Recovering strongly from the pandemic
- Full-year NAV total return of 4.2%. The benchmark returned 9.5%
- Portfolio restructured to reflect a more global outlook and a new benchmark
- Second half performance turnaround: 22% total return, ahead of the new benchmark’s 12%
- Ten-year NAV total return of 156%, compared with 142% for the benchmark
- Share price discount to NAV 2.4% at year end (2019: 0.7%)
- Dividend increased by 1.9% to 5.45 pence, more than double that paid in 2010 and an unbroken run of increases since 1974
- Intention to use reserves to support and grow the dividend while cover rebuilds
2020 will forever be associated with the COVID-19 pandemic, and I would first like to take this opportunity to express my deep sympathy to those affected and gratitude to those in the front line of the fights against the disease, before I turn my attention to how Witan has fared in the past year.
At the start of 2020, Witan changed its benchmark strategic asset allocation to reflect the increasing growth opportunities in the US and faster growing regions of the world, relative to those in the UK and Europe. This entailed an increase in the North America weight of our benchmark from 25% to 51% and a reduction in the combined weights for the UK and Europe from 50% to approximately 30%. However, on valuation grounds, we decided, wrongly with the benefit of hindsight, to phase these changes in gradually, meaning our portfolio remained underrepresented in the US which outperformed and overrepresented in the UK and Europe which underperformed during the sharp falls in the first quarter. In addition, some of our managers’ portfolios were exposed to cyclical recovery stocks that had started to perform well at the end of 2019 and were underweight in the technology stocks that subsequently led the market for much of 2020, particularly during the early reactions to the pandemic. Our use of gearing, which is so often a positive for Witan, amplified the losses. This perfect storm of negative factors created a significant performance shortfall which, while short-lived, was atypical of what we and our shareholders expect. Our Chief Executive provided shareholders with a detailed explanation of these events in June 2020. The conclusion was that we were appropriately positioned for how the world looked in January but suffered from the unforeseen reversal of market fortunes resulting from the pandemic.
Against this turbulent background, we were conducting a review of our managers to enact the change to our strategic asset allocation mentioned above. In August, we appointed two US-based global managers, following a detailed review of a broad range of highly talented managers, most of whom are not readily available to individual investors in the UK. However, timing is all in investment and it was important to avoid compounding the earlier period of underperformance by making these changes at the wrong moment. Consequently, we phased in an increased share of assets under management to managers with greater exposure to US stocks and the technology sector while retaining some managers who had underperformed but were expected to recover. The net effect was to reduce our exposure to the UK and continental Europe, while increasing our exposure to managers seeking growth opportunities globally, with a less cyclical approach.
Since the early summer there has been a consistent and significant recovery in performance.
Encouragingly, following this reshaping of the portfolio, there has been a welcome and significant recovery in Witan’s performance (discussed in more detail on page 13). Unlike the sudden pandemic linked underperformance during February and March, the recovery was steady and persistent, through up and down months for the markets. Whereas at mid-year our total return of -14.7% was 12.6% behind our benchmark, the second half of the year showed a 22.2% total return, well ahead of the 11.8% return on our benchmark, with outperformance in every month from June onwards. As a result, our total return for the full year was a gain of 4.2% and, although there is more to do, we recovered most of the earlier shortfall against the benchmark index, which returned 9.5%. Our share price total return was 2.7%, reflecting a slightly wider discount than at the end of 2019.
Taking a longer-term perspective, Witan has invested with a multi-manager approach since 2004. Over this period, we have beaten the returns on our benchmark and raised the dividend significantly faster than the rate of inflation. Over the ten years to the end of 2020, Witan achieved a NAV total return of 156.1% and a share price total return of 183.8%, both of which exceeded the benchmark’s 141.7% return.
Although implementing the transition in our benchmark was complicated by the changed economic environment, we have taken decisive action to restructure our portfolio to reflect the changed opportunities, while retaining established managers expected to perform well for Witan in the future. 2020 will certainly not go down as a good year for Witan. However, we pressed on with our plans during the exceptionally difficult conditions early in the year and since the early summer there has been a consistent and significant recovery in performance.
Sustainability and ESG
We have made further strides this year in formalising and deepening our engagement on Environmental, Social and Governance (‘ESG’) issues with our investment managers and other service providers. This reflects your Board’s belief that investing in well-managed companies with sustainable, growing businesses is the foundation for achieving good returns for shareholders as well as a better future for the planet and its people. In February 2020, we became a signatory to the UN-supported Principles for Responsible Investment (‘PRI’), seen as a code of best practice on ESG issues.
All our investment managers are also themselves direct signatories to the PRI. Although the pandemic was not itself an ESG issue, it demonstrated the potential costs from unforeseen external shocks. In doing so, it indirectly underlined the importance of businesses taking proper account of the already foreseeable risks to their sustainability, such as regulation, technological obsolescence, and environmental risks, many of which are covered by adherence to the PRI. Further details of our activity on ESG matters during the year are set out on pages 22 to 25 of the 2020 Annual Report.
A fourth interim dividend of 1.43 pence was declared in February 2021, payable on 31 March 2021. As a result, the dividend for the year increased by 1.9% to 5.45 pence per share (2019: 5.35 pence), ahead of the 0.6% rate of UK inflation at the year end. This is a lower rate of increase than the 9.6% annual rate over the past ten years, because our revenue earnings fell sharply during the year. This was principally due to the exceptional negative impact of the COVID-19 pandemic on Company profits and dividends.
Investing in well-managed companies with sustainable, growing businesses is the foundation for achieving good returns for shareholders as well as a better future for the planet and its people
One of the advantages of the investment trust structure is that trusts can use previously retained revenue earnings to sustain their own dividends to shareholders when there are fluctuations in dividends from the underlying investments. Accordingly, we used £19m of our revenue reserves to absorb the shortfall in current year revenue, after a decade during which these reserves had risen from £41m to £71m. The Board expects portfolio dividends to grow in coming years and it is the Company’s intention to continue to make use of these retained earnings to increase the dividend to shareholders annually while cover is rebuilt. If necessary, realised capital reserves could also be used, as part of a defined path towards our dividends once again being fully funded by revenue earnings. We have increased the dividend every year for the last 46 years, with the latest dividend being two and a half times that paid in 2010. The chart to the left shows the dividend’s growth over the past ten years, compared with inflation.
Our previous Chairman, Harry Henderson, stood down at the AGM in 2020 after 32 years of service to Witan shareholders, 17 of them as Chairman. His was an outstanding tenure and I know that he was particularly sorry not to be able to say farewell in person at the AGM, owing to the pandemic-related restrictions on public meetings. At the meeting, he was elected by shareholders as Honorary President of the Company.
Richard Oldfield also stood down at the 2020 AGM, after nine years on the Board, serving as Chairman of the Remuneration and Nomination Committee since 2018. His investment and managerial experience and advice were of great value to the Company and will be sorely missed. Paul Yates succeeded him as Chairman of the Remuneration and Nomination Committee.
We welcomed Rachel Beagles as a director of the Company in July 2020. Rachel is an experienced investment company director and was, until recently, chair of the Association of Investment Companies. Finally, as scheduled in the Company’s succession plans, our Senior Independent Director, Tony Watson, is standing down at the AGM in 2021, having been a director since 2006 and Senior Independent Director since 2008. His deep experience in investment management and as a listed company director have been of great value to Witan and he leaves with our thanks. The Board has appointed Suzy Neubert to be his successor as Senior Independent Director.
Following these and the other changes in recent years, the Board will consist of eight directors, representing a broad diversity in background, experience, gender and other factors. This satisfies the primary need to have the requisite balance of skills to oversee the Company’s affairs while fully meeting formal corporate governance guidelines on diversity.
In terms of length of service on the Board, there is a balance to be struck between stability and change. Six of Witan’s seven non-executive directors have been appointed within the past one to five years, while Suzy Neubert, our new Senior Independent Director, has nine years’ service on the Board, providing an essential element of continuity. With effect from this year, all directors will stand for election each year.
Our 113th Annual General Meeting this year will have to be organised remotely, as in 2020, due to continued government guidelines on the holding of public gatherings. Formal notice of the meeting will be sent to shareholders when the Annual Report is published.
10 March 2021