been brought back to economic and financial sobriety, investor focus once again recalibrated from tomorrow's possibilities to today's profits. Given evolving global macroeconomic issues and rising geo-political uncertainty, such pragmatism is welcomed.    

Portfolio Activity

Portfolio turnover was 11% of gross assets relative to 12% in 2021 and reflects a continuing decline to more normal levels over the twelve month period. Although market volatility occasionally spiked higher, most notably during the Russian invasion of Ukraine and the UK's politically induced meltdown of late September, periods of extended price distortions seldom prevailed. That said, the former presented opportunities to increase exposure to European equities, the latter to reflect on the beauty of the Trust's unconstrained, globally diversified mandate!

Exposure to Emerging Market Bonds continued to be reduced, thereby increasing overall equity exposure by year end to 103.1% compared to 102.5% at financial year-end 2021.

North American exposure decreased by the greatest amount on selective divestment of three established positions which had performed extremely well and were deemed to be fully valued. Consequently Nutrien, Pepsico and Schlumberger were sold outright, with a new purchase of leading global pharmaceutical company Merck slightly offsetting overall regional reduction.

Latin American exposure once again witnessed significant profit taking purely for reasons of valuation and strong performance. The reduction of Chilean lithium producer Sociedad Quimica (SQM) and Mexican airport operator Grupo Asur echoed similar capital re-allocation trades made last year, but large residual positions remain reflecting positive, long-term prospects for both companies.

Overall Asian exposure slightly declined on a net basis, with outright sales of Castrol India and Indocement. Profit taking in Taiwan Semiconductor and GlobalWafers also raised cash which was partially offset by additional investment in existing holdings of Hon Hai Precision and Samsung Electronics plus a newly established position in Woodside Energy in Australia.

European exposure increased significantly with the lion's share of re-cycled profits invested in the region. New positions were established in Dutch technology company BE Semiconductor, in leading global industrial conglomerate Siemens of Germany and in worldwide food processing company, Danone in France. Various existing holdings, such as Nordea, Zurich Insurance and Enel were added to during periods of weakness.  Over the period there were no transactions within UK equities. Two bond holdings were fully divested, namely Mexican communications company America Movil and the shorter-dated Indian corporate ICICI Bank, taking the total number of equity and bond holdings at year end to 51 and 18 respectively.

From an overall investment perspective, the emphasis continues to favour diversified asset exposures in companies deemed beneficiaries of the evolving backdrop, maintaining a "barbell" strategy of owning both growth and cyclical stocks. Structurally higher inflation is supportive of companies owning real assets and those possessing pricing power, whilst selective growth companies should benefit from accelerating trends in industrial automation, semiconductor miniaturisation and digital communications. The greatest potential for positive cyclical momentum upside surprises can still be identified in Asia and other countries where substantial pent up demand from prolonged Covid effects still exists. Corporate earnings may be under recessionary threat elsewhere, but scope exists for upwards earnings and dividends revisions in Latin America and Asia.  In such regions, sectors and businesses the portfolio remains meaningfully invested.

Performance

The NAV total return for the year to 31 December 2022 with net dividends reinvested was +8.8%. This compared favourably with the Reference Index (FTSE All World) total return of -7.3%. The top five and bottom five stock contributors are detailed below:

Top Five Stock Contributors	%*	Bottom Five Stock Contributors	%*
SQM	1.8	GlobalWafers	-1.8
Grupo Asur	1.7	Taiwan Semiconductor	-0.5
AbbVie	1.0	Samsung Electronic	-0.4
Schlumberger	0.9	Telenor	-0.2
Vale	0.9	CME Group	-0.2
* % relates to the percentage contribution to return relative to the Reference Index (FTSE All World TR Index)

Over the full financial year, the high single-digit total return on gross assets was welcomed although, in real terms the exceptionally high 13.4% rate of UK Retail Price Inflation proved a tough hurdle to match. Overall global equity market weakness was not reflected in the total gross asset return primarily due to broad portfolio diversification and strong defensive stock performance. In capital terms, Latin America delivered by far the strongest regional index returns in what proved to be a very tough year for capital growth. This was very much reflected in portfolio returns with a +38% contribution to overall performance from the Latin American region. Although the UK equity market proved to be the only other 'region' to deliver a positive return over the twelve month period, the portfolio's regional exposures faired much better with positive contributions recorded from five of the six regional asset areas. Strong stock selection prevailed in most areas, with only Asian holdings marginally declining in absolute terms. Sterling weakness against most portfolio currencies was modestly supportive, most noticeably against the US Dollar.  European markets suffered the negative ripple effect consequences of war in Ukraine and Russian energy dependency, whilst Asia also declined in Sterling terms as China's zero Covid policy kept most investors cautious on equity markets. North America witnessed its weakest market returns for over a  decade, with the Technology heavy Nasdaq declining -25.0% in Sterling terms. A positive North American portfolio return of +13.9% was achieved through high quality, defensive stock selection.  Despite significant reductions to Emerging Market Bond exposures since the outbreak of Covid, portfolio returns in Sterling terms also continued to be positive. In what proved a particularly, problematic period for over-extended markets and growth stocks, it was gratifying to record robust individual stock performance across a variety of sectors and industries.  Companies operating in Basic Materials, Energy, Healthcare, Consumer Staples, Real Estate and Financials all contributed to overall positive returns, once again emphasising the importance of the diversified, quality-focused strategy.

Predicting dividend income over the financial year proved slightly more straight-forward than in the preceding two Covid-infected financial periods. As supply-side interruptions waned, some semblance of corporate normality was restored, albeit with business conditions constantly being impacted by higher wage and input costs  plus growing fears over recession.  Positive cash flows became an increasingly precious commodity, particularly when faced by equity markets beginning to be squeezed by tighter liquidity. Currency movements against Sterling experienced relatively normal volatility within an historical context (outwith the farcical forty-four days of the Truss Premiership), with the usual unpredictability of magnitude and direction. Sterling weakness against practically all portfolio currencies over the  period proved modestly positive in translation of dividend  income accrued from the portfolio's diversified global holdings. Dividend increases from portfolio companies generally exceeded conservative estimates, with 80% falling into this category. Whilst notoriously difficult to predict, sectors such as Basic Materials and Energy experienced familiar fluctuating income expectations, yet over the financial period the net effect from positive and negative "surprises" was negligible. Overall gross income accrued increased +12.8% year-on-year, with earnings per share growth of +16.3% reflecting the positive impact of share buybacks during the period.

Attribution Analysis

The attribution analysis below details the various influences on portfolio performance. In summary, of the 1650 basis points (before expenses) of performance above the Reference Index, asset allocation added 410 basis points and stock selection contributed 1240 basis points. Structural effects, relating to the fixed income portfolio and gearing net of borrowing costs, added 40 basis points of relative performance.

	Company		Reference indexA		Contribution from:
					Asset	Stock
	Weight	Return	Weight	Return	Allocation	Selection	Total
	%	%	%	%	%	%	%
UK	7.7	36.6	3.8	5.3	-0.1	0.9	0.8
Europe ex UK	25.6	5.2	13.0	-9.6	0.1	3.4	3.5
North America	28.2	13.9	61.4	-8.8	0.5	6.7	7.2
Japan	-	-	6.3	-4.8	-0.2	-	-0.2
Asia Pacific ex Japan	24.6	-5.1	12.8	-5.9	0.4	0.2	0.6
Other International	13.9	18.0	2.7	30.4	3.4	1.2	4.6
Gross equity portfolio return	100.0	9.2	100.0	-7.3	4.1	12.4	16.5
Fixed income		0.6
Gross portfolio return		9.8
Management fees and admin expenses.		-0.6
Tax charge		-0.6
Finance costs		-0.2
Technical differences		0.4
Total return		8.8		-7.3
A Reference Index - FTSE All World TR Index
Notes to Performance Analysis
Asset Allocation effect - measures the impact of over or underweighting each asset category, relative to the benchmark weights.
Stock Selection effect - measures the effect of security selection within each category.
Technical differences - the impact of different return calculation methods used for NAV and portfolio performance
Source: abrdn & BNP Paribas Securities Services Limited. Figures may appear not to add up due to rounding.

 

Global Review

The deeply distorted business backdrop that greeted the onset of 2022 concealed the chasm of macroeconomic honesty and integrity that exists throughout the world. The transparent monetary orthodoxy prevailing in Developing economies versus the opaque policy unorthodoxy complicit with persistent profligacy in the so-called Developed World. Unrepentantly pursuing interest-rate policy inertia to cover up the cracks of unsustainable debt dependency, unjustified prosperity entitlement and widespread structural demise, a rude awakening belatedly descended on policymakers in the Developed World. Inflation was alive, well and most definitely unwelcome to Wall Street and those with their heads firmly in the sand.

What transpired in the United States exemplified yet again the financial pain that accompanies disrobing of delusions. The largest annual upward move in the US Federal Reserve's benchmark lending rate since 1973 caused US mortgage rates to soar. Widespread bond market weakness proved an inevitable consequence. Both domestic equity and bond markets sharply declined, the first such 'in tandem' occurrence for fifty years. Sanctuaries of capital preservation were unsurprisingly few and far between. The plunge caused significant value destruction to technology titans of the past decade, the new economy stocks of the Covid lockdowns, cryptocurrencies and numerous other unproven business concepts that so often characterise the final stages of a speculative bull market. Yet most events that defined 2022 in the United States came straight out of a macro-economic textbook! Unfortunately for bruised and battered investors the logical progression from here makes uncomfortable reading. Higher bond yields, a collapse in money supply, tightening affordability in the housing market and contracting manufacturing all point to at best recession, at worst, stagflation. Longer-term, financial markets still have many problems to digest. Corporate earnings expectations remain totally detached from reality; asset quality is likely to deteriorate as economic growth contracts; poor risk management, over-optimism and incompetence has led to the usual gross mis-allocation of capital into non-profitable, liquidity dependent businesses unlikely to survive in a higher interest rate environment.  Irresponsible Federal Reserve policy directed at managing asset prices rather than price stability has created an enormous debt legacy needing to be addressed; in doing so, upward pressure on bond yields may constrain growth and prosperity beyond the confines of any normal business cycle. With US equity and bond markets increasingly expecting policymakers to once again capitulate and do "whatever it takes" to appease short-term interests, great scope for disappointment exists in the medium-term outlook for US financial assets. 

The UK and European financial markets faced similar issues related to belatedly recognising resurgent inflation and its accompanying consequences. Desperately detached from economic realities,  The Bank of England and European Central Bank proved powerless to maintain their veneer of credibility. Frantically hiking interest rates retrospectively in response to spiralling prices fooled no one - bond markets sold off sharply and equities struggled to preserve capital. Whilst the narrow UK FTSE 100 ended in positive territory, broader indices of UK companies endured double-digit declines. The perceived "defensive" nature of the UK equity market primarily equates to significant index presence of Consumer Staples and Healthcare companies and their dividend paying culture. Yet globally such opportunities can increasingly be found elsewhere, often with higher growth characteristics and superior dividend potential. Historically the UK's energy and commodity sectors that remain over-represented in the market have tended not to provide robust downside protection when recession strikes. Consequently the current low portfolio weighting to the UK is unlikely to change. Perhaps somewhat paradoxically, given the ongoing war in Ukraine and evidence of increasingly strained EU political dynamics, the investment outlook for portfolio holdings in Europe is arguably more transparent. European Industrials such as Epiroc, Atlas Copco, Siemens and BE Semiconductor endured an extremely tough 2022. Constant downward earnings revisions, contracting equity price-earnings multiples and cautious trading statements prevailed throughout. But, at current valuations, future risk-reward prospects are undoubtably compelling, especially with sentiment being ubiquitously negative. Shunned by global investors in a world until recently infatuated with US Technology stocks, Europe offers intriguing opportunities against the current backdrop of higher interest rates and uncertainty. 

Unburdened by systemic vulnerability and unfettered by secular, short-term interests, policy directives in the Developing World remained appropriate and prudent. All too familiar with how high inflation disproportionally decimates the purchasing power of low-income earners, policymakers throughout Asia and Latin America had anticipated the majority of 2022 developments. Significant proactive interest rate hikes in 2021 prepared the economic landscape for escalating inflationary pressures witnessed in 2022, consequently such foresight had prices controlled and declining by period end. Having anchored expectations, bond markets remained sanguine over future prospects and equity markets weathered storms raging elsewhere. The one noticeable exception was China. Strict adherence to a zero Covid policy constrained Chinese economic growth for most of the period. Geo-political tensions with the United States also materially escalated at times and for the most part international investors divested Chinese assets amidst ongoing uncertainties. Yet by period end the outlook had materially changed. China's abrupt U turn on its zero Covid policy in December arguably enhances the outlook significantly, presenting numerous potential growth benefits for the country, region and beyond. Amongst potential beneficiaries are global commodity markets, Taiwanese manufacturers of semiconductors and electronic components, not to mention exporters of consumer goods desired by China's rapidly expanding middle income population. Whilst improvement is unlikely to be instantaneous, the direction of travel looks encouraging.  

For Latin America, where significant capital and income returns continue to contribute greatly to portfolio performance, the outlook remains as interesting as ever. The region delivered the best performance in Sterling terms in 2022 of any global geographical region, the ninth time this has happened in the past twenty years. Business prospects continue to flourish, whilst investment opportunities prosper often at discounted valuations given Mexico, Brazil and Chile unjustly remain ignored in an increasingly passive-investment obsessed world. With sustainable declining inflation in sight, let the monetary easing begin.

Summary of Investment Changes During the Year

	Valuation		Appreciation/		Valuation
	31 December 2021		(depreciation)	Transactions	31 December 2022
	£'000	%	£'000	£'000	£'000	%
Equities
UK	85,872	5.0	14,533	(31,634)	68,771	3.9
Europe ex UK	304,887	17.5	(1,512)	144,960	448,335	25.1
North America	496,896	28.6	44,285	(72,697)	468,484	26.2
Asia Pacific ex Japan	503,319	28.9	(41,459)	(17,557)	444,303	24.9
Latin America	184,065	10.6	57,512	(22,777)	218,800	12.3
Africa	15,794	0.9	(3,355)	-	12,439	0.7
	1,590,833	91.5	70,004	295	1,661,132	93.1
Preference shares
UK	7,637	0.4	(1,368)	-	6,269	0.3
	7,637	0.4	(1,368)	-	6,269	0.3
Bonds
Europe ex UK	6,023	0.4	737	11	6,71	0.4
Asia Pacific ex Japan	52,526	3.0	(1,173)	(4,274)	47,079	2.6
Latin America	66,703	3.8	(1,806)	(17,107)	47,790	2.7
Africa	15,590	0.9	7	182	15,779	0.9
	140,842	8.1	(2,235)	(21,188)	117,419	6.6
Total Investments	1,739,312	100.0	66,401	(20,893)	1,784,820	100.0

Outlook

For disciples of pragmatic financial fundamentalism, forecasting future prospects remain anchored in well-trodden historical paths. Whilst innovation, invention and change will always dictate improvement, advancement and growth, the investment valuations ascribed along the way invariably reflect the bi-polar extremes of human emotions. Therein lies the most toxic cocktail within investment management. When feelings and finance entwine, poor judgement tends to prevail. Endemic to each and every mania, panic and financial crash throughout the course of history is irrational valuation based ultimately on emotion. Having recently endured yet another prolonged period of such eccentric absurdity, some financial markets remain bloated with unsustainable excess. Through the unprejudiced prism of the past it is possible to assess some possible prospects for the future

In simplistic terms, what to avoid, and what to assert? Assuming inflation, recession and interest rates remain as influential as ever, some observations are worth emphasising. Global commodity prices are as unpredictable as they are volatile, so projecting peaks and troughs is futile. Such "cyclical" inflation comes and goes, but structural inflation found in wages, rents and index-linked government spending seldom subsides painlessly. Increasingly vulnerable to the latter, the debt-laden Developed World is perilously close to being deeply infected by such intransigence. Stronger inflation-fighting credentials by Central Banks in the Developing World suggest less ambiguity ahead. Similarly, sharply higher interest rates carry acutely divergent consequences for respective economies. Where there are deficits, debt and distrust, the odds of avoiding recession are slim. Paralysis of purchasing power and collapsing consumer confidence see to that. Where savings culture prevails and favourable demographics fuel growth, temporary tighter monetary policies prove less disruptive. Focusing on businesses in countries with such characteristics remains forefront to the Company's investment strategy.

Finally, the question of legacy must be addressed in any projected outlook. It would be naïve to ignore the past when considering the future. From the vast library of financial mistakes made throughout history, certain trends are clearly apparent. Acute equity market shocks tend to repair quickly when only one specific sector was excessively valued. Previous Energy and Consumer Staples-led dislocations are examples of this. Considerably more time is required to emerge from financial market crises related to systemic failures such as Asia in the late 1990s and the banking failures of 2007/08. Most ominously, recession-linked asset bubbles fuelled by artificially manipulated interest rates and  fixed income markets require long, slow and painful readjustment to cleanse the system of financial excess. Current evidence suggests the Developed World is descending towards the latter. With global Central Banks increasingly devoid of policy options and tarnished by diminishing credibility, the outlook has rarely been so opaque. The Company's high conviction investment strategy will remain focused on avoiding the pitfalls of previous valuation excesses and emphasising unaffected opportunities where realistic growth and income prevails.

 

Bruce Stout
Senior Investment Director
Martin Connaghan, Investment Director

Samantha Fitzpatrick, Investment Director

abrdn Investments Limited
2 March 2023

The Manager's Investment Process Including ESG

The Company's Alternative Investment Fund Manager is abrdn Fund Managers Limited ("aFML") which is authorised and regulated by the Financial Conduct Authority. Day-to-day management of the portfolio is delegated to abrdn Investments Limited ("aIL"). aIL and aFML are collectively referred to as the "Investment Manager" or the "Manager".  The ultimate parent of aIL and aFML is abrdn plc.

The Manager believes that deep fundamental research into companies, mediated through team debate and a rigorous stock selection process, is the key to unlocking investment insight and driving investment returns for clients such as the Company. The Manager utilises a truly bottom-up, fundamental stock-picking approach, where sector, regional and country allocations are a consequence of the bottom-up stock selection decisions, constrained by appropriate risk controls.  The Manager operates a comprehensive risk system with tools that provide better insights for its individual fund managers and a more complete understanding of all risk exposures in the portfolios to ensure that the managers only take the sort of risk that the Manager is comfortable with and can back with insight from extensive first hand research.

The Manager takes a long-term quality approach by focusing on companies that the research analysts identify as high quality.  This involves assessing each company on five key factors, namely the durability of the business model and moat, the attractiveness of the industry, the strength of the financials, the capability of management, and assessment of the company's ESG credentials. In the assessment of what is an appropriate valuation for a company, the Manager focuses primarily on earnings yields, free cashflow yields and dividend yields, set against expected long-term growth rates for those elements. The Manager targets a double digit implied annual return.

The Investment Process, Philosophy and Style

Idea Generation

The Manager's scale affords coverage of a wide and dynamic universe, with in-depth, locally-sourced insights with over 1,000 investment professionals across the world supporting fundamental stock research and insight generation. Research coverage is organised by region and on a sector basis, with analysts developing deep expertise which enables them to identify investment opportunities through fundamental knowledge at both the sector and stock level. The Manager has excellent access to the companies which it researches, through structured meetings and regular conversations with key decision-makers and conducts several thousand company meetings per year, in addition to the many ESG engagements undertaken with companies. The Manager conducts over 6,000 company meetings each year and maintains a global coverage list of over 2,000 stocks.

Research

The Manager has developed a proprietary research platform used by all its equity, credit and ESG teams, giving instant access to research globally. The research is focused on four key areas:

-       Foundations - the Manager analyses how the company makes money, the attractiveness and characteristics of its industry, and the strength and sustainability of the economic 'moat'. This includes a thorough evaluation of the ESG risks and opportunities of the company. Face-to-face meetings anchor how the Manager understands and challenges the key elements of a company's fundamentals: the evolution and growth of the business; the sustainable competitive advantage; management's track record of execution and managing risk; past treatment of minority shareholders; the balance sheet and financials; and ESG risks and opportunities of the company in question.

-       Dynamics -  the shorter- and longer-term dynamics of the business that will be the key determinants of its corporate value over time. Specifically the Manager looks for changes in the factors driving the market price of a stock, identifying the drivers that the wider market may not be pricing in. Understanding the dynamics behind these drivers allows the Manager to focus on the factors that will drive shareholder returns from a particular stock.

-       Financials and Valuation - the Manager examines the strengths and weaknesses of the company's financials including a thorough analysis of the balance sheet, cash flow and accounting, the market's perception of the company's future prospects and value, and its own forecasts of future financials and how the stock should be priced. This includes significant focus on the dividend paying capability of each business, the potential for dividend growth and the sustainability of the payout.

-       Investment insight and risk - the Manager articulates its investment thesis, explaining how it views a stock differently from the market consensus and how the Manager expects to crystallise value from the holding over time.

Integrated ESG and Climate Change Analysis

Whilst ESG factors are not the over-riding criteria in relation to the investment decisions taken by the Manager for the Company, significant attention is given to ESG and climate related factors throughout the Manager's investment process.  The Manager gives particular weight to ESG factors when they are material to the investment case being made for an investee company.

In the Manager's view, companies that successfully manage climate change risks will perform better in the long term. It is important that the Manager assesses the financial implications of material climate change risks across all asset classes, including real assets, to make portfolios more resilient to climate risk.

The detailed analysis of the Manager's embedded ESG process is contained on pages 113 to 115 of the published Annual Report for the year ended 31 December 2022.

Idea Capture

To ensure that the Manager captures the best ideas from the global research platform, the Global Equity Team is fully integrated into the regional research process.  The Team mirrors the sector specialisms across the various regional desks and they contribute to, and participate in, the investment debate of the stocks in their sector.  Being fully integrated allows the Team to be present at all stages along the investment journey and build their own conviction into the underlying investment cases. 

The Team attends company meetings as well as the regional teams' sector review meetings, facilitating deep knowledge of the companies and the degree of conviction underpinning the investment insights.  This allows the Team to capture effectively the highest conviction ideas and the most important news flow across the research platform. 

Peer Review

Having a common investment language facilitates effective communication and comparison of investment ideas through peer review which is a critical part of the process. All investment ideas are subject to rigorous peer review, both at regular meetings and on an ad hoc basis - and all team members debate stocks, meet companies from all industries, and given their dual fund manager / analyst role are incentivised to fully participate in the entire process.

Portfolio Construction/Risk Controls

Portfolios are built from the bottom up, prioritising high conviction stock ideas in a risk aware framework, giving clients access to the best investment ideas.  Portfolio risk budgets are derived from clients' investment objectives and required outcomes. Peer review is an essential component of the construction process with dedicated portfolio construction pods (smaller dedicated groups of senior team members that have clear accountability for the strategy) debating stock holdings, portfolio structure and risk profiles.

As an active equity investor the Manager has adopted a principled portfolio construction process which actively takes appropriate and intentional risk to drive return. The largest component of the active risk will be stock-specific risk, along with appropriate levels of diversification. Risk systems monitor and analyse risk exposures across multiple perspectives breaking down the risk within the portfolio by industry and country factors, by currency and macro factors, and by other fundamental factors (quality, momentum, etc.). Consideration of risk starts at the stock level with the rigorous company research helping the Manager to avoid stock specific errors. The Manager ensures that any sector or country risk is appropriately sized and managed relative to the overall objectives of the Company.

Operational Risk and Independent Governance Oversight

Risk management is an integral part of the Manager's management process and portfolios are formally reviewed on a regular basis with the Manager's Global Head of Equities, the Portfolio Managers, the Manager's Investment Governance & Oversight Team (IGO) and members of the Manager's Investment Risk Team. This third party oversight both monitors portfolio risk and also oversees operational risk to ensure client objectives are met.

Delivering the Investment Policy

Day-to-day management of the Company's assets has been delegated to the Manager. The Manager invests in a diversified range of international companies and securities in accordance with the investment objective.

The team is led by Bruce Stout with dedicated support from Martin Connaghan and Samantha Fitzpatrick. The management team utilises a "Global Coverage List" which is constructed by each of the specialist country management teams. This list contains all buy (and hold) recommendations for each management team, which are then used by the portfolio manager as the Company's investment universe. From this pool of companies the Manager looks to construct a focused portfolio of 40 - 60 companies, selecting those companies that have the most attractive quality and valuation characteristics, offering the best expected risk adjusted returns, within a diversified portfolio.  Position sizes typically range from 1% to 5% of the portfolio and are considered on an absolute, rather than benchmark relative basis. Stock selection is the major source of added value over time.

Top-down investment factors are secondary in the Manager's portfolio construction, with stock diversification rather than formal controls guiding stock and sector weights. Market capitalisation is not a primary concern.

In addition to equity exposures, the investment mandate provides the flexibility to invest in fixed income securities. The process of identifying, selecting and monitoring both sovereign and corporate bonds follows exactly the same structure and methodology as that for equity investment, fully utilising the global investment resources of the Manager. As in the case of equity exposure, the total amount, geographical preference, sector bias and specific securities will ultimately depend upon relative valuation and future prospects.

At the year end, the Company's portfolio consisted of 51 equity and 18 bond holdings. The Manager is authorised by the Board to hold between 45 and 150 holdings in the portfolio.

A comprehensive analysis of the Company's portfolio is disclosed on pages 41 to 43 of the published Annual Report for the year ended 31 December 2022 including a description of the ten largest investments, the portfolio of investments by value and a sector and geographical analysis of investments. The portfolio attribution analysis is contained in the Manager's Review.

abrdn Investments Limited

2 March 2023

Key Performance Indicators (KPIs)

The Board uses a number of financial and operating performance measures to assess the Company's success in achieving its investment objective and to determine the progress of the Company in pursuing its investment policy. The main KPIs identified by the Board in relation to the Company which are considered at each Board meeting are as follows:

KPI	Description
Dividend	Absolute Growth: The Board's aim is to seek to increase the Company's revenues over time in order to maintain an above average dividend yield. Dividends paid over the past 10 years are set out on page 26 with a graph showing dividend growth against inflation on page 27 of the published Annual Report for the year ended 31 December 2022. Relative Yield: The Board also measures NAV total return performance against the Reference Index and performance relative to investment trusts within the Company's peer group over a range of time periods, taking into consideration the differing investment policies and objectives employed by those companies.
NAV Performance	Absolute Performance: The Board considers the Company's NAV total return figures to be the best indicators of performance over time and these are therefore the main indicators of performance used by the Board. Relative Performance: The Board also measures NAV total return performance against the Reference Index and performance relative to investment trusts within the Company's peer group over a range of time periods, taking into consideration the differing investment policies and objectives employed by those companies. A graph showing the NAV and Reference Index total returns is shown on page 27 of the published Annual Report for the year ended 31 December 2022.
Share Price Performance	Absolute Performance: The Board monitors the share price absolute return. Relative Performance: The Board also monitors the price at which the Company's shares trade relative to the Reference Index on a total return basis over time A graph showing absolute, relative and share price performance is shown on page 27 of the published Annual Report for the year ended 31 December 2022 and further commentary on the performance of the Company is contained in the Chairman's Statement and Investment Manager's Review.
Share Price Discount/ Premium to NAV	The discount/premium relative to the NAV per share represented by the share price is closely monitored by the Board. The objective is to avoid large fluctuations in the discount/premium by the use of share buybacks and the issuance of new shares or the sale of Treasury shares, subject to market conditions.  A graph showing the share price premium/(discount) relative to the NAV is shown on page 27 of the published Annual Report for the year ended 31 December 2022.
Gearing	The Board's aim is to ensure that gearing as a percentage of NAV is kept within the Board's guidelines issued to the Manager as disclosed on page 28 of the published Annual Report for the year ended 31 December 2022.
Competitive Ongoing Charges Ratio	Absolute Performance: The Board monitors the longer-term trend of the Company's OCR in absolute terms. Relative Performance: the Board also monitors the relative trend of the OCR versus the Company's peer group, taking into consideration the differing investment policies and objectives employed by those companies.   Details of the annual OCR trend are disclosed on page 26 of the published Annual Report for the year ended 31 December 2022.