ABERDEEN DIVERSIFIED INCOME AND GROWTH TRUST PLC

LEGAL ENTITY IDENTIFIER (LEI): 2138003QINEGCHYGW702

HALF-YEARLY FINANCIAL REPORT FOR THE SIX MONTHS ENDED 31 MARCH 2022

The Directors of Aberdeen Diversified Income and Growth Trust plc report the unaudited results for the six months ended 31 March 2022.

Performance Highlights

Financial Calendar, Dividends and Highlights

Financial Highlights

Chairman's Statement

Performance

Global equity markets have experienced greatly increased volatility over the six months under review to 31 March 2022 as a number of negative factors have combined to create sharply increasing inflationary pressures and uncertain economic growth.  Supply chain constraints, an infectious variant of Covid-19, causing staffing issues, and rising energy prices in the latter part of 2021 then combined with the Russia/Ukraine conflict in early 2022 to fuel further sharp rises in energy, commodity and food prices.  Against this backdrop central banks have been reacting to sharp increases in inflation by raising interest rates which has meant government bonds have not provided capital protection over this period.

Given the challenging period for global equity markets and the volatility that we have witnessed, coupled with the fall in bond markets, it is pleasing to report that the Company experienced a relatively steady period of performance with low volatility. Over the six months' period ended 31 March 2022, the Company's net asset value per share ("NAV") total return, with debt at fair value and including income reinvested, was 3.8%. The Company's share price increased by 1.5% while the share price total return (assuming dividends are reinvested) was 4.4%.  Over the 12 months ended 31 March 2022, the Company's NAV, with debt at fair value, increased by 12.2% while the Company's share price total return was 12.9%. Although the 12 month returns compare favourably with the Company's revised performance target of 6% per annum, it should be noted that this needs to be judged over rolling five year periods, not just over one year.

Dividend

Part of our investment proposition to shareholders is to offer a dependable quarterly dividend.  The Company's revenue return for the six months ended 31 March 2022 was 2.79 pence per share (2021 - 2.79 pence). For the year to 30 September 2022, a first interim dividend of 1.40 pence (2021 - 1.38 pence) per share was paid to shareholders on 31 March 2022. The Board declared on 8 June 2022 a second interim dividend per share of 1.40 pence (2021 - 1.38 pence) to be paid on 14 July 2022 to shareholders on the register on 17 June 2022 with an ex-dividend date of 15 June 2022.  On an annualised basis, a quarterly dividend of 1.40 pence per share is equivalent to a dividend yield of 5.5% based on the period end share price of 101.5 pence.

Share buybacks and Treasury shares policy

During the period, the Company bought back 221,379 shares into treasury at a cost of £221,000. The Company's discount (calculated with debt at fair value) narrowed from 17.9% at 30 September 2021 to 16.8% at 31 March 2022.

The Board has agreed that in the event of the share price trading at a premium to the NAV per share, Ordinary shares can be re-issued out of treasury as this is less expensive than issuing new Ordinary shares. Although shares may be held in treasury indefinitely the Board has decided to adopt a policy such that, in the event the number of treasury shares represents more than 10% of the Company's issued share capital (excluding treasury shares) at the end of any financial year, the Company will cancel a proportion of its treasury shares such that the remaining balance will equal 7.5% of the issued share capital (excluding treasury shares).

Gearing

The Company's net gearing was 2.7% at 31 March 2022 (2021 - 3.7%), with its £16.1million 6.25% Bonds due 2031 priced at fair value. The Board continues to keep the overall level of gearing under review but, in the prevailing economic environment, there is no current intention to introduce further fixed rate gearing.

Environmental, social and governance ("ESG")

Taking account of ESG factors is now an integral part of the investment process at abrdn as well as ongoing monitoring after investments are included in the portfolio.  Equally as important the investment teams undertake constructive engagement with the management of the investments held, in both public and private markets, on ESG issues and related risks.  More detail on the approach to ESG can be found in the Company's 2021 annual report on pages 38 to 40.  It is an evolutionary process and the Board continues to review closely the Manager's approach to, and adherence with, its ESG philosophy and policies.  Further information may be found in the Investment Manager's Report.

Outlook

Whilst uncertainty prevails over markets, especially in terms of the inflationary outlook, economic growth and the Russia/Ukraine conflict, the Board believes the Company's strategy, which seeks to provide capital growth and a dependable quarterly dividend from a diversified portfolio, is well positioned to deliver an attractive total return with lower volatility to our shareholders over the medium term.  There have certainly been early fears expressed of recession.  Whilst such uncertainty exists, we remain mindful of the challenges ahead and your Board together with the Manager continue to review asset allocation on a regular basis with this heightened risk prompting the Manager to reduce equities and emerging market debt exposure as a result.  The portfolio incorporates a degree of inflation-linkage through its infrastructure assets while the renewable investments offer a degree of income protection. The diversification in the portfolio, provided through investment in a broad range of asset classes, both listed and unlisted, should offer some confidence that the Company is well-placed and will continue to take advantage of investment opportunities that arise from the volatility we are seeing in the markets. 

Davina Walter
Chairman

14 June 2022

Interim Management Report and Directors' Responsibility Statement

The Chairman's Statement and the Investment Manager's Report provide details of the important events which have occurred during the period and their impact on the financial statements.

Principal Risks and Uncertainties

The principal risks faced by the Company can be divided into various areas as follows:

-      Performance;

-      Portfolio;

-      Gearing;

-      Income/dividend;

-      Regulatory;

-      Operational;

-      Market; and

-      Financial.

The Board reported on the principal risks and uncertainties faced by the Company in the Annual Report and Financial Statements (the "Annual Report") for the year ended 30 September 2021; a detailed explanation can be found in the Strategic Report on pages 11 to 14 of the Annual Report which is available on the Company's website: aberdeendiversified.co.uk

The Board is monitoring the increasing political and economic uncertainty which emerged in the period and could affect markets, particularly the reaction to higher interest rates and the volatility associated with the conflict in Ukraine, both of which are expected to endure over the six months to 30 September 2022.

The Board is also conscious of the elevated threat posed by climate change and continues to monitor, through its Investment Manager, the potential risk that its portfolio investments may fail to adapt to the requirements imposed by climate change.

In the view of the Board, there have not been any other changes to the fundamental nature of the principal risks and uncertainties facing the Company since the previous Annual Report, which are considered to be equally applicable to the remaining six months of the financial year to 30 September 2022 as they were to the six months under review.

Going Concern

The Financial Statements of the Company have been prepared on a going concern basis. The Directors have assessed the financial position of the Company as outlined above and in the Chairman's Statement. The Board takes comfort from the Manager's construction of an actively managed portfolio of diversified assets which is designed to provide both a level of resilience in the face of shorter term volatility and the potential for an attractive return over the medium and longer return.

The forecast projections and actual performance are reviewed on a regular basis throughout the period and the Directors believe that this is the appropriate basis and that the Company is financially sound with adequate resources to continue in operational existence for the foreseeable future (being a period of twelve months from the date that these financial statements were approved). The Company is able to meet all of its liabilities from its assets, including its ongoing operating expenses.

Whilst the Company is obliged to hold an annual continuation vote at the AGM, as an ordinary resolution, the Directors do not believe this should automatically trigger the adoption of a basis other than going concern in line with the Association of Investment Companies ("AIC") Statement of Recommended Practice ("SORP") which states that it is more appropriate to prepare financial statements on a going concern basis unless a continuation vote has already been triggered and shareholders have voted against continuation.

Related Party Disclosures and Transactions with the Alternative Investment Fund Manager and Investment Manager

Aberdeen Standard Fund Managers Limited ("ASFML") has been appointed as the Company's Alternative Investment Fund Manager ("AIFM").

ASFML has (with the Company's consent) delegated certain portfolio and risk management services, and other ancillary services, to Aberdeen Asset Managers Limited and Aberdeen Asset Management PLC which are regarded as related parties under the UKLA's Listing Rules. Details of the fees payable to ASFML are set out in note 3 to the condensed financial statements.

Directors' Responsibility Statement

The Disclosure and Transparency Rules of the UK Listing Authority require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements.

The Directors confirm to the best of their knowledge that:

-      the condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with applicable UK Accounting Standard FRS 104 'Interim Financial Reporting' and give a true and fair view of the assets, liabilities, financial position and return of the Company for the period ended 31 March 2022; and

-      the Interim Management Report, together with the Chairman's Statement and Investment Manager's Report, include a fair review of the information required by 4.2.7R and 4.2.8R of the FCA's Disclosure and Transparency Rules.

This Half-Yearly Financial Report has been reviewed by the Company's auditor, PricewaterhouseCoopers LLP, and their report is set out on in the published .

The Half-Yearly Financial Report was approved by the Board and the above Director's Responsibility Statement was signed on its behalf by the Chairman.

For and on behalf of the Board
Davina Walter
Chairman

14 June 2022

Investment Manager's Report

The last six months have been one of the most volatile and dramatic periods in equities and bond markets that we can remember.  The saying 'may you live in interesting times' could not be more appropriate - we have had dramatic inflation increases in the West  and we are now experiencing war in Europe - something that was almost unthinkable when we last wrote.  Our thoughts are with any readers who have connections with Ukraine.

A dramatic period, both in terms of politics & economics, and market performance

As we wrote the last Annual Report in the third quarter of 2021 we noted that a new Covid-19 variant - Omicron - appeared to be much more infectious and observed that the effect on the global economy could be significant.  The impact of Omicron turned out to be very significant as restrictions were ramped up and countries raced to vaccinate populations, for a third time in many cases. 

The impact on supply chains, concurrent with labour shortages and commodity price increases, deepened inflation that had taken hold as a result of the reopening of economies. 

As inflation became more broad-based, market participants fretted about developed market central banks being late to adopt the appropriate monetary policy to tackle it.  The result was an enormous, and swift, rotation out of growth stocks within equities markets.  At the same time there was an equally dramatic sell off in government bonds as expectations of interest rate rises increased. 

Finally, Russia took the decision to invade its neighbour Ukraine.   This action was met with unprecedented sanctions by Western governments, including the removal of access by Russia to both its US dollar reserves and the ability of its most systemically important banks to use the global SWIFT payments system. 

As the horror of war unfolded, companies and governments began to refuse to trade with Russia.  Commodities prices soared due to Russia's importance as an energy and metals exporter, and Ukraine's importance as a wheat exporter. This served to cement the inflationary forces into place, meaning that central banks had no choice but to act, and began to raise interest rates, finally dispensing with the notion that inflation could possibly be transitory.

Capital protection in a challenging environment

On an absolute and relative basis return on net asset value ("NAV"), with debt at fair value and including income, has been reasonable during the period. The Company delivered a total return of 3.8% with 2.6% volatility, a good risk adjusted return per unit of risk taken. The compared with a 4.7% return in equities as measured by the FTSE All-Share Index with 11.8% volatility, and -5.2% in government bonds as measured by the ICE BofA UK Gilt Index with a volatility of 14.8%.  The share price total return was 4.4% during the period.

The Company has been able to protect capital in a very challenging market environment, with Private Market investments driving returns.  Equities also performed well.  Whilst Fixed Income & Credit detracted from returns, the loss was relatively muted.

In Private Markets, the standout performers were infrastructure and private equity.  Aberdeen Global Infrastructure Partners II was marked up significantly on a better than initially forecast outlook for the I77 Express Lane asset's revenue.  SL Capital Infrastructure II benefitted as revenues increased due to inflation linkage across the portfolio and increased power prices for its solar investment in Poland.  Andean Social Infrastructure Fund I also enjoyed positive performance due to the inflation linkage of its revenues. 

Within Private Equity, Maj Equity Fund IV sold Svendsen Sports, a Scandinavian fishing tackle specialist retailer, for a higher than forecast price.  The Aberdeen Standard Secondary Opportunities Fund IV benefited from strong performance from the investments acquired off-market via the abrdn origination network, driven by Vitriuvian II, a European high growth, tech enabled private equity fund.

We discuss performance, gross of management fees and expenses directly attributable to the Company, in greater detail below.

How did the Company produce returns during such a volatile period?

Private Markets

Private Markets led return generation, contributing 3.9% to performance.  As mentioned in our opening comments, infrastructure assets performed particularly well, contributing 2.5% to performance.

In addition, there can be uplifts in capital values of these assets.  For example, the Company benefitted from a significant uplift in valuation of an asset held within the Aberdeen Global Infrastructure Partners II holding.  The Interstate 77 toll road asset, which connects West Virginia and South Carolina in the east of the United States of America, gained in value as the per mile forecast increased.

The core infrastructure positions in the Company's portfolio have in place long term revenue contracts with inflation linkage built in, so the current inflationary environment has been positive for their cashflows and valuations, allowing the Company to deliver steady performance through a time of inflationary and volatile markets. The long term contracts also ensure that future revenues are already secured, so that the infrastructure portfolio at the heart of the Company is well positioned to continue to deliver value throughout the economic cycle.

In addition, there can be opportunities for uplifts in capital values of these assets.  For example, the Company benefitted from a significant uplift in valuation of an asset held within the Aberdeen Global Infrastructure Partners II holding.  The Interstate 77 express lane toll road asset, connecting West Virginia and South Carolina, which feeds traffic to and from Charlotte, North Carolina in the eastern USA, gained in value as the revenue per mile forecast increased (see case study).

Furthermore, the longer term trend of increased demand for renewable energy has been amplified by the need to move away from energy produced by Russia, which has driven improved cashflows and valuations at the Company's operational solar and wind assets in the UK and Europe. The value of the Company's stake in the largest solar platform in Poland was up over 10%, and the UK solar and wind portfolio provided its largest quarterly cash distribution to date in Q1 2022.

We continue to increase the Company's exposure to the privately held infrastructure sector as commitments made previously are called by managers, including the significant drawdown from the Andean Social Infrastructure Fund in March to develop a new port facility in Colombia (see more detail on this investment in the Investment Case Study).

Private Equity was also a positive driver of performance during the period contributing 0.7% to performance. Further to the gains made by Aberdeen Standard Secondary Opportunities Fund IV and Maj Equity Fund IV mentioned above, there was growth from the venture capital investments held in the Aberdeen Standard Global Private Markets Fund. While some tech names in the listed markets have seen sharp drops in value on concerns around user growth, the innovation cycle which drives growth in the Venture Capital (VC) market has remained strong. The current VC portfolio is tilted towards names at the forefront of Web 3.0 (the decentralisation of the internet where individuals can own their own data) which is a significant shift in the tech landscape and is expected to drive further idiosyncratic growth.

The Company's exposure to Private Credit was a marginal positive over the period due to the floating rate nature of the majority of the underlying investments, providing protection in a rising interest rate environment.

Finally, the Special Opportunities basket provided positive performance as the investment in Healthcare Royalty Partners IV continued to provide strong income for the Company. The income is linked to sales of medical treatments, and as such is non-economically linked, and should continue to perform steadily through periods of volatile market performance.

Equities

Equities returned 1.2% during the period driven predominantly by infrastructure names, but also from our Core Sustainable Equity exposure.  The infrastructure names were particularly resilient to the inflationary environment, and bucked the trend towards increased equity market volatility during the period.

The Core Sustainable Equity sleeve exposure contributed 0.3% to returns during the period, whilst the ASI UK Mid Cap Fund exposure suffered during the rotation away from growth stocks and towards value stocks, which was particularly aggressive and unfavourable towards the quality, growth, and momentum focused style of investing pursued by the team.  This loss was partly offset by the Company's exposure to the FTSE 100 Future held to balance out the factor risks of that holding.

Fixed Income & Credit

Fixed Income and Credit contributed -0.8% to returns during the period. Whilst Asset Backed Securities delivered a marginally negative return during the period, Emerging Market Debt led the negative contribution made by the Fixed Income & Credit allocation.  Inflation concerns, which have been a key concern for some time in many emerging markets, particularly in the case of food price inflation, led some central banks to continue to raise interest rates.  This led to a sell-off in some bond markets, particularly earlier in the period, although prices recovered over the turn of the year as market participants began to expect fewer rate hikes going forward.  The currency hedging basket contributed positively to performance during the period, as did interest payments.

Sadly, Russia initiating a full scale invasion of Ukraine led to losses within the Emerging Market Debt sleeve during February and March.  We had been reducing exposure to Russia and Ukraine ahead of the invasion as we anticipated some form of conflict, but like most others, we did not expect a full scale invasion, so had retained some exposure. The subsequent impact on the debt of both Russia and Ukraine, in addition to that of Belarus as a facilitator of the invasion, contributed negative performance of -0.7% during February and March.  Positive performance in the rest of the sleeve was not enough to offset these losses.

Russian debt was written down to zero within the portfolio so there will be no further negative performance impact.  Whilst the Ukraine local currency market is closed due to capital controls interest payments continue to be made, and the Company had an exposure of 0.3% at the end of March.

What portfolio changes did we make?

Private Market Capital Calls & Distributions

We continued to increase exposure to Private Markets with increased allocations to Infrastructure and Private Equity in particular.  Several notable capital calls were received from Private Market managers as they identified new investment opportunities.

Bonaccord Capital, the Private Equity fund focusing on investing in alternative investment management firms, drew down further capital as it made investments in four new managers in December, meaning the portfolio is now finalised and generating income, as well as providing the opportunity for growth.

In addition, there were significant capital calls from the Andean Social Infrastructure Fund (see the case study) and from Hark III, the Private Credit fund.

There were also several significant distributions paid back to the Company from its Private Market investments during the period.

The DWS Pan European Infrastructure Fund I sold its stake in Peel Ports and distributed the proportionate share of the proceeds (c. €3.2m) back to the Company (see the Investment Case Study).

The Aberdeen Property Secondaries Fund distributed c. €3.6m back to the Company from the proceeds of its investment in the TCAP Gemlife fund, the final remaining asset of which was a mezzanine loan secured against a portfolio of 13 retirement villages in Australia.

Finally, the Aberdeen Standard Secondary Opportunities Fund IV distributed $1.9m to the Company in November, from gains made in the three diversified portfolios acquired in previous transactions.

Listed market portfolio changes

As capital calls from Private Market managers were received during November, we chose to fund these from developed market corporate credit and core equities. We aimed to keep credit exposure broadly neutral but favoured reducing equities exposure as we had less conviction in the outlook for growth and have become more circumspect on the prospects for the revenue growth that we considered necessary to defend margins. 

In December, we reduced our long Japanese yen position in favour of the US dollar.  We felt that was a better hedge to the downside risks we saw as increasingly apparent.

At the beginning of the year we trimmed our emerging market debt exposure as it had performed well relative to other assets, and our view became more neutral as a result.  At the same time, within that sleeve, we had been trimming Russian exposure as rhetoric around Ukraine became less favourable, but like most others, we didn't anticipate a full scale invasion and so had maintained some exposure.

Finally, following the bounce off the lows witnessed in February, we trimmed equity exposure by removing the FSTE 100 future during March and funded a further private market drawdown from a Private Credit manager from our loans exposure.  We also closed the remaining long Japanese yen position in favour of the US dollar.

Whilst we have confidence in the asset allocation, the overarching view has been to reduce exposure to Equities and Emerging Market Debt at the margin as the risks to the economy from inflation and potential recession have built up, whilst allowing the Company to be in a position to participate in upside scenarios to the extent that they present themselves.

Further ESG integration

Since we last wrote, we have evolved the way we consider developments in ESG, and in particular climate change, into our strategic asset allocation process. 

Our standard long-term expected return forecasts now include climate change scenario analysis outputs for equities, which consider the impact on equity valuations in light of plausible technological, energy mix and policy developments.

The relatively short maturity of credit assets and their position in the capital structure make aggregate index level impairments very small so we do not include such considerations in our credit forecasts.

Government bond returns require the forecasting of yield curves, and the interplay between climate change policy and monetary/fiscal policy is a topic of ongoing debate.

Where do we go from here?

Omicron continues to weigh on supply chains, exacerbated further by China's zero Covid strategy.  At the same time the war in Ukraine compounds these issues and we expect continued disruption as a result.  The combination of conflict and monetary tightening will slow growth below trend.

The probability of a recession in the US during the next 24 months is undoubtedly increasing.  As this risk is elevated we have trimmed our equities and emerging market debt exposure.  We have also added US dollar exposure as we suspect this will continue to do well in the current environment of tightening policy in the US.

We expect credit to be more resilient than it would ordinarily be in this environment as a result of the balance sheet clean up during the depths of the Covid-19 crisis, and whilst we do not expect the recession to be shallow, neither will it be deep or protracted.

There will be continued inflation upside risk due to supply chain issues and elevated commodities prices.  Underlying inflation pressures are mounting, but we think the Company is insulated to a degree as we have inflation sensitive assets such as infrastructure and floating rate credit.

Policy makers will struggle to look through the energy price shock and underlying inflation pressures will mean tighter financial conditions.  We are watching real interest rates (which are rates after adjusting for inflation) closely.

In terms of the terrible events occurring in Ukraine, history suggests markets can rebound sharply when geopolitical shocks resolve, but the conflict continues to become more entrenched, sadly.

The Company has a well-diversified portfolio, and has proven to be resilient in the recent challenging environment.  While we expect market conditions to remain challenging, we believe the Company is well placed to continue to navigate what is proving to be a difficult environment. We hope to be able to continue to deliver differentiated returns to shareholders by holding Private Market assets that are uncorrelated, or less correlated to economic events, as well as listed assets that can provide good cash flows, whilst also maintaining exposure to certain assets that can participate to the upside in more constructive market environments.

Nalaka De Silva
Jennifer Mernagh

Nic Baddeley
Aberdeen Asset Managers Limited
Investment Manager

14 June 2022

Ten Largest Investments

As at 31 March 2022

Investment Portfolio - Private Markets

Investment Portfolio - Equities

Investment Portfolio - Fixed Income & Credit

Investment Portfolio - Net Assets Summary