Investment Policy, Strategy and Key Performance

The investment policy adopted by the Board, which constitutes the Company’s business model, is to invest in a portfolio of quoted and unquoted special situations, which may not normally be available to the general public, with the objective of achieving growth of shareholder value.

The investment strategy of the Company has evolved over time, but it has always been managed with a strong focus on seeking out undervalued investments. The Company has historically comprised a portfolio of special situations in U.S. Equity, combined with a strategic stake in NV5 Global. The Company continues to invest in these assets, in addition to investing in a wider remit of other asset classes and geographies. Typically, the Non‑U.S. Equity exposure is achieved through investment in funds managed by third party managers with whom we have relationships through Skyline Corporation Partners’ activities. Many of the investments are not always readily available to the general public when applied for.

The final part of the Company’s portfolio reflects its size and flexible structure, as we are always on the lookout for unconventional investments, which often cannot be accommodated by more traditional, larger fund managers, typically less flexible in their approach. These more eclectic investments range from those sectors benefiting from structurally higher growth, such as biotechnology, to assets which we believe stand on unwarranted discounts to their true intrinsic value, including investment trusts.

This investment approach may well produce returns which are not replicated by movements in any market index.
The Board considers that the use of a single benchmark won't always offer shareholders the relevance and the clarity needed with regard to the performance of their Company. Therefore the Board considers the following KPIs when assessing the performance of the Company.

The Portfolio Manager is charged by the Board to implement the investment policy under its supervision and guidance. It is important for the Portfolio Manager to be able to vary any investment at any time, in order either to protect Investors and shareholders’ funds and/or to optimize shareholders’ returns.

Chairman’s Report

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Dear Shareholder,

Shareholder returns

The past six months to 30 November 2022 have shown a decrease in net asset value (“NAV”) from 319.1p per share to 295.6p per share. The discounts on both of our share classes have widened during the last six months, from 37.8% to 38.4 % for the Ordinary shares and from 39.5% to 41.3 % for the ‘A’ non-voting Ordinary shares. This mirrors a trend seen across the whole UK Investment Trust sector, as markets have reacted in a volatile manner to the rapidly shifting economic outlook. More detail on these and the longer-term performance can be found within our Portfolio Manager’s detailed review of markets and portfolio performance in his Report.

Our Portfolio Manager, Alec Letchfield and his team at Skyline Capital Partners LLP (“the Portfolio Manager”), continue to shape the portfolio, with adjustments made in recognition of the changing economic landscape; all within the context of our longer-term investment horizon. Alec and his team have increased our exposure to metals, mining and energy during the year-to-date within the Thematic silo; asset classes which were out of favour until recently, which have now come into sharp focus given energy uncertainty and the environmental challenges facing the world. Alec and his team have also allocated further capital to their diversifying strategy during the last 12 months. This is to remove an element of volatility and to provide the portfolio with a return stream less correlated with equity markets. I note the diversifying silo within the portfolio has produced a pleasing gain (in the context of current markets) of 2.7% in sterling terms over the past six months and 5.5% over the past 12 months. Alec and his team have been successful in identifying a number of strong managers and funds in this area with highlights noted in his Portfolio Manager’s Report. Their thoughtful and diversified approach has produced an overall return on the managed portfolio of -4.7% in sterling terms in a difficult and volatile environment. Core Regional and Thematic strategies fell 6.3% and 8.2% respectively, compared to a 7.2% fall in the global equity index.
Alec Letchfield and his team continue to monitor our investments very carefully and retain a defensive element to the strategy until more clarity appears about the outcomes of the present problems. He has been particularly underweight in UK investments which has assisted performance.

Ocean Wilsons Holdings Limited

Our strategic holding in Ocean Wilsons Holdings Limited (“Ocean Wilsons”, “OWHL”) consists of two parts: an investment in the Brazilian maritime and port operator Wilson Sons Limited (“Wilson Sons”), equating to approximately 2/3 of the value of Ocean Wilsons, as well as an investment portfolio making up the balance. Wilson Sons continues to perform with stable financial returns in a market segment where logistics and international trade remains challenging. It is pleasing to see the performance of Wilson Sons, which is assisted by the long- anticipated strengthening of the Brazilian Real against the Pound. I note the Brazilian presidential election has resulted in a very close result, returning Luiz Inácio Lula da Silva (“Lula”) as President of Brazil for a third term albeit there were initial fears that the previous president, Jair Bolsonaro, would not cede power. It is encouraging to note that Jair Bolsonaro has now conceded the election by accepting the transmission process and that Lula will be constrained by the make up of Congress to pursue irresponsible fiscal measures.
The Ocean Wilsons investment portfolio has similarities to our own portfolio including a selection of defensive assets. However, it also has a significant element of private equity. Whilst the portfolio has reduced in value from $313m at the end of April to $297m at the end of June, this is in part due to dividend payments.

Discount Management

Discounts across the investment trust spectrum have widened as markets have become increasingly jittery. We have not been immune despite the less volatile results. The discount remains a source of frustration to the Board, but we continue to believe buy-backs are not in the Company’s long-term interest, as this would increase ownership concentration to Ocean Wilsons, given that any buy-back of shares would need to be funded from the Company’s pool of liquid assets. Instead, we believe transparent and clear communications on the portfolio; that strategic investment activity will deliver broader understanding and interest, expand the shareholder base, improve liquidity, and eventually positively impact the discount. To this end, we have embarked on a programme of refreshing communications across all platforms, including the Company’s website, Annual and Half-Year Financial Reports and factsheets. We hope these ongoing changes will be well received.
The Board continues to work with our marketing partner. The initial focus is to refresh the Company’s image including its website, factsheets, Annual and Half-Year Reports. Those of you who have followed our Company for a number of years will have noticed the ‘new look’ of the Company’s Half-Year Report. This will be followed shortly by our new website. In future, our marketing partner and our research broker will be considering how we can further expand our shareholder base, making the Company better known in the market, in particular within the active “self-select” investor community.

Prospects

I mentioned in the most recent Annual Report the investment challenges when there are so many moving parts in the financial world.
Although the majority of economic forecasters suggest we may be getting near the inflationary peak in this cycle, there seems to be a notable dispersion of opinion as to how quickly a decline may take place. The Federal Reserve, European Central Bank and Bank of England all recognise they have been slow to react to this inflationary cycle and seem determined to crush it now. It will be interesting to measure the strength of their determination when the inevitable pain creates political difficulties for incumbents. My own view remains that recessions are inevitable in the US, UK and Continental Europe and unless interest rates reach heights not presently anticipated, a meaningful fall in inflation rates is unlikely. Their depth should be cushioned by the continuing loose monetary policy in Japan and inevitable easing of monetary policy in China.
I mentioned in the Annual Report in June that equity markets still had some way to fall. This has duly come to pass and it is difficult to see a final bottoming out process until there is more clarity on the depth of the forthcoming corporate earnings recession, the peaking of inflation, the end of quantitative tightening and a sense that the present conflict in Ukraine is moving towards some sort of resolution.
The coming winter will sadly be very damaging for Europe, as industry may be badly affected and all environmental plans postponed due to the increase in coal and oil consumption. The worst outcomes may be avoided by above average winter temperatures and the consequential decline in seasonal energy consumption, particularly gas, with the main storage facilities presently being completely full.

Corporate governance

Senior Independent Director

I am pleased to report the Board has appointed Nadya Wells as Skyline Investment Company’s Senior Independent Director to assist and give guidance to the Chairman.

ESG Matters

With ever-growing global concerns and developments surrounding matters such has climate change, social inequalities and ethical corporate strategy and governance, the Board believes there is a communal duty for meaningful and effective action to be taken and are committed to doing so.
It is the Board’s belief that responsible investing and a well-run sustainable business model aids in generating superior long-term returns and our Portfolio Manager shares these beliefs. As long-term investors, the Portfolio Manager has a natural desire to be a responsible investor and good corporate citizen. It is likely that such businesses and investors are likely to generate superior long-term returns and, furthermore, consideration of such issues is an important element to potential risks. The Portfolio Manager does not operate an exclusionary policy, as it is not believed that excluding whole sectors or countries is a sustainable, or reasonable approach to its investment activities. Each fund manager or company is assessed as an individual, taking into account the sector and country within which it operates and its direction of travel in ESG enhancements.
You will have seen over the last two years that the Portfolio Manager has been developing its own Responsible Investing framework and, more recently, working closely with the UN Principles for Responsible Investing Initiative (“UNPRI”) considering the requirements of the investor initiative, in particular considering its impact on a portfolio such as ours. If you are not familiar with the initiative, the UNPRI encourages investors to use responsible investment to enhance returns and better manage risks, but does not operate for its own profit; it engages with global policymakers, but is not associated with any government; and is supported by, but not part of, the United Nations. It consists of six principles that all signatories must agree with:-

1. Incorporate ESG issues into investment analysis and decision-making processes.
2. Be active owners and incorporate ESG issues into ownership policies and practices.
3. Seek appropriate disclosure on ESG issues by the entities invested in.
4. Promote acceptance and implementation of the Principles within the investment industry.
5. Work together to enhance effectiveness in implementing the Principles.
6. Each report on activities and progress towards implementing the Principles.

The Manager has kept the Board closely informed at each stage and the Board has been supportive of its proposals. Therefore, I am pleased to report that our Portfolio Manager is now a confirmed signatory to the UNPRI initiative and I look forward to seeing how this develops.

Shareholder presentation

Following the release of this Half-Year Report, we are planning to hold a shareholder information presentation. Given the success of the virtual meetings in recent years, we intend to keep holding these events online to enable broad participation. More details will be published on our website and via RNS.
Finally, may I wish you all seasonal good wishes and much good health and prosperity for 2024.


Arthur Wayne
Chairman
01 February 2024