Independent Investment : Results for the year to 30 November 2015

Results for the year to 30 November 2014

RNS Announcement: Preliminary Results

The Independent Investment Trust PLC

The following is the unaudited preliminary statement for the year to 30 November 2015 which was approved by the board on 20 January 2016.

Chairman's Statement

During the year to 30 November 2015, our company produced an NAV total return of 28.1%. Theoretical investments in the FTSE All-Share Index and The FTSE World Index would have produced total returns of 0.6% and 2.6% respectively. We are pleased with this result, which not only marks a welcome return to form for us, but which also completes - for the moment at least - the process of recovery from the disasters that befell us in 2007 and 2008. In terms of performance relative to the FTSE All-Share Index, it was our best year since 2002. People often ask us why we pay so much attention to relative performance when our objective is to produce good absolute returns. The answer is that long term returns for an equity portfolio are driven by two factors: the performance of the market and the performance of the portfolio relative to the market. The first we consider inherently unpredictable but likely to be positive over long periods of time.

The second is something over which we think we ought to be able to exercise a positive influence by picking stocks with superior potential.

A slight widening of the discount - from 6.5% to 6.9% - led to a share price total return of 27.8%. It occurs to us that some of our shareholders, particularly those who bought early in the life of the Independent, may wish to use the recent revival in our fortunes to reduce their holdings. Subject to market conditions, we hope to be able to operate a rather more aggressive policy of buying back shares than is our wont for a period of about a month, starting from around the time of our AGM; some modest discount to net asset value would, of course, be necessary to protect the position of continuing shareholders. The managing director has indicated that he may wish to realize part of his holding during this period, or earlier if there is natural demand at an acceptable price. The other directors have discussed this at length with him and are satisfied that there has been no weakening in his commitment to the long term success of the Company. No other director intends to sell shares during this period or earlier.

There have been three important contributors to our results: the early reduction in our energy stake and the resulting low exposure to energy companies, together with our lack of exposure to mining companies; our big housing stake and the additions made to it during the year; and the extraordinary performance of many of the initial public offerings (IPOs) in which we have participated since February 2014. Chief amongst these have been Fever-Tree, Gamma Communications and FDM.

The state of the world economy still provides plenty of cause for concern: China, so long a source of demand for other countries, is wrestling with slowing growth and an urgent need to re-orientate its economy; economic recoveries in Europe and Japan are fragile and dependent on unconventional monetary policies; tightening monetary policy in the USA may well have an adverse impact on the economies of many emerging markets; and there are signs that the momentum in corporate profits may be slowing or reversing. Any one of these issues has the scope to provide an unpleasant reaction in equity markets, but we are struck by the number of interesting new opportunities we are seeing in the UK market. Many of these are strongly cash generative businesses with apparently good growth prospects which are not especially dependent on the health of either the world or the UK economies for their prosperity. For as long as we can buy them at sensible prices, our inclination will be to ignore the more general worries.

The main changes in the disposition of the portfolio during the year were substantial purchases of companies we lump under the heading Consumer Services, a big increase in the value of our housing stake (driven more by price performance than by new investment), a sharp reduction in our non-life insurance stake as bids were announced for three of the four companies we owned and the near elimination of our energy stake. Our continued appetite for IPOs - we participated in three during the final quarter of our year - ensured

that our cash balances reduced from 7% at 30 November 2014 to less than 2% at 30 November 2015. Further comments on the portfolio can be found in the Managing Director's Report below.

Our good results in the year under review have enhanced our long term record: for the period from inception to 30 November 2015, we produced an NAV total return of 444%, equivalent to a rate of roughly 11.9% per annum, of which 2.8% per annum can be offset by RPI inflation. By comparison, the notional return available from the FTSE All-Share Index over the period amounted to 97%, or 4.6% per annum.

Earnings per share for the year were 8.3p (7.35p in 2014). We have decided to dispense with the final dividend for 2015 and to pay a second interim dividend of 3p instead, to give a regular dividend of 5p (5p in 2014). In addition, we have declared a special dividend of 3p for 2015 (2p in 2014) in order to maintain the flexibility to vary the yield on the portfolio without threatening the regular dividend. These dividends will both be paid on 15 February with an ex-dividend date of 28 January. We have also decided to pay out most of our revenue reserve by way of an interim dividend in respect of the year ending 30 November 2016 of 5p (2p in 2015). This will be paid on 31 March 2016 to shareholders on the register at the close of business on 11 March 2016, the ex-dividend date being 10 March 2016.

Our natural parsimony has combined with the growth in the value of our assets to deliver a further reduction in our ongoing expenses ratio - from 0.36% to 0.32%. The quinquennial review of directors' salaries will make it a challenge to maintain this trend in the current year, but we hope to remain one of the lowest cost providers in our industry.

In recent years, our shares have traded at a persistent discount to net asset value and have often been an illiquid market. Throughout this period we have always been ready to repurchase shares on terms that have seemed fair to both departing and continuing shareholders. As the Company has grown the dangers of its being shrunk to an uneconomic size as a result of excessive repurchases has receded and the terms on which we have been prepared to buy in have correspondingly improved. In the year under review, we bought back 1,739,000 shares at an average discount of 6.7%, the lowest average discount for any year to date. As mentioned above, we are hoping to experiment with an even more aggressive buyback policy for a short period after our AGM. It is important to stress that, having regard to the interests of continuing shareholders, such a policy can only be pursued in relatively benign market conditions.

We have now settled into a collective state of mind that allows us to be both scared about the market and yet willing to consider individual investment ideas if these appear appropriately valued in a long term context. The profusion of such ideas presented to us by the managing director has meant that our cash balances are lower than might appear consistent with our general nervousness. We must hope that his winning run continues.

Once again, we should like to encourage you to come to the AGM, which is to be held in the Baillie Gifford offices at Calton Square at 4.30pm on 24 March 2016. It will help our planning if we know how many shareholders are likely to attend, and I shall be grateful if you will mark the proxy form accordingly and return it to the Company's registrars. I look forward to seeing as many of you as possible there.

Douglas McDougall 20 January 2016

Managing Director's Report

Our performance over the year has been covered in the Chairman's Statement.

Despite a disappointing performance from our large holding in Baidu - our largest holding a year ago - our newly enlarged commitment to technology and telecommunications served us well in the year under review: a stake worth £49.2m at 30 November 2014 had grown in value to £62.3m by 30 November 2015 after net purchases of £0.1m. We reduced our Baidu holding during the year as the company accelerated its investment in new business areas where its competitive position is not as obviously strong as it is in its traditional search activities. Alibaba, our other Chinese internet business, also had a disappointing year in share price terms, but this was as much to do with its valuation at the start of our year as it was to do with fundamental issues. Last year's IPOs, FDM and Gamma Communications, both enjoyed strong share price performances as their businesses outperformed expectations. FDM, to which we made a timely addition, was our biggest holding at 30 November 2015. Kainos, a software consultancy we bought at the time of its IPO in July, also delivered good business results and a strong share price performance. Our longstanding holding in Herald recorded a less eye-catching share price performance, but nevertheless outperformed the wider market by a comfortable margin.

The big exposure to the housing industry we built up last year has worked well and we added further to the stake during the year. Worth £28.0m at 30 November 2014, it had grown in value to £56.5m by 30 November 2015 after net purchases of £10.8m. The unprecedentedly benign conditions to which we drew attention last year, particularly those in the land market, have remained in place and our holdings have benefited accordingly. Towards the end of our year, we took a big holding in McCarthy and Stone, partly funded by the sale - at a good price - of our holding in Rightmove, an excellent business but no longer cheap. McCarthy and Stone dominates the retirement housing market, which is already chronically undersupplied and which should be a major beneficiary of demographic trends.

The companies we grouped together under the heading consumer services at the time of our interim report have produced mixed results. The AA gave back much of the strong performance it enjoyed in the previous year as investors began to appreciate the amount of investment required to realize the potential of the business. A new holding in BCA Marketplace, on the other hand, saw its shares respond well to favourable trading news. The new holding in Gama Aviation fell in value despite satisfactory trading news and the other new holding, NAHL, saw its share price hit by fears that its business would suffer under the new regime proposed by the government for personal injury claims. Overall, a stake worth £7.2m at 30 November 2014 had risen in value to £22.2m by 30 November 2015, but this was after £15.9m of net purchases.

The year produced mixed results for our holdings in the industrials sector with the benefits of a well timed sale of Aggreko and a profitable addition to our large Ashtead holding being largely offset by our miserable experience in a brief period of ownership of HSS.

The large exposure to the non-life insurance industry with which we started the year was severely, but profitably, depleted by a rash of takeover bids for our Lloyd's holdings. Beazley, the only one not bid for, was sold on grounds of valuation and the Polar Capital Insurance Fund once again performed well.

In retailing, we had a pretty good year in the UK with our old favourite Dunelm enjoying a return to form and a new holding in SCS (our second attempt to make money out of this business) making a positive contribution after a bit of a hiccough in the wake of disappointing trading in the spring. Unfortunately, progress on this front was offset by two disastrous investments in overseas retailers, Zulilly and Mysale. Both were sold at big discounts to their book cost.

Our holding in Fever-Tree deserves a paragraph of its own. Worth £5.4m at 30 November 2014, it had grown in value to £11.5m by 30 November 2015 despite sales, which now look very foolish, amounting to

£4.0m. The idea of spending a bit more on a better quality tonic water seems to have caught the imagination of the drinking community throughout the world. Sales and profits have been massively ahead of expectations and the business appears to have built up formidable momentum. The issue of whether the share price has finally caught up with reality is one to which we shall no doubt be returning frequently in the weeks and months ahead.

Elsewhere in the portfolio, we bought shares in the IPOs of two fast growing leisure companies, both of which have highly competitive cost bases. On the Beach is an online vendor of packaged holidays which can be customized to suit the particular needs of the consumer, while The Gym Group is one of the leading players

in the low cost gym market. We reluctantly sold our holding in Domino's Pizza on grounds of valuation - the second time we have made this mistake. As mentioned in the Chairman's Statement, we sold the bulk of our energy stake at prices that now look very handsome. A relatively brief holding in Sanne yielded a profit of almost 40% on cost, while an even briefer holding in Woodford Patient Capital yielded a more modest profit. The Telecom Plus share price was held back by weak energy prices and the discovery that the company had been overestimating gas sales while the SThree share price responded less well than we had hoped to good trading news. There was little change in the share price of Bluefield Solar, but it delivered a generous stream of income over the year.

Max Ward

20 January 2016