IIT.L Regulatory News (IIT)

Legal Entity Identifier: 213800IYHGJTZJ3MO642

Regulated Information Classification: Half Yearly Financial Report.

The following information is disclosed in accordance with DTR 4.2 of the UKLA Listing Rules (half-yearly financial reports).

The Company's objective is to provide good absolute returns over long periods by investing the great majority of its assets in UK and international quoted securities and, if appropriate, index futures. The portfolio is constructed without reference to the composition of any stockmarket index. Although its investment policy allows gearing, including the use of derivatives, the Company is not permitted to employ gearing whilst it continues to be a small registered UK Alternative Investment Fund Manager (AIFM). When appropriate, the directors will sanction a relatively concentrated portfolio structure and, depending on its AIFM status, relatively high levels of gearing.

The principal risks facing the Company, which have not changed since the date of the Company's Annual Report and financial statements for the year to 30 November 2019, are financial risk, investment strategy risk, regulatory risk, custody risk, operational risk, discount risk, political risk and resource risk. An explanation of these risks and how they are being managed or mitigated is set out on pages 10 to 12 of that report, which is available on the Company's website: www.independentinvestmenttrust.co.uk. The principal risks and uncertainties have not changed since the date of the annual report with the exception of the current unprecedented situation resulting from the covid-19 pandemic. The board and manager are working closely to monitor the situation as it develops and will continue to do so. The Company's policy is designed to allow the Company an unusually high degree of freedom to exploit the directors' judgement. To the extent that the directors' judgement is flawed, future results could be unusually poor.

We confirm that to the best of our knowledge:

a) the condensed set of financial statements has been prepared in accordance with FRS 104 'Interim Financial Reporting';

b) the Chairman's Statement includes a fair review of the information required by Disclosure and Transparency Rule 4.2.7R (being an indication of important events that have occurred during the first six months of the financial year, their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year); and

c) the Interim Financial Report includes a fair review of the information required by Disclosure and Transparency Rule 4.2.8R (disclosure of related party transactions and changes therein).

On behalf of the board

Douglas McDougall

Chairman

14 July 2020

* For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

† Source: Baillie Gifford/Refinitive and relevant underlying data providers. See disclaimer at the end of this announcement.

# Alternative performance measure, see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

Past performance is not a guide to future performance.

The six month period ending 31 May 2020 saw our company produce a net asset value total return of -17%. The total returns notionally attributable to the FTSE All-Share Index and the FTSE World Index were -16.1% and -1.4% respectively. Our net asset value per share fell from 571.8p to 467p over the period, and the share price from 518p to 414p, causing the discount to net asset value to rise from 9.4% to 11.3%. The share price total return for the period was -18.7%. 

This is a most disappointing outcome and we are conscious that it would have been materially less so but for a fateful decision to increase our cash balances substantially towards the end of March. This decision was driven by the fear that many otherwise strong businesses would get into financial difficulties as a result of initial government responses to the Covid-19 pandemic. It is already clear that in most instances - notably that of Ashtead - this fear was misplaced, not least because it failed to take into account the scale of the measures governments and central banks would subsequently take to counter the damaging effects of lockdowns.

Earnings for the half year amounted to 0.85p (8.08p). It has been a difficult period for the revenue account as many of our biggest dividend payers have decided to defer dividends that would have been recognized during it. These are strong companies and most of them will return to the dividend list once the outlook clears. We have therefore decided to declare an unchanged interim dividend of 3p. This will be paid on 21 August with an ex-dividend date of 30 July. We hope to have a clearer picture of the underlying potential of the revenue account towards the end of the year, at which point we shall take a decision on whether or not to recommend a final dividend.

During the period we were able to buy back 39,609 shares at a discount of 11.1%. These purchases were made in February when market conditions were orderly. We have always made it a paramount consideration in buying back shares that such activity should be in the interests of continuing shareholders. From the end of February, the volatility of markets became such that we were unable to convince ourselves that this criterion would be met. More recently there have been some signs of stability returning to markets and we have tentatively re-entered the market for our own shares.

The early part of the period was marked by an unexpectedly decisive Conservative victory in the General Election, which was beneficial to our portfolio with its domestic bias. January and February saw further encouraging trends, within both the economy and our portfolio, but the sudden realization in early March that drastic measures would need to be taken to control the spread of Covid-19 created conditions of panic in stockmarkets round the world. The fall in the UK stockmarket had a particularly severe impact on companies in the housebuilding and leisure industries, to which we were heavily exposed. Our decision to reduce our exposure to these areas and to make sales of other companies whose businesses appeared particularly vulnerable to the sudden interruption of economic activity was poorly timed. Soon after it, markets staged a dramatic recovery as governments introduced huge programmes of fiscal stimulus and central banks flooded the markets with liquidity. Many of the stocks we had sold featured prominently in this recovery.

The biggest changes in the composition of our portfolio have been the reduction in our housebuilding stake (largely driven by market movements) and the sale of our one industrial holding, Ashtead. Our cash balances rose from 13.6% at 30 November 2019 to 26.4% at 31 May 2020. Market movements and net purchases (including share repurchases) have reduced this to 20.5% at 14 July 2020.

Our technology holdings demonstrated commendable resilience over the period: a stake worth £64.9m at 30 November 2019 had fallen in value to £57.2m by 31 May 2020 after net sales of £5.1m. The star of the show was our old favourite, Herald - the only member of our current portfolio to have been held continuously since October 2000. Over the period, Herald's portfolio of small technology companies once again outperformed the market by a significant margin, allowing its share price to rise despite an increase in the discount. Herald is now our biggest holding and stands at almost four times its book cost. Gamma Communications, to which we added in April, also saw its share price rise over the period as strong trading and the evident resilience of its business model attracted investors. Blue Prism was another positive contributor despite a poorly timed sale of part of the holding. Seeing Machines, FDM and Alfa Financial Software were all affected by Covid-19 while Zoo Digital continues to wrestle with upheavals in its marketplace.

Our traditional holdings in the travel and leisure sector had a very difficult time during the period owing to the impact of lockdown on their businesses. We sold completely out of The Gym Group and Hollywood Bowl, and reduced On The Beach - all at depressingly low prices - but added modestly to Loungers at a comparably depressed price. In total, our traditional holdings in the sector cost us £16.9m over the six months, but fortunately this was mostly offset by the gains we made in our three computer games companies: Codemasters, Frontier Developments and Team 17. All three have benefited significantly from increased game playing during lockdowns round the world and there is some uncertainty as to how much, if any, of this benefit will survive a return to normal life, but their longer term prospects will be determined by their success in creating new games of enduring appeal. On this count, the track records of all three give grounds for encouragement. Overall, our travel and leisure stake fell in value from £60.6m at 30 November 2019 to £52.4m at 31 May 2020 after net sales of £6.0m.

Following their good recovery last year, we had high hopes of our housebuilding holdings for 2020. Valuations were attractive, trading was good and the uncertainty dispelled by the General Election outcome seemed likely to generate a strong spring selling season. With this in mind, we made significant additions to our stake in mid- December. Everything seemed to be unfolding much as we had hoped when the prospect of lockdown hove into view. Suddenly, what had appeared a clear and bright outlook had become a dense and unwelcoming fog. We concluded that it was no longer appropriate to have such a large exposure to an industry that could easily suffer a lengthy period of hostile trading conditions, whatever its long term attractions. Unfortunately, the timing of the reduction in our stake was poor, as is often the case when a sudden and dramatic change of view is required. Over the period, our holdings declined in value from £53.6m at 30 November 2019 to £24.2m at 31 May 2020 after net sales of £5.5m.

The traditional retail sector has been particularly badly affected by Covid-19, but our disposals of Joules and The Works took place before the outbreak, which saved us a little money. This leaves us with just one retail holding: the second hand car retailer, Motorpoint. Its share price held up better than one might have expected, allowing us to make a further reduction in the holding.

The energy sector suffered from the spectacular fall in the oil price. Early in the period we bought a holding in Shell, believing that the dividend was safe. This belief was quickly shown to be misplaced and we sold the holding at a substantial loss. We hold out greater hopes for our American holdings, Concho and RPC, both of which look certain to survive and would benefit disproportionately from a recovery in the oil price.

We made a further reduction in our hugely successful holding in Fever-Tree on grounds of valuation following a change in its US strategy and we made a poorly timed disposal of our holding in Ashtead - also a successful holding for us. The Midwich share price performed disappointingly over the period as the company's business was affected by Covid-19, but we retain our enthusiasm for the long term prospects of the business.

A new holding in the personal lines insurer, Direct Line, made a subdued start, while our longstanding holding in Polar Capital Global Insurance performed uncharacteristically poorly. The Medica share price reflected the disruption to its business caused by Covid-19, but the lentiviral specialist Oxford Biomedica performed strongly as it expanded its range of collaborations with large pharmaceutical companies. Finally, we disposed of small holdings in NAHL and Eddie Stobart Logistics at a substantial loss.

The reaction of governments and central banks to the Covid-19 pandemic has been to pursue fiscal and monetary policies of unprecedented laxity. These have had the short term effect of restoring confidence in stockmarkets, but their longer term implications for the health of economies is difficult to assess. The job of valuing equities in these circumstances is very difficult and we are struggling to find businesses where we can be confident that their stockmarket valuations are a sensible reflection of their risk-adjusted prospects. For as long as this remains the case, we expect to operate with larger cash balances than normal.

The principal risks facing the Company are set out on the inside front cover of this report. 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.

Douglas McDougall

14 July 2020

All holdings are in equities domiciled in the UK unless otherwise stated.

* These shares were bought and sold within the period.

The total column of this statement is the profit and loss account of the Company. The supplementary revenue and capital columns are prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in this statement derive from continuing operations.

A Statement of Comprehensive Income is not required as the Company does not have any other comprehensive income and the net return on ordinary activities after taxation is both the profit and comprehensive income for the period.

For the six months ended 31 May 2020

For the six months ended 31 May 2019

* The Capital reserve balance at 31 May 2020 includes investment holding gains on fixed asset investments of £62,440,000 (31 May 2019 - gains of £92,498,000).

Third party data provider disclaimer

No third party data provider ('Provider') makes any warranty, express or implied, as to the accuracy, completeness or timeliness of the data contained herewith nor as to the results to be obtained by recipients of the data.

No Provider shall in any way be liable to any recipient of the data for any inaccuracies, errors or omissions in the index data included in this document, regardless of cause, or for any damages (whether direct or indirect) resulting therefrom. No Provider has any obligation to update, modify or amend the data or to otherwise notify a recipient thereof in the event that any matter stated herein changes or subsequently becomes inaccurate.

Without limiting the foregoing, no Provider shall have any liability whatsoever to you, whether in contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in respect of any loss or damage suffered by you as a result of or in connection with any opinions, recommendations, forecasts, judgements, or any other conclusions, or any course of action determined, by you or any third party, whether or not based on the content, information or materials contained herein.

FTSE Index data

FTSE International Limited ('FTSE')© FTSE 2020. 'FTSE®' is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data and no party may rely on any FTSE indices, ratings and/or underlying data contained in this communication. No further distribution of FTSE Data is permitted without FTSE's express written consent. FTSE does not promote, sponsor or endorse the content of this communication.

Automatic Exchange of Information

In order to fulfil its obligations under UK Tax Legislation relating to the automatic exchange of information, the Company is required to collect and report certain information about certain shareholders.

The legislation will require investment trust companies to provide personal information to HMRC on certain investors who purchase shares in investment trusts. Accordingly, the Company must provide information annually to the local tax authority on the tax residencies of a number of non-UK based certificated shareholders and corporate entities.

Shareholders, excluding those whose shares are held in CREST, who come on to the share register will be sent a certification form for the purposes of collecting this information.

For further information, please see HMRC's Quick Guide: Automatic Exchange of Information - information for account holders https://www.gov.uk/government/publications/exchange-of-information-account-holders

* The dividend adjustment factor is calculated on the assumption that the dividends of 10.00p paid by the Company in the six months to 31 May 2020 (year to 30 November 2019 - 11.00p) were reinvested into shares of the Company at the cum income NAV per share/share price, as appropriate, at the ex-dividend date.

Gearing (APM)

At its simplest, gearing is borrowing. Just like any other public company, an investment trust can borrow money to invest in additional investments for its portfolio. The effect of the borrowing on the shareholders' assets is called 'gearing'. If the Company's assets grow, the shareholders' assets grow proportionately more because the debt remains the same. But if the value of the Company's assets falls, the situation is reversed. Gearing can therefore enhance performance in rising markets but can adversely impact performance in falling markets. The level of gearing can be adjusted through the use of derivatives which affect the sensitivity of the value of the portfolio to changes in the level of markets.

Available Cash

Cash and cash equivalents as adjusted for investment and share buy-back transactions awaiting settlement.

The printed version of the Interim Financial Report will be sent to shareholders and will be available on www.independentinvestmenttrust.co.uk† on or around 28 July 2020. None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

† Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

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