F&c Investment Trust Plc (0XW.F) Earnings Call Transcript

Good morning, and welcome to the F&c Investment Trust Plc Interim Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. I would now like to hand you over to Fund Manager, Paul Niven. Good morning to you.

Okay. Good morning, everyone. Thank you very much for joining this webinar. Over the next 45 minutes or so, I'm going to cover 2 main areas. Firstly, we introduced our interim yesterday. So I'll give you an overview of how the trust has performed over the first half of the year, some of the key performance drivers, some of the activity which we've undertaken. And then I'll move into some comments with respect to the current market backdrop, the outlook, the opportunities and risks as we see it. So let me start with a very brief background on the trust. I think we have many shareholders online. But just very briefly, as you know, world's oldest investment trust, a very long history, very long history of delivering strong returns for shareholders, I believe, and consecutive dividend rises, consistency in terms of management. I have been responsible for the portfolio and the trust since mid-2014, so over 12 years now. And we have scale. Scale in terms of assets that we oversee. We're a member of the FTSE 100, and our market cap is over GBP 6.5 billion. In terms of aims and how we seek to deliver outcomes for shareholders, we're looking to deliver long-term growth in capital and income. So very much focused on growth assets, exposure to listed and unlisted equity, so listed and private equity, blending a range of focused active strategies and the outcome that we look to deliver is a consistent performance outcomes for shareholders and value for money. And again, I'll give some context as to how we've done, not just over the first half of the year, but over the medium to longer term as well as we go through. But getting into the detail, we did, as I said, release our interim results for the first half of the year yesterday. And this slide gives a summary of what we reported. Now it was a very strong period for global equity markets, lots of volatility, but a strong period in sterling terms for global equity markets. Conflict in the Middle East was clearly a point of focus, adding to market volatility and a really exceptional period in terms of some individual stock contributors to returns. So what I mean by that is there's some tremendous gains from individual stocks over the first half of the year, which we'll explain as we go through. Another key theme clearly was that of AI and particularly the impact of AI infrastructure spending driving returns within the market. Magnificent Seven, that small core of very large disruptors that has led the market for many years. They actually underperformed market indices in the first half of the year, slightly losing value actually, but significant dispersion in returns within the Mag Seven and across the market. Now several of our holdings doubled, tripled in periods in some instances. And I would say, in summary, within the underlying strategies that we run, which we'll get into detail of some of those exceptional stock returns were either key contributors to strong returns from individual components of the portfolio or conversely, in a number of instances where we didn't hold these highly performing stocks, it was a detractor from returns in some instances meaningfully. Again, I'll give you a bit more detail on that as we go through. But the headlines in terms of returns that we delivered for shareholders in the first half, 12.8% in terms of shareholder return. That was ahead of the benchmark return of 12.6%, marginally ahead, while our NAV was slightly behind at 12.4%. The reason that the shareholder return was slightly ahead of NAV was because our discount narrowed, ended the period at 6.6% at the end of June, and we did buy back around 0.7% of shares in issue over that 6-month period. Net revenue return per share increased by 8.4% so up meaningfully. And our underlying portfolio of assets delivered a return of 11.8%. And just on this point about exceptional returns and putting some numbers to it, some of the stock individual -- sorry, some of the top individual stock contributors to our relative returns were Applied Materials, up 186%. SK Hynix, a Korean listed company, which has delivered tremendous returns, but also been very volatile, up 284%. ASML, European semiconductor play up 85%. But conversely, some limited exposure to names like Micron, up 310%. Intel, familiar name, up 284%. And I think the standout performer over that 6-month period, Sandisk up 872%. So there was incredible individual returns. And as I said, holding some of those very highly performing names was accretive to returns, some strategies lacking exposure in a number of instances to names like Sandisk, for example, that did detract. Private equity, you'd be aware that private equity is a differentiator in terms of the trust. A good period for private equity holdings up 9%, but they did lag listed market returns. And we did announce our first interim dividend, which is just under 1p per share at 0.99p per share, and the Board are committed to another rise in 2026, and that will be the 56th consecutive annual rise. As I'm sure you will be aware, there was a 4-for-1 share split for the company's shares. And in terms of performance returns and outcomes, we have, as I will show you, delivered returns which exceed the median peer year-to-date 1, 3, 5 and 10 years in both NAV and shareholder returns, which is obviously pleasing. And in terms of this point of value for money, we continue to think OCF, that's ongoing charges, a measure of cost on the trust of 0.45%, which is flat in the year. So that's the highlights. from the slide. In terms of that 12.8% shareholder return that I mentioned, that was made up of a portfolio return of 11.8%, as I already said, positive contribution from gearing. So the fact that we borrowed to invest, that was positive in a rising market. We bought back, as I said, 0.7% of shares in issue at a discount. Again, that was accretive to return modestly, changing the fair value of our debt. The fact that interest rates -- market interest rates rose slightly over the period that reduced the fair value of the debt, which added slightly to NAV. And then taking off the impact of management fees and other expenses takes you to the NAV total return of 12.4%. Moving from that 6.8% end of period discount to 6.6% added to shareholder total return, meaning that shareholders received 12.8% over the first half of the year, as I said, slightly ahead of benchmark over the period. Now in some detail, this shows the allocation to North American strategies, European strategies in terms of listed equities, Japanese listed equities, emerging markets and global and then our allocation to private equity. And then the second column in terms of the numerical component shows the underlying allocation. So that shows in terms of listed and unlisted holdings, how much of our investments are in North America, how much in Europe and so on. We then show the benchmark weighting, portfolio performance and then what the index return was. So this is intended to show you at the top level how much we've got geographically invested in North America and elsewhere, how that compares to benchmarks and then what the underlying returns of the geographic components were. Now you can see here that North America -- our North American holdings lagged over the period as did Europe, which does include the U.K. that component gained by 9.1%. Emerging markets, 18.7%. That was the strongest component in terms of returns geographically on the portfolio. Japan, 11.6%. Global strategies, 13.5%. So all components delivering positive returns. Within that global strategies component where we delivered 13.5% we've got a strategy called Global Focus. That's a quality growth strategy that outperformed broad index return delivering more than 20% over the period, while our income-focused strategy delivered 9.7% and global enhanced 9.2% in combination, as I said, global strategies delivering an excess return against the benchmark. Within the U.S., it was a period where value stocks outperformed growth, value indices delivering around 18% against 7% roughly from growth and our allocation stans within U.S. equities was helpful for returns. What do I mean by that? Well, we had more in value stocks than we did in growth, value outperformance. That was helpful, but stock selection was a modest detractor despite the fact that JPMorgan, who managed the growth component delivered a return of 9.2%, as I said, ahead of the growth index return of around 7%. Our value managers, Barrow Hanley and a strategy run by Columbia Threadneedle were both lagging the wider indices. And I would note that for those that are interested in the detail, within the U.S. market and within the value indices, again, really quite an extraordinary period, Micron and Sandisk, 2 names which benefited very materially and which are referenced already up by 310% and [ 870% ], respectively, in that 6-month period. They were both actually in the value index. And Barrow Hanley, for example, didn't own those names and not owning those 2 names accounted for all of their underperformance in that first half period. Interestingly, I mean, like Micron is now in the growth index rather than the value index given the uplift that we've seen in terms of stock price and the associated value of that stock. As I said previously, private equity is a good period, 9.1% is a very respectable return from private equity, but that 9.1% did lag strong returns from listed equity markets. Proportion in private equity was flat at around 11%. We selectively made some new investments. And again, getting into a bit of the detail within that private equity component, Schiehallion was a highlight. That is a listed holding listed closed-ended trust that is run by Baillie Gifford. That was up by around 40% over the period, benefiting from uplifts in names like SpaceX, which obviously listed towards the end of the first half. Pantheon, who run a future growth program for us, investing in venture and growth names, that was up by around 11%. And then the newer commitments that we made through Columbia Threadneedle, they were up by 5% over the period. So it's a good period overall, I would say, from private equity, but lagging strong listed market returns. This slide, which many of you will have seen before, gives an overview in more detail of those allocations that we have in the portfolio. I'm not going to dwell too much on this slide. There's a lot of detail here. There were no new strategies, which we incepted during the first half. There was no change in managers over the first half either. We did make some allocation changes, which I'll come on to in a moment. But just to remind you about how we run the trust, we've got a range of focused strategies, which are outlined here, each of which are looking to do something slightly differently in terms of stylistic exposure, either investing with a growth bias, volume bias, quality bias or combinations thereof and investing on a regional or a global basis in the listed space, and we blend together those strategies to incrementally add returns while reducing risk on the portfolio. And then in the private equity space, we've got a couple of main strategies, that Pantheon future growth exposure that I mentioned, that's a bespoke program run by us -- run for us, I should say, by Pantheon, investing into leading venture and growth managers and then a range again of bespoke fund and co-investment exposure run by Columbia Threadneedle. And on the listed side, all of these strategies are run within separate accounts, so not fund of funds, but separate accounts mandates that we specifically have mandated either through internal management arrangements with Columbia Threadneedle or external managers with JPMorgan, Barrow Hanley and Invesco being the primary third-party managers. And as I explained previously in prior webinars, Invesco were appointed just in the earlier part of last year to manage that emerging market component for us. So that's an overview in terms of the underlying strategies that we have in the portfolio. This slide, again, quite a lot of detail here, and I'll draw some of the highlights, shows you how allocations have changed through time. It's got end of year periods, end of year exposure for the last few years and then the end of June exposure. You can see periodically, if you go to the left-hand side of this slide that we've managed exposure quite actively between growth and value in the U.S. We've got more, as I said, in value than we do in growth at the present time in that U.S. market. We have been selling U.S. equities that was last year and in the first half of 2026 as well. U.S. core, you can see has been reduced. That's the third set of bars along. That's been reduced quite meaningfully over the past few years. But on a combined basis, we sold around about GBP 240 million out of U.S. core, U.S. large cap growth in the first half of the year. We purchased emerging markets. There's around GBP 135 million worth of physical equities bought in emerging markets in the first half of the year. And again, we've increased our exposure there previously. We also made some increased allocations towards global focus. That's that quality growth mandate that I mentioned. And we made some divestments from Europe, which is a smaller portion of the portfolio than it was a couple of years ago. So those are the main changes made over the period. We did also, I should say, add some exposure to U.S. and emerging market equities during that period of weakness on the onset of the conflict in the Middle East. So we took the opportunity to buy GBP 80 million worth of derivatives contracts on EM and U.S. indices during that point of weakness after the U.S. and Israel commenced military operations against Iran, and that's proven thus far to be a profitable trade because obviously, markets as we speak right now are very, very close to record highs in the U.S. and record highs in the U.K., for example. Now just a few comments on the U.S. market and how that's performing against the rest of the world and also on the Mag Seven. We have, as I said, in recent years, been reducing that exposure to the U.S. It's still the single largest component of the portfolio geographically. The exposure there has been brought down. The U.S. has begun to lag global indices over the course of the past year or so, 10 years to the end of 2025, you can see the gray bars, the S&P, that's the U.S. bellwether index that was returning more than 15% per annum, well ahead of non-U.S. equity indices and the Magnificent Seven, a key contributor to that return profile. Since the end of 2025 -- or sorry, during 2025 and subsequently into 2026, however, we have seen the U.S. begin to lag in performance terms. And the Magnificent Seven also lagging at the end of June, the Magnificent Seven group of stocks were actually down year-to-date. They're now up about 4%, but again, lagging wider index returns. So this point of -- the U.S. is still doing very well in absolute terms, but it is beginning to lag non-U.S. indices. And that picture has carried on through 2026 thus far. And again, this slide just gives a sense of what performance of the U.S. market was in 2025. That's the orange line there on a relative basis against the rest of the world and then shown over the course of 2026. So the picture is the U.S. is no longer leading global equity markets. And a big reason for that is due to the Magnificent Seven no longer delivering those exceptional returns that we have become used to. A few words on revenue and dividends. Again, a lot of information on this slide. The highlight I gave you already was that we had an 8.4% in net revenue return per share over the first half. We've got higher levels of revenue reserves equivalent to around 7.2p per share at the interim period, and that compares to our full year dividend, which is adjusted for that 4-for-1 share split of 4.15p per share that we paid in 2025. And the Board have indicated their intention to deliver another rise in dividends in 2026, which, as I said previously, will be the 56th consecutive rise in dividends for the trust. I look through exposure, again, I won't dwell on this sort of largest single component. North America, again, this does include private equity and technology is comprising a large component of our overall listed exposure. Gearing, a few words saying gearing. I've represented gearing here, including the futures positions, which do increase our overall market exposure, although we're not technically borrowing to achieve that increase in exposure to listed equities. But you can see over the first half of the year, we modestly raised gearing levels, again, taking advantage of an opportune time to raise exposure to listed equities during that period of weakness after the conflict with Iran begun. So gearing raised modestly over the period. The other thing to say is that we did have a maturing long-dated loan during the first half of the year. So we had EUR 42 million debt, which matured. We took out what we call revolving credit facility, which we can revolving credit facility and put to work in terms of equity investments as well. This shows you a breakdown of our borrowing costs. We are very fortunate to have a substantial amount of long-dated debt, which we secured at very low fixed rate. So this shows you the breakdown of that debt, including that revolving credit facility that I mentioned and the interest rate that we pay on debt, which matures 0 to 10, 10 to 20 and so on years out. So the blended cost of debt is around 2.6%. When we include the revolving credit facility, if you exclude that, it's around 2.4% and we've got more than GBP 600 million worth of debt on the trust as things stand right now. Discount, as said, this gives you a longer-term perspective in terms of year-end discounts where we ended the interim period, so in slightly at 6.6% we bought back 0.7% of shares in issue. And this gives you a picture in performance. Now there's numerous ways to consider performance outcomes. Obviously, when one looks at shareholder and NAV returns that we have delivered, they're very strong in absolute terms, 12.8% year-to-date, 28.3% in shareholder return terms over the past years -- past year, sorry. And when we look at compounded returns 3, 5 and 10, again, it's been a really exceptional period for investors in the trust, driven by strong returns from listed equities predominantly. So very pleasing, obviously, in absolute terms. I also show you the rank of the trust against the AIC peer group. Now there's only a small number of peers and a smaller number of peers than we did have 1 or 2 years ago within that global sector. So overall periods, we're ranking first, second or third. And again, it's pleasing to see over the 5-year period, we are #1 in shareholder return terms and in NAV terms, and we do make comparisons against open-ended equivalent and also the market benchmark. Now a couple of points I would just draw out in terms of these performance outcomes beyond the obvious statement that they are strong. But it is very pleasing to see high levels of consistency of returns with respect to our peers in particular. We are in a unique position, having delivered returns which exceed that of the median peer in shareholder terms, return terms and NAV terms over all these periods. And that speaks to this point about our focus on delivery of consistency in terms of outcomes for shareholders. And I also speak, I think, to this point on diversification. It was a period really, as I said, of exceptional returns from some individual stocks. Diversification helps to capture returns from a wider range of opportunities than focused portfolios. So as I showed you in the slide earlier, we do have a diversified portfolio, but blending together a range of focused strategies, and that has proven to be advantageous in terms of capturing those outsized returns from that small cohort of stocks. We really have driven markets over the first half of the year. Okay. So that is summary in terms of the interims. I'm going to make some comments on the outlook. I'm going to try and run through this relatively quickly because I know there are questions that you want to get to. Starting with the energy market, Iran, conflict in the Middle East. Now these slides were updated a few days ago. Obviously, things have moved on. We're back to another cease fire. We do have another couple of weeks until that memorandum of understanding expires. There was a 60-day period, which was given for negotiation that expires on the 20th of August, but we're in a bit of a lull in terms of obviously conflict in the Middle East at present. The chart on the left here shows you the collapse in terms of tanker crossings in the Strait of Hormuz. Everyone on the call will be aware that, that is a critical area in terms of energy and commodity supply for the rest of the world. It's had a very big impact in terms of this disruption on the oil price, clearly, amongst other commodities and related areas. But comparing on the right-hand side, the oil curve, this is from the market of expectations for future oil prices. You can look at what the oil curve was seeing before the conflict began and that is the orange dotted line there pre the Iran's attack and far lower than where we are now, which is the dotted blue line. But the market is still assuming that there is, I think, going to be some resolution to the stress in the Middle East. We would concur. Our view is unchanged. We think that both sides do have a clear incentive to reach a resolution. I think it's fair to say that Iran does remain incentivized to stretch negotiations out at the present time. The U.S. does appear to be in a relatively weaker position and a weaker position than it was several months ago. Military escalation is unlikely to unblock the current impact, but we should expect some more volatility, persistent threats in the Strait of Hormuz. The most likely exit, I think that we will see will involve some kind of service charge for the Strait of Hormuz on an ongoing basis won't be regarded as a toll, but it will effectively be the same outcome. But the market does similarly believe that we're not in a permanent situation of disruption. The oil price is expected to moderate from current levels in coming months and out into 2027. But I would say that while there was a response in terms of the oil price, there's been estimates that just over 9 million barrels per day of production was shut in across key Middle Eastern producers during recent months. That's equivalent to about 9% of global supply. That shortfall that the market has faced has largely been met with inventory drawdowns. Global stocks have supplied the equivalent of up to 7 million barrels per day. And you've seen that with U.S. crude and refined product exports, that's shown in the gray line on the left, that's helped to bridge the gap in terms of lack of supply. But there's clear limits as to how long this can continue. Inventories are falling, and we may well be approaching operational lows over the summer. So the situation is becoming more challenging. But the chart on the right shows European gas supply. And it does help to explain why the broader impact in terms of disruption has been more contained than was the case in 2022. Europe is less dependent on pipeline gas and LNG, which is shown by that shaded -- the shaded gray area is now playing a larger role. New supply is going to take time to come through. So prices are going to remain volatile. So the upside scenario for oil moving to $70 and if one looks at futures right now, it's currently around $84 when one looks at Brent. But to get a meaningful decline from here for the ceasefire to hold, obviously, for low-level attacks to similarly cease some tentative reopening of the Strait of Hormuz, pause on U.S. sanctions on Iranian oil and a clear progress towards a more durable agreement. And clearly, that's what we're hoping for. Conversely, the more bearish scenario where oil moves towards or through $100 would be another period where diplomacy breaks down, tax widening again in terms of scope, scale, geography, Strait of Hormuz effectively closing, disruption to the Red Sea returning conflict lasting beyond the U.S. midterms, that's November and inventory drawdowns slowing. So it remains fairly balanced, but we and I think the market do expect some resolution. So despite all the noise, the global economy has been, I think, more resilient than many people would have expected. The chart on the left shows 2026 consensus GDP growth expectations. That's the orange bars there against 2025 the blue. So Europe and the U.K. have seen the biggest downgrades, but global growth has only eased in terms of expectations from 3.2% to 2.9%, so a very modest downturn. U.S. looks resilient. Growth there is still expected to be just north of 2% fiscal support, easier financial conditions, AI-related investment, all helping. But on the right-hand side, you can see that we've got above target inflation, tight labor market, and that has brought the risk of further rate rises back into focus. So Middle East conflict lifted energy consumer price projections quite meaningfully actually, and that has led to an upgrade to rate expectations. People have been expecting rate cuts and now rate hikes are on the agenda, driven by this changed inflationary backdrop. In a bit more detail on the left-hand chart here shows you a slightly longer-term perspective in terms of the inflationary backdrop, still relatively contained, but inflation has not moderated to the extent that had been hoped. Europe does appear more exposed than many other areas with the energy shock already leading into prices. The ECB has hiked by 25 basis points in June. Markets are pricing in another couple of hikes. As you can see on the right-hand chart from the ECB, they're also expecting a hike from the Bank of England, one from the U.S. Federal Reserve, more from the Bank of Japan as well. Our view will be slightly more constructive in summary. We get too in all of the numbers, but we would expect some less tightening or less tightening from the Bank of England than markets imply, probably more balanced in terms of the outlook for the U.S. Federal Reserve. And the market has similarly moderated their expectations from 2 hikes to closer to 1 for the U.S. now. Government bonds, this chart -- or these charts show you the U.K. gilt market and other global bond markets. Interestingly, U.K. 10-year gilts are higher than many other developed areas, closer to 5% in the U.K., well above what we see in the U.S. and elsewhere. And interestingly, the U.K. has responded more negatively in terms of move up in government bond yields than many other developed areas. We think there is -- some of these concerns are somewhat overstated on balance with respect to the U.K. Obviously, it remains to be seen what the domestic political agenda looks like in terms of how more fiscal expenditure is going to be funded, but we do think there is value now actually in the government bond markets. Corporate earnings. Now corporate earnings have really driven equity markets year-to-date, surprised very, very strongly. That green line on the left-hand chart there shows you expectations for the global equity market in terms of earnings growth for 2026, and there's been massive, massive upgrades, really, really unusual to see the extent of upgrades that we've seen outside of recovery from a recession. So obviously, there's been no recession and no sharp economic recovery. In fact, economic growth in the U.S. is going to be slightly lower this year than last. But nonetheless, it's been a massive upgrade to earnings expectations. And the chart on the right here shows you expectations across the main regions at the beginning of the year, that is the gray dot there and where they are at the latest reading. So there's been upgrades from the beginning of the year expectations everywhere with the U.S. and emerging markets really the standout areas. And a lot of this has been driven by technology and in particular, but also earnings. They've been revised higher everywhere. Within emerging markets, upgrades have been concentrated, as you would expect, in Korea and Taiwan, that reflects AI demand. In Latin America, you've seen upgrades driven by higher commodity prices. But that -- these earnings upgrades really supporting equity market progress. Big dispersion within sectors. Energy sector on the left-hand side of the left chart there, now expected to deliver some of the strongest earnings growth in 2026, which a big reversal from negative growth last year. IT also expected to deliver very, very strong growth, but building on very good results last year. On the right-hand chart, we get into the technicalities. This just shows you the spread in terms of performance between the best and the worst sectors in the U.S., unusually wide dispersion of returns within the market from a sector perspective. Breadth remains narrow, I think, is a key point. Magnificent Seven, which, as I said, have been lagging. Again, a lot of detail here, a few points to make. We can look at the forecast for the Magnificent Seven in terms of their earnings growth projections. 2026 now expected to grow earnings by 32% against the wider market, which is now at 24%. So very strong growth from the wider market, that stronger still from the Mag Seven and way higher than was expected at the beginning of the year. But on the right-hand chart, another key point is that -- and we've had huge capital expenditure plans outlined by the hyperscalers who are obviously driving this AI infrastructure spending boom. And you can see that capital expenditure plans for the Magnificent Seven -- or sorry, capital expenditure for the Magnificent Seven, which is the blue line there, has overtaken free cash flow and is on current projections expected to rise further. So AI, rapid technological progress, but more limited near-term commercial returns in terms of those that are making the investments. The current pace of spending really rest on expectations of future monetization and the belief that these first movers are going to secure a lasting advantage. Moving on to equity returns and valuations within technology. There's been a clear rotation from software towards semiconductors and hardware over the past year. This is partly reversed over the past month. That's the blue line, the Philadelphia Semis or SOX Index, which has a phenomenal period over the past year or so, came back about 20% in July, bounced in recent days from that. AI has clearly raised questions about which part of the ecosystem are going to benefit most. The market has concluded in concur that software does look more exposed to disruption given AI's ability to automate coding and related tasks, while semis and hardware do look to be direct beneficiaries of the investment cycle. So this has supported far stronger technology performance in Japan and emerging markets shown in the right-hand table there again a few days out of market has been very volatile, but indices such as Korea and Taiwan have really benefited with heavier semiconductor and hardware exposure. Obviously, I should say that during July, we've had a massive setback in terms of some of these individual stocks and some of these indices with Korea particularly hard hit with retail deleveraging really driving that sharp reversal in the market. Valuations, I think it's fair to say that equity markets don't necessarily look cheap when one looks at the U.S. Conversely, emerging markets, very much helped by the upgrades to earnings that we have seen and which I reflected on a few moments ago, looking far better than developed market equivalents. Emerging markets, despite the recent setback, have had the strongest year-to-date returns, that's shown on the right-hand side here. But again, quite a big shock -- quite a big downturn over the past month or so. Our view is that in terms of conclusions from all of this work and analysis, central case is still supportive. It's been a very good period for equity markets year-to-date and in recent years. Global growth has held up far better than expected despite the oil shock supported by policy, resilient demand, strong corporate balance sheets and obviously, AI spending, range of potential outcomes and risks. Obviously, wide geopolitical uncertainty does create obvious risks and that may continue to weigh on confidence. But we would say that the outlook for equities does remain well supported by the corporate earnings backdrop, which looking into 2027 continues to look favorable. So very cognizant of the risks, very cognizant of the fact that the Middle East and geopolitics in general does remain an ongoing source of potential volatility, but we do think that the corporate earnings backdrop is supportive. The growth backdrop is supportive. There is some scope for positive surprise in terms of interest rate expectations being perhaps a little bit too bearish. So this combination of good growth, relatively modest inflation, interest rates remaining relatively accommodative is a supportive one for equity markets. And for that reason, we do think that the outlook does remain on balance positive for markets over the remainder of the year and into 2027. So I'm going to pause there, going through a lot of detail. Very happy to take any questions. I know that some have come in already. I'm going to pass over to my colleague, who I think is going to moderate from here.

I will. Thank you, Paul, very much for the detail. My name is Peter Brown. I'm part of the Investment Trust team at Threadneedle. Thank you for your questions. Please continue to submit them. If we don't get to answer them today, we'll definitely do it in written form in the next day or so, and you can get the answers on the Investment company website. So Paul, straight into it, lots of questions, you can imagine, lots about similar topics. I'll try and pair 2 or 3 up together. The first one -- we'll start with given the current level of optimism priced into all major stock markets and the failure so far to recognize the downside exposure caused by the Middle East conflicts, should F&c not consider pivoting more towards the wealth protection rather than normal capital growth income measures at least for a period of time?

Well, the short answer is that we will remain focused on growth assets. So we have, for many years, focused on listed equities and private equity. The reason that we do focus on growth assets is in the long term, we think we'll get superior returns from that approach. And I think that has proven to be the case when one compares us to vehicles that are more focused on wealth protection or absolute return. I am certainly not, as hopefully, I conveyed during my presentation, naive to downside risks. But our view is still relatively constructive. And for that reason, we will remain fully invested in equities and private equity. I don't expect that we will be going heavily into cash or diversifying assets anytime soon, and we'll retain that focus on the long-term opportunities, which we do think remain best in the -- in growth assets, equities and private equity.

And on a similar theme, a question is here, how would you react in terms of portfolio management to price volatility such as that seen recently in the semiconductor sector?

Yes. So very topical, very interesting question. So our underlying managers have moderated their exposure to semi. So I'll take one example of that. And for those that are familiar with the trust, my role is to manage the overall composition of the portfolio. As I said, it will take position between growth and value, typically not taking specific sectoral positions myself, but underlying managers will be active in terms of management of exposure. If I take that global focus component of the portfolio, which is invested globally in quality growth stocks, they had around an 18% long position on semiconductors a few months ago. That has been reined in to around a 10% long position against the benchmark weight on semi. So still long within that strategy, but roughly half the relative position that they were running. And that is reflected in a moderation in the semis exposure that we have, the trust overall. So we were running -- we're roughly -- we've taken roughly 1/3, I think, at total portfolio level out of the long semis position that we had previously. So it will be actively managed, but many of our underlying strategies, managers remain constructive on the AI theme in terms of playing beneficiaries of the huge AI expenditure, which is ongoing. It shows no sign as yet of slowing down and in many instances, see now very good value in a number of these stocks, which have had quite a material setback which are trading on relatively low multiples. I would say just adding one more piece of detail, one needs to be a little bit -- you can take a stock like Hynix, which is a South Korean name, which has fallen very, very heavily over the course of the past month or so. The forward multiple in that stock has fallen from high single digits down to somewhere around between 4 and 5x forward earnings, which is very low. The question is how sustainable are those earnings because we know many of these companies are over earning at the present time. But as I said, we do expect that, that strong earnings environment for semi AI CapEx beneficiaries will persist and the valuation is better actually than it was a month or so back.

I think you've covered. There's a couple of questions on AI, but I think you've covered that in that answer. So we'll move on to the next question about small caps. The latest Morningstar data states that you have 21% allocation to medium and smaller companies, which I haven't checked, but I'm not sure that's strictly true. Anyway, how has this allocation evolved over the past 12 months? Do you see an opportunity to allocate more to medium and smaller companies? And I'll add that with, does the size of F&c inhibit your ability to take meaningful positions in smaller companies? If valuations point to a good opportunity in medium and smaller companies, would you be able to take advantage?

Yes. So on small caps, I'm not familiar with the methodology that Morningstar used to categorize our exposure, but we don't have a small cap allocation. We did, as I showed in terms of the allocations that we have in the portfolio, how they moved about through time. We did divest in entirety from a bespoke small cap allocation that we had several years ago, that proved to be pretty well timed actually because small cap subsequently underperformed large caps quite meaningfully. We are -- we don't have a small cap allocation right now. The way that the portfolio is run is essentially probably large caps and then we've got this private equity exposure. And that private equity exposure is largely in very small companies, right, that would be in the smaller micro cap space. So it's more of a barbell with large cap and unlisted smaller company exposure through our private equity holdings and a chunk of that is invested in what we call mid-market private equity, and that's typically where the enterprise value of the opportunities is less than GBP 500 million, which is pretty small in terms of size. I don't have any immediate plans to go back into the small cap space, but where we to choose to do so, then we could do that either by buying a pooled investment or by reincepting another bespoke mandate, which we did have previously. I know there's been some pickup in small cap performance. I mean it depends on what index you use or what geography you look at. If you look globally, small caps are pretty much in line with large caps over the course of the past year and year-to-date. Obviously, within that, you can see different geographies having better returns. In the U.S., there's been a much more meaningful pickup over the course of the past 6 and 12 months. But I don't think that we're at the present time, really foregoing much by way of opportunity cost. It's fair to say that they're trading on a discount in general to large caps. I would have a view that many of the current trends, which are preeminent in the market do suggest that large cap names will continue to benefit. It's about more concentration in terms of industry structure, the [indiscernible] of a number of industries, the fact that when it takes all or a small number of companies dominate even beyond technology, I think those trends do and will persist. And also, there's been quite a change in terms of makeup of small cap indices in recent years where actually the quality arguably in terms of those indices has diminished. We've seen a number of names fall out of the indices. And therefore, comparisons with the past, perhaps not quite as relevant, I think, as where we were previously. So short answer is no immediate plans to go back in small cap. If we choose to do so, however, we do have plenty of latitude in terms of exposure and means of access, but that barbell between large and unlisted privates is the way that we're playing markets at present.

Lovely. Moving on to Asia and emerging markets. The interim report shows you a 4.7% allocated to developed Pacific and over 10% in emerging markets, which I assume includes countries in the Pacific region. Which countries are in the developed Pacific allocation and what is the specific allocation within emerging markets?

Okay. So when one think about developed Pacific, again, different index providers and different managers will probably categorize different countries in different ways. The FTSE who provide our index returns, they will have -- they will have Australia and South Korea as 2 of the largest developed Asian constituents. Those 2 countries comprise around 80% of the developed Asia index. Other means included would be Hong Kong, Singapore and then you get into smaller areas like New Zealand. Now our emerging market manager, that's Invesco. We give them wider degrees of freedom than that. And their mandate includes exposure to South Korea, for example, even though technically, it sits within the developed Asia part of the market. But MSCI and FTSE categorize things slightly differently. The main difference is Korea and whether that's as an emerging market or a developed market. Again, there's a debate, but that's the most meaningful difference in terms of index constituents. Hopefully, that answers the question.

Yes. We have a follow-up question from someone else. Are you concerned at all that emerging markets could be getting overheated?