Witan Investment Trust Half-Year results | August 2019

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  • 08 mins 54 secs
Equity markets had a tough time at the end of last year but fortunes changed in 2019. Witans net asset value total return in the first half was up by 13.5%, Andrew Bell, Chief Executive Officer, Witan Investment Trust discusses this positive performance.


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PRESENTER: Welcome, I’m Alanna Petroff. Joining me today is Andrew Bell, Chief Executive Officer of Witan Investment Trust plc, and we’ll be discussing first half results. Andrew, welcome. Equity markets had a tough time at the end of last year but fortunes changed in 2019 and Witan’s net asset value total return in the first half was up by 13.5%; although the benchmark return was up by 14.9%. So take me through this positive performance and tell me what held back Witan’s performance?

ANDREW BELL: Well markets worldwide had a fairly significant bounce in the first half of the year from the quite depressed levels that they’d reached at the end of December. And we’re obviously delighted that we were able to participate in that with the rise of 13½%. And the main contributors to that that we fully invested and we made use of gearing. And in an environment of rising markets gearing tends to help returns. The factor that held us back was that our managers as a group underperformed the benchmark, as it was quite a difficult environment for stock pickers.

PRESENTER: What were the factors influencing equity markets in the first half of this year?

ANDREW BELL: Well, 2018 was a year in which economic growth worldwide disappointed in an environment where central banks and the US in particular were expected to be putting up interest rates. So that’s a bad cocktail for equity investments. It’s like disappointment and also tighter monetary policy. We had the exact opposite pretty much in the first half of 2019. Although growth didn’t bounce, expectations stabilised at a relatively low level, but the important shift was that central banks, notably the Fed, moved from a tightening towards an easing cycle, and that meant that markets were able to shrug off short-term disappointment in the hope that things might be better next year.

PRESENTER: In Witan’s interim management report you mentioned that managers with a value emphasis found the market environment harder. Why was this?

ANDREW BELL: As we discussed earlier on, although the markets rose quite a lot, there was a lot of nervousness about the cyclical outlook for the world economy. Now, value managers by definition are trying to buy stocks that are cheap, and usually there’s a reason why a stock is cheap, and the value manager says the reason is temporary so I’ll hold on ‘til the reason’s gone away and then I’ll, the price will bounce. In an environment where sentiment is volatile people aren’t interested in waiting for the longer-term reason to come through. So they seek comfort in the immediate gratification of companies that are steady growth stocks or those which have got a more sort of new technology bias where the growth is independent of what is happening to the general economic cycle. And that’s why value managers suffered particularly badly and quite unusually in a period when markets bounced as much as they did.

PRESENTER: Now, gearing gave the fund a boost in the first half and since the start of the second half, you’ve issued £50m in new debt. Tell me about this move and Witan’s general strategy on gearing.

ANDREW BELL: We were surprised like many other people by how much interest rates have fallen over the last six months or so. We think that that is an overreaction to some short-term growth disappointment but we were willing to take advantage of it to try and lock in a rate for 31 years where, or 32 years, we’ve locked in a rate of 2.39%, which is a record low for the sector for that duration. And the purpose of doing so is we don’t expect interest rates to stay this low for most of that 30-year period. So we think that for a lot of the period our shareholders are going to benefit from having an unusually cheap rate of borrowing. And it’s quite spectacular at the moment that approximately half of the government debt outside the US actually has a negative rate of interest. Which means people are lending to those governments knowing that they will get back less at the end of that period than they originally invest. It’s a bit like lending your lawnmower to a neighbour and they return it with no petrol; it’s not sustainable.

PRESENTER: Witan has increased its dividend per share for 44 consecutive years; with that being said what’s the outlook for the dividend this year?

ANDREW BELL: Well our revenue earnings are up by around 9% in the first half of the year so well up on the previous year. And so what we’ve said in the interim report is that in the absence of any major change in circumstances, the prospectors will have another year of substantial real dividend growth and probably add to our revenue reserves. But that’s not a formal forecast but that’s the way it’s looking at the moment.

PRESENTER: You’ve just made a new investment in a fund focused on climate change and you’ve become a member of the Institutional Investors Group on climate change. Tell us more about this fund and your reasons for investing in this area.

ANDREW BELL: The evidence of climate change and the influence it’s having on societies and economies worldwide is becoming increasingly multifarious and incontrovertible, and we’re clearly aware of that as citizens. But our job at Witan is to make money for shareholders and in obviously proper ways and so forth. And we see the increasing political pressure coming from evidence of climate change is likely to mean there will be changes in regulation, changes in taxation, changes in the way society and economies run. And that should mean that there are opportunities for companies to make, to profit from that, from doing what society wants it to do. So we’ve chosen to invest in a specialist fund run by an investor with a value philosophy which aims to invest in companies which are dedicated to reversing or mitigating the effects of climate change. And that should be good for the environment and good for our shareholders.

PRESENTER: With ongoing uncertainty related to Brexit, how are you managing Witan in this context?

ANDREW BELL: I think, trying to manage a portfolio on the basis of a careful evaluation of the likely outcome from the current Brexit debate, you might as well have a crystal ball. So we’re not really trying to attempt to play the politics on that. And in fact an awful lot of investment has to entail screening out short-term politics because it’s usually the long-term economics that prevail. So happily most of our investments are quoted overseas and most of the profits from our UK investments are derived from overseas. So the direct impact on our portfolio’s fairly limited. And so our managers are concentrated on trying to assess the attractions of individual companies based upon their businesses and their profit outlook and their valuation. And Brexit is one of the factors we have to take account of, but it’s not as important as it is in the national UK political debate.

PRESENTER: And finally what’s the outlook for global equities this year?

ANDREW BELL: Well, we have to bear in mind that, you know, certainly as at the end of July most global markets were up nearly 20%, which is a pretty high return. And so you have to be a little bit cool-headed in anticipating major games from there. August being a little bit choppier for reasons related to US/China trade disputes. But fundamentally what we’re expecting is that economic growth is going to bottom out and improve. Perhaps confidence will be helped by the easing path from central banks; the Fed cut rates at the end of July. And corporate profits even during this slightly difficult period for economic growth have been surprising on the upside. So those are all fundamentally positive factors for equities. Clearly some of that’s anticipated because equity markets have had a very strong run, but our expectation is that over the next six to twelve months, from these valuation levels, people should be able to make further gains on the back of improving economic growth and delivery of corporate profits growth. But, not telephone numbers, but with interest rates being as low as they are, equities don’t need to do an awful lot to beat them.

PRESENTER: Andrew, thank you very much.

ANDREW BELL: Thank you.