The financial information set out below does not constitute the company's statutory accounts for the years ended 30 April 2022 or 2021 but is derived from those accounts. Statutory accounts for 2021 have been delivered to the registrar of companies, and those for 2022 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
The full Annual Report and Financial Statements for the Year Ending 30 April 2022 can be found here.
Shareholders may remember that in the year to April 2021, on which I reported in July 2021, your Company’s NAV had risen by 45.5%. That followed a ten year period over which the net assets of your Company had grown from £468.7m, to £3.4bn, as technology stocks outperformed markets generally, on the back of extraordinary corporate growth and rising valuations. Last year, I noted that we seemed cautiously to be emerging from the pandemic, but were in something of uncharted territory, and were seeing rising bond yields and inflationary concerns, significant concentration of performance in the largest capitalisation stocks and a rotation from “growth” to “value”. Nevertheless, I suggested that the long term supportive trends in the sector remained in place, and shareholders would continue to benefit from disruption.
For the first three quarters of the last financial year, these conditions generally persisted. Inflationary pressures continued to mount, bond yields rose, investors continued to invest in recovery stocks rather than growth stocks and the concentration of performance continued. The share prices of technology stocks suffered in this environment, although corporate performance remained strong. At the end of the financial year (the beginning of 2022) the exuberance in technology stocks continued to unwind. Our manager describes the details of this in pages 16 to 27 in the full Annual Report.
The invasion by Russia of Ukraine on 24 February 2022 sent shock waves across the world. In stock market terms, volatility increased substantially and inflationary pressures were exacerbated by oil price rises and food supply chain disruption. We do not know how or where this will end, although the long term tech trends do remain powerful and valuations are coming back into more attractive territory.
Over the year, the Company’s NAV fell by 7.7% and your share price fell by 13.7% as the discount widened. The NAV performance was behind the index which fell by just under 1%. UK investors were sheltered from the decline in the technology market by the appreciation of the US dollar against Sterling. Although the manager did hold some cash, the index performance was driven significantly by the very strong relative performance of Apple and Microsoft. The detail of this is set out in the manager’s report. We do run into a concentration problem here, in that both companies amount to around 15% of the index each and whilst they are our two largest holdings at between 10% to 11% of our portfolio individually, these positions are still lower than index weightings and not having had an index weight in each has had a significant impact on relative performance. The most significant causes of our underperformance were not having full 15% weightings in those two stocks. The manager wrote about concentration risk at the interim stage and we would not find it easy to justify holding such significant positions in these two companies. We would expect that the concentration of stock performance in the largest companies will diminish as it tends to lead to overvaluation. Investors with long memories will remember the performance of Vodafone after it became 15% of the UK index in 2000.
The Board actively monitors the discount at which the Company’s ordinary shares trade in relation to the Company’s underlying NAV. The discount has widened over the last year reflecting the considerable change in sentiment towards technology stocks and market volatility generally. Whilst the Board does not have a formal discount policy or a fixed target level for all times and circumstances, it will continue to exercise its discretion to buy back shares at a discount and to issue shares at a premium in order to seek to reduce the volatility of the share price, to add a small amount to NAV per share and to address significant imbalances in the supply and demand for shares. We have continued to buy back stock regularly and reliably, repurchasing a total of 4,188,338 shares in the year under review (amounting to 3% of the issued share capital) at an average price of 2,355.35 pence per share and an average discount of 9.6%. This produced an uplift in NAV per share of just under 7p per share. After the year end and up to 15 July 2022, the Company has bought back a further 1,475,096 shares. We should note that this activity does not preclude the manager determining that a more significant amount than usual on any one day should be purchased if there is, in their view, a particular investment opportunity best accessed through buying shares in the Company rather than buying individual securities.
We have continued to make progress on our fee structure. In April 2019 we announced a change in the calculation of the performance fee and a reduction in the participation rate for that fee, which took effect from 1st May in that year. In 2021, which was our regular three yearly review of the base management fee, we agreed with Polar Capital a reduction as follows:
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In my statement last year, I reported that the Nominations Committee and the Board would continue with its succession plan during the year. Phase one was completed in September 2021 with the appointment of Catherine Cripps and Jane Pearce as independent non-executive Directors to the Board. It is intended that Jane Pearce will succeed Charlotta Ginman (our current Audit Chair) who will come to the end of her nine years’ service in 2024. Both Catherine and Jane will stand for election by Shareholders at the AGM to be held on 8 September 2022, along with those directors standing for re-election.
Phase two of the succession plan was to appoint my successor as Chair of the Board ahead of my retirement at the Company’s Annual General Meeting in 2022, as it is the AGM after I reach 11 years’ service. In accordance with the Board’s tenure policy I am able to remain on the Board for up to 12 years. I am delighted to confirm that Catherine Cripps has been invited by the Board, and has accepted the role of Chair (subject to election by Shareholders at the AGM) when I retire at the forthcoming AGM. I should note that this part of the plan was developed and implemented by the Nominations Committee excluding me, and led by our Senior Independent Director (“SID”), Tim Cruttenden. We also are grateful to our external board evaluator, Tim Stephenson, who reviewed and commented on our plans. The Board believes that Catherine will bring a fresh perspective to its proceedings and look forward to seeing the Company make further progress under her guidance.
Current Base Management Fee Arrangement:
effective 1 May 2022
|£0 - £2bn
|£2bn - £3.5bn
Base Management Fee Arrangement:
to 30 April 2022
|Up to £800m
|£800m - £1.6bn
|£1.6bn - £2.00bn
As part of the Board’s annual fee review to ensure that remuneration paid to Directors remains competitive and in line with those of its peers, it was noted by the external board evaluator and the Remuneration Committee that the current level of fees paid to the Company’s Directors was significantly below the market rate for a large investment trust. Whilst the Board usually favours modest increases year on year (where applicable), it was felt that fees should be competitive and reflective of the current market in order to attract and retain the best candidates. It was also agreed that fees should reflect the increasing workload, time and commitment required from Directors of a FTSE 250 Company. As is detailed further within the Remuneration Committee Report, with effect from 1 May 2022, the base Directors’ fee increased by 4.8% to £33,000 and the fee of the Chair by 10% to £55,000. The supplements for the Audit Committee Chair and the Senior Independent Director remain unchanged at £7,000 and £4,200 respectively.
Annual General Meeting
Assuming we continue to emerge from the pandemic, the AGM will be held on 8 September 2022 at Haberdashers’ Hall, 18 West Smithfield, London EC1A 9HQ, a venue you might remember from the 2019 AGM. We will again be holding the AGM as a hybrid meeting supported by Lumi Global. A notice of AGM will be provided to all Shareholders and made available on the Company’s website, this includes the formal business to be conducted at the AGM and further details of how Shareholders can join the AGM virtually.
Environmental, Social and Governance (ESG)
As detailed in my report last year, we continue to develop our approach to ESG and during the year under review, we continued to engage with our manager to better understand how ESG has been further integrated into the investment and decision-making process. The Board also receives information on how ESG affects Polar Capital as a business and the technology team in particular.
In addition to this, we as a Board have nominated Catherine Cripps to assume the role of ESG lead. Catherine has been responsible for ensuring that the Board is kept abreast of the latest developments in this area to develop how the Company can report to stakeholders in line with such. Catherine has worked with the manager to develop a dashboard which allows us to see how the manager is considering ESG matters, and whether that meets our requirements. We do think the ESG issues raised are important, interesting and complicated. We have also held a number of conversations with our shareholders about their views on ESG matters and how they would like us to report, given their requirements. We have endeavoured to provide information as requested. The ESG report on pages 42 to 53 in the full Annual Report describes, both the Corporate and Investment approach to ESG matters.
After more than a decade of easier money and the extraordinary effects of COVID-19, we are seeing considerable turmoil in our financial environment. At this point, long term interest rates in the US and elsewhere have risen sharply. The valuations of companies which were elevated by very low long term interest rates, have, not to put it too finely, cratered. Many investors have not seen inflation rates such as those we currently observe.
At this point, many tech companies are not reporting significant impacts on their trading, but we are aware that company reports can be indicators of the current state, rather than of future problems. We are in uncertain times, and although between us, we’ve lived through previous savage market downturns and inflationary pressures, it’s not clear how our current circumstances play out. We suspect markets could be fearful for some time. However, we do think the basic disruptive opportunities for the companies in our portfolio persist, and we support our Manager’s view that we should stick to the fundamental principle that investing in the potential growth in our sector will remain profitable over time.
Finally, as I come to step down from the Board at the AGM may I thank our shareholders, my fellow directors and all the team at Polar Capital for all the support they have given me during my tenure as Chair.