abrdn Diversified Income and Growth plc

Half Yearly Report 31 March 2024

abrdndiversified.co.uk

Investment Objective (from 27 February 2024)

The Company's investment objective is to conduct an orderly realisation of its assets in a manner that seeks to optimise the value of the Company's investments whilst progressively returning cash to shareholders in a timely manner.

Financial Highlights

Financial Highlights

Chairman's Statement

Approval of the Managed Wind-Down of the Company

Following an extensive review of the Company's strategy and discussions with shareholders, a circular was issued by the Company in January 2024 setting out a new investment objective and policy as part of proposals for a Managed Wind-Down of the Company. These proposals were approved by shareholders at the General Meeting held on 27 February 2024.

In accordance with the Managed Wind-Down, the Company has commenced an orderly realisation of its assets in a manner that seeks to optimise the value of the Company's investments for the benefit of shareholders.

Proposed initial return of capital to shareholders

The Company announced on 17 June 2024, by way of a circular to shareholders (the "Circular").  proposals to return approximately £115 million, representing approximately 38 pence per Ordinary share, to shareholders (the "Initial Return of Capital"), pursuant to a bonus issue, on a pro rata basis, of B shares to all shareholders, followed by the redemption of such B shares (the "B Share Scheme").

The Circular, which may be viewed on the Company's website at www.abrdndiversified.co.uk, contains further details of the Initial Return of Capital and the notice convening a General Meeting. This followed Court approval being obtained for the Company to reduce its share capital and cancel the amounts standing to the credit of its share premium account and capital redemption reserve to provide the Company with sufficient flexibility and distributable reserves to deliver the Managed Wind-Down as planned.

The introduction of the B Share Scheme is conditional on shareholder approval at a General Meeting to be held on 3 July 2024. If approval is forthcoming, the Company expects to distribute funds to shareholders by 10 July 2024.

Further returns of capital to shareholders

The Board anticipates further returns of capital to follow as value is realised from the Company's private markets portfolio as follows:

·  approximately £101 million of the Company's private markets portfolio (valued as at 31 May 2024) is expected to mature between 2024 and 2027 (the "Tranche 1").

·  the remaining, approximately £91 million of the private markets portfolio (valued as at 31 May 2024) is expected to mature between 2029 and 2033 (the "Tranche 2").

It is intended that the proceeds from both Tranche 1 and Tranche 2 will be returned to Shareholders in a timely manner as the investments mature. Further information on portfolio realisations may be found in the Investment Manager's Report.

Performance

Over the six months ended 31 March 2024, the Company's net asset value ("NAV") per share total return was +0.2%. The Company's share price total return was -8.8% with the share price discount to NAV widening from 25.8% to 32.6% over the period.

Dividends

In relation to the year ended 30 September 2024, interim dividends of 1.42p per share were paid to shareholders in October 2023 and January 2024 while a special dividend of 1.65 pence per share was paid to shareholders in December 2023. A further interim dividend of 1.42p per share was paid to shareholders in March 2024.

Following Court approval on 7 June 2024 and in the absence of unforeseen circumstances, it is the current intention of the Board to declare another interim dividend, for the year ended 30 September 2024, to be paid around mid-October 2024. Thereafter, it is likely that dividends will be paid in smaller, less regular amounts principally for the purpose of maintaining the Company's investment trust status while capital will be returned progressively to shareholders in larger, infrequent amounts by the most tax-efficient mechanism available.

The Board intends to continue to pay a sufficient level of dividend to ensure that the Company will not retain more than 15 per cent. of its income in an accounting period so as to maintain the Company's investment trust status during the Managed Wind-Down. The Directors will declare certain dividends based on the Company's net income but the quantum and timing of any dividends in future will be at the sole discretion of the Board.

There can be no guarantee as to the payment, quantum or timing of dividends during the Managed Wind-Down of the Company.

Share buybacks and Treasury shares policy

During the six months ended 31 March 2024, the Company bought back no shares, resulting in 301,265,952 Ordinary 25p shares with voting rights and another 22,485,854 shares held in treasury, at 31 March 2024.

Following the approval by the Court, on 7 June 2024, of the reduction in the Company's share capital, the nominal value per Ordinary share was reduced from 25p to 1p.

Gearing and Bond repayment

Subsequent to the period end, on 9 April 2024, the Company redeemed and cancelled the remaining £16,096,000 of its 6.25% Bonds due 2031 (the "Bonds"). As announced on 8 March 2024, the redemption price was 114.983%, which was calculated in accordance with the terms of the trust deed of the Bonds. The total cost of the redemption, including accrued interest, was £18,587,000. As a result, the Company has no further Bonds outstanding nor any other borrowings.

Davina Walter
Chairman

26 June 2024

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 risk;

·  Portfolio risk;

·  Gearing risk;

·  Income/dividend risk;

·  Regulatory risk;

·  Operational risk;

·  Market risk; and

·  Financial risks.

The Board reported on the principal risks and uncertainties faced by the Company in the Annual Report and Financial Statements for the year ended 30 September 2023 (the "Annual Report"); a detailed explanation can be found in the Strategic Report on pages 14 to 16 of the Annual Report which is available on the Company's website: abrdndiversified.co.uk

The Board continues to monitor the volatility and risks associated with heightened political and economic uncertainty, particularly the impact of the higher interest rate environment and market volatility associated with specific geopolitical risks.

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 2024 as they were to the six months under review, other than gearing risk, which is no longer applicable following the redemption of the 6.25% Bonds 2031 on 9 April 2024.

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 forecast projections and actual performance have been reviewed on a regular basis throughout the period and the Directors believe that the going concern basis remains appropriate as 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.

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

abrdn Fund Managers Limited ("AFML") has been appointed as the Company's alternative investment
fund manager.

AFML has (with the Company's consent) delegated certain portfolio and risk management services, and other ancillary services, to abrdn Investments Limited and abrdn Holdings Limited, which are regarded as related parties under the UKLA's Listing Rules. Details of the fees payable to AFML 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 2024; 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.

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

For and on behalf of the Board
Davina Walter
Chairman

26 June 2024

Investment Manager's Report

The last mile for inflation is taking time to resolve. Having appeared to be slowly reducing to target, we have seen sequential inflation nudging back up. Economically, and from a capital markets perspective, the US leads the rest of the developed world with few signs of economic stress while the UK and pockets of Europe have experienced technical recessions, providing diverging challenges for central bankers. Geopolitical risks remain high, and with many countries holding elections this year, instability is unlikely to dissipate.

Concentrated market returns

In the last two Annual Reports, we noted that inflation was the number one factor driving markets with data remaining stubbornly higher than central bank targets globally, forcing central bankers to keep rates at elevated levels. While inflation had appeared to be slowly reducing to target towards the end of 2023, sequential inflation was observed nudging back up in Q1 2024. As things stand, central banks are lacking supporting evidence for rate cuts. Indeed, growing market chatter about the next move in the US is leaning towards a hike over a cut, but remains a minority view.  This has fed into corporate debt, with spreads having tightened across credit markets in early 2024, but particularly in the high yield market, making valuations in the asset class look full.

Away from the great rate debate, equity market returns have been dominated by tech names, with the 'Magnificent 7' driving over half of S&P 500 returns  on the back of optimism over an artificial intelligence-backed productivity super-cycle. Growth has been driven by higher expectations of future earnings, rather than increases in valuation multiple, distinguishing this tech-driven market from the dot com bubble of the late 1990s.  Developed market earnings growth appears to have moved through cyclical lows and should recover further if economies experience a soft landing. Chinese equity markets have stabilised thanks to policy moves, but house price falls across the country have weighed on GDP growth. Touching on property, on a global basis, most pain is behind investors now in March 2024. There is a little more yield revaluation to go but the cyclicality of the market and a current lack of new construction starts mean rental growth should start to pick up in key sectors.

Performance

Although the NAV, including income, demonstrated the low volatility that we seek, the performance over the six months was disappointing in comparison to the favourable backdrop of equity and bond markets. The Company delivered a total return of 0.2% with 3.2% volatility. This compared with a 5.2% return in equities as measured by the FTSE All-Share Index with 9.8% volatility, and a 6.2% return on government bonds as measured by the ICE BofA UK Gilt Index with a volatility of 8.1%. Higher Yielding Fixed Income securities were the top performers with Defensive Assets also performing well. The Company's Real Assets holdings detracted from returns in the period.

In Higher Yield Fixed Income, the standout performers were Emerging Market Bonds and Asset-Backed holdings. Returns from Equities were negative over the period for the Company with the Chinese market underperforming broader global indices. Our Diversifying Opportunities positions were broadly flat, with mixed performance spread across the asset class.

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

How did the portfolio produce returns during this period?

Equity Growth

Equities returned -2.3% over the period, contributing -0.3% to the Company. This was driven predominantly by underperformance of the holding in China A-shares. Chinese economic growth has been lower than expected, impacting corporate earnings growth. Equity markets have stabilised since policy stance has become more  supportive, but Chinese equities have not yet benefitted from this, despite the screening as cheap on a forward P/E ratio.

There was also negative performance from Private Equity, where good performance from Aberdeen Standard Secondary Opportunities Fund IV was outweighed by a reduction in value at TrueNoord, the regional aircraft leasing company, where new equity was raised at a slightly lower valuation.

Higher Yielding Fixed Income

Higher Yielding Fixed Income led return generation over the six months, adding 1.3%. Within this, Asset-Backed Securities were the top performer, contributing 0.5%. TwentyFour Asset Backed Opportunities led returns with the floating rate nature of the debt benefitting the investment, within a higher interest rate environment.

The tilt to floating rate lending also provided higher returns within the Private Credit portfolio. Mount Row II in particular has seen income paid rise as the semi-annual rates of the underlying securities reset at higher coupons. The slightly delayed effect of this means that the increased income from higher interest rates is yet to be fully reflected and will be positive to portfolio income for several months following a potential move down in rates.

Real Assets

Real assets detracted from performance, returning -1.1% over the six months.

Property assets have suffered from continued underperformance due to their susceptibility to rising rates. As central banks have increased rates this has also increased the yield on government bonds. These are typically used as the risk-free rate in discounted cashflow calculations that drive the valuations for real assets. A higher risk-free rate increases the discount rate and reduces the present value of future cashflows.  As rates remain high, this resulted in lower valuations and has also depressed the demand for real estate assets in particular. Real estate is highly cyclical, and in the current environment, few people are starting new construction projects. In the long run, this has the impact of reducing supply, which means valuations will start to turn as rates begin to drop, and demand will quickly outstrip supply. The Company owned no public real estate assets over the 6 month period to 31 March 2024, but the private assets underperformed.

While NAVs for our infrastructure positions have been more resilient to rising interest rates, given the high inflation linkage of underlying revenues for assets in the privately held portfolio, there were a couple of stock specific negative contributions to the portfolio which weighed on returns. Firstly, investors voted to approve a liquidity window for the Aberdeen Global Infrastructure Partners II Fund, which means the fund has been looking to realise is underlying portfolio. Pleasingly, it has received bids for assets in line with NAV, but the faster than anticipated return of cash mechanically increases the Internal Rate of Return assumption and crystallises a larger performance fee, reducing the carrying value of the investment. Secondly, the SL Capital Infrastructure Fund raised equity for a digital infrastructure asset at a lower valuation than anticipated, reducing the value of this holding.

Shortly after the 31 March 2024 balance sheet date, information was received from the manager of Aberdeen European Residential Opportunities Fund that necessitated a further write down in the value of the investment, reflected in the Company's daily NAV published for 2 April 2024. The adjustment principally related to the persistent high interest rate environment and a slower than expected transactional market in the real estate sector. In addition, investor caution continued to affect adversely the marketing and divestment of the underlying property assets.

Diversifying Opportunities

The basket of Diversifying Opportunities contributed 0.1% to the performance of the Company over the period. Performance was broadly spread across several assets, with positive returns from the private HealthCare Royalty Partners IV fund and the publicly listed healthcare provider BioPharma Credit, and shipping group Tufton Oceanic Shipping, being offset by a slight markdown in Burford Opportunity Fund.

Defensive Assets

Our exposure to defensive assets, such as government bonds and cash, increased over the period firstly as an investment decision, as rates appeared to be peaking, and a movement down in yields  increases the value of these assets. This proved to be the case with both the Government Bond and Investment Grade Credit positions performing positively, contributing 0.5% and 0.3% respectively.

What portfolio changes did we make?

Following shareholder approval on 27 February 2024 to put the Company into a managed wind-down, the public assets in the Equity Growth, Real Assets, Diversifying Opportunities and Higher Yielding Fixed Income were sold in an orderly manner with the proceeds reinvested in the Defensive Assets basket to preserve capital value and reflecting the lower appetite for risk.

Future portfolio realisations

The Chairman's Statement sets out the expected timescale for realisation of the Company's private market investments, in terms of Tranche 1 and Tranche 2.

In the first three months of 2024,  approximately £3m was received from the underlying assets in Tranche 1, including £1m from Burford Opportunity Fund as it received payment on completion of further cases,  and £1m from Maj IV, in respect of the sale of the stake in Sticks N Sushi, in line with its carrying value. We will continue to realise the stakes in Tranche 1 assets, and look opportunistically to generate liquidity in the Tranche 2 assets.

Nalaka De Silva

Simon Fox

Nic Baddeley
abrdn Investments Limited
Investment Manager

26 June 2024

Ten Largest Investments

As at 31 March 2024

Investment Portfolio - Private Markets

Investment Portfolio - Equities

Investment Portfolio - Fixed Income & Credit

Investment Portfolio - Net Assets Summary

Condensed Statement of Comprehensive Income (unaudited)

Condensed Statement of Financial Position (unaudited)

Condensed Statement of Changes in Equity (unaudited)

Condensed Statement of Cash Flows (unaudited)

Notes to the Financial Statements

For the year ended 31 March 2024

Alternative Performance Measures

END