Mid Wynd International Investment Trust Regulatory News (MWY)

To: PRN      

From: Mid Wynd International Investment Trust plc

LEI: 549300D32517C2M3A561

Date: 29 February 2024

Half-Yearly Financial Report (Unaudited) for the six months ended 31 December 2023

Financial Highlights

Chairman’s Statement

Performance

For the six months ended 31 December 2023 the Company’s share price rose 9.7%, on a total-return basis (with dividends assumed to be re-invested). This compares to a total return from the MSCI All Country World Index (GBP) of 7.0%. The Company’s net asset value (‘NAV’) per share rose 6.8% on a total-return basis. Our new investment manager, Lazard Asset Management Limited (‘Lazard’ or ‘Manager’), assumed responsibility for the management of our assets with effect from 1 October 2023. The approach of the new Manager is bearing fruit and the total return from our investments has marginally outperformed our comparator index for the three months ended 31 December 2023, albeit covering a very short period. On a total-return basis, during this period, the Company’s share price rose 6.5%, compared with a 6.3% rise in the comparator index. The NAV increased by 6.8% during this time. Further details on the performance of the Company during the period under review are included in the Investment Manager’s Review.

As at 31 December 2023 the share price stood at a 1.7% discount to NAV. This compares favourably to the weighted average discount of the ‘Global’ sector per the Association of Investment Companies (‘AIC’), of which the Company is a member, which stood at 7.2% at the same date. Despite volatile market conditions during the six-month period under review the Company’s average discount was 1.4% over the period. The Company’s policy, within normal market conditions, is to issue and repurchase shares where necessary to maintain the share price within a 2% band relative to the NAV. The Company’s NAV is assessed on a real time basis when buying or selling the Company’s shares using modelling that updates live prices and exchange rates to provide the most accurate valuation.

Management and service provider arrangements

As announced in June 2023 and disclosed in the 2023 Annual Report, following a review of management arrangements, the Board took the decision to appoint Lazard and in conjunction with this change, Juniper Partners Limited was appointed as Alternative Investment Fund Manager, Company Secretary and Administrator, with J.P. Morgan Europe and J.P. Morgan Chase Bank being appointed as Depositary and Custodian respectively, with effect from 1 October 2023.

The transition to the Company’s new operational state was a successful one and the Board would like to thank all parties involved, including the previous investment manager, Artemis Fund Managers Limited (‘Artemis’). All new service providers are now fully embedded, and operations are functioning well.

Lazard agreed to waive its investment management fee for the first 15 weeks from appointment, which more than offset the cost of the transition including the ensuing changes to the portfolio. The total gross cost of the implementation of the new management and administration arrangements (including portfolio re-organisation costs of 0.03%) was approximately 0.07% of the Company’s NAV as at 31 December 2023.

Portfolio re-organisation

The portfolio was extensively rebalanced immediately following Lazard’s appointment. Six holdings from the legacy portfolio were retained and 35 new ones added.

The lack of turnover of the portfolio since the reorganisation reflects Lazard’s approach and we expect portfolio turnover and brokerage commission to remain low.

Earnings and dividend

The net return for the six months to 31 December 2023 was a gain of 45.64 pence per share, comprising a revenue gain of 4.72 pence per share and a capital gain of 40.92 pence per share. The Board is proposing an interim dividend of 3.85 pence per share which will be paid on 28 March 2024 to those shareholders on the register at the close of business on 8 March 2024. This represents no increase on last year’s interim dividend of 3.85 pence. Net revenue return pence per share this period decreased by 16% on the equivalent period to December 2022, although total net return saw an increase of 159% on the same period.

The revenue per share of the Company in this financial year will benefit from the fee holiday which the Board secured from Lazard on its appointment, offset by additional costs associated with the change of several of our key service providers. As previously communicated, we expect the Lazard investment strategy to generate a lower level of income than that generated by the Company in recent years. After allocating a greater proportion of costs to capital to reflect the change in investment style, as explained under ‘Cost allocation’ below, we expect our revenue returns to be lower in the short term. Until such time as portfolio revenue organically grows to a point where it can, once again, fully fund the dividend, the Board intends at least to maintain the dividend, using the revenue reserve and, if required, the capital reserve, for a short period of time.

The Company has pursued a flexible dividend policy for many years. In the past two years we have separated our dividend into an ordinary and a special dividend. This was to recognise that in the last two years of management by Artemis, the underlying earnings power of our assets was boosted by a temporary shift in the portfolio to companies with higher dividend yields. Given our new Manager’s investment style, we do not expect to pay a special dividend in respect of this financial year nor in the foreseeable future.

The Company has, over many years, not fully distributed all of its income but has retained a portion of its earnings, usually at near the maximum 15% level that is compatible with maintaining investment trust status. This revenue reserve was built up to help to support the Company’s dividend policy during unforeseen events or during a transition phase to a new investment style. As a guide to assessing the length of this period of transition, to a time when dividends are matched or exceeded by revenues, we should note that our Manager’s Global Quality Growth strategy has produced annual dividend growth of 7.7% over the past five years.

Cost allocation

Part of the calculation of our revenue return involves the deduction of the costs of running the Company. A portion of these costs is allocated to the capital account and the balance is charged to the revenue account. Historically, the management fee, the company secretary and administration fee and also the cost of operating our discount control mechanism (which were previously provided by our investment manager) have been allocated between capital and revenue. This will continue to be our policy even though these services will now be provided by other key service providers.

In adopting a cost allocation policy, a company must consider how the policy best reflects its investment strategy. In 2014 we adopted a new policy of allocating 75% of certain management, administration and financing charges to capital and 25% to revenue to reflect Artemis’ investment approach. Lazard has a long track record for its global quality growth investment style and we expect that track record to be the best guide as to the balance of future returns.

A key reason for appointing Lazard as our new Manager is that we expect them to generate high long-term total returns for shareholders. The Lazard style focuses on investing in companies that retain a large proportion of their cash flows to reinvest them at high rates of return, rather than returning cash to shareholders in the form of dividends. Accordingly, we expect a higher proportion of future total returns to come from capital appreciation rather than dividends. To recognise this likely shift, the Company will allocate 90% of the costs mentioned above to capital and 10% to revenue, and the Half-Yearly Financial Report has been drawn up on this basis.

Share capital

Despite successfully weathering the market downturn suffered by many of its peers in the early 2020s, the Company’s discount widened early in 2023 and it entered a period of buybacks from this point. In order to assist with discount management, during the six months to 31 December 2023, the Company bought back 7,445,136 shares at a total cost of £52.7 million and an average discount of 2.3%. These shares are held in Treasury, bringing the total held in this account to 11,447,798 as at the period end. It is expected that these shares will be reissued at such time as market conditions permit the Company’s return to issuing shares at a premium to NAV and thus at an advantage to existing shareholders.

Given the heightened buyback activity experienced in the summer of 2023, we sought early renewal of our share buyback authority from shareholders in September 2023 to avoid these authorities being fully utilised prior to the 2023 AGM and to enable the continued implementation of the discount management policy. These buyback authorities were subsequently renewed at the October 2023 AGM for 14.99% of share capital.

Following the period end, 1,504,500 ordinary shares were bought back and are held in Treasury.

Borrowings and cash

The US$60 million revolving credit facility with The Bank of Nova Scotia (UK Branch) was terminated in September 2023 with no amounts drawn down at the point of termination. The decision to terminate was made by the Board after taking into consideration the high interest rate environment and the Company’s level of cash. As at 31 December 2023 the Company is in a net cash position of 1.7%. The level of cash available enables the Manager to manage the portfolio and participate in market opportunities as they arise, whilst also ensuring the Company has the ability to buy its own shares should they trade at a discount in excess of 2%.

Board succession

As noted in the 2023 Annual Report, I will step down from the Board at the 2024 Annual General Meeting to be held in October, having served as a Director since 2009 and as Chairman since 2020. It was further announced in October 2023 that David Kidd, the Company’s Senior Independent Director, will succeed me as Chairman. I and my fellow Directors are delighted that David, a Board member since 2016, will be assuming this role thereby ensuring a vital continuity of experience.

In consideration of its future composition, the Board intends to recruit a new Director in due course, the process for which will commence over the coming months.

Outlook

We seem to live in a world of the ‘dog that didn’t bark’. That phrase, used by Sherlock Holmes in a short story called Silver Blaze, rather accurately sums up the relative silence that has followed the very dramatic rise in global interest rates. By the summer of 2020 interest rates had reached a 5,000 year low at a time when debt, relative to GDP, had almost certainly reached an all-time high. The key global interest rate, set by the US central bank, has risen from 0.25% in 2022 to 5.5%. Across the globe interest rates have seen similarly dramatic rises. Rising interest rates bring rising interest expense, particularly for those who have not locked in long-term debt at fixed interest rates, and usually credit distress follows. There have indeed been some instances of distress and the US authorities had to cope with the demise of its 16th largest bank (Silicon Valley Bank) and Switzerland had to cope with a similar fate for its second largest bank (Credit Suisse). So there was some ‘barking’, in the form of credit distress, but the consequences for investors in equity markets have been very limited. The S&P500, an index that measures the returns of the world’s largest stock market, has recently reached a new all-time high. Corporate earnings in general and the corporate earnings of our investee companies continue to grow. In the broader economy things are not as bad as one might have expected given the material rise in interest rates. In the UK, for instance, the number of employed persons is near an all-time high and the unemployment rate near an all-time low. Market determined short-term interest rates are now falling. Does this mean that we can now expect to avoid the type of credit distress that impacted investors so negatively in the recession of 2008-2009?

Interest expense can continue to rise long after interest rates have peaked. While many borrowers see their interest expense rise and fall as the level of short-term interest rates adjust many do not. Some borrowers lock in fixed interest payments over longer periods and their interest expense only rises when that debt matures and has to be refinanced. The evidence is that, during the period of ultra-low interest rates that pervaded from 2009-2022, many companies, individuals and governments did borrow for longer periods and at fixed rates of interests. This change in borrowing pattern has been particularly evident in the US and the UK but is less evident in other countries such as South Korea, Australia, Canada or Norway where interest expense has already risen materially. As debt matures and has to be rolled-over at higher rates of interest borrowers are increasingly likely to struggle to pay interest on their debts. Thus, while there is a growing sense of relief that the credit crisis dog will not bark, it is simply too early to tell particularly for the many countries where debt-to-GDP levels remain near or above the record highs reached at the advent of the COVID-19 crisis. Given that interest rates have risen from such remarkably low levels many borrowers will continue to see rising interest expense through 2024 and beyond as their debt matures and is refinanced.

Mid Wynd invests in companies and not economies. The balance sheet of any company can be radically different from that of the economy in which it operates. It can sell products and/or services the demand for which remains resilient in even the toughest of economic circumstances. In selecting our investee companies our Manager looks for companies that can continue to generate high returns on invested capital even in more difficult economic climes. As long as they can continue to do so and we have not paid too much to own the shares these companies are particularly well placed to weather any coming economic storm and, over the long-term, produce good total returns for investors. Total returns from global equities have been driven by a rise in the US stockmarket and from a select band of US listed equities, known to some as ‘the magnificent seven’, and the rise in our NAV, in-line with the comparator index, since Lazard re-organised the portfolio is reassuring.

At a time of great uncertainty, the certainty of high returns on invested capital, where we can find it and buy it at a good price, is likely to be a port in a storm for investors. Sherlock Holmes was able to solve the murder mystery by deducing that the dog did not bark because the intruder was known to the dog. Perhaps the risks ahead similarly lie in plain sight be they credit distress, liquidity, geopolitical or concentration risks. As long as our investee companies continue to maintain solid balance sheets and invest at high rates of return with a long-term time horizon, then the outlook for our Company will remain positive.

Contact us

Shareholders can keep up to date with developments between formal reports by visiting midwynd.com where you will find information on the Company and a factsheet which is updated monthly.

In addition, the Board is always keen to hear from shareholders and, should you wish, you can contact me via the Company Secretary at cosec@junipartners.com.

Russell Napier

Chairman

28 February 2024

Investment Manager’s Review

Investment Manager’s Report

Artemis Fund Managers Limited was the Investment Manager of the Company for the first quarter of the financial year. Following the announcement in June 2023 of the decision to appoint Lazard Asset Management Limited, investment management responsibility transferred with effect from 1 October 2023. The period under review is therefore split by Investment Manager and total returns over the respective periods are noted below.

Market Review

Over the three-month period since Lazard became Investment Manager to the Company, global equities rose sharply, as investor optimism shifted amid encouraging inflation data and a changing outlook for interest rates. US stocks rallied as a sustained slowdown in inflation sparked hopes that the US Federal Reserve (‘the Fed’) would end its rate-hiking campaign and perhaps even begin cutting rates. Many investors cheered when the Fed hinted that its rate-hiking campaign had reached its conclusion and forecast that it could reduce interest rates three times in 2024. Additionally, the US economy continued to show resilience, with a revised reading of third-quarter gross domestic product (‘GDP’) coming in higher than initially anticipated at 5.2% and the country continuing to add more jobs than expected. In Europe, the European Central Bank (‘ECB’) left interest rates unchanged, amid signs that its efforts to reduce inflation had made significant progress. Despite the ECB’s vow to maintain a restrictive monetary policy for a sustained period of time, many investors nevertheless anticipated it would reduce rates this year. Similarly, with price pressure in the UK easing materially, the Bank of England (‘BOE’) kept its interest rates steady. However, data suggesting that the UK was headed for a period of economic stagnation sparked speculation that the BOE would cut rates in the first half of 2024.

Equity markets in both the developed and developing worlds advanced, with developed markets outperforming developing markets. The US market outperformed while European equities performed in line with the broader global market. In Japan, equities gained but underperformed, as a stronger yen sapped some of the momentum from the Japanese stock market rally. Meanwhile, in China, equities declined due to concerns over property companies and the country’s slower-than-expected economic recovery.

Investment Process

We manage the Company’s portfolio in accordance with our Global Quality Growth strategy, aiming to invest in businesses we consider to be “Compounders”. Compounders, in our view, are companies we believe will generate consistently high returns on capital and that can reinvest in their business to drive future growth. In doing so, investors can share in the economic wealth created by these businesses. The investment approach is reinforced by empirical research covering 25 years of markets and supported by Lazard’s extensive fundamental research team of 70 global sector specialists.

We believe the market undervalues Compounders because it adheres to the economic law of competition. This theory prescribes that high returns on capital attract competition, which results in an erosion of these returns towards a cost of capital. However, we see plenty of examples that show this theory may not always work. We believe Compounders have sustainable competitive advantages, and they can outperform when they can deliver consistently high financial productivity for longer than the market expects – when they “beat the fade” they can “beat the market”. These types of exceptional businesses can often be inefficiently valued by market participants, who can be focused more on near-term multiples rather than the long-term earnings power of the company. Our investment philosophy therefore encourages us to own Compounders for a long period of time, to allow the Compounding Cycle to drive cash flows and share prices higher. Over the last five years, portfolio turnover has averaged 10-15% annually – this low level of turnover also helps to ensure trading costs are at a relatively low level.

The portfolio is constructed through stock selection, based on our proprietary fundamental research. We aim to deliver a portfolio that is broadly diversified across sectors, regions and competitive advantages, in order to generate attractive total returns for investors.

Performance

Lazard was appointed Investment Manager with effect from 1 October 2023.

We proceeded to reshape the Company’s assets to align with the Lazard Global Quality Growth strategy. Our trading team aimed to transition the portfolio quickly while seeking natural liquidity, seeking to reduce market impact and not apply unnecessary pressure on share prices in either the buy direction or the sell direction. The transition of the portfolio went very smoothly, with trades 93% complete on day one and 99.7% complete by day four. Estimated trading costs were less than 0.03%, which was very pleasing to see.

The portfolio was invested in 41 names. We retained the six names that were consistent with our investment philosophy and held in our institutional strategy, and we invested in 35 new names. Broad portfolio exposures changed as a result. Between 1 October 2023 and 31 December 2023, there was an increase in portfolio exposure to Financials, Industrials, and Information Technology, while there was a decrease in Health Care and Consumer Staples exposure. Regionally, exposure to US names increased while exposure to European and UK names decreased.

For the fourth quarter of 2023, the Company’s NAV appreciated by 6.8% (all returns are stated in GBP). In share price terms, the Company rose by 6.5%, outperforming the MSCI All Country World Index which gained 6.3% over the same period. The Company traded at a discount over the period, ending the period at a discount of 1.7% compared with a discount of 7.2% for its Association of Investment Companies (‘AIC’) Global Sector peer group.

The portfolio is constructed through stock selection, based on our proprietary fundamental research. At the stock level, key contributors to absolute returns included:

Key detractors to absolute returns included:

Our region and sector exposures are driven by stock selection. At the region and sector level, contribution in the fourth quarter was led by North America and Information Technology. Regionally, Europe ex-UK, Japan, and Emerging Markets also contributed positively, whilst the Financials, Health Care, Industrials, and Communication Services sectors also performed well. Asia ex-Japan and Energy had slight negative contributions.

Outlook

We expect to see continued volatility as the Fed and other central banks seek to balance the goals of maintaining financial stability and controlling inflation. We believe that Compounders have fundamental advantages that can provide resilience across different macro scenarios, and this can be important in navigating potential uncertainties in equity markets. For example, should interest rates rise, Compounders should benefit as their “economic moats” widen and they continue to generate cash flow into the future. Should inflation persist, the competitive advantages of Compounders should offer pricing power, allowing Compounders to pass through higher costs and maintain margins.

While AI has the potential to transform companies over the long-term, we are cautious that the exuberance surrounding AI has the potential to drive valuations in certain stocks to unsustainable levels in the short term. Towards the end of the 2023, this concentration of equity returns began to broaden from a smaller set of names to the wider market, presenting a better environment for quality investing should this continue.

We firmly believe that investing in the highest quality companies is the best way to deliver outperformance over the long-term.

Louis Florentin-Lee & Barnaby Wilson

Fund Managers

28 February 2024

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, market risks, legal and regulatory risk and operational risks including reliance on third-party service providers and reliance on key personnel. External factors such as geopolitical risk 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 have not materially changed from the description provided on pages 19 to 21 of the previous Annual Financial Report for the year ended 30 June 2023 which is available at midwynd.com. These risks remain applicable to the six months under review and the remaining six months in the financial year.

Related Party Transactions

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

As disclosed in the Annual Financial Report for the year ended 30 June 2023, Russell Napier supplies investment research to Lazard Asset Management. The Board has confirmed that there continues to be no conflict of interest. The supply of services is monitored as a potential conflict.

Going Concern

The Directors have considered the Company’s principal risks and uncertainties together with its current financial position, the liquid nature of its investments, assets and liabilities, projected revenue and expenses and the Company’s dividend policy and share buyback programme. The Directors also considered the impact on the Company of recent market volatility due to the conflicts in Ukraine and the Middle East and continuing inflationary pressures. 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 Financial Report. For this reason, the going concern basis of accounting continues to be used in the preparation of these financial statements.

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 December 2023:

• the condensed set of financial statements has been prepared in accordance with Financial Reporting Standard (‘FRS’) 104: ‘Interim Financial Reporting’;

• the Half-Yearly Financial Report, includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of the important events that have occurred during the first six months of the financial year and their impact on the financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last Annual Financial Report that could do so.

The Half-Yearly Financial Report for the six months ended 31 December 2023 was approved by the Board and the above Responsibility Statement has been signed on its behalf by:

Russell Napier

Chairman

28 February 2024

Condensed Statement of Comprehensive Income

Condensed Statement of Financial Position

Condensed Statement of Changes in Equity

Condensed Statement of Cash Flows

Notes to the Half-Yearly Financial Report