A 360 view of the latest results from CHRY, ASL, HSL, HOT, APEO, CMPI

Ah those were the days! According to Chrysalis, the number of IPOs in the UK prior to the GFC averaged 217 per annum. How does that compare to more recent averages? Clue – very well! Have a read of the latest Weekly 360 round-up for the answer…

ByFrank Buhagiar•02 Feb, 2024

Unwanted stat of the week

“At the point of the Company’s IPO, the Investment Adviser calculated that the average number of IPOs in the UK had fallen from 217 per annum prior to the GFC, to 94 per annum in the period from 2011 to 2017. In the five years since the Company’s IPO, the average has fallen further to 69.” Chrysalis Investments (CHRY) Investment Adviser’s Report.

A powerful indicator

Full-year results from Chrysalis Investments (CHRY). As Chair Andrew Haining explains: “NAV for the period to 30 September 2023 fell relatively modestly from 147.79p to 134.65p per share. In that period our exciting portfolio of high growth, tech enabled companies experienced a range of positive activity which we believe positions them strongly to benefit from a recovery in markets, which we would expect to see in 2024.” However, “Significant macro issues, which we are unable to influence, have moved sentiment in our asset class so substantially that it has gone from trading at a premium for three years to a discount over the last two…” All is not lost though, “As we look forward, we have good reason to be hopeful that realisations will occur in one or two of our investments during…the 2024 financial year, albeit this will depend on wider market conditions. We hope that these actions, together with the Capital Allocation process…will over time be reflected in a return to more normal market levels of discount/premium for the Company’s share price.”

The portfolio managers add: “The last two years have seen a significant change in market sentiment, the ramifications of which have triggered a widespread reconsideration of strategic priorities across both the Company’s investee companies, and in the Investment Adviser’s approach to running the Company. The Investment Adviser has worked hard with the portfolio companies over this time to extend cash funding runways and assist the quicker transition to more sustainable operating models. As a result, the Company’s portfolio contains a number of companies that are both mature in scale and, conceivably, moving into a window where an exit is a possibility. The recent strength in markets – triggered by yields falling in response to better inflation data – should be seen as encouraging. A backdrop of more optimistic markets should increase the possibility of exits for the Company’s investments…A commitment to return up to £100 million of capital to shareholders – representing approximately 25% of the Company’s market capitalisation at the time of writing – should be viewed as a powerful indicator of the Board and Investment Adviser’s ambition to manage the prevailing share price discount.”

Winterflood adds: “Continuation vote to be held at 15 March AGM. Board recommends continuation, based on shareholder consultation. The managers add that the portfolio is maturing (average holding period 3.6 years) and the market is ‘apparently’ more amenable to exits, with Klarna (7.1% of NAV) reportedly preparing for IPO. Proposed capital allocation policy: £100m capital return (likely via buybacks, subject to discount/premium) from realisations in excess of maintaining £50m cash buffer (current total liquidity £33m). Thereafter intend to return at least 25% of net realised gains against cost.”

Liberum is a buyer: “CHRY’s portfolio is as well-placed as it has been for quite some time with respect to the potential for shareholders to benefit from significant realisations. We believe the current share price does not capture the potential uplifts to NAV from liquidity events. The pathway is beginning to centre on a scenario where CHRY will be in a position to realise some of its core portfolio, particularly with respect to Starling Bank, wefox, Brandtech, and now Klarna, all of which are held at carrying values in excess of £90m. Were these to take place at valuations significantly in excess of NAV and the accompanying proceeds being returned to shareholders while a significant discount to NAV persists, this will be at a very high ROI and particularly impactful to NAV per share given the commitment to return the first £100m of realisations over the next three years, after satisfying the £50m cash buffer…Our TP of 118p reflects a 158p 12M NAV per share forecast and a 25% discount to NAV. 118p TP – BUY.”

Numis is positive too: “…the revised fees and capital allocation policy make the fund a much more attractive proposition. In addition, they have been active in engaging with shareholders, therefore we would expect their views to have been reflected in the various proposals. There has been significant progress in the portfolio with several companies performing well and being at a stage of maturity that makes realisation more likely, which will hand a lot more flexibility to the board, as well as providing valuation validation to shareholders. We would expect shareholders to give the company more time, and vote in favour of continuation, to deliver realisations and returns of capital. There has been significant rotation in the shareholder register, with the stake of Jupiter managed funds falling below 5%. The shares are trading at 81.5p this morning, representing a c.43% discount to the December NAV. We believe this offers significant value and a highly attractive investment opportunity.”

Question of the week

“The UK small company and AIM sectors are full of vibrant companies that can be expected to lead the UK economy’s future growth. Therefore, to be invested in them at the current very depressed valuation levels will, we believe, prove rewarding over the medium to longer term. A question the Board of course asks is ‘when will this recovery happen?’. Unsurprisingly, there is never a very satisfactory answer as the outlook for the UK remains very uncertain.” Henderson Opportunities Trust (HOT) Chair Statement.

A historically wide level

Half-year Report from CT Global Managed Portfolio (CMPI). Chairman David Warnock has the numbers: “…NAV total return was -2.9% for the Income shares and -0.5% for the Growth shares. The total return for the benchmark index for both share classes, the FTSE All-Share Index, was +1.6%.” The Chair adds: “High inflation and rising interest rates were a considerable headwind, particularly for the wider alternatives sector. Investment companies in the renewables, core infrastructure, property, specialist property, credit and royalty income sub-sectors are sensitive to interest rates, gilt yields and discount rates for valuing their underlying assets. This led to declines in reported asset values and, in the main, the share prices of these investment companies moved to wider discounts. This affected mainly the Income Portfolio where a number of investment companies in these sub-sectors have been held for their attractive dividends and diversity of income…Another headwind was leadership within equity markets where in the case of the UK the share prices of larger companies continued to outperform smaller ones.”

In his outlook statement, the Chairman first provides a useful summary of what the fund invests in: “The key themes for both portfolios are: investment companies focused on UK equities with a bias to medium and smaller companies which offer interesting growth prospects at very attractive valuations; investment companies with secular growth characteristics typically with holdings in the technology and healthcare sectors; and private equity trusts which have strong underlying growth characteristics though are at very wide discounts.” Before going on to highlight how “In November, there was a change which is positive for equity markets and investment companies in particular. Inflation data in key economies appears at last to be trending meaningfully lower, which if sustained could pave the way for interest rates to be cut sooner than had been anticipated. Lower inflation and lower interest rates are a more favourable environment for equity markets and investment companies. Discounts are beginning to narrow; however, at around 15%, the average sector discount is still at a historically wide level.”

Winterflood writes: “Performance hit by exposure to interest rate sensitive asset classes, particularly in Income portfolio, as well as underperformance of small caps vs large caps. Discount widening across the investment trust sector also detracted, particularly in alternatives.”

Confidence of the week

“…we know that stockmarkets are cyclical and this gives us confidence that today’s valuations will at some point be the basis of good future returns.” Henderson Opportunities Trust (HOT) Chair Statement.

By no means an outlier

Annual Report from abrdn Private Equity Opportunities (APEO). Chair Alan Devine is heartened: “I am heartened that the APEO portfolio has continued to deliver a resilient annual NAV TR during the period of 5.4%, despite a currency FX headwind of -2.8%, and that the Company continues to regularly return capital to shareholders through its enhanced quarterly dividend, delivering a yield of 3.6% as at 30 September 2023…” As for share price total return, this “…increased by 11.7%, which I would normally consider a strong performance in isolation. However, I recognise that this performance is relative to a low base, in terms of the share price declines we saw in most equities and asset classes in 2022. The APEO share price total return underperformed the 13.8% total return from the FTSE All-Share Index over the period and the share price discount to NAV remained wide at 43.2%…” But as the Chair writes: “APEO’s share price performance is by no means an outlier in the investment trust landscape, and particularly the private equity investment trust sector…I personally find the current share price discount confusing given the quality of APEO’s underlying portfolio companies, the robustness of its valuation…and the long-term nature of its NAV growth.”

The Chair goes on to remind investors that: “…private equity…should be viewed over the long term, where new investment decisions are often made with a five-year time horizon in mind.” And while “The immediate road ahead remains uncertain…the governance model of private equity has proved many times in the past…that it facilitates nimble and active ownership and allows underlying businesses to adapt more quickly to changing market circumstances. Periods of uncertainty also tend to offer up new and different opportunities for investment, which private equity firms have proved adept at generating and completing. This is why I believe that private equity should be particularly attractive to investors at times like these, in order to capture the upside that usually follows…I remain convinced by the strategy of APEO, which is centred on investment selection conviction and focused principally on the European mid-market buyout segment of private equity, where there is a plentiful supply of private companies that are highly resilient niche market leaders or fast-growing disruptive businesses of the future.”

Winterflood sounds positive: “In our view, portfolio valuation growth of +9.4% and EBITDA growth of +23% across the top 50 largest holdings simply does not match up to the level of stress currently implied by a 35% share price discount to NAV. This is compounded by the recent initiation of a share buyback programme, with the Board happy to ‘put their money where their valuations are’, and these results suggest they did so with good reason, given an average uplift of +18% achieved across £149.9m of realisations over the year (with further £53m secondary sales at book value, totalling 17% of NAV). Whether it can continue to deliver this remains the key challenge for the fund moving forwards…”

Numis is a fan: “We continue to believe that abrdn Private Equity is an attractive way to gain diversified exposure to a portfolio of leading buyout managers, although limited trading liquidity can be a drawback. APEO is differentiated from its fund of fund peers by paying a quarterly yield of 3.5% pa, partly financed from capital distributions, as well as its European bias…The shares currently trade on a c.34% discount to NAV and the fund is likely to start buying back shares, following partial realisations of its co-investment in Action, with buybacks expected to be up to €34.6m.”

JPMorgan is neutral: “Although discounts have narrowed a little for many of the listed private equity investment companies, they remain wide. An improvement in the exit market and delivering strong NAV growth may help this, but, in our view, so will a focus on capital allocation. And, with that in mind, we welcomed APEO’s commitment to share buybacks that will be significantly accretive to NAV per share due to the wide discount at which the shares trade. It is hard to justify new investments when there is a guaranteed risk-free way to increase the NAV. While APEO’s discount is wide, compared to its nearest peers, the implied discount on the unlisted assets of 31.7% is narrower than the peer average of 35.5%. We are Neutral.”

Spotlight of the week

“It is not straightforward to identify what will change to shine the spotlight on the value on offer in the UK – were it easy, after all, valuations would not now be so attractive.” Aberforth Smaller Companies (ASL) Manager’s Report.

On a more positive note

Half-year Report from Henderson Smaller Companies (HSL). Chair Penny Freer had this to say: “…NAV…total return fell by 7.7%…while the Numis Smaller Companies ex-Investment Companies Index (the ‘Benchmark’) was almost flat, and the AIC UK Smaller Companies sector average NAV declined by 3.7%. Your Company’s share price total return fell by 5.8% during the six months.” As for what lies behind the underperformance, this “…was largely due to compressed valuations and deratings in the challenging market environment for smaller UK businesses.” In addition, “Growth stocks continued to remain out of favour…” But “On a more positive note, it does seem as though October 2023 may have marked a low point of sentiment towards the UK equity market. Since then, we have had a well-received Autumn Statement from the UK Chancellor and the performance in the second quarter showed a marked improvement compared with returns achieved in the first quarter. The longer-term performance record of the Company remains consistently strong, reflecting an unchanged and proven investment strategy adopted by the Fund Manager and his team.”

And the Chair sounds confident for the future: “The Fund Manager has continued to follow a disciplined and unchanged long-term approach which is focused on bottom-up stock selection through a thorough assessment of a company’s market proposition, balance sheet strength and management. The Board is encouraged by the strong performance seen in the final months of the period under review and since the period end. In December 2023 your Company’s NAV rose by 12.4% compared with the Benchmark return of 9.4%, while the three-month NAV performance to 31 December 2023 was 12.5% compared with the Benchmark return of 8.3%, all on a total return basis. The Board remains confident in the Fund Manager’s ability to create a portfolio which will benefit from the opportunities that will progressively emerge as conditions continue to improve.”

Numis is positive: “Some of the recent underperformance has reversed post-period end and we note that the fund is the best performer in its peer group over the last three months…The long-term track record is still intact, and Henderson Smaller Companies remains one of our top picks within the UK smaller companies sector. We continue to rate the management team highly and believe that following a period of poor performance over the last two years, the manager is starting to reap the rewards of sticking to the Growth at a Reasonable Price investment approach and believe that it is well placed to continue its recent resurgence. We note that the portfolio is currently offering relative value, reflected by a forward PE ratio of 11.0x (at 31 December), which compares to a five-year average of 13.5x. As a result, we believe that this represents a compelling entry point to a high-quality, growth-biased portfolio.”

Bold assumption of the week

“…it would be bold to assume that the recent easing of price pressures means that inflation will return to the very low single digit rates of the pre-pandemic period.” Aberforth Smaller Companies (ASL) Manager’s Report.

Well positioned to prosper

Henderson Opportunities Trust (HOT), another from the Henderson stable to report. As Chair Wendy Colquhoun writes: “Against a backdrop of high interest rates and persistent inflation, continued and significant market volatility and negative sentiment towards the UK equity market and smaller companies in particular, it has been a very disappointing year for the Company in both absolute and relative terms. The NAV total return for the year was -9.3% and the share price total return over the period was -12.2%. In comparison, over the same period the FTSE All-Share Index, the Company’s benchmark index, rose by 5.9%, the FTSE 250 Index of medium-sized companies fell by 1.3%, the FTSE SmallCap Index rose by 1.3% and the AIM All-Share Index of the smallest listed UK businesses fell by 14.1%.” All a matter of timing though for “…the Company’s share price delivered a total return of 10.8% in November and 5.4% in December, outperforming the 3.0% and 0.9% return from the FTSE All-Share in those months respectively.”

As for the outlook: “In due course (and if this is not already starting to happen) the UK market will anticipate a recovery of the economy and smaller company share prices are likely to rebound. The Company’s portfolio of quality companies is well positioned to prosper in these circumstances and the Board shares the Fund Managers’ belief that there is considerable potential for gains in coming years when the current clouds affecting the economic outlook eventually clear. This should benefit shareholders over the medium to longer term.”

Note from Winterflood: “A key driver of underperformance was weak sentiment to domestic smaller companies (FTSE 250 -1.3%), to which the fund was overweight.”

Hope of the week

“We are hoping that in the above reports we are talking about a period that has passed.” Henderson Opportunities Trust (HOT) Fund Manager’s Report.

A powerful and welcome rally

Aberforth Smaller Companies (ASL) makes it a hat-trick of results from UK equity trusts with a small-cap tilt. Unlike the two Henderson funds, ASL’s results run to 31 December 2023 which makes quite a difference, as Chairman Richard Davidson explains: “…net asset value total return in the twelve months to 31 December 2023 was +8.2%…ASCoT’s share price total return was +8.0%.” This compares to the 10.1% “…total return from the Numis Smaller Companies Index (excluding investment companies) (NSCI (XIC))…Larger UK companies, represented by the FTSE All-Share, were up by 7.9% in total return terms. It was a volatile year for financial markets as they wrestled with inflation and its implications for monetary policy. A positive outturn for 2023 seemed unlikely as late as November. But then favourable inflation data in both the UK and the US encouraged the view that the next move in interest rates would be downwards. This triggered a powerful and welcome rally into the year end. In the UK, this has so far been led by the mid cap stocks, to which ASCoT has a relatively low exposure.”

Over to the investment managers for the outlook: “US interest rates are likely to dictate the near-term mood of global financial markets, the UK’s included. But equity returns over time are heavily influenced by starting valuations, which stockmarkets can take to extreme levels in their fits of despondency and elation.” With this in mind “…the low valuations ascribed to UK equities, smaller companies and, in particular, ASCoT’s portfolio bode well for returns over the medium term…while acknowledging the present debate about the relevance of the UK stockmarket, the Managers retain confidence in its ability to reflect fairer valuations in due course. Awaiting a general re-rating of the UK listed companies, ASCoT is well placed to prosper in the meantime.”

Numis writes: “Aberforth Smaller Companies modestly lagged the index during the period despite its value bias, which principally reflects that the portfolio is focused on the smaller end of the small cap segment, which lagged the slightly larger companies in the benchmark in the ‘Santa rally’. A higher interest rate environment has been favourable for the fund’s distinct value style in recent years, reflected in relative outperformance versus its more ‘growthy’ peers and the fund is the best performer in its peer group over three years…The managers have stuck to their value style through both the good times and the bad – so investors know what they are getting in terms of approach, and this differentiates the fund in a peer group that is growth biased.”

Funds on the Watch List this week include: SMT, SSIT, FSF, CRS, BEMO, BSRT, MATE JGGI, BIPS, CORD, APEO, CGT, TIGT, CCJI, LWDB

Welcome to this week’s Watch List where you’ll find golden nuggets on trust discounts, dividends, tips and lots more…

ByFrank Buhagiar•29 Jan, 2024

BARGAIN BASEMENT

Discount Watch: 11

Our estimate of the number of investment companies whose discounts hit 12-month highs (or lows depending on how you look at them) over the course of the week ended Friday 26 January 2024 – four more than the previous week’s seven.

Two of the 11 were on the list last week: Digital 9 Infrastructure (DGI9) from infrastructure; and SDCL Energy Efficiency Income (SEIT) from renewable energy infrastructure.

Renewable energy infrastructure also accounts for three of the nine newbies too: Gresham House Energy Storage (GRID); Harmony Energy Income (HEIT); and Aquila Energy Efficiency Inc (AEET). Two more come from Japan: Baillie Gifford Japan (BGFD); and Baillie Gifford Shin Nippon (BGS). One from North America equity income: BlackRock Sustainable American Inc (BRSA). One from UK equity income: Finsbury Growth & Income (FGT). Another from debt: NB Distressed Debt (NBDD). And finally, Custodian REIT (CREI) from property.

ON THE MOVE

Monthly Mover Watch: Seraphim Space (SSIT)

Back at the summit of Winterflood’s list of top-five monthly movers in the investment company space. Still no new news out since the December shareholder letter, but that didn’t stop the space investor from extending its monthly gain from 26.1% to 48.1% over the course of the week. Some shareholder letter…

Next Foresight Sustainable Forestry (FSF) jumps from fifth to second after its share price gain on the month doubled to +26.2% from 12.4% a week earlier. A look at the graph reveals the shares have been on a tear since mid-January, rising from the 63p level to around 76p. No news out though…for now.

Three newbies to run through, although in the case of Crystal Amber (CRS) (+10.7%) in fourth not such a newbie, as the small cap investor, which is in wind-down mode, has been something of a feature among Winterflood’s top-fivers in 2024. Baker Steel Resources (BSRT) another not so new newbie takes third – shares up +12.8% on the month. Last top-five appearance? End of December 2023 and, speaking of December, this week the co. reported a +16.3% uplift in NAV per share for the month.

That just leaves fifth spot which goes to Barings Emerging EMEA Opportunities (BEMO) (+9.3%). This month the fund had some good news to report: “The Company recently sold its holding in TCS, a Russian depositary receipt…for total proceeds of USD 669,834. Based on the most recent net asset value, this would represent approximately 0.7% of the Company…Prior to realising this holding, it was valued at zero in the Company’s net asset value…the Company remains focused on how best shareholder value can be preserved, created and realised in relation to the holdings of Russian assets.”

Scottish Mortgage Watch: -0.6%

Scottish Mortgage’s (SMT) monthly share price loss as at Friday 26 January 2024 – an improvement on last week’s -4.5% monthly deficit. NAV also improved, closing flat on the month compared to being off -3.6% the previous week. Finally, the wider global IT sector finished the week up +1.5% compared to a minuscule -0.1% loss seven days earlier.

THE CORPORATE BOX

Combination Watch: JPMorgan Multi-Asset Growth & Income (MATE) JPMorgan Global Growth & Income (JGGI)

To tie the knot: “JPMorgan Multi-Asset Growth & Income…is pleased to announce that it has signed Heads of Terms with the Board of JPMorgan Global Growth & Income…in respect of a proposed combination of the Company and JGGI to be effected by way of a section 110 scheme of reconstruction of MATE…and issuance of new ordinary shares of JGGI as consideration for the transfer of all of MATE’s assets…”

Comment from MATE Chair Sarah MacAulay: “Your Board has been conscious for some time that MATE’s relatively small size reduced its appeal to investors, while prospects for the Company’s growth have been limited by difficult market conditions. Unfortunately, size does matter due to the implications for costs and for the liquidity of MATE’s shares. The Board believes that the proposed combination with JPMorgan Global Growth & Income plc offers shareholders exposure to a large, liquid company with significantly lower costs and a well-established dividend policy. Furthermore, it offers a degree of continuity, given that approximately 50 per cent. of MATE is currently managed by the same investment team that has an excellent performance record from investing in a globally diversified portfolio.”

Raise Watch: Invesco Bond Income Plus (BIPS)

Announced “…a placing (the ‘Placing’) and retail offer of Shares in the Company…via the Winterflood Retail Access Platform…” As the company explains “Throughout the course of 2023, the Company demonstrated continued strong performance, and the Company’s shares…have traded at an average premium to NAV of 1.55 per cent…The Board also notes the recent announcements by Henderson Diversified Income Trust plc (HDIV) in connection with its winding up…Consequently, the Board has decided to undertake a Fundraising to provide new and existing investors, including retail investors and HDIV’s shareholders who have elected to receive the cash offer, the opportunity to maintain their high yield exposure by purchasing Shares at a modest premium to NAV.”

Note from Winterflood: “BIPS has announced a placing and retail offer at a 0.75% premium to latest NAV; issue price to be announced on 6 February…The fundraising will be capped at £15m, of which the retail offer value is limited to €8m.”

Insider Watch: 1,000,000

The number of Cordiant Digital Infrastructure (CORD) shares purchased by Chairman and co-founder Steven Marshall at a price of 73p a share on 23 January 2024: “Following this purchase, Mr Marshall owns a total of 7,927,957 ordinary shares. The number of ordinary shares held by the Directors of the Company and the Investment Manager (either directly or by its staff) now represents 1.34% of the entire issued share capital of the Company.”

Buyback Watch #1: 8.1 million

The number of abrdn Private Equity Opportunities (APEO) shares that could be bought as part of the fund’s share buyback programme: “During the last 18 months, like many of its peers, APEO’s share price has diverged materially from its NAV, resulting in the Company’s shares trading at a material discount…It is the Board’s view that APEO’s current share price presents an exceptional investment opportunity for the Company. Notably, APEO has in recent months proactively undertaken a series of partial secondary sales of its co-investment in Action for portfolio construction reasons. All of these disposals have been achieved at 100% of the most recent quarterly valuation of that asset…The Board has decided to use a portion of the €34.6 million of proceeds realised from the most recent sale…to commence a buyback programme.”

Buyback Watch #2: Capital Gearing Trust’s (CGT)

Zero discount policy may soon be unshackled once more. As announced in October 2023, the policy has had to be put on the back burner due to the fund’s limited distributable reserves available to effect share buybacks. This is set to change however following approval from the High Court of Justice in Northern Ireland for the cancellation of £1.1bn in the share premium account and the crediting of an equivalent amount to distributable reserves.

Dividend Watch: 4%

The percentage increase in Troy Income & Growth’s (TIGT) total dividends for the year: “The total dividends for FY23 totalled 2.05p, representing a 4% increase on the prior year. Over the year this was above the peer group rate of dividend growth.”

8 – the number of consecutive years CC Japan Income & Growth’s (CCJI) dividend has been increased: “…the Board declared a second interim dividend of 3.75p per Ordinary Share, making a full year distribution of 5.30p per Ordinary Share and representing an 8.2% increase over last year… This is the eighth year of dividend increase for the Company with the annual dividend increasing by 76.7% since launch in December 2015. We currently pay a dividend yield of around 3% out of covered income.”

MEDIA CITY

Tip Watch #1: Law Debenture (LWBD)

Tipped by The Telegraph’s Questor Column. In Buy into this unique trust while its shares are depressed, Questor highlights how “Uncertainty over the timing of

interest rate cuts and Houthi attacks on Red Sea shipping have weighed on the new year stock market and depressed shares in Law Debenture Corporation, creating a good opportunity to buy the leading UK equity income investment trust…”

In terms of LWDB’s uniqueness, the article adds: “Launched 135 years ago, Law Debenture is a £1bn listed fund that seeks to generate income and growth from a portfolio of British stocks managed by Janus Henderson and a set of specialist financial services businesses…This unique combination – which underpins a strong dividend and diversifies investors’ returns – has impressed us for a long time. We first recommended the shares at about 578p in July 2017 and continue to regard Law Debenture as a good core holding for private investors at today’s share price of 773p.”

Tip Watch #2: Scottish Mortgage (SMT)

Given the once over by Shares Magazine. In What should investors do with Scottish Mortgage? Shares points out that “For the first time in years Scottish

Mortgage Investment Trust (SMT) investors are contemplating selling up and moving on. Over the past month, it is the most sold investment trust on the AJ Bell platform, accounting for 14.6% of all trust sales. This is almost unheard of, and it is meaningful too. For most of the 21st Century, long-term investors have backed Scottish Mortgage to the hilt, enjoying a seemingly endless supply of successes, including stakes in Amazon…long before the rest of the market caught on. It is a run that has made Scottish Mortgage a foundation stone of thousands of private investor portfolios, powering the trust into the FTSE 100.”

The last three years have been tough however: “During the three years to 31 December 2023, the shares lost 32.8%, according to manager Baillie Gifford, versus a 28.7% gain for its FTSE All World Index benchmark. Even over five years, typically the period joint managers Tom Slater and Lawrence Burns prefer to be judged on, it has barely tracked the benchmark’s 77.8% returns…A big part of that underperformance comes from Scottish Mortgage’s decisions on the thorny issue of owning stakes in private companies, notoriously difficult to value and especially so during dry spells for funding rounds and an IPOs (initial public offerings) drought.”

There could be light at the end of the tunnel though. As Shares writes: “Many believe 2024 will see the IPOs market pick up again, which will help established private company valuations and dispel some of the worries investors might have.” The article concludes: “…for those willing to accept the volatility inherent in the share price, this remains a clearly focused investment trust aiming to capture outlier returns amid market risk aversion from many of the largest investment themes around, such as AI, (artificial intelligence), energy storage, digital commerce, and healthcare technology. We believe this means share price performance will improve and could repeat the benchmark-beating return of the past decade’s 318.9% versus 193.2%.”

Harmony Energy Income follows GRID in slashing dividend

• QuotedData

Following a similar announcement from Gresham House Energy storage GRID – to see our coverage of this from yesterday), Harmony Energy Income Trust (HEIT) has also issued a trading update ahead of the publication of its quarterly Net Asset Value update and audited annual results later this month. Like GRID, HEIT says that BESS revenues for the year ended 31 October 2023 were markedly lower than revenue generated in the same period in 2022 and it is postponing its first quarter dividend for the current financial year. However, it also says that, if the situation continues for an extended period, this will impact its ability to pay dividends, so further cuts could be on the cards.

Weaker revenue environment in 2023 and January 2024

HEIT says that, whilst a reduction in BESS revenues was expected from “the remarkable highs” of 2022 and built into third party revenue forecasts, the scale and the speed of the reduction has exceeded market expectations. It says that there are multiple drivers of this reduction, both macro and sector-specific, and these are detailed below:

Saturation of ancillary service markets

HEIT says that a high rate of build-out of BESS in Great Britain led to saturation of ancillary services and has driven clearing prices to record low levels. It says that this was widely anticipated and it had positioned its 2-hr duration portfolio specifically to protect against this event and take maximum advantage of the inevitable shift by BESS towards wholesale market revenue strategies and the Balancing Mechanism (BM).

Reduction in wholesale power price volatility and spreads

HEIT says that, with its 2-hr duration portfolio, this issue is more relevant to it than the ancillary services detailed above. Wholesale spreads for its 2023 financial year and the first quarter of its 2024 financial year have narrowed primarily due to a reduction in natural gas prices, itself due to milder than expected weather and high levels of European reserves. In addition, Great Britain has imported a large volume of energy from Europe (via interconnectors) and high consumer prices have encouraged a material reduction in consumer energy usage.

Wholesale price spreads are forecast by independent experts to increase during 2024 and beyond. This is driven by a range of factors including increased consumer energy demand (as the cost-of-living crisis eases), continued electrification of the country’s heating and transport infrastructure, greater penetration of intermittent renewables and an increase in pricing for natural gas and carbon.

Implementation issues with National Grid ESO (NGESO) Open Balancing Platform

Another key factor in recent revenue weakness is NGESO’s continued sporadic use of BESS in the Balancing Mechanism. HEIT says that, despite a well-publicised policy and comprehensive plan from NGESO to increase BESS dispatch rates in the Balancing Mechanism via process and software enhancements over 2024 and 2025, the December 2023 launch of the new “bulk dispatch” software was curtailed due to technical issues.

Since its re-launch on 8 January 2024, NGESO appears to only be using its Open Balancing Platform intermittently. As a consequence, HEIT’s portfolio is seeing some days of high Balancing Mechanism volume, and some of zero. BESS projects utilise algorithms and AI software to execute revenue strategies, and so the inconsistent use of Open Balancing Platform by NGESO not only limits BESS volumes in the Balancing Mechanism, but also creates uncertainty over how much daily capacity BESS can dedicate to other strategies and services.

HEIT’s investment adviser is in ongoing dialogue with NGESO on this topic directly and also via stakeholder interest groups. NGESO also has a published ambition to operate the Great Britain system with zero carbon emissions by 2025 (by reducing its use of coal and gas) and a consistent use of the Open Balancing Platform with BESS by NGESO would, in HEIT’s adviser’s opinion, help accelerate NGESO’s progress towards this goal and should also result in a near-immediate and marked increase in the Company’s revenue performance.

HEIT’s portfolio is outperforming peers

HEIT says that, despite the problems described above, its operating portfolio continues to out-perform peers (on a £/MW basis). Its Pillswood (Phase 1) and (Phase 2) projects ranked first and third respectively for the calendar year 2023, and every one of its five operating assets appear in the Top-10 leaderboard for January 2024 (excluding non-BM units and estimated revenue from the Embedded Export Tariff – Source: Modo Energy).

Operational free cash flow forecast to increase in 2024

HEIT says that its operational free cash flow is forecast to increase in 2024 as its remaining three projects (c. 236 MWh / 118 MW, equating to around 30% of the current portfolio) complete construction and begin operations. Crucially, HEIT says that it has sufficient cash reserves to complete construction of these projects. In addition, revenues going forward will be supported by HEIT’s existing Capacity Market contracts, for which delivery only began in October 2023.

First quarterly dividend ‘postponed’ but more cuts could follow

HEIT paid a total dividend of 8p per share in relation to its last financial year ended 31 October 2023.However, for the first quarterly distribution in relation to the current financial year, (2 pence per share, which HEIT expected to be declared later this month and pay in March) the Board, with the backing of the Investment Adviser, has decided to postpone this declaration. HEIT says that while the reasons for the recent low revenue environment are understood, and the market conditions are expected to improve, the short-term outlook remains uncertain. It says that, if these conditions do continue for an extended period, this will impact on its ability to pay dividends. It is well understood that BESS revenues can vary across the course of a year and therefore prudent cash management is required.

HEIT’s strategy for 2024

HEIT says that its board is preparing to implement a series of short-term actions which it says would better position it for long-term stability and growth. These actions will include a restructuring of the Company’s existing debt facilities (to reflect that 70% of the portfolio’s MW capacity is now operational), coupled with one or more asset sales. Any cash proceeds from such sales would be used, in priority, to reduce gearing and then to fund future dividend distributions for the current financial year and next. HEIT says that these distributions could take the form of income and/or capital distributions.

HEIT says that its ambition remains to pay 8 pence per share per annum and that any funds available after the payment of dividends could be used to repurchase shares. Further updates will be made to shareholders in due course.

Asset Valuations have been consistent

HEIT says that, despite the recent weak revenue environment during 2023, the discount rates applied to its “operating” and “under construction” assets have remained stable. Asset valuations have been supported by long-term average revenue forecasts from independent experts, as well as evidence of market transactions. It cites the sale by the Company of its Rye Common asset in September 2023, at a 1.5% premium to the carrying value, is an example. HEIT’s investment adviser continues to observe a high level of appetite amongst private investors for BESS assets, especially whilst 2-hr duration operational BESS projects are relatively scarce and well-positioned to outperform once revenues conditions improve.

Full Year Results for the year ended 31 December 2023 Results and Q1 FY2024 NAV

The Company is currently completing the audit of its financial results for the year ended 31 October 2023 and expects to publish its annual report and accounts alongside its Q1 NAV for the period ended 31 January 2024 in the week commencing 26 February 2024.

[QD comment: Like GRID’s shareholders yesterday, HEIT’s investors will be very disappointed by the dividend cut and what now appears to be a difficult outlook for the rest of the year, while National Grid ESO implements its new software. As we noted yesterday, revenues from the ESO had been expected after the software upgrade and it has been a disappointment to the market that this has not come through.

To give some additional context, the current situation is ludicrous. It appears that, rather than drawing on the BESS assets, National Grid is choosing to fire up gas instead, at what will ultimately be a higher cost to consumers, to address supply shortages. Battery storage projects that stand ready to supply are being ‘skipped’ in the balancing mechanism. We understand that National Grid ESO is implementing changes that will rectify the issue but the final and perhaps most important upgrade is not due until late this year.]

---

Gresham House Energy Storage slashes dividend

• QuotedData

Gresham House Energy Storage has published a trading update ahead of the publication of its results in April 2024. It says that it is still impacted by a weak revenue environment, due to a combination of:

• battery energy storage (BESS) still being significantly under-utilised in National Grid ESO’s Balancing Mechanism – its forum for trading the necessary amounts of electrical energy to balance supply and demand for each half-hourly period – resulting in ‘skip rates’ remaining high despite the recent launch of ESO’s Open Balancing Platform (OBP).
• the continued excessive use of legacy gas-fired electricity generation by ESO to provide the Balancing Mechanism with flexible generation which in turn causes oversupply in the wholesale electricity market, reducing the revenue opportunity for BESS; and
• the slower than expected pace of commissioning of new projects to date, due to elongated grid connection times.

The company says that the rising need for battery energy storage as renewable generation increases remains as true as ever. It thinks that the revenue environment will improve, as discussed in the market update below, although there is some uncertainty on the timing and trajectory of such improvement.

Despite problems in securing grid connection at certain projects, the company remains on target to reach 1,072MW in total operational capacity (currently 740MW) and intends to complete a number of extensions to battery discharge durations in 2024, taking the average to 1.6hrs from 1.2hrs, doubling the number of MWh installed over the course of the year.

Dividend cut

Given the constraints on its cash generation, the board and manager are keeping a tight control of capital allocation, focusing on i) capital expenditure (capex), ii) dividend policy, iii) share buybacks and iv) debt facilities.

i) Capex – In 2024, the company intends to solely focus on completion of its 2023 pipeline projects comprising of a further 332MW, all of which are constructed and awaiting completion of grid connection related works, together with the duration extensions already committed to, given the potential for this to meaningfully increase the earnings capacity of the portfolio. A significant amount of this capex is expected to be financed by cash on hand (which stood at in excess of £40m as at 31 December 2023).

ii) Dividend policy – Given the recent difficult revenue environment, the board has decided not to declare a dividend for Q4 2023. In terms of the dividend for 2024, if the current revenue environment endures, it will be challenging to generate the cash required to cover the dividend this year. As such, the board intends to recalibrate the company’s dividend target for 2024, as well as the dividend policy on an ongoing basis to better reflect the predominantly merchant nature of the company’s revenues. A further announcement in this regard will be made as soon as possible and not later than the announcement of the company’s annual results.

iii) Share buybacks – the board confirms its intention to commence a share buyback programme.

iv) Debt facility – The company also intends to enter into discussions with its lenders to seek certain amendments to optimise its debt facility. This may include a reduction in the size of the facility, to reduce the overall cost of funding given the whole of this debt facility may not be required. As of 31 December 2023, £110m was drawn under the £335m debt facility.

Market update

Open Balancing Platform (OBP)

• The launch of the ESO’s OBP took place as planned on 12 December 2023. The system was taken offline on 15 December to address minor technical issues and was relaunched on 8 January 2024.
• OBP is being actively used, and while the volume of trades allocated to BESS has increased since the launch, it remains far below its potential. As such the ‘skip rate’ has remained high.
• ESO has committed to reporting on its progress via its Operational Transparency Forum (OTF) webcast going forward.
• ESO has indicated that it will allocate a rising volume of trades to BESS, as pre-contracting of gas assets declines, which in turn will help increase volumes of trades to the OBP (and therefore BESS).
• Specifically, in accordance with ESO’s Balancing Programme milestones published here, we expected better utilisation of BESS:

1. As BESS capacity in the Balancing Mechanism is seen as being present in sufficient volume for the control room to schedule marginally less gas-fired power. Expected timeframe: February 2024.
2. As a result of the launch of Balancing Reserve (BR), BESS will be able to pre-contract their capacity in the day ahead market, in a competitive forum, head-to-head with gas-fired generation (for the first time since the small reserve from storage trials in 2020). This will allow BESS to be “seen” and used by the control room ahead of real time. This represents a new revenue stream for BESS while also ensuring less gas-fired power hits the market, leading to lower skip rates in real time. BR is intended to replace Regulating Reserve, through which gas-fired generation is currently reserved, and is expected to be a gigawatt-scale opportunity. Expected timeframe: BR launches 12 March 2024.
3. Quick Reserve is set to launch in the summer and represents a further revenue opportunity for BESS. It is a service for reserving primarily BESS, to take advantage of their highly responsive capabilities. Expected timeframe: Summer 2024.

Wholesale electricity market

• The impact of gas-fired generation being turned on in order to meet flexibility requirements of the market is leading to oversupply in the wholesale market, and curtailment of renewables, in our view this is distorting half-hourly power prices.
• As gas-fired generation is used less often, gas will supply the marginal demand less frequently. This will result in more volatile power prices, unlocking again the revenue potential for BESS in the wholesale market.

Assets under construction

In terms of recent construction progress, the 50MW/50MWh West Didsbury project has been commercially operational since December 2023. In addition, the 50MW/76MWh York project was energised in mid-January 2024 and is expected to be revenue-generating in February 2024.

340MW of projects are being upgraded with longer life batteries, of which 305MW will have a two hour duration;

• Arbroath (35MW) is being extended to a 1.4h project and work is underway.
• Nevendon is being extended from a 0.4h 10MW project to a 2h 15MW project. This is expected to complete in May.
• Enderby (50MW) and West Didsbury (50MW), both built with extensions in mind, are increasing from a 1h to 2h duration. Works are set to start in March and are expected to take two months.
• Penwortham (50MW) and Melksham (100MW), similarly built with extensions in mind are also being upgraded from a 1h to 2h duration with works expected from April and also expected to take two months.
• Coupar Angus (40MW) is also being upgraded from 1h to 2h and works will commence in around June.

Given the focus on existing projects, the company has decided to defer its investment in Project Iliad, which it intends to revisit once the market backdrop improves. The company is continuing to progress a disposal of a subset of the portfolio and the process is ongoing.

Chair’s comment

John Leggate CBE, chair, commented:

“The challenging environment continues to persist for the battery storage industry in Great Britain as it transitions to a trading-focused business model, having been focused on frequency response until Q1 2023. These conditions, and their effect on revenues, are not unique to GRID. The UK’s need for increased energy storage capacity remains as clear as ever given the rising levels of committed renewable generation coming online over the period to 2030. In turn, clean energy dominates energy output more and more frequently, as legacy gas-fired electricity generation continues to be squeezed off the system by cheaper renewables, with battery storage the clear technological leader in tackling the consequential rising intermittency. The ESO’s efforts to improve access to the Balancing Mechanism for BESS via the Balancing Programme, are clear evidence of this and are welcomed. However, the rollout of ESO’s Balancing Programme must remain on track and enable improved utilisation of BESS, which has yet to manifest in a material way.

Proper utilisation of BESS will also result in lower energy bills for consumers and will accelerate the decarbonisation of our power system. It is therefore a matter of when, not if, BESS become better utilised and fully integrated into the ESO’s operating environment. Similarly, it is also a matter of time before our pipeline is completed and target capacity is reached.

Therefore, the decision to cut our Q4 2023 dividend and reallocate capital in GRID’s shares has been very carefully considered. The current level of the share price represents the most compelling historic opportunity to invest capital in GRID’s shares, and to enhance net asset value per share. It is for these reasons that, in parallel with today’s dividend announcement, we aim to commence a share buyback.

In the meantime, the board is working closely with the manager to continue to position the company to thrive, as further renewable generation comes online and ESO continues to improve battery storage utilisation in the Balancing Mechanism.”

[QD comment: Clearly shareholders will be extremely disappointed by the dividend cut and unnerved by the lack of a turnaround in National Grid revenues that was expected after its software upgrade. The uncertainty about when things will turn for the better is the killer. We would expect that this fund and Harmony Energy will be out of favour for some months to come. Gore Street Energy Storage seems to be in a much better position, however, as it derives much more of its revenue from other countries.]

GRID : Gresham House Energy Storage slashes dividend

This website is for information purposes only and is not intended to encourage the reader to deal in any mentioned securities. QuotedData is a trading name of Marten & Co Limited, which is authorised and regulated by the Financial Conduct Authority.

GRID leaves the watch list on the dividend miss.

CMPI has been included for control.

David Kempton.

My core trusts and ETFs for income and growth

Experienced private investor David Kempton shares the investment companies, exchange-traded funds and government bonds giving him a mixture of growth and stability this year.

Any of the current geopolitical threats could escalate at any moment, yet markets remain calm and services continue as normal in the developed world. The S&P 500 is even on an official bull run to a high of 4,850, up almost 26% from the low last March.

I continue to seek refuge in a significant holding of short-dated UK government bonds with a low coupon. I want the yields to be almost entirely capital gain, which has zero tax liability in gilts, and not interest income, on which I would pay my marginal tax rate.

Gilts

JJI use the excellent abbreviated gilts list in Saturday’s Financial Times from which I chose my current holdings:

Treasury 0.125% 2026, redemption yield 4.01%.

Treasury 0.5% 2029, redemption yield 3.74%.

ETFs

For income I have selected from the Just ETF website, which shows the top 50 exchange-traded funds (ETFs) with the highest dividend yields. Pick your own risk-reward from those on the list.

I have bought small amounts in: 

Brazil HSBC MSCI Brazil UCITS ETF USD yielding 9.4%;

Asia Pacific iShares Asia Pacific Dividend UCITS ETF on 5.9%;

Equity Europe Dividend iShares Euro Dividend UCITS ETF 5.9%;

Equity United Kingdom Dividend iShares UK Dividend UCITS ETF 5.5%,

Equity World Dividend Global X SuperDividend UCITS ETF USD distributing 11.9%;

and Equity United States Technology Global X Nasdaq 100 Covered Call UCITS ETF USD distributing 10.9%.

Infrastructure and property

Currently some of the listed infrastructure funds offer useful risk-adjusted returns with high quality cash flow from a portfolio of critical assets. Now that interest rates are perceived to have peaked, discounts have narrowed and it seems a good moment to gain exposure to the sector.

I have bought International Public Partnerships (INPP), which holds a diversified portfolio of infrastructure assets in UK, Europe, US and Australia. The shares, on current discount to asset value of 17%, yield 6%.

For yield I have also bought AEW UK Reit (AEWU), which has a portfolio of 36 smaller office properties, retail warehouses, high street retail, and industrial warehouses. On a discount of 20%, it yields 8.5%, although the dividend has been uncovered in recent years.

In the Renewable Energy sector I hold Bluefield Solar Income Fund (BSIF), invested in UK solar energy infrastructure on a discount of 17% and yielding 7.4%.

Rockwood for UK

I am not alone in believing that there is terrific value in UK markets, where, according to Citywire analysis, the number of British stocks being backed by the best-performing global fund managers has doubled in the last year.

After the US and China, Britain remains the third-largest tech economy in the world, with Google announcing a $1bn data centre for north London and Microsoft planning to spend $2.5bn on AI data centres nationwide. 

I don’t currently hold a FTSE 100 focused fund, bearing in mind that 75% of blue-chip earnings are generated abroad, making such funds really a sterling bet on the world’s economy.

I have, though, increased my holding in Rockwood Strategic (RKW), the smallest of the renowned Christopher Mills Harwood stable with only £58m of assets in a tightly focused portfolio of 19 UK small-cap stocks.

With the shares now on premium of 1%, the performance is exceptional with one-year and three-year growth of 19% and 72%. 

JAM today

A US holding is essential since you must have some interest in the magnificent seven. Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla are now worth more than the combined markets of Japan, UK and China!  

US politics baffle the world, but a Trump victory in November would clearly be good for their economy as fortress America draws inwards, focusing on its own indigenous resources, whilst minimising global investment, financial support and dependency – all essentially bad for their allies. 

My US exposure remains in JP Morgan American (JAM) predominantly invested in the shares of larger quoted companies with maximum 10% in smaller companies.  It still looks best-of-breed to me, with one-, three- and five-year performances of 31%, 53% and 126%.

Japan

I have held CC Japan Income and Capital Growth (CCJI) for some years but it remains one of the best options in the sector with growth over one, three and five years of 20%, 41% and 54% while the shares still stand on a 7% discount and yield 3%.

Although the Japanese recovery is struggling to gain momentum and GDP contracted in the third quarter as inflation eroded purchasing power, recovery is forecast in the second quarter of 2024, when wage growth is expected to pick up.

By the second half of the year, moderating inflation and accelerating wages should bring a stronger recovery. 

Emerging markets

In common with many investors, I currently avoid China; global investors have switched to the benefit of other Asian regions and emerging markets.

I have bought Vietnam Holding (VNH), which is invested in high-growth companies in Vietnam and actively managed with a high-conviction portfolio. On a 7% discount with one-, three- and five-year performances of 18%, 65% and 94%, it looks attractive to me.

India, now with the world’s largest population and democracy, has overtaken Britain to rank fifth in global economies. Apple set the trend by transferring iPhone manufacture from China to India, where labour costs are one-third, and is already exporting $1bn of units every month. 

I hold India Capital Growth (IGC), predominantly invested in mid- and small-cap Indian stocks. The shares offer a narrow 2% discount with one-, three- and five-year total returns of 40%, 104% and 104%. 

I also hold Blackrock Frontiers (BRFI), invested in companies operating in less-developed countries outside the MSCI World index including, Brazil, China, India, Korea, Mexico, Russia, South Africa, and Taiwan. On an 8% discount, the performance over one, three and five years is 9%, 34% and 33%. 

Healthcare and technology

Healthcare and technology must be part of any medium-term portfolio and I hold Polar Capital Global Healthcare Trust (PCGT) with its long-term diversified healthcare industry portfolio, invested 58% in the US, on a discount of 6%. The performance over one year, three years and five years is 4%, 37% and 73%

I have added to my holding in Allianz Technology Trust (ATT), which is invested in global technology companies, currently 95% US, on a 6% discount with one-, three- and five-year performances of 48%, 4%% and 149%. 

Gold and bitcoin

Clearly in today’s insecure world, there must be a holding in gold and I have added to my two funds:

Ninety One Global Gold 1 Acc GBP (AEE1) – primarily invested in the shares of global companies involved in gold mining and related derivatives.

Meanwhile, Wisdom Tree Physical Gold (PHAU) is designed to offer cost-efficient access to the gold market by providing a return equivalent to the movements in the gold spot price backed by physical allocated gold held by HSBC Bank. 

I have had exposure to Bitcoin since 2020, but never directly into the myriad of direct investments. Instead, I hold KR1 (KR1:AQSE), a fund on the Aquis Stock Exchange which invests in blockchain ecosystem projects and digital-based assets.

There are several collective funds in the space, but over the last three years this fund has done me well. The US Securities and Exchange Commission (SEC) this month approved the first ever ETFs tied to crypto. That should give the sector some credibility, though there’s still no understandable dynamic.

Blackrock and Fidelity also plan to launch funds, which will be interesting.  

Uranium

In the resources sector, my largest exposure is now uranium, where the price should remain strong as demand increases to feed the current 450 worldwide nuclear power plants in 32 countries with 60 more under construction – all the while global supplies remain constrained by the current geopolitical issues.

Geiger Counter (GCL) invests primarily in the securities of companies involved in the exploration, development and production of uranium. On a discount of 13%, over one, three and five years the shares have provided total returns of 38%, 125% and 212%

10 shares to give you a £10,000 annual income in 2024

Once again, our head of equity strategy’s portfolio has generated more than the required annual income, and the yield from company dividends is way above the most generous bank account.

10 shares to give you a £10,000 annual income in 2024
Once again, our head of equity strategy’s portfolio has generated more than the required annual income, and the yield from company dividends is way above the most generous bank account.

by Lee Wild from interactive investor

After 14 years of either declining or historically low interest rates, UK savers finally had something to cheer at the end of 2021. Rates started rising and didn’t stop until they reached 5.25% in August last year. But while higher savings rates are good news for those seeking risk-free returns, sky-high inflation and a buoyant stock market meant the best opportunities for both income and growth in 2023 were found elsewhere.

Britain’s flagship FTSE 100 index grew less than 4% on a share price basis last year. Despite making a record high and briefly exceeding 8,000 for the first time in February, it spent most of the year between 7,350 and 7,750.

However, the total return, which includes dividends, was 7.9%. The FTSE 250 index managed 8%. Those diversifying their portfolios with overseas assets would have done even better. America’s Nasdaq tech index delivered almost 54% on the same basis, Japan grew 28% and European bourses were up by a fifth.

Best rates on easy access savings accounts last year, according to our monthly income screener column, were 5.3%, and 5.5% for easy access cash ISAs. You could have got 6.2% on a one-year fixed rate bond.

But with CPI annual inflation anywhere between 10.4% early in 2023 and 3.9% in November, every percentage point was crucial to generating a positive real-terms return. Now, in 2024, savers will be forced to make some big decisions if interest rates do start to fall in a few months’ time, as expected.

Income portfolio performance in 2023
The objective is to generate at least £10,000 of annual dividend income over the 12 months, using a diversified basket of 10 shares. Ideally, the value of the portfolio would also be higher at the end of the year than at the start; but income is the priority.

When I put the portfolio together a year ago, I anticipated a dividend yield of 6.4%. I wanted a diverse basket of shares, so sacrificed yield in some cases. But there were still some chunky prospective dividends in there, and the likes of Legal & General Group
LGEN
1.04%

British American Tobacco
BATS
1.09%

and M&G Ordinary Shares
MNG
0.55%

delivered the goods. Over the year, my 10 stocks generated £10,660 of income for a yield of 6.8%.

Biggest contributors to the excess income were Sainsbury (J)
SBRY
2.99%

with 24% more than I’d expected, Taylor Wimpey
TW.
0.27%

(17%) and SSE
SSE
0.12%

(12%). Diversified Energy Co
DEC
0.77%

was the biggest positive surprise, generating an extra 27%. However, its share price was also the biggest negative in the portfolio.

Having invested £158,000 in the portfolio to generate that level of income, I ended the year with £147,461 for a decline of 6.7% and total return of 0.1%. Diversified accounted for £6,900 of the lost capital.

Normally, an investor would not churn their portfolio at the end of each calendar year but, as I point out each time, this portfolio starts the year with a clean slate. It means the exercise remains relevant for anyone who shows an interest, whether existing investor or newbie. That also means there will be some changes in the line-up for 2024. Here are the stocks that stay, those that don’t and some new entries.

The shares that stay in 2024
Six companies in the 2023 portfolio are kept for this year’s basket of 10 income stocks. Not all of them had a spectacular 2023, but each delivered a generous dividend and provided valuable diversification, while four of them also chipped in a market-beating capital gain.

Last year I switched out of Persimmon
PSN
0.28%

and into Taylor Wimpey. That proved to be a wise decision, the latter’s share price ending the 12 months up 23% and yielding 8.2%. The payout was deemed safer than housebuilder peers because its dividend policy is not based on earnings cover targets. Instead, the company promises to return 7.5% of net asset value, giving investors “increased certainty of a reliable income stream throughout the cycle.” That’s good enough for me, especially as a likely decline in interest rates this year should support the housing sector.

Sainsbury’s also did me proud, my estimate of a 4% dividend yield proving conservative. A 5% payout generated almost £1,000 for the portfolio, while the share price ended the year up 8%. There’s not much to choose between Sainsbury’s and Tesco
TSCO
2.79%

in terms of share performance, but the former has a much better yield.

I’m keeping M&G in the portfolio for a fourth year because it continues to deliver the goods. A steady share price performance over the past few years and one of the best blue-chip yields around make it impossible to reject the asset manager. Yes, plenty have been predicting a dividend cut for years, but the company repeats that its policy of “delivering stable or growing dividends to our shareholders remains unchanged.”

GSK
1.58%

had been ever present in these income portfolios since launch before losing its place in 2021 following the decision to ‘rebase’ its dividend. The payout still isn’t great, but diversification into the defensive pharma sector made up for last year’s modest prospective yield of 4%. As well as making a solid contribution to the income strategy, the share price grew by 10%. I’m sticking with the drug giant this year for the same reasons.

There’s wasn’t much to choose between the high street banks last year, confirmed by their share price performance over the 12 months. None covered themselves in glory, despite much higher interest rates, and Lloyds Banking Group
LLOY

shares fell 19%. But it’s a well-run company and has avoided any shocks, unlike some peers. Its shares have spent most of the past three years in a 40-50p range, and there’s little to suggest they’ll be worth significantly less in 12 months’ time, so I’m locking in a 6.6% yield.

Legal & General shares were pretty much flat in 2023, but a 7.7% dividend yield made a welcome contribution toward our £10k target. A near two-year downtrend appeared to end in November as the insurer’s shares rallied with the rest of the market. L&G shares sit near an 11-month high and offers an 8% yield and, having outperformed rival Aviva

last year on both share price and dividend, albeit marginally, I’m sticking with L&G in 2024.

Heading for the exit
If six stocks stay, it must mean four stocks have been shown the door. Three are punished for an underperforming share price and deteriorating outlook, but utility SSE gets the boot for committing the cardinal sin – cutting the dividend. This was flagged by the company before I picked it for the 2023 portfolio, but there was still an attractive yield to be had before the payout was rebased for the year to 31 March 2024. There are better yields than SSE’s 3.5% elsewhere in the sector.

British American Tobacco
BATS

three-year run in the portfolio ends now. It’s always delivered the dividend it promised, but the capital depreciation has been significant (25% in 2023). The shares are cheap on a price/earnings basis compared to the FTSE 100 average, but I just don’t see enough potential for significant recovery in the near term.

Since launch, I’ve always set aside one or two spots in the portfolio for more speculative income plays, typically with higher yields. I don’t invest as much in them as I do the blue-chips, just in case. Often it pays off, and when it doesn’t, the lower investment and diversification within the portfolio protects both income and capital.

Diversified Energy had been in the portfolio for three consecutive years because strong free cash flow meant regular and very generous dividends – it yielded over 9% in each of the first two years and 12.6% in 2023. But a lot’s happened over the past year – US gas prices have declined, the company listed its shares in New York after a 20 for 1 share consolidation, and now there are concerns in the US regarding its well retirement and emissions information.

A 57% slump in the share price means the already high-yielding stock now offers a dividend yield of around 30%. Understandably, alarm bells are ringing loud, and despite still impressive free cash flow, the payout looks vulnerable. It seems an irresponsible and unnecessary risk for this year’s portfolio.

Sylvania Platinum Ltd
SLP

inclusion in the portfolio has been brief, despite achieving a 7.6% dividend yield. It all seemed rosy when I explained the rationale a year ago – running platinum group metal (PGM) processing plants across South Africa’s lucrative Bushveld complex, owning exciting mining rights, high margins and return on capital, reasonably priced shares, and a generous dividend.

But October’s annual results were poorly received, and the share price decline has accelerated in recent weeks. Platinum and palladium prices both fell in 2023, and Sylvania shares suffered a 42% capital loss amid an uncertain year ahead for the industry.

Four more for 2024
Energy company SSE has generated a healthy annual income above 5% for the past two years, but after deciding to rebase the dividend for 2023/24, the forecast yield drops to 3.5%. That’s why I’m going back to National Grid
NG.

a defensive stock which offers an inflation-linked dividend and attractive yield of 5.7%. It’s a well-run business, and some analysts believe the market is overlooking long-term asset growth in UK electricity networks and US networks.

Both Imperial Brands
IMB

and British American Tobacco are among the highest yielders in the FTSE 350, but while BAT’s three-year stint in this income portfolio started well, the capital loss in each of the past two years, particularly the 30% slump in 2023, has been disappointing. Imperial fell too, yes, but the decline in the last calendar year was a more modest 12.8%. And while both share prices had followed similar trends, a divergence became obvious last October, widening during December when BAT said it would write down the value of its acquired US cigarette brands by £25 billion.

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And for the two more speculative spots, I’ve dialled down the risk and brought in Rio Tinto Registered Shares
RIO

. The mining heavyweight had been in this income portfolio for three years until I switched it out last year when fewer special dividends meant a much lower prospective yield.

While there are still plenty of issues around demand and production overhanging the industry, Rio has promised “total cash returns to shareholders over the longer term to be in a range of 40% to 60% of underlying earnings in aggregate through the cycle.”

Morgan Advanced Materials
MGAM

is the smallest company in this year’s portfolio at £800 million, but it yields over 4% and offers exposure to the industrials sector. Morgan manufactures advanced carbon and ceramic materials used in wind farms and plane engines.

At third-quarter results in November, the company maintained its forecast for annual organic revenue growth of 2-4%. It also expects “good growth” in the first half of 2024 and further margin expansion following recent sequential improvements. The dividend is both generous and well covered by earnings, while the valuation is also attractive at 11 times prospective earnings.

Company

Share price 24 Jan 2024 (p)

Sum invested (£)

Percentage of the portfolio

Prospective dividend yield (%)

Expected annual income (£)

Lloyds Banking Group
LLOY
0.04%

42.2

20,000

12.3

6.6

1,328

GSK
GSK
1.58%

1,554.8

20,000

12.3

3.7

740

National Grid
NG.
1.00%

1,033.5

20,000

12.3

5.7

1,142

Sainsbury (J)
SBRY
2.99%

283.6

20,000

12.3

4.7

931

Legal & General Group
LGEN
1.04%

253.4

15,000

9.2

8.4

1,264

Taylor Wimpey
TW.
0.27%

144.3

15,000

9.2

6.2

936

Rio Tinto Registered Shares
RIO
1.42%

5,494.0

15,000

9.2

6.5

969

M&G Ordinary Shares
MNG
0.55%

224.6

13,000

8.0

9.4

1,226

Imperial Brands
IMB
0.48%

1,916.5

13,000

8.0

8.0

1,036

Morgan Advanced Materials
MGAM
1.66%

273.5

12,000

7.4

4.4

527

Total

163,000

100

6.2%

£10,098

The most consistent global funds of the decade

Passive funds are more consistent performers year in, year out, than actively-managed strategies.

By Matteo Anelli,

Senior reporter, Trustnet

Passive global equity funds have been more adept at consistently beating their benchmarks than active funds during the past decade.

Trustnet has analysed the performance of funds in the IA Global sector and reveals that in the past 10 years, the strategies that beat the most common benchmark – the MSCI World index – more consistently are, perhaps surprisingly, trackers. Passive funds pulled ahead by a few percentage points every year, consistently delivering for their investors.

A mere five funds managed to outperform the MSCI World index in eight or more years from the past 10.

Of those, only one is actively managed: Amadeo Alentorn’s Jupiter Merian World Equity fund – although this is unsual as it holds more than 300 stocks. The managers use a systematic approach, tilting the portfolio around themes such as growth, value and momentum, shifting when they believe different parts of the market are going to be in vogue.

As such, they do not make big bets on individual companies, instead aiming to beat the benchmark each year by smaller margins by making these tactical decisions.

Jupiter Merian World Equity has performed strongly for similar reasons to the passive funds in the list. Recently, the portfolio benefited from having all the so-called ‘Magnificent Seven’ stocks among its top 10 holdings – with the other three being Visa, Novo Nordisk and Adobe.

The most consistent performer of the past decade was a passive giant, iShares Core MSCI World UCITS ETF. It beat the bogie in nine years out of 10 (2015 was the outlier).

This £53.5bn behemoth has done slightly better than the index it is trying to replicate almost every year – and has done so whilst charging only 0.2%.

The vehicle is on the radar of FE Investments’ analysts, who like “the focus on transparency and efficiency across iShares’ index funds and ETFs” as well the investment process.

“To supplement fund returns and compensate for the trading costs involved with direct ownership of the securities, the fund manager engages in stock lending. This is a common process in long-term investing, where a select third party borrows a limited amount of the passive fund’s holdings in exchange for a fee,” they explained.

“As a security measure the borrower will place a collateral deposit with an independent intermediary, which is generally of similar or higher-quality. When reinvested, profits from stock lending reduce the effect of management fees, further minimising overall tracking difference to the index.”

Moving down the list to the funds that outperformed the MSCI World index eight years out of 10, L&G Global 100 Index Trust and HSBC MSCI World UCITS ETF were unlucky in 2014 and 2015 – the only two years when they didn’t exceed the most common benchmark for their sector.

L&G’s strategy stands out because it does not lend securities in retail-facing products in order to minimise exposure to additional risks. It also keeps costs down at just 0.14%.

The Vanguard FTSE Developed World ex-UK Equity Index fund does engage in securities lending (although it typically won’t lend more than three percent of its portfolio) and it too convinced the FE Investments team.

“Its structure facilitates Vanguard’s heavy cost-cutting approach, which is ultimately a great benefit to the end investor,” the analysts said.

“The firm applied a new pricing model at the end of 2017 for their index funds, which works by adjusting the price for all investments on a given day up or down according to the inflows or outflows in and out of the fund.”

One explanation for why active managers have struggled to consistently beat the MSCI World is its concentration, with the US market making up the largest chunk. Here, trying to deviate from the index can penalise active managers, because the best performance has come from the ‘Magnificent Seven’ biggest stocks, without which US growth would look anaemic.