BIT – Annual Financial Report

PLEASE REFER TO THE PDF TO VIEW THE FULL ANNOUNCEMENT LEGAL ENTITY IDENTIFIER: 213800B9YWXL3X1VMZ69 THE BANKERS INVESTMENT TRUST PLC Financial results for the year ended 31 October 2023 This announcement contains regulated information Performance Highlights1,2 31 October 2023 31 October 2022 Net Asset Value per ordinary share - With debt at par 108.0p 105.1p - With debt at fair value 111.0p 105.0p Share price at year end3 93.5p 96.6p Dividend per share for year4 2.56p 2.328p 31 October 2023 31 October 2022 Dividend growth 10.0% 7.0% (Discount)/premium at year end5 (13.4%) (8.1%) Net (gearing)/cash at year end6 (7.1%) (5.4%) Ongoing Charge for year 0.50% 0.50% 1 A glossary of terms can be found in the Annual Report 2 The alternative performance measures can be found in the Annual Report 3 Share price is the mid-market closing price 4 This represents the four ordinary dividends recommended or paid for the year (see the Annual Report for more details) 5 Based on the mid-market closing price with debt at par 6 Net (gearing)/cash calculated in accordance with the gearing definition in the alternative performance measures in the Annual Report 7 Capital return excludes all dividends 8 The net asset values shown for the periods up to 15 years include debt at fair value, whereas for 15 years it is shown with debt at par value 9 For the 5, 10 and 15 years, this is a composite of the FTSE World Index and the FTSE All-Share Index 10 Total return assumes dividends reinvested Sources: Morningstar Direct, Janus Henderson, LSEG Datastream CHAIR'S STATEMENT Dear shareholder Performance Throughout the year economists worldwide have predicted a recession in the western world caused principally by sharply rising interest rates. The real data have shown a more robust picture with employment remaining near historic highs, inflation falling and, particularly in the US, healthy economic activity. The arrival this year of ChatGPT bringing to the fore generative Artificial Intelligence ('AI') was a seminal moment in the free usage of AI. Your Company has delivered a net asset value total return over the year ended 31 October 2023 of 5.2% (2022: -11.3%) just narrowly underperforming the FTSE World Index total return of 5.7% (2022: -2.8%) and a share price total return of -0.7% (2022: -13.4%). Over the year, performance relative to the AIC Global peer group placed Bankers at eighth position on share price total return performance out of 13 comparable trusts and similarly sixth position out of 13 on net asset value total return. The principal reason for poor performance against the benchmark over three years was on account of our comparatively low exposure (40% vs 68% in the benchmark) to the US market and in particular the largest technology companies which now dominate the US market. Often called the 'Magnificent Seven' (Microsoft, Apple, Amazon, Alphabet, Meta, Nvidia and Tesla), these stocks collectively increased in value by 64% during the twelve months to the end of October 2023. This was in stark comparison to the performance of the remaining 493 stocks in the US S&P 500 index, which barely moved, combined only increasing in value by +0.5% in the year. The Asian and Chinese portfolios underperformed partially due to the late lifting of Covid restrictions and in China in particular due to the continued weakness in the property market impacting consumer sentiment. European and Japanese portfolios performed well and the UK portfolio made a modest contribution. The Board has long set a twin objective to grow capital and dividends. The US market is increasingly dominated by zero yielding stocks, which is causing problems for income investors, with five of the Magnificent Seven not paying a dividend. We therefore only own two of these seven companies. Other funds and in particular some in our peer group hold all seven and this is reflected in their performance this year. Our investment style has long focussed on those growth stocks that pay dividends. The size and scale of these companies that probably have little prospect of paying a dividend now means we need to be more flexible with revenue reserves to enable a broader investment pool. However, history has taught us we must be careful of not being blind to valuation, that the technology space is disruptive and has previously been vulnerable to over-exuberance. The Fund Managers' report contains more detailed information regarding performance, together with market commentary. Borrowings The ?15 million 8% Debenture Stock matured on 31 October 2023 and was repaid in full. The Company continues to have longer term debt in the form of the loan notes which were issued in 2015 and 2021 at lower interest rates than the debenture stock. Following repayment of the debenture, the Company's overall cost of borrowing has fallen to 2.7%, in line with the dividend yield on the portfolio. The Company has historically only fair valued the debenture in the published daily net asset value but having reviewed best practice and that of our peer group, daily fair value net asset values will be published incorporating a revaluation of the loan notes based on equivalent dated government bond yields plus a margin. Revenue, dividends and share buybacks Revenue earnings per share of 2.72p (2022: 2.34p) exceeded expectations for the year and has enabled a greater increase in the dividend than the Board had forecast this time last year. One of the Company's key objectives is to achieve long-term dividend growth in excess of inflation, measured by the UK Consumer Price Index ('CPI'). This objective has been challenging in recent years but inflation has now started to moderate and CPI rose by 4.6% for the year to 31 October 2023 (2022: 11.1%). The Board is therefore recommending a final quarterly dividend of 0.66p per share, resulting in total dividends per share for the year of 2.56p (2022: 2.328p), an increase over last year of 10%. The final dividend will be paid on 29 February 2024 to shareholders on the register of members at the close of business on 26 January 2024. This will be the Company's 57th successive year of annual dividend growth. For the current financial year, the Board expects to recommend dividend growth of at least 5%, which would equate to a full year dividend of 2.69p per share. In common with the investment trust sector, the Company's shares have traded at a wide discount to net asset value but we have taken advantage of this opportunity to buyback shares from the market. This activity is beneficial to ongoing shareholders, as shares are only purchased when the Company's shares are trading at a discount thereby enhancing shareholder value; in this last year increasing the net asset value by 0.5%. A total of 60,618,929 shares were bought back in the year ended 31 October 2023 (2022: 18,219,870 shares were repurchased). The Company will continue to buyback shares to be held in treasury as appropriate. The Board and Manager Ankush Nandra, joined the Board on 1 September 2023 and is Chair of the renamed Audit and Risk Assurance Committee. His appointment increases the diversity and skill set of the Board. Ankush is a qualified accountant with extensive financial management and accounting experience gained through several roles in industry. He has over 20 years' experience mainly in the pharmaceutical industry. He is currently Vice President Finance and Chief Financial Officer (CFO) International Region and Enabling Units at AstraZeneca. Julian Chillingworth, our Senior Independent Director, who joined the Board in 2015 is to retire at the conclusion of the 2024 Annual General Meeting when he will have served for nine years. I would like to take this opportunity to thank Julian for his outstanding contribution and commitment to Bankers and his wise counsel during his long association with the Company. To ensure a greater focus on marketing the Company, the Board has established a Marketing Committee, which is chaired by Hannah Philp. The role of the Committee will be to support and scrutinise the increased marketing efforts of the Manager. Recently our Deputy Fund Manager, Mike Kerley, has indicated he will be retiring in 2024 and in due course a replacement will be announced. The Board would like to thank Mike for his contribution to the Company since taking on the Asian Pacific portfolio in 2006. Sat Duhra, who has worked alongside Mike for the past eleven years, will be taking over the portfolio management of the Asian Pacific portfolio. Annual General Meeting ('AGM') The Company's AGM is scheduled to take place at 12 noon on Thursday, 22 February 2024 at the offices of Janus Henderson Investors at 201 Bishopsgate, London EC2M 3AE and I very much look forward to welcoming you. Light refreshments will be served. All voting will be on a poll and therefore we would ask that you submit your proxy votes in advance of the meeting. If you are unable to attend in person, you can watch the meeting live on the internet by visiting www.janushenderson.com/trustslive. If you have any questions about the Annual Report, the Company's performance over the year, the investment portfolio or any other matter relevant to the Company, please write to us via email at ITSecretariat@janushenderson.com in advance of the AGM. Outlook A key element will be to attract new investors who have yet to learn the benefits of long-term investing in a Company such as Bankers Investment Trust, with an established record of dividend and capital growth over generations of shareholders. This will be achieved by greater focus on potential retail investors through a variety of channels including advertisements in publications and an enhanced website. The Fund Manager is currently reviewing portfolio construction in the light of the low exposure in particular to US non-yielding stocks. This includes assessing how the Company's revenue reserves and the investment trust structure can better serve the ability to pay a progressive dividend and yet invest in a wider range of stocks. Now that inflation is moderating, there is an expectation that interest rates in western markets will be cut in 2024. It remains to be seen whether central banks can engineer a soft landing, not impacting growth while reducing inflation. Equity markets have been driven higher by a small set of companies supported by investors' enthusiasm for the transformative power of generative AI. In the rush to invest in the US and these few leaders, the vast bulk of quoted companies are trading on undemanding valuations and look attractively priced for patient investors, like ourselves. Simon Miller Chair 17 January 2024 FUND MANAGER'S REPORT This year has seen a titanic battle between rising interest rates and, at least initially, stubbornly high inflation. Central banks have few tools to reduce inflation other than by raising interest rates, which drains cash from the economy through the higher cost of mortgages and loans. A major challenge is that not all consumers or companies are affected in the same way. Pensioners with cash deposits have benefitted from higher rates, whilst younger mortgagees on variable rates faced a sharp rise in payments. There is also a one to two-year lag as fixed term lending gradually rolls over. It is difficult to tell whether the recent moderation in inflation is simply down to supply bottlenecks easing rather than higher rates reducing demand. For the past year G7 economies in general have worn higher interest rates rather well since there has not been much economic growth but neither has there been a recession nor a significant increase in unemployment. The reasons behind this perfect slowdown are down to increased government spending, propping up investment into reshoring supply chains. In addition, consumers have benefitted from high demand for workers driving wage growth while they also are dipping into their savings, which were boosted by Covid payments, all helping to maintain their confidence and ability to spend. The former can keep going as long as investors support record government debt issuance but spending savings is finite. The global bond markets have experienced a bear market as yields have increased to reflect the increase in interest rates and their initially modest impact on inflation. Meanwhile equity markets recovered from the lows in 2022 when many investors worried about a recession which never materialised. However, on more careful examination of the global indices, it is clear that relatively few stocks are driving forward the level of the indices. These key companies, now named the Magnificent Seven, rather than FAANG, comprise the largest technology companies listed in the US (Microsoft, Apple, Amazon, Meta, Nvidia, Alphabet and Tesla). Since the launch of the launch of ChatGPT in November 2022, they have caught the imagination of investors. The advent of computer systems so powerful that they can replicate human thought through generative Artificial Intelligence ('AI') lit the touchpaper on the share price of any companies involved in AI. These seven companies now comprise over 30% of the US market valuation and nearly 20% of our benchmark the FTSE World Index. Our belief in the long-term attractiveness of companies that pay a dividend is being tested by the continued performance of these seven companies, only two of which pay shareholders a dividend. The valuation of the Magnificent Seven is high, an average of 32x price to earnings ratio (P/E), compared to a P/E of 19x for the rest of the US market. Cutting costs and raising margins through charging higher prices supported the earnings this year for these companies but their revenues will need to increase rapidly on the back of selling AI. We are still at an early point in the adoption of AI and there remains a large degree of uncertainty in terms of evaluating the risks, opportunities and even potential regulation of the technology. The contribution to performance from asset allocation was positive this year despite having a lower percentage of assets in North America compared to the index. Japan has been a standout performer with corporate profits surprising positively and improving corporate governance leading to greater returns for shareholders. Although the Japanese Yen weakened, this helped many of the exporters and local returns more than offset the translation reduction into sterling. The allocation to Europe also benefitted performance as share prices bounced from an oversold position in 2022 and the anticipated recession was narrowly avoided. Stock selection was more challenging in the year, principally in North America where we only owned 2 of the Magnificent Seven companies referenced above. The impact of not owning Nvidia has alone reduced performance of the total portfolio by 1.50% relative to the benchmark. Stock selection was positive in Europe, UK and Japan as quality and defensively positioned businesses performed better than the market. In the Pacific and China, consumer orientated companies, which comprise the bulk of our investments in these regions, performed very well at the start of the year as China reopened from Covid restrictions. However, the positive effects of freedom to move around soon gave way to fears of a property market crash which dampened consumer spending. The Company's net asset value total return was 0.5% behind the benchmark over the year, as the benefits of Japan, Europe and the UK just failed to offset the disappointing Chinese equity market and limited exposure to the highly valued US technology sector. I have rarely seen markets so narrowly focussed on a few winners where the decision to own one or two stocks has meant the difference in under or outperforming the index. The last time this occurred was at the height of the (technology-media-telecoms) bubble, led by Vodafone in the UK, which did not end well for them and now they trade nearly 80% down from their peak in 2000. In the last decade the proportion of our benchmark represented by zero yielding stocks has risen from under 10% to 20%. This year we have seen performance impacted by not owning zero dividend yielding stocks and we are reviewing how to deliver progressive dividend growth while allowing greater investment into zero yielding companies. Outside the large technology stocks, it is apparent that investor demand for equities is weak. Market flows have been impacted by the opportunity cost to investors of owning cash, yielding a risk free 5%. This opportunity cost is impacting demand for equities generally across the world and is likely to remain a negative until interest rates are meaningfully cut from their current levels. Environmental, social and governance factors As mentioned in previous reports, we do not exclude sectors or stocks purely for environmental, social and governance ('ESG') reasons, as we feel ultimately that excluding them will not lead to improvements in their behaviour. Our preferred strategy is through engagement with company management to encourage change and invest in safer or more environmentally sustainable processes. A sample of some of the engagement that Janus Henderson conducted on our behalf last year is listed in the Annual Report. Our favoured measure of the environmental impact of the portfolio is its Carbon Intensity, which calculates the absolute carbon emissions divided by the revenues generated by the companies. We consider this measure useful in comparing companies, as it is less volatile than others and should reduce if companies find ways to be more efficient in how they produce goods or operate. At the year-end we had a carbon intensity 37% lower than the benchmark. This is principally due to a lower exposure to utilities, materials and energy compared to the benchmark. However, the exposure to energy has increased in the year as there are now clearer and more realistic investment plans from the oil majors, however we remain below the benchmark weight due to uncertainty over the future demand for oil. The collection of data relating to ESG factors has clearly improved in recent years, although understanding the assumptions behind various figures can be challenging. Companies continue advancing the quality and scope of this data which now gives us the confidence to publish a TCFD report in 2024, giving greater detail of the portfolio company's environmental impact and expanding on other governance and social factors. Income The level of investment income from the portfolio increased by 7% over the year, driven by a continuation of special dividends and underlying growing dividends. Inflation has had a positive impact on some companies who can pass on higher prices and grow their margins. The US portfolio grew its dividends by 57% year on year through an increased allocation of the total portfolio and stock selection favouring strongly growing dividend payers. Europe and the Pacific were negatively impacted by a lower proportion of financials and the lack of economic growth. China also saw a decrease in dividends as we sought out more defensively orientated companies in healthcare and alternative energy providers which yield less than the market. The outlook for income is largely dependent on economic growth improving, which might be challenging in the coming year unless interest rates are materially reduced. We are endeavouring to favour companies that have the scope to raise the proportion of profits they pay out and are well positioned compared to their competitors. The repayment of the 2023 debenture also saves the Company ?1.2m annually in interest costs which should allow more of the investment income to be distributed to shareholders. Gearing The Company's ?15 million 8% debenture was repaid at the end of the financial year, which will reduce the Company's overall average borrowing cost to 2.7%; the next loan stock is not due for repayment until 2035. The current outstanding loan stock issuance results in a maximum gross gearing of 9.3% at the year-end. If the cash balances are netted off, then net gearing at the year-end was 7.1%. We view our default geared position as being close to the maximum gross gearing with a small cash balance to manage transitioning between trades. To determine whether we fully gear the Company, or hold tactical cash, we have a number of statistics such as excess money supply, the rate of corporate profit growth and valuations relative to historical levels that we review. We have maintained a fairly full level of gearing this year, which has been beneficial, but in the latter part of the year have started to raise cash, reducing net gearing. The key indicator of global excess money supply has turned negative, impacted by rising interest rates and increased bond sales from central banks. Outlook Leading indicators for the global economy continue to point to fading growth, and in particular a contraction in Europe where money supply is negative and the highest interest rates starting to bite. The more positive news is that the valuation of most stocks appears to be now factoring in a mild recession. Forecasts for profit growth are modest with the exception of the companies associated with the Artificial Intelligence boom, where the bubble continues to inflate. The declining inflation numbers are also good news but it is hard to judge when central banks will start cutting rates as inflation approaches or subsides below their 2% targets. We feel that inflation could surprise on the downside as China is now in outright deflation and, barring an energy crisis, most goods and services are in surplus. As we look forward, employment is key to the direction of both the economy and, importantly, sentiment. So far into this interest rate cycle employment has held up very well, as many companies remember recent times when labour was hard to find so are consequently reluctant to shed labour as the economy slows. The market consensus view has swung towards a soft landing scenario led by the US, in which interest rates are cut in the early summer of 2024 and provide the stimulus to offset fading demand. We are a little more cautious as this type of soft landing has rarely been engineered successfully by central banks and we expect some overshoot to the downside. US companies increasingly see share buybacks as their preferred method to return cash to investors and less companies in the US now pay dividends. We have undoubtedly missed some opportunities in the US market through our preference for dividend paying companies. We intend to widen our focus in the coming year although we will maintain our preference for cash generative companies with well defended market positions. Our stock selection seeks to avoid the overvalued and under invested companies, prioritising higher quality and lower geared companies, offering earnings resilience. Now that the cost of capital and debt is no longer close to zero, companies need to generate proper returns to justify their valuations, and our investment process aims to seek out these opportunities. Alex Crooke Fund Manager 17 January 2024 PLEASE REFER TO THE PDF TO VIEW THE FULL ANNOUNCEMENT For further information please contact: Alex Crooke Fund Manager Janus Henderson Investors Telephone: 020 7818 4447 Simon Miller Chair The Bankers Investment Trust PLC Telephone: 020 7818 4233 Dan Howe Head of Investment Trusts Janus Henderson Investors Telephone: 020 7818 4458 Harriet Hall Investment Trust PR Director Janus Henderson Investors Telephone: 020 7818 2919 Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) are incorporated into, or form part of, this announcement. ---------- End CA:00424978 For:BIT Type:FLLYR Time:2024-01-19 08:30:01