Half-year Report

DUNEDIN INCOME GROWTH INVESTMENT TRUST PLC

HALF YEARLY REPORT FOR THE SIX MONTHS ENDED 31 JULY 2022

Legal Entity Identifier (LEI):  549300PXLZPR5JTL763

INVESTMENT OBJECTIVE

The objective of Dunedin Income Growth Investment Trust PLC is to achieve growth of income and capital from a portfolio invested mainly in companies listed or quoted in the United Kingdom that meet the Company's sustainable and responsible investing criteria as set by the Board.

BENCHMARK

The Company's benchmark is the FTSE All-Share Index (total return). Performance is measured on a net asset value total return basis over the long-term.

Performance Highlights and Financial Calendar

Financial Calendar

Financial Highlights

For further information, please contact:

Stephanie Hocking

William Hemmings

abrdn Standard Fund Managers Limited

0131 372 2200

Chairman's Statement

Review of the Period

In recent years we have got used to writing about "extraordinary" times, be that the Financial Crisis, Brexit or the Covid 19 pandemic. In the first half of our financial year we find ourselves again in a challenging period. The biggest war in Europe since 1945, soaring gas and power prices, the fastest inflation since the 1980's and a consequently aggressive central bank tightening cycle. Against this difficult backdrop, the Company delivered an almost flat absolute return for the six-month period ended 31 July 2022. The net asset value ("NAV") fell by 0.1% on a total return basis, matching its benchmark, the FTSE All-Share Index. The share price total return for the period was -2.6%, reflecting a slight 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 2.2% (on a cum-income basis with borrowings stated at fair value), compared to a premium of 0.3% at the beginning of the period. 

Your Investment Manager has continued to execute our investment strategy, focussing on UK and European 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 market.

In the half-year under review, market conditions were not particularly propitious for our strategy. Small and mid-cap companies, to which the Investment Manager tends to have an overweight exposure, have, on average, significantly lagged their larger counterparts. Energy, mining, and tobacco companies, in which we are strategically underweight, have performed well. However, stock selection has been good and we have benefitted from some corporate acquisition activity involving companies we have invested in.  

As I commented at the time of the full year results earlier in the year, we see events in Ukraine and the growing energy crisis in Europe as intensifying investor focus on all elements related to environmental, social and governance matters. Developments since then have only strengthened our view that companies will need to make sustainability a core part of their strategy if they are to prosper longer-term. The passing of the Inflation Reduction Act in the United States earlier this year paves the way for significant investment into renewable energy. While from the end investors' perspective we will see the implementation of the Sustainable Disclosure Requirements ("SDR") in the UK which will likely have far reaching consequences for asset allocation - developments which we believe your company will be well positioned to navigate and potentially prosper from over the longer-term. 

A detailed review of portfolio activity during the period is contained in the Investment Manager's Review.  

Earnings and Dividends

Revenue account performance during the period was strong.  Revenue earnings per share rose by 16.2% during the period to a new interim record level of 8.54p per share (2021: 7.35p). This increase was driven by a combination of a rebound in dividend payments from companies recovering from the effects of the pandemic, as well as strong underlying trading from a number of holdings. A first interim dividend in respect of the year ending 31 January 2023, of 3.0p per share (2021: 3.0p), was paid on 26 August 2022 and the Board has declared a second interim dividend of 3.0p (2021: 3.0p) per share, which will be paid on 25 November 2022 to shareholders on the register on 4 November 2022.

The Board recognises the importance of delivering a growing dividend to shareholders, with the aim of keeping pace with the cost of living. However, given the current high levels of inflation, increasing the dividend in real terms over the short term is unlikely to be achievable. Our distribution policy 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. The portfolio's carbon footprint is significantly lower than the benchmark, as is its carbon intensity. MSCI gives the Company's portfolio its highest AAA ESG rating. The Investment Manager has continued to actively engage with the companies invested in, having addressed ESG-specific issues with management teams at companies representing 31 of the holdings in the portfolio. Voting policy also forms an important part of the Investment Manager's corporate engagement approach and they voted against management recommendations at least once in 23% 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 £30 million multi-currency revolving credit facility which matures in July 2023. Under the terms of the revolving credit 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 £13.1 million was drawn down under the facility at the end of the period.

With debt valued at par, the Company's net gearing fell from 8.4% to 7.8% during the period, reflecting higher cash balances at the period end despite a decline in net assets. The Board believes this remains a relatively conservative level of equity gearing and, with the option to increase the commitment under 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 slight discount of 2.2% (on a cum-income basis with borrowings stated at fair value), compared to a premium of 0.3% at the beginning of the financial year. Your company remains one of the highest rated investment trusts in its sector. We believe the premium rating has been driven by the relatively resilient income delivery, a consistent record of total return performance and the Company's adoption of more sustainable investment criteria.

The Board will continue to monitor the rating of your company's shares carefully and make further use of both the Company's share buy back and issuance powers to address any imbalance of supply and demand in the Company's shares. The Board believes that this action, together with continued delivery of investment performance, our commitment to grow the dividend faster than inflation over the medium term and a clear communication of the strategy should all help to maintain the Company's rating.

Outlook

As I write this interim report, we move into unchartered waters in the United Kingdom. A new King, a new Prime Minister and a new government. Globally too, the challenges are mounting from ongoing events in Ukraine, a slowing Chinese economy, recessionary conditions in Europe and an aggressive monetary tightening in the United States. It is likely to be a tough and challenging period. Yet, building our strategy around a single outcome, given such a wide variance of potential future developments, seems an unwise course of action. The very unpredictability of world and economic events instead 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 quality, by investing in well-managed companies, financially healthy companies with robust earnings potential and good management of their environmental, social and governance risks. We invest actively across the range of market capitalisations and sectors to identify businesses that have the potential to participate in any upside growth opportunities, 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 return, over the medium and long-term. We have made good progress in this period. Whilst the global outlook is uncertain and likely to be volatile, building an actively managed portfolio of UK and European companies, that are leading on sustainability today or taking steps to lead the way in the future, is, we believe, a sound strategy, and particularly so when the outlook is more difficult to foresee.

David Barron
Chairman
28 September 2022

Interim Management Statement

Directors' Responsibility Statement

The Directors are responsible for preparing the Half Yearly Financial Report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge:

-       The condensed set of financial statements has been prepared in accordance with Financial Reporting Standard 104 'Interim Financial Reporting';

-       The Interim Board Report (constituting the interim management report) includes a fair review of the information required by DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and

-       The financial statements include a fair review of the information required by 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 financial year and that have materially affected the financial position or performance of the Company during that period, and any changes in the related party transactions described in the last Annual Report that could do so.

Principal Risks and Uncertainties

The Board regularly reviews the principal risks and uncertainties faced by the Company together with the mitigating actions it has established to manage the risks. These are set out within the Strategic Report contained within the Annual Report for the year ended 31 January 2022 and comprise the following risk categories:

-       Investment objectives

-       Investment strategies

-       Investment performance

-       Income/dividends

-       Financial/market

-       Gearing

-       Regulatory

-       Operational

-       Geo-political

The Company's principal risks and uncertainties have not changed materially since the date of the Annual Report and are not expected to change materially for the remaining six months of the Company's financial year.

Going Concern

The Company's assets consist mainly of equity shares in companies listed on the London Stock Exchange and in most circumstances are considered to be realisable within a short timescale. The Board has set limits for borrowing and derivative contract positions and regularly reviews actual exposures, cash flow projections and compliance with loan covenants. The Board has also performed stress testing and liquidity analysis.

The Directors believe that the Company has adequate financial resources to continue in operational existence for the foreseeable future and for at least twelve months from the date of this Report. Accordingly, they continue to adopt the going concern basis of accounting in preparing the financial statements.

On behalf of the Board
David Barron,
Chairman
28 September 2022

Investment Manager's Review

Performance and Market Review

Despite the sharp gyrations in markets caused by the conflict in Ukraine and concerns over inflationary pressures, the Company's net asset value total return performance was in line with the benchmark index over the period, recording a fall of 0.1% in total return terms. The first quarter of the financial year was particularly challenging, following on from a difficult last few months of 2021/22. The increase in bond yields combined with surging commodity prices made for a tough period for relative returns. The second quarter, however, saw more favourable conditions emerge and we were also aided by continued good operating performance from a number of the holdings in the portfolio as well as a takeover offer for Euromoney Institutional Investor, the events and database business.

Aside from Euromoney, positive contributions came from a number of the portfolio's largest absolute positions including AstraZeneca, London Stock Exchange, Relx and SSE as they continued to deliver good growth through what were volatile market conditions. On the negative side, Direct Line Insurance, Marshalls, Persimmon and Pets at Home all detracted from performance. While the immediate outlook is undoubtedly uncertain for these businesses, the valuations look appealing and the mid-term prospects are attractive.

Pleasingly, income delivery was ahead of our expectations over the period. This was driven by a continued recovery in more cyclical dividends post-pandemic from the likes of retailer Pets at Home and construction companies Marshalls and Morgan Sindall where, despite share price weakness, their cash generation and robust balance sheets allowed for substantial increases. We have also seen shareholders rewarded due to stronger underlying trading at Croda, Dechra Pharmaceuticals, Edenred, London Stock Exchange and Relx. It was also pleasing to see AstraZeneca return to dividend growth for the first time in a decade.

We continued to generate income from option writing, where relatively elevated levels of volatility have facilitated higher prices. We have also been able to implement a number of strategic actions through options, most notably writing calls over the holding in GlaxoSmithKline ahead of its spin-out of Haleon, generating significant revenue from a position which we wanted to exit over the medium term.

Given the timing of dividend declarations, our visibility over the income out-turn for this financial year is high. We also take comfort from our focus on higher quality businesses with strong balance sheets. Given the challenging outlook, we will continue to be watchful. It is worth noting that the Company's future dividend prospects are tied into businesses with exposure to structural over cyclical growth, stronger pricing power and, consequently, greater control over their own destiny. Ultimately, this will prove supportive if we enter into more economically challenging times.

We continue to be very active in our engagement approach with holdings in the portfolio. During the period, this included, amongst many others, seeking to improve governance at Abcam and Prosus, discuss water and supply chain security at Diageo, decarbonisation strategy at SSE and human capital management at Prudential and Ubisoft. Being aware of these potential risks to the companies' long-term strategies and looking to drive mitigation and create opportunities is a key part of our investment approach.

Portfolio Activity

We are actively investing to bring together what we believe are the best opportunities, but this was a period of relatively modest levels of activity within the portfolio. Given tough market conditions, we preferred to focus on existing holdings with the potential to yield attractive returns.  As a result, we added to industrial software developer Aveva, Eastern European and African beverages company Coca-Cola Hellenic Bottling Company, private markets asset manager Intermediate Capital and Asian insurance group Prudential. All four of these had seen their share prices weaken for a range of reasons but we consider them to be very strong businesses with excellent long-term prospects. After a series of reassuring meetings with the company, we also increased the position in London Stock Exchange, which has had some issues in the integration of its acquisition of Refinitiv, but where the business now appears to be back on the front foot and performing well. We have also significantly increased the position in Unilever, where the company's brand portfolio remains solid and its exposure to emerging markets is attractive at a time of more subdued growth elsewhere. With activist shareholders on the board and a relatively modest valuation, we believe this is a strong addition to the Company's income and capital return generating capabilities.

To fund these purchases, we exited several smaller positions including Prosus and Abcam. Abcam had seen question marks build over corporate governance and eventually we concluded that management had failed to adequately protect and prioritise shareholder interests. Prosus' shares had held up relatively well at the start of the year and we opted to exit the holding. Finally, we sold out of the position in German reinsurer Hannover Re as we sought to manage the overall exposure to financials within the portfolio.

Outlook

Given the rapid tightening of monetary policy and the ongoing war in Ukraine, we retain the cautious outlook that we have had for some time but remain positive on the potential returns on offer from the existing portfolio, believing that good stock selection has the potential to help mitigate challenging market conditions. During the year so far, our priority has been to add capital to existing holdings, particularly where returns are looking increasingly compelling. We also continue to look at a number of attractive potential new investments. Overall, we will seek to keep a balance to our positioning, giving ourselves the potential to perform in a range of market environments. We will be aiming to protect capital, but also to participate in upside opportunities in companies with strong long-term prospects, and at the same time meeting our sustainable and responsible investing criteria.

Ben Ritchie and Rebecca Maclean
Aberdeen Asset Managers Limited
28 September 2022

Investment Portfolio

Investment Case Studies

Sustainable Leader* - Unilever

Unilever will need little introduction as the Anglo/Dutch consumer goods company. While it originally started life selling soap and margarine, today its focus is on food and refreshment, beauty and personal care, and home care products. Its strengths lie in the portfolio of leading brands and in the company's emerging markets distribution footprint, with over 60% of revenues now coming from those countries. This includes leading local subsidiaries in markets such as India, Indonesia and Brazil. In recent times, the company has struggled with both competition in more mature markets and in managing price input pressures, leading to a sharp derating in the share price.

After a number of years of modest performance, the Investment Manager believes that the prospects for an investment in Unilever look more propitious than they have done for some time. Expectations from investors are low, the valuation multiple that the shares trade on has significantly contracted, the famed activist Nelson Peltz has a seat on the board and the potential for growth from emerging markets is improving. Coupled with this comes Unilever's strong commitment to sustainability, with industry leading net-zero carbon commitments, alongside detailed and ambitious plans on its supply chain to reduce water intensity, reduce virgin plastic usage and remove deforestation completely. For consumer brands to be relevant in the longer-term, sustainability will need to be at their core and in this regard the Investment Manager sees this as an additional point of advantage in Unilever's quest to regain the leading mantle among global consumer goods companies.

Solutions Provider* - AstraZeneca

Under the leadership of Chief Executive Pascal Soirot, Astra Zeneca has transformed itself over the past decade from facing significant patent cliffs across its major products to becoming one of the fastest growing healthcare companies globally. This has been powered by a focus on innovation that has delivered a world leading position in oncology treatments, pioneering radical improvements in the standard of care for a number of cancers. Alongside this leading position in oncology, the company has strong capabilities in cardiovascular and respiratory treatments and, through the recent acquisition of Alexion, it has expanded into rare disease outcomes.

The Investment Manager expects the company to continue to be at the forefront of innovation and to drive financial success through continued breakthroughs in the impact of the treatments it can offer its patients. This should lead it to be able to sustainably drive high levels of revenue growth over many years and increasingly translate that into cash flow and ultimately into dividends back to investors. The increase in the dividend this year was the first in a decade and the Investment Manager expects that trend towards dividend growth to continue, while from a capital perspective the Investment Manager considers the valuation of the business to be relatively modest for the prospects that it has.

Sustainable Improver* - Volvo

Volvo is one of the world's leading manufacturers of trucks, buses and construction equipment, with strong market positions across the world and a portfolio of operating brands from Volvo, Mack and Renault Trucks. It has radically improved its corporate performance over a multi-decade period and transformed itself from a modestly profitable, deeply cyclical and operationally leveraged company into one able to benefit from structural growth within global freight and construction markets while generating significant services revenues and healthy cash flows. It has a very strong net cash balance sheet and a track record of paying out excess cashflows to shareholders, while at the same time embracing the more Nordic approach to stakeholder capitalism.

The next challenge for the company is managing the transition away from combustion engine technologies and towards the renewable power sources. In the commercial transport sector, this change has come more slowly than in the passenger car arena but is now starting to accelerate. The Investment Manager believes that Volvo is now very well positioned to capture an outsized share of the shift towards battery and fuel cell powered commercial vehicles, driven by its strong expertise in battery electric vehicles and leading technology within fuel cells. The most exciting part of the transition from a commercial perspective is the potential for the company to expand its services offering around all facets of the batteries, software and electric powertrain. The Investment Manager believes this should allow it to reduce capital intensity and enhance the recurring nature of its revenues, enabling a transition to new more environmentally sustainable technologies while also allowing its business to prosper.

*Explanatory Note:

Companies that the Investment Manager's investment analysts score highly on the quality of their ESG risk management are designated as 'Sustainable Leaders'.

Those Sustainable Leaders that have a high alignment of revenues or investment with the UN sustainable development goals will additionally be designated as 'Solutions Providers'. The majority of the Company's portfolio will be invested into Sustainable Leaders.

Companies that are scored as average in ESG risk management with the potential to improve are designated as 'Sustainable Improvers'.

Condensed Statement of Comprehensive Income (unaudited)

Condensed Statement of Financial Position (unaudited)

Condensed Statement of Changes in Equity (unaudited)

Condensed Statement of Cash Flows (unaudited)

Notes to the Financial Statements (unaudited)

Independent Review Report to Dunedin Income Growth Investment Trust PLC

Conclusion

We have been engaged by Dunedin Income Growth Investment Trust PLC (the "Company") to review the condensed set of financial statements in the Half Yearly Financial Report for the six months ended 31 July 2022 which comprises the Condensed Statement of Comprehensive Income, Condensed Statement of Financial Position, Condensed Statement of Changes in Equity, the Condensed Statement of Cash Flows and the related explanatory notes 1 to 14.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the Half Yearly Financial Report for the six months ended 31 July 2022 is not prepared, in all material respects, in accordance with Financial Reporting Standard 104 and Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Basis of Conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Financial Reporting Council for use in the United Kingdom (ISRE (UK) 2410). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 1, the annual financial statements of the Company are prepared in accordance with United Kingdom Generally Accepted Accounting Practice (including Financial Reporting Standard 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland'). The condensed set of financial statements included in this Half Yearly Financial Report have been prepared in accordance with Financial Reporting Standard 104 'Interim Financial Reporting'.

Conclusion Relating to Going Concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for Conclusion section of this report, nothing has come to our attention to suggest that the Directors have inappropriately adopted the going concern basis of accounting or that the Directors have identified material uncertainties relating to going concern that are not appropriately disclosed.

This conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410; however future events or conditions may cause the entity to cease to continue as a going concern.

Responsibilities of the Directors

The Directors are responsible for preparing the Half Yearly Financial Report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

In preparing the Half Yearly Financial Report, the Directors are responsible for assessing the Company's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

Auditor's Responsibilities for the Review of the Financial Information

In reviewing the Half Yearly Financial Report, we are responsible for expressing to the Company a conclusion on the condensed set of financial statements in the Half Yearly Financial Report. Our conclusion, including our conclusion relating to going concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Use of our Report

This report is made solely to the Company in accordance with ISRE (UK) 2410. Our work has been undertaken so that we might state to the Company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.

Deloitte LLP,
Statutory Auditor
Glasgow

United Kingdom
28 September 2022

Alternative Performance Measures ("APMs")

By order of the Board

Aberdeen Asset Management PLC

Company Secretary

28 September 2022

Please note that past performance is not necessarily a guide to the future and the value of investments and the income from them may fall as well as rise.  Investors may not get back the amount they originally invested