Good performance for The Investment Company following portfolio turnaround – The Investment Company (INV) has published its full-year results for the year ended 30 June 2021. During the period, its NAV per share increased by 8.28% while its share price was up 11.96%. The discount widened from 9.43% to 12.41% over the year.
Following the shareholder vote in favour of the change in investment policy in November 2020, the legacy portfolio of over 70 holdings has been transitioned into a significantly reduced number of participations.
The company’s holdings are now composed of 20 equities with a fair value of £10.8m (66.7% of net assets), fixed income and legacy holdings of £0.7m (4.0%), and gold and cash reserves of £4.8m (29.3%).
Statement from the chair:
Starting in November 2020 we began to completely rebuild the portfolio in order to meet our new objective. Because of this wholesale change, we limit our remarks below to investment activity in the second six months of the year.
During this six-month period from 1 January 2021 to 30 June 2021:
• We, amongst others, took new positions in Cembre (a manufacturer and distributor of electrical connectors), Nedap (which develops radio-frequency identification (“RFID”) based commercial software across many industries), and Fromageries Bel (a global branded cheese producer). These are the kinds of little business gems that we hope to own many years from now. However, this is not always possible. The family controlling Fromageries Bel announced they will take the company private later this year with a forced buyout of minority shareholders. Though a small boon to the net asset value, looking ahead ten years we would rather have held the shares.
• We rebalanced our precious metals holdings by selling some shares in Franco Nevada and a few kilos of gold held through ETCs to increase our position in Barrick Gold and adding a new position in an intermediate gold producer, Alamos Gold. This increased our exposure to precious metals miners and royalties to 7.9% of net assets.
• We increased our presence in oil production by adding a new position in Lukoil. Together with our stake in Imperial Oil this brings our combined oil holding to 6.6% of net assets. These two companies share many traits which make them valuable to us: they have little to no debt, enduring and integrated businesses, proven reserves which are measured in decades, and a record of sensible capital decisions over many years. At different times in the past year they have also represented some of the lowest-priced oil reserves available in the market.
• We increased our holdings in Tonnellerie Francois Freres, British American Tobacco, and ForFarmers. We made a partial sale of Bakkafrost and Rio Tinto, and we sold out entirely of Diageo to concentrate our portfolio elsewhere.
• Of the fixed income and legacy holdings, we sold the Six Hundred Group bonds early in the second half and our Intercede notes were redeemed at par. What remains in this category are two substantial preference shares (3.5% of assets) and several smaller fixed income securities (0.5% of assets). All these holdings are illiquid, but we are working to sell them as opportunity allows and they are marked at conservative valuations.
The pace of investment activity slowed markedly during the second half as the portfolio transition ran its course. While there are still a few legacy assets we hope to sell, this transition is effectively complete and we expect our level of investment activity to be much more limited in the current year compared to the period just ended.
Liquidity and Reserves
We continue to hold substantial reserves totalling £4.8 million (29.3% of net assets). This consists of gold bullion valued at £4.1 million (25.2%) and cash and other net assets valued at £0.7 million (4.1%). While we hold our gold bullion indirectly through different ETFs, we view this collectively as a single investment of 100 kilos of gold. We sold a small amount of gold during the second half, about 5 kilos worth, but our gold holding remains largely unchanged from six months ago.
We are willing to hold substantial reserves because we consider them a necessary part of the pursuit of capital preservation. We see our reserves as a purposeful component of our portfolio and not some dial to be constantly fiddled with as financial conditions become slightly more or less ‘bullish’. It is not a matter of market timing but of identifying and acquiring a collection of businesses that we’d love to own ten years from now. Our reserves will vary in time, but we do not consider ourselves ‘underinvested’ because we hold more reserves than others may do.
Shareholders
As set out in the list of significant Shareholders on page 16 of the Annual Report, we were pleased to welcome Edelweiss Holdings plc as a significant Shareholder in March 2021, who are holding their shares for investment purposes. We look forward to welcoming further new Shareholders as the investment policy of the Company becomes more widely known. As a Board we are mindful of the Company’s modest size, and in due course look forward to broadening our capital base with likeminded individuals and families. We also recognise that it is appropriate to offer Shareholders the opportunity to formally opine on the success of the Company, whilst recognising the long-term nature of the Company’s investment policy and its participations. To this end a vote on the continuation of the Company will be proposed at the AGM in 2025.
Income and Expenses
Our income and expenses for the year ending 30 June 2021 are set out on pages 45 and 46 of the Annual Report. During the year under review expenses increased by £206,921. However, one-off items, including legal fees and the overlap in Investment Management and Administration fees, amounted to £238,684. If these items, that are not expected to be repeated in future periods, are excluded, overall expenses decreased by £31,763. It is anticipated that expenses will continue at this reduced level in future periods, thereby improving the total return to Shareholders.
AGM
We are hopeful of a return to some form of normality in terms of public and statutory meetings and look forward to welcoming you to our 155th AGM on 27 October 2021. Details are set out on pages 58 to 62 of the Annual Report together with the resolutions to be put to Shareholders at the AGM. We encourage all Shareholders to vote and as many as possible to attend the AGM in person. It will be a pleasure to meet with Shareholders again, and we welcome those who are interested to learn more of our endeavours. We will of course have in place alternative arrangements should COVID restrictions return.
Outlook
We are experiencing increasingly fragile and unpredictable economic times with valuations that often defy any form of interpretation. The Board looks forward to working with Shareholders in ensuring the Company holds fast to its guiding principles and develops a purpose that will endure generationally.
INV : Good performance for The Investment Company following portfolio turnaround