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Invesco Inc Grth Tst (IVI)

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Tuesday 03 December, 2019

Invesco Inc Grth Tst

Half-year Report

Invesco Income Growth Trust plc

Half-Yearly Financial Report for the Six Months to 30 September 2019

Key Facts

Invesco Income Growth Trust plc is an investment trust company listed on the London Stock Exchange.

Investment Objective

The Company’s investment objective is to produce income and capital growth superior to that of the UK stock market and dividends paid quarterly that, over time, grow above the rate of inflation.

Principal Investment Aims

The Company aims to:

•           have a portfolio yielding more than the FTSE All-Share Index in order to generate sufficient income;

•           provide shareholders with dividend growth in excess of inflation over the longer term;

•           achieve capital growth in excess of the FTSE All-Share Index over the longer term;

•           reduce risk by diversifying investments across a wide range of companies and sectors; and

•           enhance returns by utilising borrowings, when appropriate.

The Company invests principally in quoted UK equities and equity-related securities of UK companies selected from any market sector.

Full details of the Company’s Investment Policy (incorporating the Company’s investment objective) can be found on page 12 of the Company’s 2019 annual financial report.

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Performance Statistics

Six months to Six months to
30 September 30 September %
2019 2018 Change
Total Return (dividends reinvested)(1)(2)(3)
Net asset value (NAV) per ordinary share +6.4% +8.2%
FTSE All-Share Index(4) +4.6% +8.3%
Share price +6.0% +3.3%
Revenue and Dividends
Net revenue after tax (£’000) 4,416 3,960 +11.5
Revenue return per ordinary share 7.54p 6.76p +11.5
Dividends – first interim 2.50p 2.40p +4.2
– second interim 2.50p 2.40p +4.2

   

At Period End At Year End
30 September 31 March
2019 2019
NAV per ordinary share 326.8p 311.2p +5.0
FTSE All-Share Index(1)(4) 4,061.7 3,978.3 +2.1
Share price(1) 271.0p 262.0p +3.4
Discount per ordinary share(5) (16.4)% (15.8)%
Gearing
Gross gearing(6) – excluding the
  effect of cash 1.5% 3.9%
Net gearing(7) – including the
  effect of cash 1.5% 3.9%

(1)      Source: Refinitiv.

(2)      See Glossary of Terms and Alternative Performance Measures (APM) on pages 70 to 72 of the 2019 annual financial report for full details of the explanation and reconciliation of APMs.

(3)      Key Performance Indicator.

(4)      The benchmark index of the Company.

(5)      The discount to NAV as at 30 September 2019 above has been calculated based on the NAV per share after deducting the proposed first interim dividend of 2.5p and not the NAV per share as disclosed on the Company’s balance sheet. This is due to accounting standards requiring that dividends be reflected in the accounts only when they become a legally binding liability, which in practise translates into being the date interim dividends are paid to shareholders. Accordingly, as the first interim dividend for 2019 was marked ex dividend (‘ex div’) on 19 September 2019 and is reflected in the Company’s share price as at 30 September 2019, any share rating based on this ex div price also needs to be calculated using a 324.3p ex div NAV.

(6)      Gross gearing: borrowing divided by shareholders’ funds.

(7)      Net gearing: borrowing less cash and cash equivalents divided by shareholders’ funds.

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Chairman’s Statement

Performance

It is pleasing to be able to report not only a further positive total return on our net asset value (NAV) over the half year to 30 September 2019 of 6.4%, but also an outperformance of our benchmark, the FTSE All-Share Index, which returned 4.6%. This was, however, not quite matched by the share price total return which was 6.0%, as the discount to NAV at which the shares traded remained stubbornly wide at 16.4% at the period end. This is disappointing given the strength of the performance delivered by the portfolio and the increased marketing effort that Invesco have been undertaking, but UK value orientated portfolios like ours have remained out of favour with investors. In his Portfolio Manager’s Report that follows, Ciaran Mallon provides commentary on the background to the portfolio’s performance over the period.

Revenue and Dividends

It is encouraging that the portfolio’s income generation has continued to grow strongly in the period, helped by some special dividends, with net revenue of £4,416,000 for the six months to 30 September 2019, which on a per share basis was 7.54p, compared with 6.76p per share for the same period last year.

We have declared a second interim dividend of 2.5p per share in respect of the year ending 31 March 2020. This dividend will be paid on 27 December 2019 to shareholders on the register on 6 December 2019. Together with the first interim dividend, this makes a total of 5.0p for the first half of the current financial year compared with 4.8p last year, an increase of 4.2%. This is consistent with our objective of growing the dividend at above the rate of inflation, as well as our previously stated move to rebalance the distribution of our dividend payments over the course of the year and so the percentage increase of 4.2% should not be taken as an indication of the rate of increase for the full year.

Outlook

As I write this we are in the midst of an election, the outcome of which is likely to have a very significant effect on the future of the UK and its economy. So the prospect that, whatever the outcome, it is likely to be followed by a period of considerable political uncertainty in the UK, will continue to weigh on the UK stock market. Although by many measures much of the UK stock market is not overvalued, the continued uncertainty, together with various geopolitical and economic uncertainties in the rest of the world, means that I must continue to run the risk of being accused of being repetitive, as I again say that it is going to be challenging for our Manager. However, I take some comfort from the fact that history suggests that in such an environment, the benefits of value investing and also the attractions of the income growth sector and companies like ours should be recognised. I am sure that Ciaran’s investment approach will win through and that we will continue to meet our investment objectives of growing the income and capital in real terms over the longer term.

Hugh Twiss MBE

Chairman

3 December 2019

Portfolio Manager’s Report

Market Review

The UK equity market provided a positive return in the six-month period to 30 September 2019. However, this headline return masks periods of underlying volatility. Global markets were driven by persistent concerns of a slowdown in economic growth and the fluctuation of US-Sino trade tensions.

Domestic political uncertainty continued. The Conservative leadership election, ongoing negotiations for the UK’s exit from the EU and parliamentary procedure dominated the domestic agenda. The value of sterling against international currencies remained weak, continuing to serve as the bellwether for the perceived likelihood of a “no-deal” exit. The prorogation of parliament pushed the pound to just US$1.20 in August.

Amid this protracted uncertainty the Bank of England’s Monetary Policy Committee voted unanimously to hold the UK base interest rate at 0.75%. Data released during the period showed weaker business investment and slowing economic growth. However, robust employment data belied signs of a slowdown.

Portfolio Review

The Company’s net asset value, including reinvested dividends, delivered a return of 6.4% during the period under review, outperforming the benchmark the FTSE All-Share Index which delivered a total return of 4.6%.

A large number of the portfolio’s holdings delivered a positive return over the period. Most notable was Experian, which traded strongly over the period. Solid full-year results and an encouraging trading update supported positive momentum. The holding in Ferguson also performed well. In September, the company announced plans to demerge its small UK business and examine potentially relisting the remaining company is the US, which was well received by the market.

Elsewhere in the portfolio healthcare stocks, Smith & Nephew and GlaxoSmithKline (GSK), also supported returns. Smith & Nephew benefited from better-than-expected revenue from its sports medicine division. GSK released solid results for the second quarter in July, raising its earnings forecasts for the full year following better-than-expected sales of vaccines.

Other notable contributors included RELX. The company traded well in the first half of the period, supported by a positive trading update and management confidence in the full-year guidance. Meanwhile Informa released strong half-year results and CVS re-rated strongly on increased acquisition activity in the veterinary services sector. The share price had been weaker in 2018, leading some commentators to view CVS as a possible takeover candidate.

The portfolio remains well invested in the utilities sector. This exposure has supported returns in a volatile market, both in absolute and relative terms. I continue to favour the sector which variously offers an attractive combination of asset backing and, in the majority, index-linked dividend growth. Within the sector holdings in Pennon, Severn Trent and SSE outperformed.

The portfolio also benefited from the low exposure to the basic materials and oil & gas sectors as mining stocks (excluding gold) and oil producers proved volatile.

In contrast, the portfolio’s tobacco holdings have continued to be disappointing. I had reduced the portfolio’s holdings in British American Tobacco and Imperial Brands some time ago, but this remains an overweight exposure compared to the wider market. Revived fears around the regulation of vaping technology impacted broad sentiment towards the sector. However, Imperial Brands was the standout detractor following the release of underwhelming sales data for next generation technology. Since the period end, Imperial Brands has announced that the CEO plans to leave and inevitably this will lead to a reappraisal of strategy by her replacement. Given this uncertainty I have sold the holding.

Bunzl released a disappointing trading update in April, reporting a slowdown in underlying revenue growth for the first quarter. The share price failed to recover momentum as half-year results later confirmed lower-than-expected margins in the firm’s ex-US business. I am not surprised that the company, which supplies products to a huge range of industries, is not immune to the general slowdown in global growth. However, I believe that the company remains a strong business with potential to continue its good long term track record of growth.

In terms of portfolio activity over the period, equity holdings remained constant. The Barclays 14% preference share was called by the company so is no longer in the portfolio.

Strategy and Outlook

Market conditions have proven no less challenging than last year, despite the overall upward movement in the market and the portfolio’s outperformance. Having slightly raised gearing towards the end of 2018, I have maintained this modest level. This reflects the balance between my enthusiasm for the potential of the companies in the portfolio against the somewhat uncertain and difficult economic and political backdrop we continue to face.

We are still a long way off establishing what the United Kingdom’s future trading relationship with the European Union will look like, and at the time of writing a general election campaign is the political focus. It is several decades since the Conservatives and Labour had such different views of how the UK economy should function, so political uncertainty will probably continue to impact the UK stockmarket in the near-term. The US administration remains a belligerent participant in global trade talks, which is also unsettling to markets. China has been the engine of global growth for many years but seems now to be steadily slowing. For these and other reasons global economic growth is slowing. Because of these factors I think market conditions will remain volatile.

Given this assessment I continue to believe that it is sensible to remain conservative in my investment approach. I continue to seek to achieve both capital and income growth from the portfolio, with a balance between the current level of income and future income growth. It remains my goal to invest in companies whose prospects are not wholly dependent on a particular economic outcome, but are supported by self-help or industry specific dynamics. Overall, while I am cautiously optimistic in my outlook for the UK market as a whole, I remain confident in the long-term return potential of the holdings in the portfolio. I continue to believe that the portfolio is well positioned to meet its performance objectives, most notably in respect of delivering dividend growth, which has grown for the past 22 years consecutively.

Ciaran Mallon

Investment Manager

3 December 2019

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Related Parties Transactions

Under UK Generally Accepted Accounting Practice (UK Accounting Standards and applicable law), the Company has identified the Directors as related parties. No other related parties have been identified. No transactions with related parties have taken place which have materially affected the financial position or the performance of the Company.

Principal Risks and Uncertainties

The Board carries out a regular review of the risk environment in which the Company operates, including consideration of emerging risks. The principal risks and uncertainties relating to the Company can be summarised as:

•        Investment objective – there can be no guarantee that the Company will meet its investment objective;

•        Market risk – market prices of securities are influenced by many factors outside the control of the Board and Manager, such as general economic conditions, politics and investor sentiment;

•        Investment risk – there is a risk of poor performance of individual investments. This is mitigated by diversification and monitoring of investment guidelines;

•        Shares – the market value of the shares in the Company may not reflect their underlying net asset value;

•        Gearing Arising from Borrowings – borrowing will amplify the effect on shareholders’ funds of portfolio gains and losses;

•        Regulatory – whilst compliance with rules and regulations is closely monitored, breaches could affect returns to shareholders; and

•        Reliance on Third Party Service Providers – the Company has no employees, so is reliant upon the performance of third party service providers, particularly the Manager, for it to function.

A detailed explanation of these principal risks and uncertainties can be found on pages 14 to 16 of the 2019 annual financial report, which is available on the Company’s section of the Manager’s website at: www.invesco.co.uk/incomegrowth.

In the view of the Board these principal risks and uncertainties are equally applicable to the remaining six months of the financial year as they were to the six months under review.

Going Concern

This half-yearly financial report has been prepared on a going concern basis. The Directors consider this is the appropriate basis as the Company has adequate resources to continue in operational existence for the foreseeable future, being 12 months after approval of these financial statements. In reaching this conclusion, the Directors took into account the diversified portfolio of readily realisable securities which can be used to meet funding commitments, and the ability of the Company to meet all of its liabilities, including bank overdraft and ongoing expenses, from its assets. The Directors also considered the revenue forecasts for the forthcoming year and future dividend payments in concluding that the going concern basis is appropriate.

Directors’ Responsibility Statement

In respect of the preparation of the half-yearly financial report

The Directors are responsible for preparing the half-yearly financial report using accounting policies consistent with applicable law and UK Accounting Standards.

The Directors confirm that to the best of their knowledge:

–        the condensed set of financial statements contained within the half-yearly financial report have been prepared in accordance with the FRC’s FRS 104 Interim Financial Reporting;

–        the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R of the FCA’s Disclosure Guidance and Transparency Rules; and

–        the interim management report includes a fair review of the information required on related party transactions.

The half-yearly financial report has not been audited or reviewed by the Company’s auditor.

Signed on behalf of the Board of Directors.

Hugh Twiss MBE

Chairman

3 December 2019

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Twenty Five Largest Holdings at 30 September 2019

UK?Listed ordinary shares unless otherwise stated Market
Value % Of
Company Sector £’000 Portfolio
Experian Support Services  9,280  4.8
GlaxoSmithKline Pharmaceuticals & Biotechnology  8,622  4.5
Ferguson Support Services  8,021  4.1
RELX Media  7,874  4.1
Informa Media  7,245  3.7
Young & Co’s Brewery – Non-VotingAIM Travel & Leisure  6,895  3.6
BP Oil & Gas Producers  6,884  3.6
British American Tobacco Tobacco  6,876  3.5
Royal Dutch Shell – B Shares Oil & Gas Producers  6,592  3.4
Euromoney Institutional Investor Media  6,458  3.3
Smith & Nephew Health Care Equipment & Services  6,203  3.2
Pennon Gas, Water & Multiutilities  6,070  3.1
Croda International Chemicals  6,019  3.1
HSBC Banks  5,974  3.1
Legal & General Life Insurance  5,821  3.0
Compass Travel & Leisure  5,781  3.0
Next General Retailers  5,069  2.6
Severn Trent Gas, Water & Multiutilities  4,935  2.5
Bunzl Support Services  4,928  2.5
InterContinental Hotels Travel & Leisure  4,903  2.5
Whitbread Travel & Leisure  4,895  2.5
National Grid Gas, Water & Multiutilities  4,691  2.4
Aviva Life Insurance  4,438  2.3
NicholsAIM Beverages  4,298  2.2
SSE Electricity  4,202  2.2
152,974 78.8
Other Investments (18)  41,119 21.2
Total Holdings (43) 194,093 100.0

AIM Investments quoted on AIM.

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Condensed Income Statement

Six Months To
30 September 2019
Six Months To
30 September 2018
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Gains on investments held at fair value 7,342 7,342 10,623 10,623
Losses on foreign exchange (6) (6)
Income - note 2 4,854 76 4,930 4,415 429 4,844
4,854 7,412 12,266 4,415 11,052 15,467
Investment management fee - note 3 (234) (234) (468) (265) (265) (530)
Other expenses (183) (183) (186) (186)
Net return before finance costs and taxation 4,437 7,178 11,615 3,964 10,787 14,751
Finance costs – note 3 (21) (21) (42) (4) (4) (8)
Return before and after
  taxation for the financial period 4,416 7,157 11,573 3,960 10,783 14,743
Return per ordinary share – basic 7.5p 12.3p 19.8p 6.8p 18.4p 25.2p
Number of ordinary shares in issue during the period 58,551,530 58,551,530

The total column of this statement represents the Company’s profit and loss account, prepared in accordance with UK Accounting Standards. The return after taxation is the total comprehensive income and therefore no additional statement of other comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the period.

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Condensed Balance Sheet

Registered number 3141073

At At
30 September 31 March
2019 2019
£’000 £’000
Fixed assets
  Investments held at fair value through profit or loss  194,093  188,308
Current assets
  Prepayments and accrued income  356  1,166
 356  1,166
Creditors: amounts falling due within one year
  Bank overdraft (2,950) (7,067)
  Accruals (158) (179)
(3,108) (7,246)
Net current liabilities (2,752) (6,080)
Net assets  191,341  182,228
Capital and reserves
  Share capital  14,638  14,638
  Share premium  40,021  40,021
  Capital redemption reserve  2,310  2,310
  Capital reserve  124,978  117,821
  Revenue reserve  9,394  7,438
Shareholders’ funds  191,341  182,228
Net asset value per ordinary share – Basic 326.8p 311.2p
Number of 25p ordinary shares in issue at the period end  58,551,530  58,551,530

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Condensed Statement of Changes in Equity

Capital
Share Share Redemption Capital Revenue
Capital Premium Reserve Reserve Reserve Total
£’000 £’000 £’000 £’000 £’000 £’000
For the six months ended 30 September 2019
At 31 March 2019  14,638  40,021  2,310  117,821  7,438 182,228
Net return  7,157  4,416  11,573
Net dividends paid – note 5 (2,460) (2,460)
At 30 September 2019  14,638  40,021  2,310  124,978  9,394 191,341
For the six months ended 30 September 2018
At 31 March 2018 14,638 40,021 2,310 114,721 7,016 178,706
Net return 10,783 3,960  14,743
Net dividends paid – note 5 (2,330) (2,330)
At 30 September 2018  14,638  40,021  2,310  125,504  8,646 191,119

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Notes to the Condensed Financial Statements

1. Accounting Policies

The condensed financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, FRS 104 Interim Financial Reporting and the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in October 2019. The financial statements are issued on a going concern basis.

The accounting policies applied to these condensed financial statements are consistent with those applied in the financial statements for the year ended 31 March 2019.

2. Income

Six Months to Six Months to
30 Sept 2019 30 Sept 2018
£’000 £’000
Income from investments
UK dividends – ordinary  4,603  4,331
UK dividends – special  215
UK unfranked investment income  36  84
 4,854  4,415

Special dividends of £76,000 were recognised in capital during the period (2018: £429,000).

3. Management Fees and Finance Costs

Investment management fees and finance costs are allocated 50% to capital and 50% to revenue. The investment management fee is calculated and payable monthly in arrears based on market capitalisation. Until 30 September 2018, this was 0.65% up to £150 million and 0.55% thereafter. From 1 October 2018, the fee was reduced to 0.60% for the first £150 million of market capitalisation and 0.50% thereafter with all other terms of the management agreement remaining unchanged.

4. Taxation and Investment Trust Status

It is the intention of the Directors to conduct the affairs of the Company so that it satisfies the conditions for approval as an investment trust company. As such, no tax liability arises on capital gains. In addition, no taxable profits arise as expenses exceed taxable income.

5. Dividends paid on Ordinary Shares

The first interim dividend for the year ending 31 March 2020 of 2.50p was paid on 11 October 2019 to shareholders on the register on 20 September 2019. The shares were marked ex dividend on 19 September 2019. The second interim dividend of 2.50p for the year ending 31 March 2020 will be paid on 27 December 2019.

Six Months to Six Months to
30 Sept 2019 30 Sept 2018
Pence £’000 Pence £’000
Final paid (previous year)  4.20  2,460  4.10  2,401
Return of unclaimed dividends from
  previous years (71)
 2,460  2,330
First interim payable (current
  year) 2.50 1,464  2.40  1,405

In accordance with accounting standards, dividends payable after the period end have not been recognised as a liability as at the period end.

6. Classification Under Fair Value Hierarchy

The fair value hierarchy analysis for investments held at fair value at the period end is as follows:

At At
30 Sept 2019 31 Mar 2019
£’000 £’000
Level 1 – The unadjusted quoted
  price in an active market for
  identical assets or liabilities that
  the entity can access at the
  measurement date  194,093  186,977
Level 2 – Inputs other than quoted
  prices included within Level 1
  that are observable (i.e. developed
  using market data) for the asset
  or liability, either directly or
  indirectly  1,331
 194,093  188,308

As at 30 September 2019, all of the Company’s portfolio was composed of quoted (Level 1) investments. There were no Level 2 securities. The Level 2 investments held at 31 March 2019, comprising one fixed income holding, was sold during the period.

7.         Status of Half-Yearly Financial Report

The financial information contained in this half-yearly report does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The financial information for the half years ended 30 September 2019 and 30 September 2018 has not been audited. The figures and financial information for the year ended 31 March 2019 are extracted and abridged from the latest audited accounts and do not constitute the statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included in the Report of the Independent Auditor, which was unqualified and did not include a statement under section 498 of the Companies Act 2006.

By order of the Board

Invesco Asset Management Limited

Company Secretary

3 December 2019


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