Independent Investment Trust reveals unchanged interim dividend after tough period – The Independent Investment Trust (IIT) has released its interim report for the six months ended 31 May 2021. During the period, is NAV rose by 15.8% while its share price total return was up by 11.7%. This compares with the FTSE All-Share index which was up 13.4% and the FTSE World index, which rose 9.8%. The company’s discount widened from 7.7% as at 30 November 2020, to 11% as at 31 May 2021.
Earnings for the six months amounted to 5.17p which reflects a strong recovery in IIT’s revenue account. This resulted in the company declaring an unchanged interim dividend of 3p. Meanwhile, IIT bought back 911,769 shares at an average discount of 10.4% during the period under review.
Statement from the chairman:
Once again this has been a period when the economic background has been dominated by the development of the Covid-19 pandemic. Early optimism prompted by the start of the vaccination programme gave way to concern over the scale and duration of restrictions needed to curb further waves of infection. More recently, growing evidence that economies have been more resilient to the second lockdown than to the first has led to upgrades to forecasts for growth. For those economies, such as the UK and the USA, that have enjoyed good progress in their vaccination programmes, these upgrades have been significant. Stockmarkets have also been boosted by the continuing programmes of monetary and fiscal stimulation. Particularly helpful to sentiment has been the determination of central bankers to regard any signs of inflationary pressure as temporary.
The most striking feature of portfolio activity during the period was the re-emergence of the market for initial public offerings (IPOs) as a source of investment ideas: we invested a total of £27.3m in three IPOs (Bytes Technology, Moonpig and tinyBuild) and the aggregate value of these investments had climbed to £41m by 31 May 2021. We are impressed by the quality of these businesses and we believe we have paid reasonable prices for them. Our cash balances fell from 19.2% of our net assets at 30 November 2020 to 14.4% at 31 May 2021. They had reduced further to 11.2% by 8 July.
With a valuation of £63.6m at 31 May 2021, after net sales of £17.7m, our technology holdings maintained their position as our biggest sector exposure, albeit down from their valuation of £69.8m at 30 November 2020. The three stars of the show were the same three as featured in our last Annual Report: Seeing Machines, which continued its strong recovery from an unduly depressed valuation as investors began to recognize the strength of its technology; Herald Investment Trust, where a strong portfolio performance comfortably offset a disappointing rise in the discount; and Gamma Communications, which simply continued its exemplary record since our original purchase in 2014. We sold out of Zoo Digital on grounds of valuation after a strong recovery in its share price and made a big reduction in the Blue Prism holding following disappointing trading news. We also reduced our holding in FDM on grounds of valuation. The Alfa Financial share price ran out of steam despite further encouraging trading news.
We commented last year on the outperformance of our computer games companies and the underperformance of our traditional travel and leisure holdings. In the current period this pattern was reversed with our traditional holdings performing strongly and our historical holdings in the computer games industry tending to struggle. Paradoxically, however, it was our new computer games holding, tinyBuild, that delivered the best individual performance following its successful IPO. tinyBuild has two particularly interesting features: first, a huge social media following through which it is able to test and amend its games before they are released and secondly, a major cost advantage resulting from its big operations in eastern Europe. Coupled with a strong pipeline and a successful track record, these presented a compelling investment case. Frontier Developments and Team 17 also have strong pipelines and successful track records, but their share prices have suffered in recent months from a shift in investor sentiment. Of our traditional holdings, Loungers performed particularly well on the back of very strong trading when it was allowed to open while the recovery in the On The Beach share price faded towards the end of the period as travel restrictions were tightened once again. A new holding in Jet2 made a strong start, but also faded in May. Overall, a stake worth £47.6m at 30 November 2020 had grown in value to £60.3m by 31 May 2021, after net purchases of £8.6m.
Aided by pent up demand and the stamp duty holiday, the housing market went from strength to strength over the period and the share prices of our housebuilding holdings benefited accordingly. In the belief that investors were proving slow to recognize the scale of the buoyancy of demand, we made a well timed addition to our Persimmon holding. The current rate of increase in house prices is clearly unsustainable and raises the risk of a bout of turbulence in the market, but our holdings are well placed to cope with this and we believe the longer term outlook is underpinned by the chronic shortage of supply. We continue to think that the sector represents excellent long term value. Our position in the sector rose in value from £28.6m at 30 November 2020 to £43.7m at 31 May 2021, after net purchases of £6.3m.
Business Services has re-emerged as an important sector for us with purchase of Bytes Technology, a software distributor with a strong record of organic growth stretching back over many years. Its sparkling post IPO performance led to its ending the period as our largest holding. Its sector colleague, the audio visual distributor Midwich, recouped some of the ground lost last year as the momentum in its business began to pick up. When account is taken of their generous dividends, our two tobacco companies produced satisfactory investment returns, while our two healthcare holdings performed strongly despite the premature sale of Oxford Biomedica.
Elsewhere in the portfolio, the decision to repurchase Ashtead proved a rewarding, if psychologically painful, one and the performance of our new retail purchase, the online cards retailer Moonpig, went some way towards offsetting a disappointing showing from Motorpoint. Most of the return from the motor insurer Direct Line came from its generous final dividend, but our old favourite Fever-Tree produced a solid capital gain, as did the property company Derwent London before its sale. Finally, the unit price of our longstanding holding, Polar Capital Insurance, had a subdued six months.
With both central banks and governments committed to stimulative policies, the immediate outlook for economic growth appears bright. This is reflected in the fact that many of the world’s stockmarkets are trading close to their all time highs and at levels of valuation that are stretched by historical standards. This is less true of the UK than of other countries, but it is unlikely that the UK would escape a general setback in markets. The most immediate threat to markets appears to be that of unexpectedly high inflation becoming embedded, but in the longer term the problem of global indebtedness resulting from the financial crisis and the covid pandemic also poses a threat to the stability of the global financial system. These concerns counterbalance the optimism we feel about the long term prospects of the businesses we own.
The principal risks facing the Company are set out above. We draw your attention, in particular, to the unusually important role of the directors’ judgement in the success or failure of the Company’s policy. We should also like to remind shareholders, despite the decision by the Association of Investment Companies to classify us as a UK trust, that we are free to invest in quoted equities wherever they are listed.
IIT : Independent Investment Trust reveals unchanged interim dividend after tough period