In what Kershaw described as “a tough year for small businesses”, the trust’s net asset value fell 30%, according to its first-half 2022 results, while its benchmark, the Numis Smaller Index Companies ex Inv Trust, lost 20.2% over the period. .
In the 12 months to June 2022, the company’s share price and net asset value fell 21.3% and 24.4% respectively, while its benchmark gained 17.2% .
The trust’s haircut stood at 15.7% at end-June, down from 15.3% in December 2021, while its leverage stood at 4.8%, up three percentage points from the period. former.
“The first half of 2022 has been a relentless half for global equity markets, driven by conflict in Ukraine, lingering fears of high inflation and the risk of a global recession,” Kershaw said.
“This resulted in a high rotation from ‘growth’ stocks to ‘value’ stocks; an environment in which your Managers Quality, Growth and Momentum (‘QGM’) process was not appreciated.”
However, he noted that although the company’s share price underperformed in the first six months, “the focus on quality inherent in the investment manager’s investment process means that companies in which it invests are resilient and able to withstand the current environment”.
“Retailers Seraphine and Halfords detracted from performance during the period. The retail sector had a torrid start to the year on fears of a consumer slump and there were downgrades across the sector,” co-managers Amanda Yeaman and Abby Glennie said.
During the review period, the trust reduced the portfolio’s overall exposure to the retail sector as consumers faced an erosion of purchasing power, “meaning retailers’ margins will bear some pain,” the managers said.
“While the retail companies in the firm’s portfolio are structural growth stocks, offering market share gains, attractive return on capital employed, excellent cash conversion, lower operating leverage/downgrade risk and compelling long-term growth prospects, we consider it prudent to reduce exposure to the sector in this environment.
Despite the trust’s underperformance, the board announced dividends of 2.40p each per share for the first and second quarters of 2022, an increase on last year’s figures of 11.6% .
“Investors have had a volatile first half; however, UK dividends performed strongly. After a solid first quarter, the second quarter did not disappoint. Total dividend payout jumped 38% year-on-year to £37bn, according to Link Dividend Monitor,” Kershaw said.
The trust said the mining, banking and oil sectors, all of which are dominated by large caps, accounted for three-quarters of the year-over-year increase in the second quarter. The mining sector was the main contributor, thanks to favorable cyclical swings and rising mining profits.
Despite the dividend increase, the trust’s investment manager expects more headwinds to arise in 2023, with a recession limiting the ability and willingness of many companies to increase dividends, as earnings are under pressure and balance sheets under more scrutiny.
In the first week of September, the trust announced that Amanda Yeaman, who had served as the company’s co-portfolio manager alongside Abby Glennie since November 2020, would become lead manager effective January 2023.