Dunedin Income Growth Investment Trust plc: Chair's Statement

Review of the Period

Looking back over past the few years, our Half Yearly Report has often corresponded with significant geopolitical events such as the global pandemic in 2020 and the invasion of Ukraine in 2022. In contrast, the first six months of this financial year saw a return to more conventional points of focus: a UK economy struggling for growth amidst the steepest inflation in 40 years, trying to assess the extent of central bank interest rate increases, concerns over growth in China and speculation on the potential of new developments in Artificial Intelligence. Against that backdrop, the Company delivered a positive absolute return for the six month period ended 31 July 2023. The net asset value ("NAV") increased by 5.5% on a total return basis, exceeding that of its benchmark, the FTSE All-Share Index, which produced a total return of 0.8%. The share price total return for the period was -0.4%, reflecting a widening of the discount at which the Company's shares trade relative to the NAV. At the end of the period the shares traded on a discount of 8.4% (on a cum-income basis with borrowings stated at fair value), compared to a discount of 2.9% at the beginning of the financial year.
Your Investment Manager has continued to execute our strategy of investing in businesses of higher quality that meet our sustainable and responsible investment criteria and balancing attention between both income and capital growth potential. The portfolio continues to exhibit strong quality characteristics, while retaining a premium yield to, and superior dividend growth to, the FTSE All-Share Index. At the same time, it exhibits a high level of active share and stock specific risk reflecting a very differentiated approach to the wider index and many investment trusts in the peer group with similar objectives.
Against a flat market return, investment performance has been positive, aided by the Company's focus on higher quality areas of the market, coupled with good stock selection. In particular, we have seen strong performance from a number of the portfolio's holdings alongside continued merger and acquisition activity. A detailed review of portfolio activity during the period is contained in the Investment Manager's Review.

Earnings and Dividends

Revenue earnings per share fell by 3.4% during the period to 8.25p (2022: 8.54p) per share. Importantly, underlying dividend income increased by 1.5% reflecting good trading from a number of our holdings, although the level of option income generated was lower than the equivalent period last year.
A first interim dividend in respect of the year ending 31 January 2024, of 3.2p (2023: 3.0p) per share, was paid on 25 August 2023 and the Board has declared a second interim dividend of 3.2p (2023: 3.0p) per share, which will be paid on 24 November 2023 to shareholders on the register on 3 November 2023. The rate of interim dividend was last increased in August 2018. The Board had been mindful that the increases in the overall annual rate of dividend since 2018 had caused the final dividend to become a growing percentage of the total annual payment. The Board therefore decided, and announced on declaring the first interim dividend, to increase the rate of each of the three interim dividends from 3.0p to 3.2p per share so as to create a more even balance between the rates of the interim and final dividends. The 6.7% increase in the rate of interim dividends therefore represents a rebalancing of dividend payments.
Based on last year's annual dividend of 13.1p per share, the dividend yield on the Company's shares was 4.6% at the end of the period. This is one of the higher yields available from the AIC's UK Equity Sector and is approximately 20% higher than the yield available from the UK equity market as measured by the FTSE All-Share Index.
In the year ahead, the Board's intention is to maintain a progressive dividend, substantially covered by earnings, although given the high level of inflation it is unlikely to increase in real terms, so as to allow the Company to continue to appropriately balance its focus on both capital and income generation. Our distribution policy, though, remains to grow the dividend faster than inflation over the medium term and, with the Company's robust revenue reserves, modest level of gearing and the healthy underlying dividend growth of the companies within the portfolio, that policy remains well supported.

Sustainability

Your Company continues to exhibit strong evidence of its sustainable positioning, elements that we believe will enhance the portfolio's long-term risk adjusted returns. Its carbon footprint is significantly lower than the benchmark. MSCI has assigned the Company an AA ESG rating and it is considered top decile out of all investment funds globally. The Investment Manager has continued to actively engage with the companies invested in, having addressed ESG specific issues with management teams at companies representing 28 of the holdings in the portfolio. Voting policy also forms an important part of the corporate engagement approach and the Investment Manager voted against management recommendations at least once in 21% of company general meetings held during the period.

Gearing

The Company currently employs two sources of gearing. The £30 million loan notes maturing in 2045, and a recently renewed one year £30 million multi-currency revolving credit facility with Bank of Nova Scotia that matures in July 2024. Under the terms of the facility the Company has the option to increase the level of the commitment from £30 million to £40 million at any time, subject to the lender's credit approval. A sterling equivalent of £13.4 million was drawn down under the facility at the end of the period.
With debt valued at par, the Company's net gearing increased from 7.1% to 9.7% during the period, reflecting lower cash balances at the period end, despite an increase in net assets due to capital appreciation. The Board believes this remains a relatively conservative level of gearing and, with the option to increase the revolving credit facility, provides the Company with financial flexibility should further opportunities to deploy capital arise.

Discount

As stated above, at the end of the period your Company's shares traded at a discount of 8.4% (on a cum-income basis with borrowings stated at fair value), compared to a discount of 2.9% at the beginning of the financial year.
Widening discounts were evident across the investment trust sector during the period. As a result of this, and in order to address the imbalance of supply and demand for the Company's shares, we bought back 22,055 shares to be held in treasury. With the higher level of discount persisting, we have bought back a further 400,863 shares since the period end. The Board will continue to monitor the rating of your Company's shares carefully and make further use of both the Company's share buyback and issuance powers to address any imbalance of supply and demand in the Company's shares.
abrdn Investment Trust Savings Plans
The Board is aware that over 20% of the Company's shares are held through the abrdn Investment Trust Savings Plans (the "Plans"). These types of share schemes were the original and only means by which the shares of investment trusts could be made available to private investors. The development of whole of market platform offerings means other options are now available. abrdn has written to their clients in the Plans explaining that they will be closing in December 2023 and that the Plans will be transferring to the interactive investor platform. We would stress this has no impact on those holders' ability to receive communications from the Company, to vote and attend general meetings in person or to re-invest dividends.

Amendment to Investment Policy (Overseas Exposure)

As explained in the recent Annual Report, during the previous year, the Board and Investment Manager reviewed the guidelines governing the management of the portfolio and determined that the part of the investment policy relating to the limit on the exposure to investments in companies listed or quoted overseas should be amended from its previous limit of 20% to a new limit of 25%. The change took effect on 1 May 2023 and this higher limit provides the Investment Manager with greater flexibility to invest in overseas companies. The change was not a material change to the investment policy that would have required shareholder approval.

Outlook

The economic challenges to global growth continue to build, following rapid and sustained interest rate increases from central banks across the world, coupled with a Chinese economy facing significant headwinds. Despite some signs of easing, inflationary pressures remain significant in most economies and supply constraints are placing upward pressure on many commodity prices. In the UK, inflation remains too high and growth too low, albeit there are indications that a trough has been reached and perhaps somewhat ahead of other major economies. For equity markets, there remain reasons to be cautious and the next 18 months are likely to be a tough period for corporate earnings development. It is that very unpredictability of world and economic events that makes us concentrate on the companies within the portfolio and their ability to navigate the environment ahead of them.
As such, the approach of the Investment Manager is to balance the portfolio to handle a range of potential scenarios. There is an emphasis on protecting the downside from investing in companies with enduring business models, pricing power, robust balance sheets and strong management of their environmental, social and governance risks. At the same time, the Investment Manager is making sure that those businesses have the potential to participate in any upside opportunities that emerge, particularly stemming from powerful long-term structural drivers, dynamics likely to be less sensitive to the ups and downs of the economic cycle.
Our objectives remain to meet investor needs for capital and income returns over the medium and long term. We have again made good progress in this period. Whilst the global outlook is far from propitious, we believe our strategy of focussing on a concentrated and actively managed portfolio of high quality companies from across the UK and European markets with leading sustainability characteristics sets us up well to navigate conditions ahead.

Important Information

Risk factors you should consider before investing:

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.

• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company's assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company's shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.
• There is no guarantee that the market price of the Company's shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company's shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• Certain trusts may seek to invest in higher yielding securities such as bonds, which are subject to credit risk, market price risk and interest rate risk. Unlike income from a single bond, the level of income from an investment trust is not fixed and may fluctuate.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London, EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen's Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK