BlackRock Income and Growth Investment Trust plc (LON:BRIG) has announced its annual results for the year ended 31 October 2022.
For more information on the BlackRock Income and Growth Investment Trust and how to access the opportunities resented by the income and growth sector, please visit: www.blackrock.com/uk/brig
|As at |
|As at |
|Net assets (£’000)1||40,572||43,468||-6.7|
|Net asset value per ordinary share (pence)||191.63||203.13||-5.7|
|Ordinary share price (mid-market) (pence)||171.00||191.00||-10.5|
|Discount to net asset value2||10.8%||6.0%|
|FTSE All-Share Index||7945.76||8173.30||-2.8|
|Performance (with dividends reinvested)|
|Net asset value per share2||-2.3%||30.4%|
|Ordinary share price2||-7.0%||22.2%|
|FTSE All-Share Index||-2.8%||35.4%|
|Year ended |
|Year ended |
|Net profit after taxation (£’000)||1,438||1,557||-7.6|
|Revenue earnings per ordinary share (pence)3||6.77||7.10||-4.6|
|Total dividends paid and payable||7.30p||7.20p||1.4|
1 The change in net assets reflects portfolio movements, the purchase of the Company’s own shares and dividends paid during the year.
2 Alternative Performance Measures, see Glossary in the Annual Report and Financial Statements.
3 Further details are given in the Glossary in the Annual Report and Financial Statements.
When I reported to shareholders at this time last year, the UK market had been buoyed by a successful vaccine roll-out and there was, to some extent, a degree of optimism as the shadow of COVID-19 faded away and economic activity started to return to more normal levels. However, although the risk of direct COVID-19 related disruption appeared to have dissipated, the longer-term damage to the UK economy that many had feared was evident in strained supply chains, labour shortages and the rising price of materials, freight and logistics.
As the UK economy struggled with the transition from a COVID-19 driven demand for goods over services, to a more balanced goods and services-based economy, the mismatch in demand over supply inevitably led to rising prices and in turn rising inflation. This supply chain pressure was compounded by China’s zero COVID-19 policy, which created bottle necks and was at odds with the resumption of economic activity seen around the industrialised world.
As we moved through early 2022, Russia’s invasion of Ukraine triggered an energy supply shock, resulting in soaring wholesale energy prices, as well as price spikes in agricultural commodities, pushing up the cost of many food staples and further exacerbating the supply constraint led inflationary forces seen at the start of the period. These powerful inflationary drivers ensured the rate of inflation continued to rise throughout the financial year and at the time of writing UK inflation, as measured by the Consumer Prices Index, is at 9.2%, having peaked at 11.1% in October 2022.
The Bank of England has taken action to combat rising inflation by reiterating its commitment to the 2% inflation target and through monetary policy it has implemented several interest rate hikes during the year. However, this action has not come without cost, negatively impacting growth forecasts and raising the likelihood of a more prolonged economic recession. The stock market responded by adjusting valuations downward to reflect this more challenging economic environment and the compounding effect on corporate profit margins of a weakening pound, higher input costs and rising wages. This rise in operating costs has, in many cases, been passed on to the consumer, whose spending power has been steadily eroded as the rising cost of living bites.
Notwithstanding the headwinds faced by the UK economy, our portfolio managers have approached this challenging backdrop with prudence and balance over the 12-month period, avoiding taking large sector or style bets and with limited use of gearing in the portfolio. They also increased portfolio exposure to the resources and power sectors, seeking to add to those holdings which they believe will be beneficiaries of both rising energy costs and the UK Government’s focus on the security of energy supply following the invasion of Ukraine. They have also used their ability to invest in non-UK companies, providing a degree of diversification and additional sources of income.
Our portfolio managers’ ongoing focus on high quality, cash generative companies, with strong balance sheets and experienced management teams has served the Company well during the year as the portfolio remained resilient, marginally outperforming the benchmark; notwithstanding that the Company’s NAV fell in absolute terms during the period.
During the year the Company’s Net Asset Value per share (NAV) returned -2.3%. By comparison, the Company’s benchmark, the FTSE All-Share Index, returned -2.8%. At the share price level, the Company returned –7.0% over the period as our discount widened from 6.0% at the start of the financial year to 10.8% as at 31 October 2022.
As at 30 January 2023, since the year end the Company’s NAV and share price have increased by 11.7% and 13.7%, respectively (all percentages are in Sterling with dividends reinvested).
As you will read in the Investment Manager’s Report which follows, our portfolio saw strong performance from our exposure to commodities and energy, and our financial holdings also performed well as interest rates rose. Further details of the key contributors and detractors from performance, and the portfolio managers’ views on the outlook for the forthcoming year, can be found in their report which follows below.
Revenue earnings and dividends
I am pleased to report that despite market volatility the Company’s earnings remained relatively stable, with revenue earnings per share for the year ended 31 October 2022 of 6.77 pence compared with 7.10 pence for the previous year. The Directors are mindful of shareholders’ desire for income in addition to capital growth and believe the Company’s dividend is of great value in the current environment as inflation soars to a 40 year high and a challenging global economic backdrop erodes the value of the pound. We are therefore proposing a final dividend per share of 4.70 pence (2021: 4.60 pence) giving total dividends for the year of 7.30 pence per share.
Subject to approval at the Annual General Meeting, the final dividend will be paid on 15 March 2023 to shareholders on the Company’s register at the close of business on 10 February 2023 (ex-dividend date is 9 February 2023). This final dividend, combined with an interim dividend of 2.60 pence per share (2021: 2.60 pence) paid to shareholders on 1 September 2022, gives a total dividend for the year of 7.30 pence, resulting in a yield of 4.3% based on a share price of 171.00 pence as at 31 October 2022.
One of the benefits of the Company’s investment trust structure is that it can retain up to 15% of total revenue each year to build up reserves which may be carried forward and used to pay dividends during leaner times. As at the date of this report the Company held £2,294,000 in revenue reserves.
Policy on share price discount
The Directors recognise the importance to investors that the Company’s share price should not trade at a significant discount to NAV, and therefore, in normal market conditions, may use the Company’s share buy back, sale of shares from treasury and share issuance powers to seek to ensure that the share price does not differ excessively from the underlying NAV. The existing authority to buy back up to 14.99% of the Company’s issued share capital (excluding treasury shares) will expire at the conclusion of the 2023 Annual General Meeting and a resolution will be put to shareholders to renew the authority at that meeting. Currently, ordinary shares representing up to 33% of the Company’s issued ordinary share capital can be allotted as new ordinary shares or sold from treasury.
During the year, a total of 226,928 ordinary shares were purchased at an average price of 181.50 pence per share, for a total consideration (including costs) of £416,000. All ordinary shares bought back were cancelled. No shares were placed in treasury. The average discount for the year to 31 October 2022 was 7.8% and the discount at the year end was 10.8% which resulted in a share price return of -7.0% over the financial year. To put this in context, average discounts for investment trusts as a sector widened during the year to 13.3% as at 31 December 2022, compared with just 2.5% at the end of 2021. As at 30 January 2023, the sector discount was 9.2%.
One of the advantages of the investment trust structure is that the Company can use gearing with the objective of increasing portfolio returns. The Company operates a flexible gearing policy which depends on prevailing market conditions and is subject to a maximum level of 20% of net assets at the time of investment. Net gearing during the financial year did not exceed the level. As at 31 October 2022 it stood at 2.4%.
At the year end, the Company had in place a borrowing facility of up to £4 million, provided by ING Luxembourg S.A. This facility expired in December 2022 and the borrowings were repaid to the lender. Following consultation with the Manager, the Board sought a new borrowing facility that was aligned with the Company’s gearing limit of 20% of net assets. On 23 December 2022, the Company arranged a replacement borrowing facility provided by The Bank of New York Mellon (International) Limited. This new facility has a higher borrowing limit of £8 million and as at the date of this report it is drawn down by £4 million.
At the date of this report the Board consists of four independent non-executive Directors, with two of the current Directors having been appointed since 2019. In accordance with best practice and good corporate governance, the Directors continue to submit themselves for annual re-election. The Board has a succession plan in place and will continue to appraise regularly its composition to ensure that a suitable balance of skills, knowledge, experience, independence and diversity is achieved to enable the Board to discharge its duties effectively. Further information on the Board’s policy on director tenure and succession planning can be found in the Directors’ Report in the Annual Report and Financial Statements.
The UK Code of Corporate Governance (the UK Code) requires enhanced disclosure setting out how we, as Directors, have fulfilled our duties in taking into account the wider interests of stakeholders in promoting the success of the Company. The Board takes its governance responsibilities very seriously and follows the provisions of the UK Code as closely as possible.
The Association of Investment Companies (AIC) has also published updates to its Code of Corporate Governance (the 2019 AIC Code) which were endorsed by the Financial Reporting Council (FRC) as being appropriate for investment companies and fulfils the requirements of the UK Corporate Governance Code, as they are applicable to investment companies. The Board has fully adopted the recommendations of the 2019 AIC Code.
Environmental, Social and Governance (ESG) considerations
Material ESG issues can present both opportunities and risks to long-term investment performance. While the Company does not have a sustainable investment objective or exclude investments based only on ESG criteria, these ethical and sustainability issues are a consideration of the Company, and your Board is committed to a diligent oversight of the activities of our Investment Manager in these areas.
We believe that the companies in which the portfolio is invested should operate within a healthy ecosystem of all their stakeholders whether these are shareholders, employees, customers, regulators or suppliers and that this can aid the sustainability of long-term returns. We have also provided information on our Manager’s approach to investment stewardship and voting. Further information can be found in the Annual Report and Financial Statements.
The Company has an arrangement in place whereby at the Annual General Meeting (AGM) held in 2018 and at every fifth AGM of the Company convened thereafter, shareholders shall be asked to approve the continuation of the Company as an investment trust. Therefore, an ordinary resolution will be put to shareholders at the forthcoming AGM to be held at 12.00 noon on Tuesday, 7 March 2023. The Board has considered the Company’s performance, investment strategy and objective and the ongoing viability of the Company over the next five years. The Board believes that the Company’s offering remains compelling, providing shareholders with growth in both capital and income over the longer term. The Board therefore unanimously recommends that shareholders vote in favour of the continuation of the Company in its current form.
Annual general meeting
It is the Board’s intention that this year’s AGM will be held on Tuesday, 7 March 2023 at 12.00 noon at the offices of BlackRock at 12 Throgmorton Avenue, London, EC2N 2DL. Details of the business of the meeting are set out in the Notice of Annual General Meeting in the Annual Report and Financial Statements.
At present, UK Government restrictions on public gatherings are no longer in force in connection with COVID-19 and therefore we intend to hold the AGM in the normal way with physical attendance by shareholders. However, although unlikely, shareholders should be aware that it is possible that such restrictions could be reimposed if required prior to the date of the AGM and therefore we recommend that as well as physical attendance, shareholders also cast their votes by proxy to ensure that their votes are counted.
Shareholders who intend to attend the AGM should ensure that they have read the venue requirements for entry to the AGM. These requirements, along with further information on the business of this year’s AGM, can be found in the Directors’ Report in the Annual Report and Financial Statements.
The Board very much looks forward to meeting shareholders and answering any questions you may have on the day. We hope you can attend this year’s AGM.
Communication with shareholders
We appreciate how important access to regular information is to our shareholders. To supplement our Company website, we now offer shareholders the ability to sign up to the Trust Matters newsletter which includes information on the Company and other news, views and insights. Further information on how to sign up is included on the inside front cover of the Annual Report and Financial Statements.
As you will read in their report which follows below, your investment managers’ fundamental strategy has not changed, although they remain cautious, not least given the ongoing impact of the war in Ukraine. The UK market has been subject to sustained political and economic uncertainty this year, with rapid changes in last government’s policy and the ill advised “mini-budget” negatively impacting confidence among both companies and investors. However, in a world currently dominated by macroeconomic and geopolitical factors, our portfolio managers remain focused on bottom-up stock selection, assembling a portfolio of individual companies which they believe are well placed to prosper over time.
Your Board remains fully supportive of this approach and have every confidence in the ability of our Investment Managers to continue to deliver on the Company’s investment objective as we move into 2023 and beyond.
1 February 2023
INVESTMENT MANAGER’S REPORT
For the 12 months since 31 October 2021, the Company’s NAV returned -2.3%, outperforming its benchmark, whereas the FTSE All-Share Index (the Benchmark Index) returned -2.8% over the same period (all percentages are in Sterling with dividends reinvested).
The year ended 31 October 2022 marked a tumultuous time in markets with building inflationary pressures that were exacerbated by the war in Ukraine, leading to rising interest rates and heightened recessionary concerns.
Strong demand combined with supply chain constraints continued to drive inflation higher at the start of the period. Interest rate expectations rose to reflect this increasingly inflationary backdrop causing the discount rate used by financial markets to rise and the valuation of financial assets to fall. This also impacted the shape of the market as the valuation of long duration assets was hit hardest, as evidenced by the underperformance of growth shares within equity markets. Global stock markets weakened further on the announcement of Russia’s invasion of Ukraine in February 2022. The war exacerbated inflationary concerns as supply chains were disrupted once more, with the price of key commodities across energy and agriculture markets rising sharply while energy supply and security became a key focus. Geopolitical tensions have remained at the fore throughout the period, as highlighted by the interruptions to Europe’s energy supply due to the suspension of the Nord Stream gas pipeline. Recessionary fears have been stoked by persistent high inflation pressuring consumers, while the rhetoric from central banks remains hawkish driving interest rate expectations higher.
Whilst COVID-19 faded in relative importance, it continued to have impacts, notably with China’s ongoing zero-COVID-19 policy, compounding the global inventory problems and causing continued supply chain constraints.
The period ended with the UK Government’s “mini-budget” announcement leading to market turmoil. The scale of the announced tax cuts and the lack of independent oversight from the Office of Budget Responsibility triggered a sell-off in gilts which quickly spiralled as Liability Driven Investment pension schemes became forced sellers and only stabilised once the Bank of England intervened. The outlook for the UK economy remains challenged, although it has stabilised following the latest change in leadership.
Although the FTSE All-Share Index fell in absolute terms, the UK market provided some relative respite compared to other global markets, benefitting in part from its low starting valuation. Market performance was dominated by the strength in commodities prices; Mining and Oil & Gas markedly outperformed as the oil price surged and defensive sectors, such as Tobacco and Pharmaceuticals, also benefitted from the increase in economic uncertainty. In contrast, cyclical sectors, notably Industrials, and domestically exposed sectors, such as Construction and Retailers, fell sharply contributing to weakness in mid and small-cap indices.
Contributors to and detractors from performance
During the period, the Company’s performance fell in absolute terms as rising interest rates and the implications of the “mini-budget” announcement weighed on performance, however, the portfolio outperformed in relative terms. International shares performed relatively better and contributed to relative performance of the portfolio while domestic holdings including BT Group, Taylor Wimpey and Moonpig Group performed poorly and detracted. Mining holdings Rio Tinto and BHP were top positive contributors to the returns of the Company reflecting the strength in commodity markets.
Pearson was a top positive contributor during the period despite rejecting a bid from private equity. The company has consistently posted strong results and was the strongest performing company in the index over the period. The education company is shifting emphasis away from the legacy textbook business to the stable growth, highly cash generative core, where we see material value.
Whilst the underweight positioning in the Oil & Gas sector detracted from performance given strength in the oil price, other holdings exposed to the energy sector including Drax and Chart Industries, a US-listed supplier of equipment to the clean energy sector performed well and contributed to relative performance. Whilst these had been relatively recent purchases for the Company, both have been subsequently sold following significant outperformance having risen c. 40% in absolute terms during the year.
US-listed Mastercard reported solid results with strong payment volumes and an encouraging acceleration in cross-border volume linked to increased travel as COVID-19 restrictions fade. EuroAPI, a pharmaceutical ingredients producer, was another top positive contributor to relative performance during the period. This was added to the portfolio after its spin-off from French pharmaceutical company, Sanofi. The company announced very strong numbers in September for its first statement as a public company where revenue beat expectations by 5% and EBITDA by 10%.
Heightened recession concerns impacted the portfolio with the potential for consumer weakness, housing price falls and rising unemployment leading to weakness in several holdings, such as Moonpig Group, Hays, Taylor Wimpey and Grafton Group. Whilst cyclical exposure in the Company was moderated, we continue to own positions in these areas given the attractive valuations on offer. We are also reassured by strong balance sheets and cash generation and where we see the opportunity for companies to improve market positions through the downturn.
Elsewhere the holding in Integrafin negatively impacted performance. Although the technology platform for independent financial advisers reported strong results, we were disappointed to see a meaningful cost increase causing us to question the operational strength of the company. We have sold the position.
We approached portfolio construction with caution and balance over the 12-month period, avoiding large sector or style bets and with limited use of gearing, given the difficult circumstances and many moving parts that investors faced.
Having added to holdings in the resources and energy sectors prior to the period, we continued to add to holdings that are beneficiaries of both rising energy costs and of the focus on the security of energy supply; purchasing Centrica and Woodside Energy Group and adding to BP Group and Shell. We also reduced Financials exposure in the portfolio, including the sale of Legal & General, given challenges in the financial system in the UK.
Ferguson’s strong logistics enabled the company to thrive during the period of robust demand and disrupted supply chains, while high commodity prices boosted revenues and margins. The strong share price combined with our concern over the sustainability of this performance prompted us to sell the holding. We used some of the proceeds of the Ferguson sale to purchase a new holding in Ashtead Group, the US-focused equipment rental company offering attractive structural growth from continued outsourcing trends in this fragmented industry.
We purchased a new holding in BT Group which is building out the UK’s national fibre network, targeting more than 25 million homes, providing customers and businesses with access to high-speed internet.
We purchased Sanofi in the first half of 2021, encouraged by the progress of the operational turnaround at the company which was focused on improving efficiency while benefitting from the growing and underappreciated success of its blockbuster, Dupixent, while its consumer health division offered optionality. More recently, we grew concerned on litigation around the recalled drug Zantac and we subsequently sold the holding in August 2022.
Towards the end of the period, we purchased a small position in Kone, the Finnish elevator engineering company. The company trades at a significant discount to peers, primarily due to concerns over its exposure to China yet has a strong service division, is highly cash generative supporting a compelling dividend.
Historically, we have managed the Company’s portfolio with a modest and consistent level of gearing, typically between 5-8% to enhance income generation and capital growth. However, as market volatility has picked up, we have been more active over the last 2 years, varying both the level of gearing and using a broader range (0-10%) depending on the opportunities or risks presenting themselves at the time. At 31 October 2022, the Company had employed net gearing of 2.4%.
As we look ahead into 2023, the headwinds facing global equity markets are evident. Inflation has consistently surprised in its depth and breadth, driven by the resilient demand, COVID-19 supply chain constraints, and most importantly by rising wages in more recent data. Central banks across the developed world continue to unwind ten years of excess liquidity by tightening monetary policy desperate to prevent the entrenchment of higher inflation expectations. Meanwhile, the risk of policy error from central banks or politicians remains high as evidenced by the turmoil created by the “mini-budget” in the UK that sent gilts spiralling. The cost and availability of credit has changed and strengthens our belief in investing in companies with robust balance sheets capable of funding their own growth. The rise in the risk-free or discount rate also challenges valuation frameworks especially for long duration, high growth or highly valued businesses. We are mindful of this and feel it is incredibly important to focus on companies with strong, competitive positions, at attractive valuations that can deliver in this environment.
The political and economic impact of the war in Ukraine has been significant in uniting Europe and its allies, whilst exacerbating the demand/supply imbalance in the oil and soft commodity markets. We are conscious of the impact this has on the cost of energy, and we continue to expect divergent regional monetary approaches with the US being somewhat more insulated from the impact of the conflict, than for example, Europe. Complicating this further is the impact COVID-19 has had on certain parts of the world, notably China, which has used lockdowns to control the spread of the virus impacting economic activity. More recently, China’s reopening in January 2023 has been well received by markets, with the return of the world’s second largest economy bolstering the global outlook. However, the rapid reversal of the lockdown policy has seen infections rates surge to levels not seen since the height of the pandemic. We also see the potential for longer-term inflationary pressure from decarbonisation and deglobalisation, the latter as geopolitical tensions rise more broadly across the world.
We would expect broader demand weakness as we enter 2023 although the ‘scars’ of supply chain disruption are likely to support parts of industrial capex demand as companies seek to enhance the resilience of their supply chains. A notable feature of our conversations with a wide range of corporates has been the ease with which they have been able to pass on cost increases and protect or even expand margins during 2022 as evidenced by US corporate margins reaching 70-year highs. We believe that as demand weakens and as the transitory inflationary pressures start to fade during 2023 (e.g. commodity prices, supply chain disruption) then pricing conversations will become more challenging, despite pressure from wage inflation which may prove more persistent. While this does not bode well for margins in aggregate, we believe that 2023 will see greater differentiation as corporates’ pricing power will come under intense scrutiny.
The UK’s policy has somewhat diverged from the other G7 countries in fiscal policy terms as the present government attempts to create stability after the severe reaction from the “mini-budget”. The early signs of stability are welcome as financial market liquidity has increased and the outlook, whilst challenged, has improved. Although the UK stock market retains a majority of internationally weighted revenues, the domestic facing companies have continued to be impacted by this backdrop, notably financials, housebuilders and property companies. The valuation of the UK market remains highly supportive as currency weakness supports international earnings, whilst domestic earners are in many cases at COVID-19 or Brexit lows in share price or valuation terms. Although we anticipate further volatility ahead as earnings estimates moderate, we know that in the course of time, risk appetites will return, and opportunities are emerging.
We continue to focus the portfolio on cash generative businesses with durable, competitive advantages with strong leadership as we believe these companies are best-placed to drive returns over the long-term. We anticipate economic and market volatility will persist in 2023 and we are excited by the opportunities this will likely create by identifying those companies using this cycle to strengthen their long-term prospects as well as attractive turnaround situations.
ADAM AVIGDORI AND DAVID GOLDMAN
BlackRock Investment Management (UK) Limited
1 February 2023
TEN LARGEST INVESTMENTS
1 = AstraZeneca (2021: 1st)
Sector: Pharmaceuticals & Biotechnology
Market value: £3,510,000
Percentage of portfolio: 8.4% (2021: 7.2%)
AstraZeneca is an Anglo-Swedish multinational pharmaceutical group with its headquarters in the UK. It is a science-led biopharmaceutical business with a portfolio of products for major disease areas including cancer, cardiovascular infection, neuroscience and respiration.
2 + Shell (2021: 3rd)
Sector: Oil & Gas Producers
Market value: £3,497,000
Percentage of portfolio: 8.4% (2021: 4.7%)
Shell is a global oil and gas group. The group operates in both Upstream and Downstream industries. Upstream is engaged in searching for and recovering crude oil and natural gas and the liquefaction and transportation of gas. Downstream is engaged in manufacturing, distribution and marketing activities for oil products and chemicals.
3 – RELX (2021: 2nd)
Market value: £2,422,000
Percentage of portfolio: 5.8% (2021: 5.2%)
RELX is a global provider of professional information solutions that includes publication of scientific, medical, technical and legal journals. It also has the world’s leading exhibitions, conference and events business.
4 = Reckitt Benckiser (2021: 4th)
Sector: Household Goods & Home Construction
Market value: £1,942,000
Percentage of portfolio: 4.7% (2021: 4.5%)
Reckitt Benckiser is a global leader in consumer health, hygiene and home products. Its products are sold in many countries. The company’s strategy is to have a highly focused portfolio concentrating on its most profitable brands, which are responsible for 70% of its revenues.
5 + British American Tobacco (2021: 8th)
Market value: £1,854,000
Percentage of portfolio: 4.5% (2021: 3.7%)
British American Tobacco is one of the world’s leading tobacco groups, with more than 200 brands in the portfolio selling in approximately 180 markets worldwide.
6 + Rio Tinto (2021: 7th)
Market value: £1,651,000
Percentage of portfolio: 4.0% (2021: 3.7%)
Rio Tinto is a metals and mining group operating in approximately 36 countries around the world, producing iron ore, copper, diamonds, gold and uranium.
7 – Unilever (2021: 5th)
Sector: Personal Goods
Market value: £1,365,000
Percentage of portfolio: 3.3% (2021: 3.9%)
Unilever is a global supplier of food, home, and personal care products with more than 400 brands focused on health and well-being.
8 – 3i Group (2021: 6th)
Sector: Financial Services
Market value: £1,329,000
Percentage of portfolio: 3.2% (2021: 3.8%)
3i Group is a private equity and venture capital group based in London. The group invests in mid-market buyouts, growth capital and infrastructure. Sectors invested in are business and financial services, consumer, industrials, energy and health care.
9 + Pearson (2021: 32nd)
Market value: £1,321,000
Percentage of portfolio: 3.2% (2021: 1.3%)
Pearson is a British multinational and provides educational materials and learning technologies. The company provides a range of education services, including educational software, and system-wide solutions. The company serves customers in the education and consumer publishing markets across North America, Europe, Asia Pacific, and other regions.
10 + Smith & Nephew (2021: 13th)
Sector: Health Care Equipment & Services
Market value: £1,187,000
Percentage of portfolio: 2.9% (2021: 2.8%)
Smith & Nephew is a multinational medical equipment manufacturing company and an international producer of advanced wound management products, arthroscopy products, trauma and clinical therapy products, and orthopaedic reconstruction products.
All percentages reflect the value of the holding as a percentage of total investments as at 31 October 2022.
Percentages in brackets represent the value of the holding as at 31 October 2021.
Together, the ten largest investments represent 48.4% of total investments (ten largest investments as at 31 October 2021: 43.5%).
DISTRIBUTION OF INVESTMENTS AS AT 31 OCTOBER 2022
Analysis of portfolio by sector
|% of investments|
by market value
|2||Oil & Gas Producers||10.5||12.4|
|3||Pharmaceuticals & Biotechnology||9.6||10.5|
|5||Household Goods & Home Construction||7.4||1.0|
|12||Electronic & Electrical Equipment||3.1||0.9|
|13||Travel & Leisure||2.9||2.9|
|15||Health Care Equipment & Services||2.9||0.7|
|18||Fixed Line Telecommunications||1.3||1.8|
|19||Gas, Water & Multiutilities||1.1||3.3|
|21||Real Estate Investment Trusts||0.8||2.6|
Sources: BlackRock and Datastream.
|% of investments|
by market value
|£1m to £2m||11||37.0|
|£2m to £3m||1||5.8|
|£3m to £4m||2||16.8|
List of investments as at 31 October 2022
|Oil & Gas Producers|
|Woodside Energy Group||330||0.8|
|Pharmaceuticals & Biotechnology|
|Household Goods & Home Construction|
|Lloyds Banking Group||680||1.6|
|London Stock Exchange Group||394||0.9|
|Premier Asset Management Group||319||0.8|
|British American Tobacco||1,854||4.5|
|Direct Line Group||944||2.3|
|Electronic & Electrical Equipment|
|Travel & Leisure|
|Fuller Smith & Turner – A Shares||270||0.6|
|Health Care Equipment & Services|
|Smith & Nephew||1,187||2.9|
|Tate & Lyle||1,182||2.8|
|Fixed Line Telecommunications|
|Gas, Water & Multiutilities|
|Real Estate Investment Trusts|
|Big Yellow Group||321||0.8|
1 Non-UK listed investments.
2 Company under liquidation.
All investments are in ordinary shares unless otherwise stated. The total number of investments held at 31 October 2022 was 45 (31 October 2021: 48).
As at 31 October 2022, the Company did not hold any equity interests comprising more than 3% of any company’s share capital.
The Directors present the Strategic Report of the Company for the year ended 31 October 2022.
The Company’s objective is to provide growth in capital and income over the long term through investment in a diversified portfolio of principally UK listed equities.
Business and management of the company
BlackRock Income and Growth Investment Trust plc is an investment trust company that has a premium listing on the London Stock Exchange. Its principal activity is portfolio investment. Investment trusts, like unit trusts and open-ended investment companies (OEICs), are pooled investment vehicles which allow exposure to a diversified range of assets through a single investment thus spreading, although not eliminating, investment risk.
Investment trusts, unlike unit trusts and OEICs, have the ability to borrow for investment purposes and to manage dividend distributions through revenue reserves. They also enjoy, unlike unit trusts and OEICs, the benefit of continuous dealing during market hours.
The Company is an Alternative Investment Fund in accordance with the Alternative Investment Fund Managers Directive (AIFMD). BlackRock Fund Managers Limited (the Manager) is the Company’s Alternative Investment Fund Manager. The management of the investment portfolio and the administration of the Company have been contractually delegated to the Manager. The Manager, operating under guidelines determined by the Board, has direct responsibility for decisions relating to the running of the Company and is accountable to the Board for the investment, financial and operating performance of the Company.
The Company delegates fund accounting services to BlackRock Investment Management (UK) Limited (BIM (UK) or the Investment Manager), which in turn sub-delegates these services to the Fund Accountant, The Bank of New York Mellon (International) Limited, and also sub-delegates registration services to the Registrar, Computershare Investor Services PLC. Other service providers include the Depositary, also performed by The Bank of New York Mellon (International) Limited. Details of the contractual terms with these service providers are set out in the Directors’ Report in the Annual Report and Financial Statements.
The Company invests in accordance with the investment objective. The Board is collectively responsible to shareholders for the long-term success of the Company and is its governing body. There is a clear division of responsibility between the Board and the Manager. Matters reserved for the Board include setting the Company’s strategy, including its investment objective and policy, setting limits on gearing, setting the dividend, capital structure, governance, and appointing and monitoring the performance of service providers, including the Manager.
The Company’s business model follows that of an externally managed investment trust, therefore the Company does not have any employees and outsources its activities to third party service providers, including the Manager which is the principal service provider.
Investment strategy and policy
The Company’s policy is that the portfolio will usually consist of approximately 30-60 securities and the Company will invest primarily in the securities of companies listed or admitted to trading in the UK. The Company may invest up to 20% of the gross asset value of the Company in the securities of companies that are not listed or admitted to trading in the UK.
The Company may hold a maximum of 10% of the issued ordinary share capital of any company. No more than 15% of the gross asset value of the Company may be invested in the securities of any one issuer, calculated at the time of any relevant investment. Cash may not exceed 10% of the net asset value of the Company. The performance of the Company is measured by reference to the FTSE All-Share Index (the Benchmark Index) on a total return basis. Non-benchmark securities (including securities that are not listed or admitted to trading in the UK) may not exceed 20% of the gross asset value of the Company. Any non-benchmark securities which are listed or admitted to trading in the UK shall be limited to 10% of the gross asset value of the Company. Each investee company that is a constituent of the Benchmark Index is subject to a lower limit of 0% and an upper limit of plus 4 percentage points of the Company’s gross asset value against such investee company’s weighting in the Index on an ongoing basis, subject to an absolute sector weighting upper limit of 20% of the Company’s net asset value at any time.
The Company may deal in derivatives, including options, futures, contracts for difference and derivatives not traded on or under the rules of a recognised or designated investment exchange for the purpose of efficient portfolio management. Derivatives and exchange traded funds may be dealt in only with the prior consent of the Board.
The Company achieves an appropriate spread of risk by investing in a diversified portfolio of securities.
No material change can be made to the investment policy without the approval of shareholders by ordinary resolution.
Investment approach and process
In assembling the Company’s portfolio, a relatively concentrated approach to investment is adopted to ensure that the fund manager’s best ideas contribute significantly to returns. We believe that it is the role of the portfolio overall to achieve a premium level of yield rather than every individual company within it. This gives increased flexibility to invest where returns are most attractive. This relatively concentrated approach results in a portfolio which differs substantially from the Benchmark Index and in any individual year, the returns will vary, sometimes significantly, from those of the Benchmark Index. Over longer periods the objective is to achieve total returns greater than the Benchmark Index.
The foundation of the portfolio, approximately 70% by value, is in high free cash flow companies that can sustain cash generation and pay a growing yield whilst aiming to deliver a double-digit total return. Additionally, the Investment Manager seeks to identify and invest 20% by value of the portfolio in ‘growth’ companies that have significant barriers to entry and scalable business models that enable them to grow consistently. Turnaround companies are also sought, at around 10% by value, which represent those companies that are out of favour by the market, facing temporary challenges with high yields/very low valuations, but with recovery potential. The return from this segment is expected to contribute meaningfully to returns over time.
Our approach to Environmental, Social and Governance (ESG)
BlackRock believes that sustainability risk – and climate risk in particular – now equates to investment risk, and this will drive a profound reassessment of risk and asset values as investors seek to react to the impact of climate policy changes. This in turn (in BlackRock’s view) is likely to drive a significant reallocation of capital away from traditional carbon intensive industries over the next decade. BlackRock believes that carbon-intensive companies will play an integral role in unlocking the full potential of the energy transition, and to do this, they must be prepared to adapt, innovate and pivot their strategies towards a low carbon economy.
As part of BlackRock’s structured investment process, ESG risks and opportunities (including sustainability/climate risk) are considered within the portfolio management team’s fundamental analysis of companies and industries. ESG factors have been a key consideration of the BlackRock UK Equity Team’s investment process since inception and the Company’s portfolio managers work closely with BIS to assess the governance quality of companies and understand any potential issues, risks or opportunities.
As part of their approach to ESG integration, the portfolio managers use ESG information when conducting research and due diligence on new investments and again when monitoring investments in the portfolio. In particular, portfolio managers now have access to 1,200 key ESG performance indicators in Aladdin (BlackRock’s proprietary trading system) from third-party data providers. BlackRock’s internal sustainability research framework scoring is also available alongside third-party ESG scores in core portfolio management tools. BlackRock’s analyst’s sector expertise and local market knowledge allows it to engage with companies through direct interaction with management teams and conducting site visits. In conjunction with the portfolio management team, BIS meets with boards of companies frequently to evaluate how they are strategically managing their longer-term issues, including those surrounding ESG and the potential impact these may have on company financials. BIS’s and the portfolio management team’s understanding of ESG issues is further supported by BlackRock’s Sustainable Investment Team (BSI). BSI look to advance ESG research and integration, active engagement and the development of sustainable investment solutions across the firm.
The Company does not meet the criteria for Article 8 or 9 products under the EU Sustainable Finance Disclosure Regulation (“SFDR”) and the investments underlying this financial product do not take into account the EU criteria for environmentally sustainable economic activities.
Further information on the Manager’s approach to ESG and Socially Responsible Investing can be found in the Strategic Report in the Annual Report and Financial Statements.
Gearing and borrowings
The appropriate use of gearing can add value and the Company may, from time to time, use borrowings to achieve this. The Board is responsible for the level of gearing in the Company and reviews the position at every meeting. Gearing, including borrowings and gearing through the use of derivatives (which requires prior Board approval), when aggregated with underwriting participations, will not exceed 20% of the net asset value at the time of investment, drawdown or participation. There are no derivative positions at 31 October 2022. Any borrowing, except for short-term liquidity purposes, is used for investment purposes or to fund the purchase of the Company’s own shares.
At the year end, the Company had in place a two-year unsecured Sterling revolving credit facility of £4 million, provided by ING Luxembourg S.A. The facility matured on 31 December 2022 and was repaid. The Company has put in place a replacement borrowing facility with a limit of £8 million, extended to the Company by The Bank of New York Mellon (International) Limited. At the date of this report the facility was drawn down in the sum of £4 million.
The Board also reviews regularly the Company’s performance attribution analysis to understand how performance was achieved. This provides an understanding of how components such as sector exposure, stock selection and asset allocation impact performance. The table below provides performance information for the current and prior year.
Details of the Company’s performance for the year are also given in the Chairman’s Statement above. The Investment Manager’s Report above includes a review of the main developments during the year, together with information on investment activity within the Company’s portfolio.
Results and dividends
The Company’s revenue earnings for the year amounted to 6.77p per share (2021: 7.10p per share). The total net loss for the year, after taxation, was £949,000 (2021: profit of £10,621,000) of which the net revenue profit amounted to £1,438,000 (2021: £1,557,000) and the net capital loss amounted to £2,387,000 (2021: profit of £9,064,000). Details of dividends paid and declared in respect of the year are set out in the Chairman’s Statement above.
KEY PERFORMANCE INDICATORS
At each Board meeting, the Directors consider a number of performance measures to assess the Company’s success in achieving its objectives. The key performance indicators (KPIs) used to measure the progress and performance of the Company over time, and which are comparable to other investment trusts, are set out in the following table. As indicated in the footnote to the table, some of these KPIs fall within the definition of ‘Alternative Performance Measures’ under guidance issued by the European Securities and Markets Authority (ESMA) and additional information explaining how these are calculated is set out in the Glossary in the Annual Report and Financial Statements.
Additionally, the Board regularly reviews the performance of the portfolio, the net asset value, share price, discount to NAV and ongoing charges of the Company and compares this against various companies and indices. The Board also reviews the performance of the portfolio against a benchmark index, the FTSE All-Share Index. Information on the Company’s performance is given in the Chairman’s Statement above.
The principal KPIs are described below.
Performance against the benchmark
The performance of the portfolio together with the performance of the Company’s net asset value and share price are reviewed at each Board meeting and compared to the return of the Company’s benchmark, the FTSE All-Share Index.
Premium/discount to NAV
At each meeting the Board monitors the level of the Company’s premium or discount to NAV and considers strategies for managing any premium or discount. Further details of the discount policy are provided in the Annual Report and Financial Statements. In the year to 31 October 2022, the Company’s share price to NAV traded in the range of a discount of 15.7% to a premium of 0.9%, both on a cum income basis. The Company bought back a total of 226,928 ordinary shares during the year at an average discount of 10.8% and at an average price of 181.50p per share. The total consideration (including costs) was £416,000. No ordinary shares were reissued from treasury during the year.
Ongoing charges represent the Company’s management fee and all other operating expenses, excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation, write back of prior year expenses and certain non-recurring items, expressed as a percentage of average daily net assets.
The Board reviews the ongoing charges and monitors the expenses incurred by the Company at each meeting. The Board also compares the level of ongoing charges against those of its peers.
|Year ended |
|Year ended |
|NAV per share1||191.63p||203.13p|
|Net asset value total return3, 4||-2.3%||+30.4%|
|Share price total return3, 4||-7.0%||+22.2%|
|Change in Benchmark Index5||-2.8%||+35.4%|
|Discount to net asset value4||10.8%||6.0%|
|Revenue earnings per share||6.77p||7.10p|
|Dividends per share||7.30p||7.20p|
|Ongoing charges4, 6||1.18%||1.21%|
1 Calculated in accordance with accounting policies adopted by the Company and AIC guidelines.
2 Mid-market share price.
3 This measures the Company’s share price and NAV total return, which assumes dividends paid by the Company have been reinvested.
4 Alternative Performance Measures, see Glossary in the Annual Report and Financial Statements.
5 FTSE All-Share Index (total return).
6 Ongoing charges represent the management fee and all other operating expenses, excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation, write back of prior year expenses and certain non-recurring items as a % of average daily net assets.
Performance against the Company’s peers
Whilst the principal objective is to achieve growth in capital and income relative to the benchmark, the Board also monitors performance relative to a range of competitor funds, particularly those also within the AIC UK Equity Income sector.
For more information on the BlackRock Income and Growth Investment Trust and how to access the opportunities resented by the income and growth sector, please visit: www.blackrock.com/uk/brig