New Star Investment Trust PLC: Final Results

NEW STAR INVESTMENT TRUST PLC

This announcement constitutes regulated information.

UNAUDITED RESULTS

FOR THE YEAR ENDED 30TH JUNE 2024

New Star Investment Trust plc (the ‘Company’), whose current objective is to achieve long-term capital growth, announces its results for the year ended 30th June 2024.

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.  The total return performance basis is the industry standard and is considered a more appropriate measure than just the revenue returns.  This is an alternative performance measure.

CHAIRMAN’S STATEMENT

PERFORMANCE

Your Company’s generated a total return of 11.69% over the year to 30th June 2024, leaving the net asset value (NAV) per ordinary share at 194.11p. By comparison, the Investment Association’s Mixed Investment 40-85% Shares Index gained 11.80%. The MSCI AC World Total Return Index gained 20.61% in sterling while the MSCI UK All Cap Total Return Index rose 13.16%. Over the year, UK government bonds returned 4.50%. Further information is provided in the investment manager’s report.

Your Company made a revenue profit for the year of £2.88 million (2023: £2.12 million).

RETURN OF CAPITAL

On 21st June 2024, the board announced plans to return £17 million to shareholders by way of a B share scheme. On 24th July 2024, shareholders voted in favour of the scheme at an extraordinary general meeting. New B Shares were issued and then redeemed immediately at a price of 24p per B share. Following the scheme, your Company’s total issued share capital and voting rights were unchanged. Your Company financed the repayment by selling a proportion of its holdings across the board with a view broadly to maintaining in percentage terms the asset allocation, including the allocation to cash. As a result, the risk profile of the portfolio was broadly unchanged.

CHANGE OF INVESTMENT OBJECTIVE

Your Board is proposing to widen the investment objective towards total return rather than simply capital growth. This revised objective will be put to shareholders at the forthcoming annual meeting.

GEARINGS AND DIVIDEND

Your Company has no borrowings. It ended the year under review with cash and bank deposits representing 11.61% of its NAV and is likely to maintain a significant cash and bank deposit position. In respect of the financial year to 30th June 2024, your Directors recommend the payment of a final dividend of 1.7p per share, making a total for the year of 3.4p (2023: 2.6p).

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

Inflation in the US, the UK and eurozone is likely to fall further towards the leading central banks’ 2% targets over the remainder of 2024. Amid this backdrop and at a time of weakening monetary trends within the Group of Seven major industrial nations and the seven largest emerging markets, there are likely to be further reductions in policy interest rates. Lower interest rates should be supportive for equities and bonds. There may, however, be increased volatility ahead of November’s US presidential election, especially given the conflicts in Ukraine and the Middle-East and as investors attempt to discern the potential for profit from advances in artificial intelligence.

NET ASSET VALUE

After the return of capital, your Company’s unaudited NAV at 30 September 2024 was 169.07p.

INVESTMENT MANAGER’S REPORT

MARKET REVIEW

Equities, as measured by the MSCI AC World Total Return Index, and bonds, as measured by the Bloomberg Barclays Global Aggregate Bond Total Return Index, rose 20.61% and 1.50% respectively in sterling over the year to 30 June 2024 as inflation fell towards the major central banks’ 2% targets. In response, the European Central Bank (ECB) eased its monetary policy for the first time in the current interest rate cycle, reducing its main policy rate by a quarter percentage point to 4.25%. Shortly after the year end, the Bank of England cut Bank Rate by a quarter point to 5% and in September the Federal Reserve reduced its policy rate by a half point to 4.75-5.0%.

The US core personal consumption expenditures price index, the Fed’s preferred inflation measure, fell from 4.3% in June 2023 to 2.6% in July 2024. UK headline inflation fell from 7.9% in June 2023 to 2.0% in May and June 2024 before increasing to 2.2% in July. The ECB’s preferred eurozone inflation measure fell from 5.5% in June 2023 to lows of 2.4% in November 2023 and April 2024 before increasing to 2.6% in July.

Emerging from two quarters of mild recession, the UK recorded stronger-than-expected economic growth of 0.7% in the first quarter of 2024 followed by 0.6% in the second quarter. After Labour’s general election victory in July, tax increases are expected in October’s budget. Clarity on fiscal policy may, however, encourage businesses and households to commit to longer-term spending, enhancing economic activity. 

By contrast, the Bank of Japan (the BoJ) began to reverse its accommodative monetary policy, which had been intended to achieve sustained 2% inflation through negative interest rates after decades of deflation. The BoJ raised its key short-term interest rate in March 2024 from -0.1% to a 0-0.1% range in the first rise since 2007 and raised the rate a second time in July, taking it to 0.25%. Japanese stocks rose 25.59% in yen terms as currency-weakness improved Japan’s export competitiveness but the yen’s decline against the pound reduced the gain to 13.49% in sterling terms.

Among developing economies, China eased monetary policy by cutting its key reserve requirement ratio from 7.6% to 7.4% in September 2023 and to 7% in February 2024. Despite this, Chinese stocks fell 0.87% in sterling over the year as a result of slowing economic growth, property-sector over-indebtedness and bipartisan US support for trade restrictions. China’s “common prosperity” measures collided with shareholder interests to justify a higher risk premium and lower valuations for Chinese stocks. By contrast, Indian equities rose 35.67% in sterling, benefitting from strong economic growth, business-friendly policies and protections for shareholder rights under the rule of law. In India’s general election, Narendra Modi, the Prime Minister, secured a third term in office, albeit propped by coalition partners.

PORTFOLIO REVIEW

Your Company’s total return over the year under review was 11.69%. By comparison, the Investment Association (IA) Mixed Investment 40-85% Shares sector, a peer group of multi-asset funds with allocations to equities in the 40-85% range, rose 11.80%. The MSCI AC World Total Return and MSCI UK All Cap Total Return Indices rose 20.61% and 13.16% respectively while global bonds rose 1.50% in sterling and UK government bonds rose 4.50%. Your Company is invested across asset classes to increase diversification and reduce longer-term risks. In consequence, performance did not keep pace with a strongly rising equity market as sterling and dollar cash and low-risk multi-asset investments lagged the gains for equities. Within the equity allocation, a relatively high emerging markets weighting at the expense of the technology-heavy US market compared to the IA 40-85% Shares sector hurt performance. The focus on higher-yielding markets and investments managed in accordance with an income mandate will facilitate the payment of dividends by your Company.

US technology stocks rose 45.14% in sterling as investors embraced the commercial potential of artificial intelligence (AI), fueling the 25.27% gain in US stocks overall. Within the portfolio, Polar Capital Global Technology, the largest holding at the year end, and the iShares S&P 500 exchange-traded fund (ETF) gained 41.70% and 26.94% respectively. Polar Capital Global Technology has focused on beneficiaries of the demand for artificial intelligence, with Nvidia, the leading designer of AI semiconductors, the largest holding. This focus on AI may lead to greater volatility of returns because of the difficulties inherent in forecasting the commercial development of an emerging technology.

Nvidia outsources production to Taiwan Semiconductor Manufacturing Company (TSMC), the world’s leading foundry, and TSMC is another large Polar Capital holding because hardware suppliers should benefit from commercial applications for AI. TSMC is also a large holding in the portfolio’s emerging markets holdings including Polen Capital Asia Income, Schroder Asian Income Maximiser, the Schroder Oriental Income investment trust and JP Morgan’s two Emerging Markets Income funds, one of which is an investment trust. Nvidia and TSMC gained 193.81% and 65.03% in sterling respectively over the year. Your Company will benefit in the longer term from AI advances because of its significant allocation to technology stocks. Investments outside US technology may, however, provide some protection and diversification if and when technology stocks fall short of investors’ expectations.

By contrast, your Company’s relatively high weightings in developing markets hurt performance as equities in Asia excluding Japan and emerging markets lagged, rising 13.92% and 13.62% respectively in sterling. Valuations ended the year relatively low, however, and likely US interest rate cuts may lead to dollar weakness, which typically increases demand for developing economy assets. Within the emerging markets allocation, Stewart Investors Indian Subcontinent did best, rising 24.40%, while Vietnam Enterprise Investments was weakest, up 1.55%. 

The UK stock market also lagged, rising 13.29%, but smaller stocks did slightly better, rising 14.49%. UK companies ended the year relatively lowly valued and may prove defensive should equities fall overall. Within the portfolio’s UK equity allocation, Aberforth Split Level Income did best, rising 31.60% over the year. The majority of your Company’s holding in this investment trust was rolled over in June 2024 into Aberforth Geared Value & Income, which has a similar mandate, investing in smaller value stocks. Man GLG UK Income, which invests across the market cap spectrum in value stocks, also outperformed rising 20.62%, while Chelverton UK Equity Income, a small cap specialist, gained 13.80%.

Over the course of the year, various long-standing investments were sold including Fundsmith as well as Crux European Special Situations and BlackRock Continental Income, two disposals that reduced your Company’s allocation to equities in Europe excluding the UK.

Investment in higher-yielding equity investments facilitates the payment of dividends by your Company. Higher-yielding equities may also deliver attractive total returns because an above-average yield may indicate an undervalued investment opportunity capable of delivering capital returns alongside a healthy dividend. The allocation to equity income holdings increased during the year through purchases of Baillie Gifford Global Income Growth and Redwheel Global Equity Income. A new investment was also made in Clearbridge Global Infrastructure Income. Infrastructure stocks typically benefit from falling interest rates because many have bond-like characteristics as a result of the high visibility of future cash flows. Spending on environmentally friendly electricity generation and distribution to meet governments’ clean energy targets is a major opportunity for some companies in the Clearbridge portfolio. Investment in higher-yielding UK equities was also increased through an addition to Man GLG UK Income.

Your Company’s holdings in developing economies increased through purchases of Schroder Asian Income Maximiser, Prusik Asian Equity Income and Schroder Oriental Income. Matthews Asia ex-Japan was sold, however, following a change of manager and investment mandate from income to total return as was Baillie Gifford Pacific.

In Japan, Lindsell Train Japanese Equity, a growth-oriented holding, was sold following poor performance while the JP Morgan Japan Small Cap Growth & Income, an investment trust, was added.

Trojan, a low-risk multi-asset investment, and BlackRock Gold & General, which invests in mining companies, were sold. These investments provided diversification during the recent rate-tightening cycle in which your Company had a low allocation to bonds, which typically fall as interest rates rise. A sterling-hedged iShares Treasury Bond 7-10 Years ETF holding and Schroder Strategic Credit were purchased, however, because interest rates appeared to reach a cyclical peak and these holdings may provide attractive income as well as capital gains as interest rates fall.

OUTLOOK

Following your Company’s year-end, £17 million was returned to shareholders via a B share issue and redemption. The asset allocation was kept broadly unchanged.

Over the coming months, inflation is likely to fall further towards central bank targets, leading to monetary easing across the major western economies. Easier monetary policy should support equities and bonds while your Company’s cash and longer term deposits provide income and some diversification in the event that markets fall.

Your Company has benefited from the strong performance from US technology stocks but changes over the year have resulted in a higher allocation to more lowly-valued countries and sectors, which may prove defensive if investors become disenchanted with the scale or pace of the commercialisation of AI advances. With the outcome far from clear, there may be increased volatility ahead of November’s US presidential election. Since your Company’s year-end, conflict in the Middle East has intensified although the impact on global markets, particularly oil prices, remains muted for now because of US energy self-sufficiency.  A focus on equity income investments may provide some defensiveness in times of heightened volatility and facilitate the payment of dividends by your Company.

SCHEDULE OF LARGEST HOLDINGS AT 30TH JUNE 2024