Artemis Alpha Trust

ARTEMIS ALPHA TRUST PLC (the "Company")

LEI: 549300MQXY2QXEIL3756

Notice of Results and Investor Presentation via Investor Meet Company.

ARTEMIS ALPHA TRUST PLC is pleased to announce that KARTIK KUMAR will provide a live presentation via Investor Meet Company on 25th Jan 2024 at 10:00am GMT.

The presentation is open to all existing and potential shareholders. Questions can be submitted pre-event via your Investor Meet Company dashboard up until 9am the day before the meeting or at any time during the live presentation.

Investors can sign up to Investor Meet Company for free and add to meet ARTEMIS ALPHA TRUST PLC via:

https://www.investormeetcompany.com/artemis-alpha-trust-plc/register-investor

Investors who already follow ARTEMIS ALPHA TRUST PLC on the Investor Meet Company platform will automatically be invited.

Half-Yearly Financial Report for the six months ended 31 October 2023

This announcement contains regulated information

Chairman’s Statement

Performance

In the six months to 31 October 2023 your Company’s net asset value per share and share price (on a total return basis) fell by 9.6% and 16.2% respectively, ending the period at 327.14p (NAV per share) and 263.50p (share price). The FTSE All-Share Index fell by 5.9% over the same period. The FTSE 250, a UK domestic index of smaller companies which more closely resembles our portfolio, declined by 10.5%.

Market conditions have continued to be challenging during the period, with the conflicts in Ukraine and Gaza as well as uncertainty over interest rates and inflation contributing to volatility.

During the half-year, we suffered from our overweight exposure (comprising about half the portfolio) to UK domestic equities where weak sentiment still prevails.  However, the Manager remains confident that these conditions offer the prospect of attractive future returns from the portfolio.  These returns are still likely to be influenced by the relatively high concentration within the portfolio and the fact that it does not resemble the broader stock market or our benchmark index.

Performance since the 31 October has been particularly strong with the latest NAV per share up by about 16.4% at 380.79p, compared to an advance of 6.1% by the FTSE All-Share Index.

More detailed information on the portfolio is set out in the Investment Manager’s Review which follows.

Revenue earnings and dividends

Revenue earnings per share for the half-year were 2.84p, a decrease of 19% on the comparable period last year, reflecting the uncertain outlook. Investment income from our portfolio was 9.0% lower. This reflects the timing of dividend payments and carries no implication for the magnitude of the final dividend.

The Board has today declared a first interim dividend of 2.54p per ordinary share (2022: 2.33p) which will be paid on 31 January 2024 to shareholders on the register as at 5 January 2024. This increase of 8.7% over the equivalent interim dividend paid in January 2023 is consistent with our policy of growing dividends in line with, or at a rate greater than, the UK CPI inflation rate of the preceding financial year (8.7% as at 30 April 2023).

Share buybacks / discount

We have continued our pragmatic approach to buying back our shares, aiming to do so when we believe this is in the best interests of our shareholders. In the period, adverse market conditions and sentiment have resulted in wider discounts amongst our peer group and in the investment trust sector generally. Despite a widening in the Company’s discount, from 12.8% to 19.5%, particularly at the end of the period, buyback activity was limited. Our judgement was that the risk of impacting the liquidity in our shares was likely to outweigh the scope to create material accretion in net asset value per share. The Company bought back 21,756 shares at a total cost of £69,000 and an average discount of 13.0%.

At the date of this report, the share price stood at 336p, representing a discount of 11.8%.

Gearing

During the half year, the Company marginally increased its gearing, which stood at 14.1% of NAV at the period end (13.9% 30 April 2023). This gearing is achieved by “contracts for difference” which continue to offer a more cost-efficient alternative to a conventional bank loan as well as providing a revenue stream over the half-year amounting to 16.8% of investment income (9% in the six months to 31 October 2022).

Outlook

There are, perhaps, the first signs of an improvement in economic and market conditions, with the prospect of a reduction in interest rates and inflation.  Our policy remains essentially one of picking individual stocks in pursuit of increasingly attractive long-term returns.

Contact

As always, we welcome contact with our shareholders. I can be contacted by email on [email protected].

Detailed information on the Company can be found on our website, artemisalphatrust.co.uk, including a monthly factsheet and quarterly updates from the Manager.

Duncan Budge

Chairman

20 December 2023

Investment Manager’s Review

In the 6-month period, the Company’s NAV declined by 9.6% compared to 5.9% fall in the FTSE All-Share.

The key factor impacting equities over the period was a rise in long-term interest rates with 10-year UK bond yields rising to 4.5%. This reflects continued uncertainty over the path of inflation and monetary policy, which has damaged confidence, compounded more recently by the outbreak of conflict in the Middle East.

Against this backdrop, weak sentiment towards UK domestic equities deteriorated further causing underperformance against the broader market, with the FTSE 250 declining by 10.5%. The Company’s NAV suffered from its overweight exposure to this segment of the market, with banks (Lloyds/Natwest) and airlines (Easyjet/Ryanair), offsetting positive contributions from overseas allocations (Alphabet/Universal Music Group) and energy (BP/Shell).

We retain high confidence that the recent confluence of events, which has led to broad weakness in UK equity prices, has created the conditions for high, future portfolio returns. There are three important and inter-linked concepts that form the basis of our view:

1.)    Human psychology explains the tendency to weigh losses more heavily than gains. In investing this creates adverse behaviour;

2.)    Equities can be owned forever, and earnings tend to grow in inflation-adjusted terms. Real earnings growth, reinvestment risk and duration are important concepts when making comparisons between asset classes;

3.)    Equity risk premium is the compensation you receive for the volatility and uncertainty for investing in equities. In the UK, equity risk premium is high in absolute terms and relative to bonds.

These factors are paramount to our current optimistic outlook and so we explain each in turn.

UK investors are driving in the rain

Daniel Kahneman established the concept of “loss aversion”, which is a cognitive bias impacting decision-making under uncertainty.  The simple notion is that basic survival instincts impact human nature meaning that the pain of loss is felt more highly than the pleasure of an equivalent gain.

Kahneman’s demonstrated loss aversion with New York taxi drivers in the rain. A taxi driver earns more per hour when it is raining than when it is sunny and there is less demand. The price of a driver’s leisure is therefore lower when it is sunny. Counterintuitively, Kahneman found that taxi drivers work harder when it is sunny and less when it is rainy. This is because low income on a sunny day feels like lost income.

The same concept explains why golfers statistically make fewer successful putts for birdie than for par. A bogey feels like a loss, whereas a par does not.

The concept of loss aversion is widely applicable to financial markets where volatility in prices creates loss aversion. Customers in a supermarket will buy more goods when they are on sale, but investors in a stock market do the opposite. Investment trusts discounts widen after markets fall and fund outflows are highest after markets decline, not before.

Our view is that loss aversion is impacting behaviour in UK equity markets following poor and weak absolute and relative performance. One clear indicator is the fact that there have been over £76bn in outflows from UK funds since 2016. Another is the near halt in the market for initial public offerings after a boom in 2021.

Our approach to investing is aimed at helping to combat these natural instincts and take advantage of the opportunity it creates. In forecasting the prospective returns of a stock by estimating earnings and exit multiples, we are forced to see that, all else being equal, prospective returns rise when prices fall.

This approach can be seen in the current positioning in several respects. First, we have held on to poorly performing holdings where we retain conviction in future returns. Secondly, we have utilised gearing to increase our net exposure. Thirdly, we have made switches into holdings where we perceive risk-adjusted returns to be higher. This approach created significant value between March-September 2020 when prices were depressed, and sector dispersion was high.

The third point explains the majority of the activity undertaken in the period. Overseas holdings in Prosus, Meta, and EssilorLuxottica were sold. We added to existing holdings in Natwest, Hargreaves Lansdown, Delivery Hero, and Springfield Properties following share price declines.

Our Company’s share price discount to its net asset value has widened recently. Repurchasing shares is an option we have that would also take advantage of the value opportunity. However, our current judgement is that the impact this would have on vehicle liquidity likely outweighs the scope to create material accretion in net asset value per share. As can be seen from disclosures, the managers have continued to purchase shares in the Company.

Misperceptions over nominal yields and duration

The UK’s National Savings and Investment (NS&I) scheme raised over £10bn between April and September with one product offering a 1-year interest rate of 6.2%. UK investment platforms have seen weak flows as a result. There is a widespread view that equities are no longer attractive because of the yield now available on cash.

There are multiple issues with this comparison.

Firstly, company earnings and dividends tend to grow with economic and corporate prosperity. This means that mathematically, a business earning high returns on capital (e.g. 20%) that grows earnings by 3% per annum, will return more than 6% per annum even if it is purchased on a PE ratio of 25x. Both the earnings yield and dividend yield of this stock would be materially lower than 6%, but theoretically the return should be in excess of 6% owing to the growth generated.

Secondly, the duration of equities must be considered. Equities offer a perpetual claim on the earnings of a business. They are among the most long-term of all financial instruments. You should not be in equities if you do not have a long-term horizon.

A short-duration instrument, such as a 1-year savings product carries reinvestment risk, which is the risk that you cannot reinvest cash flow in the future at the current rate on offer. If your objective is to maximise your wealth over 5 or 10 years and you invest in a 1-year product, your long-term returns will be less certain. 

The other important consideration with duration is that the longer the duration, the more sensitive the security’s value will be to changes in interest rates. This explains why investors in long-dated bonds have suffered significant losses in 2021 and 2022 as interest rates rose. Equities are long- duration instruments, but their values offered more resilience than bonds as their earnings grew with the inflation that prompted the interest rate increases.

Interest rates are likely above neutral and inflationary pressures appear to be abating. Equity values will be geared to a decline in interest rates as illustrated by the following quotation from Warren Buffett, writing in 2000:

"The best time to buy stocks… has been when interest rates were sky high, and it looked like a very safe thing to do to put your money into Treasury Bills… As attractive as that appeared, it was exactly the wrong thing to be doing. It was better to be buying equities at that time, because when interest rates changed, their values changed even much more."

In a scenario where interest rates fall, a short-dated instrument will see reinvestment risk realised and will not capture the upside in values from gearing to duration.

UK equity risk premium is elevated

Equities carry a variety of risks which may mean that the earnings for any one security do not grow by inflation and GDP. Failure to adapt to change is the greatest risk for most businesses and this is often difficult to assess at the time. In addition, equity prices can be highly volatile in the short-term.

Equity investors require compensation for this risk and uncertainty over investing in a risk-free and inflation-linked bond. This is defined as equity risk premium and can be quantified by comparing the earnings yield (the inverse of its price-to-earnings ratio) of an index.

To note, dividend yields are an incomplete measure of value. Companies can effectively use earnings for distribution through share buybacks or be retained for reinvestment: Berkshire Hathaway has never paid a dividend and its returns are now considered legendary.

The graph below shows the FTSE All-Share’s earnings yield is 10.4% and 10-year inflation linked bonds yield 0.6%, implying thereby that the equity risk premium today is 9.8%.
 

This chart suggests that, so long as you believe earnings for the stock market as a whole will rise with inflation, the excess return from equities over bonds should be close to 10%. In absolute terms, equity returns should be 10% plus inflation and real corporate profit growth, which historically would add c.4%. 

It is important to note from the chart above when bond yields were materially higher in the 1990s, equity risk premium was materially lower than it is today, with the average being 5%.

The aspect of this logic that could most likely be questioned is the assumption around inflation linking. The UK market has sectors such as financials and commodities, which are cyclical, meaning that there have been multi-year periods where earnings do not grow in excess of inflation.

This is a valid reservation and risk, but we would note that cyclical sectors, to which the Company has significant exposure, offer earnings yields far in excess of the index. For example, our bank stocks have earnings yields of 18%-20%. Our airline holdings offer earnings yields of 12%-14%.

Reasons to be optimistic about portfolio returns

We have explained why we believe the current state of the UK equity market ought to deliver compelling returns. Negative sentiment and loss aversion is manifesting itself in high equity risk premium. High short-term cash rates are creating an illusion of attractiveness.

By asserting that the future is bright, we are not setting out a near-term prediction. Equity returns are inherently “lumpy” and particularly for a portfolio that is concentrated and does not resemble the broader stock market. There have been two months since 2019 where our portfolio’s absolute returns have been 10% points in excess of the market (August 2020 and January 2023).

Some encouragement can be found in recent developments that have been supportive for a reduction in UK risk premium.

First, several factors that led to high inflation were global, exogenous, and temporary in their nature such as supply chain interruptions and energy disruption. It is clear that many of these factors have abated. As an example, container rates have fallen 80% from their peak and are forecast to fall a further 30% in 2024. Central Banks were not wrong to talk about “transitory” factors impacting inflation.

Secondly, UK-specific endogenous factors (monetary supply and tight labour markets) that contributed to inflation are also normalising. Interest rates have risen markedly, and money supply is declining in nominal terms. Input costs are a leading indicator and point to deflation. UK labour market participation continues to increase towards pre-pandemic levels, migration has reached a record high, and unemployment has risen to 4%.

All these factors point to an improvement in real wage growth and recovery in consumer and business confidence. We also see more reasons to be constructive about the future path of interest rates and inflation than the market is currently pricing in.

Our judgement is that the return potential in the UK domestically exposed segment of the portfolio (c.50% of NAV) is particularly exciting.

Our bank holdings (Lloyds/Natwest) trade on earnings yields of close to 20% and are using capital generated to repurchase shares. The sector’s performance has been impeded by a rise in deposit costs. We are confident this is a timing issue and that the tailwinds from a repricing of interest rate hedges will lead to higher earnings.

We have 5 holdings across UK housebuilders, which is the sector likely to be most geared to a stabilisation or fall in interest rates. The current depressed market is only compounding the undersupply of housing in the UK which underpins the long-term demand for the industry.

Frasers Group has successfully led consolidation in segments of the retail industry, underpinned by its high cash generation. Its strategy to focus on brands is yielding strong results in terms of improved product availability and gross margins. The company continues to invest in operational efficiency, such as warehouse automation, which increases the scale economies advantage of the business.

The airline sector (Ryanair/easyJet) has seen a strong earnings recovery this year, although performance has been muted owing to concerns over demand. We feel that the more important factor is the industry’s capacity constraints. Key UK airports are operating at capacity and new airplanes ordered today would not be delivered until after 2030. In a commoditised industry, we think supply dynamics are more important than demand. 

Plus500 continues to execute well and make progress on growing its business outside of Europe. In the period, the company bought back 8% of its share capital in one transaction, which demonstrates its shrewd approach to capital allocation and confidence in the business. Hargreaves Lansdown is well placed to benefit from a return in investor confidence and from the growth potential of direct-to-consumer investing.

Our ownership in Dignity was transferred to Castlenau following its takeover. As we have articulated historically, this holding has the potential significantly to drive overall portfolio returns owing to our judgement of perceived value and favourable characteristics of the end-of-life industry (predictability and lack of cyclicality). 

Our positions in long-duration, compounding franchises continue to offer exciting prospects.

Nintendo is pursuing a strategy to extend the reach of its intellectual property outside of its core video gaming market. In the period, the company released its first Mario movie, which grossed over $1.3bn, to become the second-highest grossing animation of all-time. Alphabet is well-placed to create new growth opportunities from integrating artificial intelligence into its broad product suite. A new holding was started in Universal Music Group in May following concerns over generative AI as we felt that risks to the franchise were being overestimated.

Haleon and GSK continue to trade on material discounts to peers yet are delivering earnings growth that does not justify their discounts. Vinci’s contracting business is enjoying record levels of demand as the energy transition necessitates significant new infrastructure investment.

Our conviction has been retained in food delivery companies (Delivery Hero/Just Eat). Higher interest rates have led to capacity rationalisation. Sector revenue and volumes have troughed and should improve further if cyclical headwinds abate. Profitability has markedly improved as efficiencies have been sought and scale advantages exploited. 

Overall, we feel optimistic about the portfolio’s return potential.

UK value stocks resemble coiled springs where even a modest reappraisal of the path forward could result in a marked reaction. Long duration franchises are delivering robust earnings and remain attractively priced, in absolute terms and relative to bonds. Lastly, we have idiosyncratic exposures where upside potential has the potential to make a substantial difference to fund returns.

John Dodd, Kartik Kumar

Fund Managers

Artemis Fund Managers Limited
 

20 December 2023

Current positioning

PORTFOLIO OF INVESTMENTS

1 CFDs are disclosed in Derivative assets/liabilities at market value in the Statement of Financial Position.

2 Unquoted investment.

3 AIM quoted investment.

4 Delisted, suspended or investments in administration or liquidation.

* Global exposure has been calculated in line with the guidelines issued by the European Securities and Markets Authority (‘ESMA’) and represents the market value of an equivalent position in the underlying investment of each derivative contract. For all other asset types the percentage of net assets has been calculated based on the valuation of each holding.

Interim Management Report and Responsibility Statement

Principal Risks and Uncertainties

Pursuant to DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, the principal risks and uncertainties faced by the Company include strategic risk, investment risk, legal and regulatory risk, operational, cybercrime and climate change risks. External factors such as UK political and geopolitical events also bring risk and uncertainty to the Company.

The Directors have assessed these risks and are of the opinion the nature of the risks and the way in which they are managed has not materially changed as described in the previous Annual Financial Report. These risks remain applicable to the six months under review and the remaining six months in the financial year. Details of the risks and their management is described in more detail in the Annual Financial Report 30 April 2023 which is available at artemisalphatrust.co.uk.

Related Party Transactions

During the six months ending 31 October 2023, no transactions with related parties have taken place which have materially impacted the Company.

Going Concern

The Directors have considered the Company’s principal risks and uncertainties together with its current financial position, assets and liabilities, projected revenue and expenses and the Company’s dividend policy. The Directors also considered the impact on the Company of recent market volatility due to geopolitical events and the inflationary pressures currently being felt. It is the Directors’ opinion that the Company has adequate resources to continue in operational existence for the foreseeable future; a period of at least 12 months from the approval of this Half-Yearly Report. For this reason, the going concern basis of accounting continues to be used in the preparation of this financial statement.

Responsibility Statement of the Directors in respect of the Half-Yearly Financial Report

The Directors confirm that to the best of their knowledge, in respect of the Half-Yearly Financial Report for the six months ended 31 October 2023:

■     the condensed set of financial statements has been prepared in accordance with IAS 34 ‘Interim Financial Reporting’ issued by the International Accounting Standards Board as adopted by the EU;

■     the Interim Management Report, together with the Chairman’s Statement and the Investment Manager’s Report, include a fair review of the information required by:

(a)   Disclosure Guidance and Transparency Rule 4.2.7R (indication of important events during the first six months; and a description of the principal risks and uncertainties for the remaining six months of the year); and

(b)   Disclosure Guidance and Transparency Rule 4.2.8R (related party   transactions).

The Half-Yearly Financial Report for the six months ended 31 October 2023 was approved by the Board and the above responsibility statement was signed on its behalf by:

Duncan Budge

Chairman

20 December 2023

Condensed Income Statement

The total column of this statement represents the Statement of Comprehensive Income of the Company, prepared in accordance with International Financial Reporting Standards. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies.

All items in the above statement derive from continuing operations.

All income is attributable to the equity shareholders of Artemis Alpha Trust plc. There are no minority interests.

Condensed statement of financial position

    Condensed statement of changes in equity

Condensed Statement of Cashflows

  NOTES TO THE HALF-YEARLY FINANCIAL REPORT

1. Accounting policies

The Half Yearly Financial Report has been prepared in accordance with International Accounting Standard 34, ‘Interim Financial Reporting’, the provisions of the Companies Act 2006 and with the guidance set out in the Statement of Recommended Practice for Investment Trust Companies and Venture Capital Trusts (“SORP”) issued by the Association of Investment Companies in July 2022.

All other accounting policies remain the same as disclosed in the Annual Report for the year ended 30 April 2023.

2. (Loss)/earnings per ordinary share

3. Net asset value per ordinary share

During the period, the Company repurchased 21,756 shares into treasury (six months ended 31 October 2022: repurchased 852,486 shares into treasury; 30 April 2023: repurchased 1,019,766 shares into treasury).

4.    Dividends

A first interim dividend for the year ending 30 April 2024 of 2.54p per ordinary share has been declared. This will be paid on 31 January 2024 to those shareholders on the register at close of business on 5 January 2024.

5.  Analysis of retained earnings – capital

6. Investment in subsidiary undertaking

Investment in the subsidiary undertaking is held at fair value, which is deemed to be its net assets. It holds a portfolio of listed investments for short term appreciation which are measured at their quoted bid prices.

Other payables includes an intercompany loan to Alpha Securities Trading Limited of £3,727,000 (31 October 2022: £3,707,000; 30 April 2023: £3,546,000).

7. Comparative information

The financial information for the six months ended 31 October 2023 and 31 October 2022 has not been audited and does not constitute statutory financial statements as defined in Section 234 of the Companies Act 2006.

The information for the year ended 30 April 2023 has been extracted from the Audited Annual Report for the year ended 30 April 2023. These financial statements contained an unqualified auditor’s report and have been lodged with the Registrar of Companies and did not contain a statement required under Section 498 of the Companies Act 2006.

8. Related party transactions

The amounts paid to the Investment Manager are disclosed in the Condensed income statement. However, the existence of an independent Board of Directors demonstrates that the Company is free to pursue its own financial and operating policies and therefore, under IAS 24: Related Party Disclosures, the Investment Manager is not considered to be a related party.

9. Fair value hierarchy

IFRS 7 ‘Financial Instruments: Disclosures’ requires an entity to provide an analysis of investments held at fair value through profit and loss using a fair value hierarchy that reflects the significance of the inputs used in making the measurements of fair value. The hierarchy used to analyse the fair values of financial assets is set out below.

Level 1 – investments with quoted prices in an active market; 

Level 2 – investments whose fair value are based directly on observable current market prices or are indirectly derived from market prices; and

Level 3 – investments whose fair value are determined using a valuation technique based on assumptions that are not supported by observable current market prices or are not based on observable market data.