Speaker 0:
joining me here in the studio of Witten's chief executive, Andrew Bell. Andrew, thanks very much for being here. Thank you. So, first half of 2023 is another challenging year. We've got stubbornly high inflation. We've got interest rates going up. Give us a sense of how Whitton performed in the first half of this

Speaker 1:
year. Yeah, you, you you wouldn't really think it to read all the news headlines, but actually, it was a pretty strong, uh, half of the year for equity markets, I think because gloom was so acute at the at the end of last year, people think inflation is going up. Interest rates are going up. We're all going into recession.

Speaker 1:
And the world turned out to be better than that. Not brilliant, but better than expected. So we had a total return of 8.7% in the first half of the year. Our benchmark 7.2. So a useful out performance there, um, it was offset a little bit by the widening of the discount because the whole sector came under discount pressure for a variety of reasons. Um, so that eroded the total return for for shareholders in price terms, but in the end, it's NAV growth that's going to drive the risk

Speaker 1:
if you like. That's the weight of the company, whereas the discounts, uh, short term opinion poll Let's

Speaker 0:
stay with that out performance. What were some of those key drivers that really pushed that up?

Speaker 1:
There were a couple of, uh, small contributions from the overall portfolio out performed at the at the manager level, and there was a benefit from buying back some of our shares at sort of eight or 9% discounts. But the main contribution actually came from the application of gearing during the first half of the year.

Speaker 1:
In a positive market, gearing is obviously helpful. And, uh, because otherwise it was quite a tricky period for managers to navigate because of the ebbs and flows of market leadership that you referred

Speaker 0:
to and digging down into the portfolio. What's it looking like? How the managers performed and are you going to make any changes to those core holdings,

Speaker 1:
the the managers in aggregate? Our core managers outperformed at one stage. In fact, we had all six of our managers or our core managers outperforming at the same time, even though they had very different stylistic biases

Speaker 1:
by the, uh, by the mid-year mark, most of them were ahead of benchmarks. The, uh, 11 particular out liar was Jenison, which is the most growth of our managers, which had a real mayor of a year. In 2022. They had a total return of about 25% which was about 17% ahead of their benchmark. And that was, I think, largely because they were the most exposed of our managers to the dawning theme of artificial intelligence. But otherwise,

Speaker 1:
uh, you know, we we're very happy with the mix that we have. A year ago, when things weren't going so well, we reviewed our managers. Should we keep them? Should we dump them? And we decided that actually looking forward, they looked right like a good mix of managers to have. You can't undo performance that's already been experienced, and we're still happy with them.

Speaker 0:
And looking at the split, you got about 75% UK and global around 25% in specialist. How's that specialist area performed? And what are the key themes driving that

Speaker 1:
the the the specialist area this year has had a mixed performance. Um, you'd probably say we had two reds and one green. The the areas which have lagged behind are the portfolio of investment companies that we, uh, where we allocate to specialist asset classes, which we think are particularly attractive or long term growth plays

Speaker 1:
a couple of areas there, like, uh, life sciences and mining stocks were both under pressure in the first half of the year. Uh, the other major theme within that portfolio is private equity, which actually did OK, Uh, they they came under a bit of pressure in 2022 but the first half of this year, our private equity plays performed well,

Speaker 1:
um, but we also had an opportunity to add a new holding at almost a 50% discount to NAV. And we we think that was both. That was an opportunity thrown up by the, um, the acute gloom, if you like that pervaded that. People thought that private equity valuations hadn't yet fallen with the market last year. So So that should be an interesting building block for future returns. The other,

Speaker 1:
um, drag on that specialist part of the portfolio was our climate change fund which actually was our strongest, uh, performer last year. This year, I think a combination of, uh, weaker energy prices generally and a bit of market rotation. They're not big investors in technology. They were broadly, I think they were up 1% in the first half of the year. The the green after those two reds was our was our emerging market manager, which was, uh,

Speaker 1:
delivered a return of 9% against an almost flat outlook for emerging markets themselves. So overall it was a that was the major major area of dragon performance in the first half of this year. But we think there's a lot of value there, and we're hopeful for the future.

Speaker 0:
Underpinning all of that, I guess, is an ESG mandate. What's Witten's ESG strategy at the moment, and how does it benefit shareholders

Speaker 0:
of the company?

Speaker 1:
There's an awful lot of of posturing and rule Booker, if you like in the area of ESG. But the underlying principles are are undeniable that if you find well managed companies which are soundly financed, producing products or services that customers want doing better than their competitors and also working with the grain of what Society wants out of companies.

Speaker 1:
That's the ingredients for a cake, which is gonna be OK, and we don't spend all our time trying to weigh the cake or check how it's cooking. But the 22 tangible things that we look at are we developed a a scoring system for the sustainability of our manager's portfolios a year ago. And we'll be revisiting that this year to see how they're making what sort of progress they're making in terms of their score under that system.

Speaker 1:
And one particular, uh uh, figure is the carbon intensity of our portfolio, which is measured in tonnes of carbon dioxide per million dollars of sales, if you like, and that has declined by over 40%. Um, since 2019. Uh, the the eventual ambition is to have a, you know, carbon zero portfolio by 2050 but we're almost at our 2030 intermediate target. So,

Speaker 1:
uh, that's only a figure, but it's a It's one way of our measuring, uh, and assessing whether the portfolio is moving in the direction, um, of, uh, in the direction that society wants in terms of mitigating climate change. Um, because although what matters in the end is the investment returns for our investors. We don't see a conflict between the sustainability rules that we set

Speaker 1:
and delivering good returns. In fact, we think without sustainability it as part of your investment philosophy. You're not going to you're either going to be regulated or taxed or abolished out of existence. So, uh, we think we're making good progress, but we'll be reporting more about that at the year end,

Speaker 0:
and we know that gearing is a useful mechanism that you have at your disposal. Have you used gearing in the last six months or so?

Speaker 1:
Yeah, One of the unique features of investment trust is the ability to use gearing in a in, hopefully a judicious and and timely way. We've benefited because more than half of our gearing is is at fixed rates, which average under 3% which is now looking pretty competitive. The the variable rate gearing is more expensive, but we can repay it at will when we don't want to have it invested in the market. And we've maintained

Speaker 1:
uh a a level of between 13 and 15% gearing for the first half of the year, the year because, as mentioned earlier on, we were we we felt that there was undue pessimism about the outlook for markets at the beginning of the year. And although we've we've taken a bit off the table when the markets have rallied and put it back in, we're running at the moment with about 14 or 15% gearing.

Speaker 1:
That will vary according to opportunity. Uh, but in the long term, more often than not, it's benefited our shareholders. Obviously, if you get a a bad a bad year for for Markets, then it's gonna gonna amplify the losses, as indeed it did last year. This year it's worked in our

Speaker 0:
favour, and some of the shareholders will be keen to know is what the outlook is for the the four year dividend for 2023.

Speaker 1:
Just to be clear, we're total return investors, not yield investors. But we recognise that,

Speaker 1:
uh, well, two things about dividend one is a lot of our shareholders are private individuals, and the there is a benefit for them of having a reliable and growing income as part of their total return. The other is it's a bit of a reality check if you have a portfolio that's able to distribute surplus cash, which you can then pass on to shareholders. It's they're probably well managed companies with good governance. So over the years, uh,

Speaker 1:
we've, you know, grown our dividend for the last 48 years. Uh, this year, the revenue earnings in the first half of the year were 15% higher than a year ago. That probably flatters the likely outturn for the full year. But we've, uh we we say in our interim report that we anticipate the, uh, the full year dividend being a further year, 49th year of growth.

Speaker 0:
Yeah, And without asking you to predict the future, what do you think some of the big investment themes coming ahead are, And how do you think we're in a position to take advantage of that?

Speaker 1:
I think the first half of the year has been a sense of relief in the equity markets that economies have held up better than expected. And that means that an and of corporate profits, so equity markets have been able to absorb a larger than expected interest rate increases second half of this year. I think we're quite close to the peak in interest rates in most of the major centres.

Speaker 1:
And I think the, uh there is evidence that inflation is coming down in most centres, even in the UK, which was a poor performer for most of the last 12 months. But we we do have to live through that process. In the next two or three months, we'll I. I think we will see rates peak in UK, US and Europe if they haven't already. Uh, but we don't quite know whether the slowdown in growth is going to morph into a you know, something uncomfortably close to a recession. So I think between now and the end of the year,

Speaker 1:
we've got to, you know, go through that period of evidence coming through of inflation, peaking, seeing the peak in interest rates. And then by the end of this year, we'll have seen the peak in inflation and rates. We'll be looking forward to the prospect of some sort of recovery in 2024. And so I

Speaker 1:
I think perhaps just a little bit of investor patience might be called for in the next couple of months. It wouldn't be surprised if we backed and filled a little bit consolidating the gains we've seen so far. But but I'm optimistic that by the end of the year the outlook is going to look a lot more interesting.

Speaker 0:
And Andrew Final point, I want to to finish on here. What's your outlook for global economies and for equities? More generally,

Speaker 1:
I think the, uh, I I'm an optimist in the medium term. And it's partly because historically, if the equity markets are a sort of play on human progress and ingenuity, usually and we've come from caves to where we are now, and that's usually have been a thing to back. So staying fully invested is is a pretty good default thing. If you only had one decision to make, depending upon your circumstances. Of course,

Speaker 1:
my my view of the medium term is could be sum summed up as the word egg. It's environmental genomics and growth. The environmental part is clearly there's massive amounts of investment have already been announced to, uh, facilitate the energy transformation, electrification of the economy. And even if we miss the various targets under the various cop, uh, conferences,

Speaker 1:
I think these that's that is only going to intensify over over in coming coming decades. It's a very big tailwind for some of our investments. The genomics is a sort of what I sort of is one of the key areas of biotech that's set potentially to transform, um,

Speaker 1:
medical care over the next decade or so that the other being cell therapy, different ways of tackling, um, either rare diseases or even in the case of something like covid. It was part of the genetic engineering that that developed the covid covid vaccine. So I think that's going to be a a very interesting area. And oddly enough, it's in a sector which has been absolutely kicked to pieces in the last two years. Um, the biotech sector has done very poorly. The third is growth. There is so much debt, particularly the national government debt,

Speaker 1:
that the only way you're going to be able to get on top of it well short of defaulting, which is not usually viewed as a preferred outcome, is to grow out of it. And and that's going to mean, I think that there will be a a policy bias towards favouring growth. Even if inflation targets are slightly missed. I think the the imperative is going to be to try and grow the economy. It's going to be helped by,

Speaker 1:
alas, defence spending, but also by the the energy the environmental spend I mentioned earlier on. I think also we should not underestimate the dawning field of a I as a source of productivity. I think it's going to massively change and potentially for the better. An awful lot of areas of the economy. So I I'm an optimist that my my egg is going to come and and then give birth to a chicken.

Speaker 0:
I think that's a great point to leave it. Andrew, Thank you very much.

Speaker 1:
Thank you.