New Star Investment Trust : 06/21 preliminary results

NEW STAR INVESTMENT TRUST PLC

This announcement constitutes regulated information.

UNAUDITED RESULTS

FOR THE YEAR ENDED 30TH JUNE 2021

New Star Investment Trust plc (the 'Company'), whose objective is to achieve long-term capital growth, announces its consolidated results for the year ended 30th June 2021.

FINANCIAL HIGHLIGHTS

• The total return figure for the Group represents the revenue and capital return shown in the Consolidated Statement of Comprehensive Income divided by the net asset value at the beginning of the period.

CHAIRMAN'S STATEMENT

PERFORMANCE

Your Company generated a positive total return of 22.16% over the year to 30th June 2021, taking the net asset value (NAV) per ordinary share to 194.49p. By comparison, the Investment Association's Mixed Investment 40-85% Shares Index rose 17.48%. The MSCI AC World Total Return Index rose 25.10% in sterling while the MSCI UK Total Return Index rose 17.46%. Over the year, UK government bonds declined 6.48%. Further information is provided in the investment manager's report.

Your Company made a consolidated revenue profit for the year of £429,000 (2020: £1.32 million).

GEARINGS AND DIVIDEND

Your Company has no borrowings. It ended the year under review with cash representing 6.12% of its NAV and is likely to maintain a significant cash position. In respect of the financial year to 30th June 2021, your Directors recommend the payment of a dividend of 1.4p per share (2020: 1.4p). The level of future dividends may, in the short term, be adversely affected by Covid-19-related dividend cuts.

DISCOUNT

During the year under review, your Company's shares continued to trade at a significant discount to their NAV. The Board keeps this issue under review.

OUTLOOK

Monetary and fiscal stimulus programmes, the roll-out of Covid-19 vaccination programmes, the restoration of dividends after cuts imposed during the pandemic lockdowns and economic recovery are likely to support equities over the coming months. Inflation may, however, rise further, raising the prospect of an earlier end to monetary easing than had previously been expected. This may put further pressure on government bonds after their price declines during the year under review.

NET ASSET VALUE

Your Company's unaudited NAV at 31st August 2021 was 199.81p.

INVESTMENT MANAGER'S REPORT

MARKET REVIEW

Global equities gained 39.87% in local currencies over the year to 30th June 2021 but only 25.10% in sterling due to the pound's strength while global bonds returned 2.63% in local currencies but fell 8.20% in sterling. Ultra-loose monetary policies, unprecedented fiscal stimulus programmes and some successful Covid-19 vaccination programmes led to a rebound in the world economy. The strength of sterling, up 15.02%, 11.80% and 5.89% respectively against the yen, dollar and euro, resulted from the European Union-UK trade agreement, which averted a hard Brexit. Gold and gold equities fell 14.07% and 14.01% respectively in sterling as investors favoured risky assets over some safe-havens such as gold.

Leading central banks eased monetary policies to support economic recovery and mitigate the impact of fresh waves of the pandemic. The Federal Reserve bought more than $80 billion of treasury securities and $40 billion of agency mortgage-backed securities per month in pursuit of its dual mandate to deliver maximum employment and price stability. In August 2020, in a significant policy shift, the Federal Reserve moved its inflation target from a fixed 2% to a 2% average. The move implies that inflation may exceed 2% for some time before monetary policy tightens.

In June and December 2020, the European Central Bank (ECB) increased its Pandemic Emergency Purchase Programme bond purchases by €600 billion and €500 billion respectively to increase the programme from €750 billion to €1,850 billion. Market purchases will continue at least until March 2022 and maturing principal payments will be reinvested until the end of 2023. In July 2021, the ECB followed the Fed's lead, shifting from a target to keep inflation "below but close to 2%" to a 2% average. The Bank of England remained dovish, fearing that "premature tightening" might undermine the UK's recovery. In August 2021, the Bank's monetary policy committee voted to maintain the total target stock of bond purchases at £895 billion.

Since the 2008 global financial crisis, central bankers have encouraged governments to support monetary easing with fiscal easing. Covid-19 lockdowns provided the catalyst for major stimulus programmes. By autumn 2021, fiscal measures were winding down in some countries but the new US president, Joe Biden, had introduced measures that emulated Roosevelt's New Deal in the 1930s in their scope. In November's elections, the Democrats gained control, albeit by a narrow margin, of both houses of Congress in addition to the presidency. The $1.9 trillion American Rescue Plan was enacted in March 2021, resulting in cash distributions to households. In August 2021, agreement was reached on the $1 trillion Bipartisan Infrastructure Investment and Jobs Act although its passage was delayed to allow debate over a potential $3.5 trillion of additional measures.

Inflation, particularly in the US and UK, was stronger than anticipated over the year under review despite higher unemployment and lower workforce participation compared to pre-pandemic levels. Pent-up consumer demand, materials shortages and disrupted supply chains contributed to inflation rising above central bank targets. US headline inflation in July rose to 5.4% and the personal consumption expenditures index, the Fed's chosen inflation measure, reached 3.6%. UK headline inflation was 2.1% in July while the initial estimate for eurozone inflation in August was 3%. Jerome Powell, the Fed chairman, became more hawkish, suggesting higher inflation might prove "more persistent" rather than "transitory". Price pressures may ease as supply catches up with demand and reduced lockdown restrictions lead to higher demand for consumer services at the expense of consumer goods. Manufacturers may, however, retreat from globalisation policies and increase their resilience by increasing supplier numbers and holding higher stocks of raw materials and finished goods. Consumers are likely to face higher prices as companies move from "just in time" to higher-cost "just in case" manufacturing. Over the longer term, monetary easing, fiscal easing, demographics, as workforces shrink relative to ageing populations, and decarbonisation goals may all contribute to rising inflation.

PORTFOLIO REVIEW

Your company's total return over the year under review was 22.16%. By comparison, the Investment Association Mixed Investment 40-85% Shares Sector, a peer group of funds with a multi-asset approach to investing and a typical investment in global equities in the 40-85% range, rose 17.48%. The MSCI AC World Total Return Index rose 25.10% in sterling while the MSCI UK Total Return Index rose 17.46%. Your company benefited from its allocations to UK smaller companies and emerging markets but allocations to dollar cash and gold equities hurt performance. Income fell due to dividend cuts resulting from Covid-19 lockdowns. Such cuts are, however, likely to be temporary and further investments in equity income holdings were made during the year.

UK equities lagged foreign equities for two main reasons: the pound's strength and the bias of the London stockmarket towards cyclical companies, leading to larger dividend cuts than experienced by companies in Europe excluding the UK and the US. UK smaller companies outperformed, however, rising 49.77% as Britain's relatively successful vaccination programme led to the lifting of some lockdown restrictions,

fuelling a domestic recovery that exceeded expectations. Aberforth Split Level Income, which has a bias towards UK smaller value stocks, was your Company's best performer, rising 97.66% as strong investment returns were magnified by the leverage provided by its split capital structure.

In July 2020, the UK equity allocation reduced through the sale of the SPDR FTSE UK All Share exchange- traded fund (ETF), which had been bought after stockmarket falls triggered by the initial lockdowns in March 2020. In January 2021, the allocation to higher-yielding UK smaller companies increased through an addition to Chelverton UK Equity Income, which gained 44.65% but lagged the gain for smaller companies overall as dividend cuts narrowed the opportunities to generate equity income. Brompton UK Recovery and Man GLG UK Income also benefited from their bias towards smaller companies, rising 30.35% and 23.32% respectively. Trojan Income lagged, however, up only 8.16% because of its focus on large stocks in defensive sectors such as consumer staples, accounting for 27% of its portfolio at the year end.

Equities in emerging markets and Asia excluding Japan gained 26.43% and 25.25% respectively in sterling as Covid-19 was initially contained following stringent lockdowns in China and other Asian countries. In July 2020, the allocation to Asia ex-Japan equities increased through the purchase of Matthews Asia ex Japan Dividend. The Chinese economy rebounded strongly at first but there were signs in the weeks after your Company's year end that growth was slowing. There were also fears that Beijing's focus on "common prosperity" might lead to regulation to reduce corporate profits.

At 30 June 2021, Matthews Asia ex Japan Dividend was underweight in China and overweight in Vietnam and South Korea. Vietnam benefits from manufacturers shifting production out of China to reduce costs and mitigate the impact of poor China-US trade relations. Vietnam Enterprise Investments, which invests mainly in quoted companies, was added to increase your Company's exposure to this fast-growing economy. Your Company's emerging markets allocation increased in February through the addition of JP Morgan Emerging Markets Income, an open-ended fund that follows a similar strategy to the JP Morgan Global Emerging Markets Income investment trust, an existing holding, which gained 40.11% over the year. Somerset Asia Income Fund, previously Liontrust Asia Income, also outperformed, rising 28.60%.

Among your Company's single-country Asian and emerging market investments, Stewart Investors Indian Subcontinent Sustainability rose 47.52%, outperforming the 40.41% gain for Indian equities in sterling as investors shrugged off rising Covid-19 infections exacerbated by the more infectious delta variant and focused on the longer-term impact of Narendra Modi's liberalisation of employment and agricultural laws. The HSBC MSCI Russia Capped ETF rose 22.96% while Russian equities gained 24.96% in sterling. The Russian market, which has a bias towards energy stocks, benefited from the strong oil price, up 61.63% in sterling, but currency weakness resulting from rising political risk in the wake of the US election, proved a headwind. Lindsell Train Japanese Equity fell 8.01%, lagging the 10.71% gain for Japanese stocks in sterling, because of its bias towards quality companies during a year in which cyclical stocks such as banks outperformed.

Investments in dollar cash and BlackRock Gold & General, which holds gold miners, provide diversification and may offer some capital protection should equity markets fall. Both investments were hurt during the year under review by currency swings as exceptional monetary and fiscal measures weakened the dollar and the Brexit deal buoyed the pound. Gold and gold equities fell 14.07% and 14.01% respectively in sterling, contributing to a 15.46% fall by BlackRock Gold & General. The holding in dollar cash suffered from the dollar's 10.56% fall against sterling although the impact was muted because some cash was invested during the year in new opportunities, predominantly in equity markets.

All six of the EF Brompton Global multi-asset funds were ranked above the median for performance in their respective Investment Association (IA) peer group with four funds in the top quartile and two funds in the second quartile.

Amongst your Company's private equity investments, there was good news regarding the holding in Embark, which accounted for 6.14% of net assets at the start of the year. In July 2021, Lloyds Banking Group said it had reached agreement, subject to regulatory approval, to buy the majority of Embark's business. As a result, your Company recognised an additional net £7.9 million in respect of this investment.

OUTLOOK

Over the late summer of 2020, the outlook for equities remained positive given the monetary and fiscal support in place and the possibility that further stimulus measures might be forthcoming, particularly in the US. By July, leading indicators for some of the world's major economies had risen significantly, implying that a global economic recovery was on the horizon. Your Company did, however take some profits from investments in equity funds shortly after the year end because of uncertainty regarding the spread of Covid-19. In June, the World Health Organisation warned the worst could be to come.

In the early autumn of 2021, there were grounds to be positive on the prospects for equities given the strong economic bounce-back fuelled by exceptional monetary and fiscal stimulus programmes. Dividends fell over the year as companies cut or deferred dividends but such cuts are likely to be temporary and your Company has added to its income-oriented equity investments.

Inflation may prove higher and more persistent than central bankers expect, raising the prospect of monetary tightening. Equities may perform well in an environment of moderate inflation but longer-dated bonds, in which your Company has no direct investments, may fall. Gold equities should provide diversification and the potential for gains in an environment where inflation is above interest rates. Low- risk multi-asset and alternative investments may also provide some protection in a falling market.