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Mid Wynd International struggles for another year as inflation pressures increase

Mid Wynd International struggles for another year as inflation pressures increase – Mid Wynd International (MWY) has posted its annual results for the year to 30 June 2022. During the period under review its NAV fell by 7.5% while its share price fell by 9.5%. This compares with a 4.2% fall from its MSCI All Country World benchmark.

Meanwhile, an average share price premium of 2% to the net asset value was maintained through the year. The manager attributed the negative performance to Inflation which returned as economies reopened after the pandemic. The Russian invasion of Ukraine intensified inflationary pressures, especially because of the rise in European gas prices. However, the companies MWY selected for the portfolio have generally coped well with the changes in the economic background, he added.

The total return for the year ended 30 June 2022 was a loss of 62.75 pence per share, comprising a revenue gain of 11.72 pence and a capital loss of 74.47 pence. The board is proposing a final dividend of 3.70 pence per share and a special dividend of 3.00 pence per share which, subject to approval by shareholders, will be paid on 4 November 2022.

The total dividend, including the special dividend, for the current year of 10.20 pence per share represents an increase of 59.4% on the 6.40 pence per share paid for the year ended 30 June 2021. The dividend is fully covered by the year’s revenue return and the aim remains to grow the regular dividend progressively subject to the level of revenue reserves available.

Chairman’s outlook:

‘There are decades when nothing happens; and there are weeks where decades happen’. This quotation, attributed to a range of authors, seems to summarise the way we live now. The price of financial securities reflect the future and therefore they are likely to be particularly volatile when decades are happening in weeks. The return of inflation, higher interest rates, a hot and bloody war in Europe and a cold war with China are just some of the major changes that the price of financial securities are currently trying to digest. It would be peculiar if investors accurately discounted such profound shifts in how the world works at their first attempt. I was a young fund manager in 1989 and remember the initial reaction to the fall of The Berlin Wall in which investors proclaimed that the demand for capital to ‘rebuild the east’ would result in higher inflation and higher interest rates. The profound structural change that followed, in Europe and in China, unleashed disinflationary forces and, as a result, falling interest rates. Back then decades also happened in weeks, but markets took years to discount the consequences.

In such periods investors are even more interested than usual in what these rapid changes mean for the two powerful currents; being the future path of corporate profits and also the likely future level of interest rates, which are both key in determining equity prices. Rising interest rates tend to be negative for equity prices but rising corporate profits tend to be good for equity prices. Forecasting the net impact on share prices from these competing forces is particularly difficult in a period of structural change. It is the gap between the interest rate/discount rate and the growth rate of earnings that is particularly important in establishing the correct valuation for equities. When both variables are subject to considerable volatility the gap between them is even more volatile. This greater uncertainty brings greater volatility in share prices and greater opportunities for those focusing on longer-term trends during this choppy period.

The aim of the investor, seeking to preserve and grow the purchasing power of capital through such turbulence, should be to focus on the long-term prospects and attempt to create an equity portfolio suited to the dominant current when it finally prevails. The cross-currents that prevail until that new current dominates create opportunities for investors. Our Managers have made significant changes to our Company’s equity holdings over the past year in a period when contending currents have produced choppy waters. A dominant current is not yet established but the portfolio has been re-positioned to provide what our Managers believe will be a greater inflation protection than that available to those who invest only in equity indices. In last year’s Chairman’s Statement, I discussed why higher levels of inflation are indeed likely and this repositioning is a welcome move to prepare for what is likely to be the dominant current shaping investment returns over the next decade and possibly even longer.

Can an investment in equities alone defend investors from the ravages of inflation? As ever in the investment field there is no clear-cut answer to that question but there is evidence that a well-selected portfolio of equities can provide such protection. An era of higher inflation has had a dramatic impact on equity markets before. The valuation of the S&P 500, a broad index of US equities, declined, not of course in a straight line, from January 1966 to July 1982. However, with dividends re-invested the total return from large capitalisation US equities was still positive. The problem was that the total return of 126%, from 1966 to 1982, was significantly less than the rise in the inflation index of 206% over the same period. For those who invested in small capitalisation stocks there was much better news as they produced a total return of 643% far outstripping the rise in inflation. There were sectors of the US equity market that also produced positive real returns at a time when investors who had bought the stock market index witnessed a major decline in the purchasing power of their savings.

The point of these reflections is not that the inflationary winners of that era will be the inflationary winners of our new era. The point is that it has been possible to find a portfolio of equities that can produce positive real returns in a prolonged period of high inflation. That portfolio is unlikely to be biased towards the stocks in the S&P 500 or other key global equity indices. The companies now included in these indices, due entirely to their large market capitalisations, represent the companies that have prospered and have been awarded higher valuations in the old regime. To preserve and grow the purchasing power of savings via equity investment, it is now important to find the winners of a new and very different regime. The definition of an index fund is that it operates a portfolio that is 100% aligned with the composition of the index. Mid Wynd’s portfolio is less than 20% aligned with the composition of our comparator index. Our Managers are actively seeking the new winners in the period of higher inflation and associated disruptions that higher inflation entails.

Our Managers have the flexibility to invest our capital in tens of thousands of different companies that are listed on the global exchanges. The management of each company has significant flexibility to adapt their business to change. The world is changing but so is our portfolio as are the companies that we invest in. Having started with a somewhat alarming quotation, let us end with something more upbeat from Socrates – ‘The secret of change is to focus all of your energy not on fighting the old, but on building the new.’, So, Mid Wynd will stick to its core purpose of seeking to increase the real wealth of our shareholders, more inspired by Socrates than frightened by those ‘weeks when decades happen’.

MWY : Mid Wynd International struggles for another year as inflation pressures increase

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