Invesco Perpetual Select Trust plc
Annual Financial Report Announcement
Year Ended 31 May 2017
.
FINANCIAL PERFORMANCE
CUMULATIVE TOTAL RETURNS TO 31 MAY 2017
| UK Equity Portfolio |
ONE
YEAR |
THREE
YEARS |
FIVE
YEARS |
| Net Asset Value |
22.0% |
38.9% |
134.6% |
| Share Price |
22.5% |
40.3% |
150.4% |
| FTSE All-Share Index |
24.5% |
25.4% |
77.6% |
| Global Equity Income Portfolio |
ONE
YEAR |
THREE
YEARS |
FIVE
YEARS |
| Net Asset Value |
29.2% |
45.9% |
114.3% |
| Share Price |
31.1% |
47.8% |
124.8% |
| MSCI World Index (£) |
31.3% |
53.6% |
114.0% |
| Balanced Risk Portfolio |
ONE
YEAR |
THREE
YEARS |
FIVE
YEARS |
| Net Asset Value |
9.7% |
13.8% |
30.7% |
| Share Price |
11.9% |
15.1% |
45.1% |
| Merrill Lynch 3 month LIBOR +5% pa |
5.5% |
16.6% |
27.9% |
| Managed Liquidity Portfolio |
ONE
YEAR |
THREE
YEARS |
FIVE
YEARS |
| Net Asset Value |
0.0% |
–0.2% |
0.6% |
| Share Price |
0.5% |
0.1% |
1.8% |
Source: Thomson Reuters Datastream.
YEAR END NET ASSET VALUE, SHARE PRICE AND DISCOUNT
|
SHARE CLASS |
NET ASSET
VALUE
(PENCE) |
SHARE
PRICE
(PENCE) |
DISCOUNT |
| UK Equity |
193.5 |
192.0 |
0.8% |
| Global Equity Income |
198.6 |
197.5 |
0.6% |
| Balanced Risk |
134.7 |
133.5 |
0.9% |
| Managed Liquidity |
103.2 |
101.5 |
1.6% |
.
CHAIRMAN’S STATEMENT
The Company
The Company’s investment objective is to provide shareholders with a choice of investment strategies and policies, each intended to generate attractive risk-adjusted returns.
The Company’s share capital comprises four share classes: UK Equity Shares, Global Equity Income Shares, Balanced Risk Shares and Managed Liquidity Shares, each of which has its own separate portfolio of assets and attributable liabilities.
The investment objectives and policies of all of the Portfolios are set out on pages 28 to 31.
The Company enables shareholders to adjust their asset allocation to reflect their view of prevailing market conditions. As set out on the inside of the front cover, shareholders have the opportunity to convert between share classes, free of capital gains tax, every three months.
Performance
The NAV total return of the UK Equity Portfolio over the year was +22.0%, which compares with the total return of +24.5% posted by the FTSE All-Share Index.
The NAV total return of the Global Equity Income Portfolio over the year was +29.2%, compared with the MSCI World Index (£), net of withholding tax, return of +31.3%.
The Balanced Risk Portfolio returned +9.7% compared with the total return of +5.5% for its benchmark of 3 months LIBOR plus 5% per annum.
The Managed Liquidity Portfolio performance continued to be affected by the ongoing low interest environment, with an NAV total return of 0.0%.
The performance of equity markets in the year was in marked contrast to the previous year. The MSCI World Index rose by 31.3% whereas over the previous year it had only risen 0.7%. From the perspective of a sterling investor there were three main contributors, the devaluation of sterling after the UK’s vote to leave the European Union, the realisation that growth and corporate profits were generally improving worldwide and the continuation of easy money policies sustaining valuations. The political scene oscillated with the populist results of the UK referendum and the US Presidential election contrasting with the French Presidential election and local results in Germany. However, the turmoil in the US under the Trump administration has clearly created greater international uncertainty from which both China and Russia have particularly benefited.
Significant contributors to the Global Equity Income Portfolio’s slight underperformance relative to its benchmark were the positions in major drug companies and the underweight in commodity-based companies. The UK Equity Portfolio had a much better second half to the year as the outperformance of commodity-based companies faded, though this was not sufficient to erase the difficulties of the first half. Its longer-term performance remains excellent. The Balanced Risk Portfolio had a good year, outperforming its benchmark of 3 month Libor plus 5%, and maintaining that position for the last five years overall. It has performed much better than many of its competitors who seek to provide stable returns with relatively low correlations, particularly to equity markets. However, such “risk parity” strategies have remained unpopular in the UK, in contrast to the US, even though other absolute return funds have attracted substantial inflows. It remains a tax-efficient share class with some of the characteristics of a zero dividend preference share with higher volatility but without any prior charges ranking above it. The Managed Liquidity Portfolio was inevitably and appropriately dominated by the continuing very low level of short term interest rates.
Outlook
There is a marked divergence between the economic outlook and the political scene worldwide. Economically the picture is improving almost everywhere, with the UK as a possible exception, and the OECD has generally raised its growth forecasts. Employment is rising and there are signs of greater wage growth, though generally either regionally or skill-based rather than economy-wide. In consequence it seems reasonable to expect a rebalancing of economic policy, at least by independent central banks, away from the exceptionally easy money policies which have dominated since 2008. However, more accommodative fiscal policies look more distant, particularly in the US and UK which are both deadlocked politically. Regionally, the biggest changes are in Europe, where the Eurozone is finally growing more evenly and reducing the stresses caused by the Euro and in the UK, where growth now appears to be under pressure.
Politically the scene is much more dramatic. The unexpected combination in the UK of an inconclusive General Election and the difficulties and uncertainties of “Brexit” make for a very problematic outlook, both politically and economically as major uncertainties persist, no matter who is in government. While this may well mean that a potential “Brexit” is softer it is likely to make the negotiations and their implementation extremely difficult. My plea in an earlier statement that the US system should remain dysfunctional if Donald Trump became President has been answered positively to an embarrassing extent. Domestic government has been erratic in its implementation and internationally the US has become an unreliable partner, to the probable advantage especially of China. No resolution is in sight.
Elsewhere, the political scene is more stable. The economic recovery in the Eurozone has definitely helped mainstream politicians, though a lasting solution to the problems of the common currency is likely to be difficult to achieve. The Middle East seems tragically to be condemned to war and disruption without end as political rivalries and stirred-up religious hatred combine. External intervention is only likely to be short term and palliative and unlikely to lead to longer term peace.
Against this political and economic background securities markets have been calm. Equities and bonds both appear rather expensive, particularly the latter. However, there remain plenty of things for markets to worry about, which suggests that they have not yet reached a peak of optimism. The economic improvement in Europe may benefit the Global Equity Income Portfolio. The UK market should be helped by its relative lack of exposure to its domestic economy. Our portfolio managers remain confident that there remains a wide range of opportunities available to them.
Management Arrangements – UK Equity Portfolio Manager
As I wrote in my half-yearly statement, James Goldstone took over the management of the Company’s UK Equity Portfolio at the beginning of October 2016. The profile of the portfolio has changed somewhat since he took over its management, reflecting his views on where the best potential for achieving that Portfolio’s investment objective lies combined with the investment opportunities he has found. The NAV total return of the Portfolio over the first seven months of his management was encouraging at 16.4% compared with 12.4% for the benchmark FTSE All-Share Index and we look forward with optimism to the maintenance of this pattern.
Management Arrangements – Fees
We have also been discussing fee arrangements with our Manager in view of competitive pressures and a concern that certain of the fees were becoming out of line with our peers. This has culminated in agreement to a reduction in the basic management fee on the UK Equity and Global Equity Income Portfolios from 0.65% per annum to 0.55% per annum and a reduction in the maximum performance fee payable in any one year from 0.65% of net assets per annum to 0.55%. However, as before, the performance fee earned can exceed the capped amount. The changes are effective from 1 June 2017. No changes have been made to the fees payable in respect of the Balanced Risk and Managed Liquidity portfolios, or to any other aspect of the investment management agreement.
The Board
As reported in the half-yearly financial report, the Board appointed a new non-executive Director, Craig Cleland, with effect from 1 November 2016. He is the second new Director we have appointed in the last two years and we recommend that shareholders support his election at the forthcoming AGM. Craig is Head of Corporate Development: Investment Trusts at CQS (UK) LLP and has a wealth of experience in the investment trust sector. He will take on the challenge of being the Audit Committee Chairman following publication of this annual financial report. The current Audit Committee Chairman, Sir Michael Bunbury, will continue to serve on the Board as a non-executive Director if he is re-elected by shareholders.
Dividends
We have continued to apply the dividend policy established in the last financial year whereby for both UK Equity and Global Equity Income Shares, dividends are paid by way of three equal interim dividends declared in July, October and January with a larger ‘wrap-up’ fourth interim declared in April. For the year under review the first three dividends declared for both Share classes were 1.4p per share. The fourth dividends were 2.05p per share for the UK Equity Shares, bringing the total to 6.25p per share for the year, and 2.2p per share for the Global Equity Income Shares, bringing that total to 6.4p per share for the year.
This was achieved with contributions from capital of approximately 0.9p (2016: 0.3p) per share for the UK Equity Portfolio and 0.8p (2016: 0.5p) per share for the Global Equity Income Portfolio. We intend to continue with this policy and have set a target for each Portfolio for the year ending 31 May 2018 of at least maintaining the dividend level. The first interim dividends in respect of the year to May 2018 were 1.45p per share for both the UK Equity and Global Equity Income share classes.
It continues to be the case that in order to maximise the capital return on the Balanced Risk Shares, the Directors only intend to declare dividends on the Balanced Risk Shares to the extent required, having taken into account the dividends paid on the other Share classes, to maintain the Company’s status as an investment trust. No dividends have been paid on the Balanced Risk Shares.
The Managed Liquidity shareholders have not received any dividends since May 2012. It remains the Directors’ intention to distribute substantially all net revenues earned shortly before conversion dates, but this Portfolio currently generates insufficient net revenue, due to the continued very low interest rates together with that Portfolio’s share of administrative costs.
Discount Policy
The Company adopted a discount control policy for all four share classes in January 2013, whereby the Company offers to issue or buy back Shares of all classes with a view to maintaining the prices of the Shares at close to their respective net asset values. The policy has been successful to date and the level of share buy backs since its adoption has been modest. The ongoing implementation of this policy is dependent upon the Company’s authority to buy back Shares, and the Directors’ authority to issue Shares for cash on a non pre-emptive basis, being renewed at general meetings of the Company.
Share Capital Movements
During the year to 31 May 2017, the Company bought back and placed in treasury 1,545,540 UK Equity Shares, 636,000 Global Equity Income Shares, 58,000 Balanced Risk Shares and 264,000 Managed Liquidity Shares. Other than as an artefact of the share conversion process no Shares were issued or sold from treasury and no treasury shares were cancelled. No Shares have been bought back or sold since the year end. The Board intends to use the Company’s buy back and issuance authorities when this will benefit existing shareholders as a whole and to operate the discount control policy mentioned above, and will ask shareholders to renew the authorities as and when appropriate.
Share Class Conversions
The Company enables shareholders to adjust their asset allocation to reflect their views of prevailing market conditions. Shareholders have the opportunity to convert their holdings of Shares into any other class of Share, without incurring any tax charge under current legislation. The conversion dates for the forthcoming year are as follows: 1 August 2017; 1 November 2017; 1 February 2018; and 1 May 2018. Should you wish to convert Shares at any of these dates, conversion forms, which are available on the Manager’s website at www.invescoperpetual.co.uk/investmenttrusts, or CREST instructions must be received at least 10 days before the relevant conversion date.
Annual General Meeting (‘AGM’)
The business of the AGM is summarised in the Directors’ Report on pages 52 and 53. The AGM will be held at 6th Floor, 125 London Wall, London EC2Y 5AS at 11.30 am on 21 September 2017 and shareholders are cordially invited to attend. Refreshments will be provided. The Board recommends that shareholders vote in favour of all resolutions as each of the Directors intend to do in respect of their own Shares.
Patrick Gifford
Chairman
31 July 2017
.
STRATEGIC REPORT
UK EQUITY SHARE PORTFOLIO
MANAGER’S REPORT
Investment Objective
The investment objective of the UK Equity Portfolio is to provide shareholders with an attractive real long-term total return by investing primarily in UK quoted equities.
Market and Economic Review
The UK stock market rallied strongly during the 12 months under review, a period characterised by significant divergence in sector performance. This was driven initially by rising commodity prices and “dovish” central bank monetary policy then, following the EU referendum, by the sharp fall in sterling and, finally, by the surprise election of Donald Trump as the 45th US President.
The resources sectors (oil and mining) performed particularly well in the year, as crude oil continued to rise from the lows seen in early 2016. A decline in share prices was seen after the EU referendum in certain domestically focused sectors, while the share prices of companies with US-dollar denominated earnings rose strongly in anticipation of upgrades to forecast earnings. The share prices of mining companies rose strongly through the fourth quarter of 2016 in anticipation of increased infrastructure and domestic spending following the US election, while continuing to benefit from sterling weakness.
In August, the Bank of England’s 0.25% cut in interest rates met expectations, but the broader language around monetary stimulus went further than many in the market had anticipated. UK equity markets and government bond yields rose in response to the surprise election of Donald Trump as US President and a Republican majority in Congress, expecting higher rates of government spending and lower taxes to provide some tailwinds to global economic growth. At the end of November OPEC members agreed its first production cut in eight years – a boon for oil prices – spurring further gains for oil companies, a trend which continued into the first quarter of 2017.
Investors’ appetite for risk assets cooled into the second half of the period after the Trump administration failed to progress healthcare reforms through Congress, raising doubts over the administration’s ability to get pro-growth measures enacted. The shift in sentiment saw the consumer goods sector, led by tobacco companies, rebound strongly. Meanwhile, the oil and gas sector retreated due to falling oil prices.
Political events dominated UK equity market movements into the end of the period. The market fell sharply in response to the positive reaction of sterling to Prime Minister Theresa May’s call for a snap general election; sterling rallied to a six month-high relative to the US dollar on the news, exerting downward pressure on the share prices of companies with non-sterling denominated earnings.
Change in Portfolio Manager
I took over as portfolio manager from Mark Barnett at the beginning of October, four months into the reporting period, and I have implemented a series of changes in the portfolio since then. Most significant among these changes was the addition of Barclays; by period end the UK banking major was the largest holding in the portfolio with a weighting of 4.7%. Elsewhere in the financial sector, other new additions to the portfolio included Lloyds Bank (3.2%), Aviva (2.9%) and Aldermore (1.2%).
In real estate, new positions in Cairn Homes and Hibernia REIT reflect my views on the potential for recovery in the property sector in the post-Brexit environment, as confidence returns and lending growth spurs demand for property.
Some exposure to gold has been added via Randgold Resources and Acacia Mining, the portfolio’s only exposure to the resources sector. Other new positions include Ashtead, Coats, Dairy Crest, JD Sports Fashion and International Consolidated Airline.
Portfolio holdings in AstraZeneca, Beazley, Bunzl, Capita, Hiscox, London Stock Exchange, KCOM, New River and Shaftesbury were sold.
Portfolio Performance
On a total return basis, the net asset value of the UK Equity share class rose by 22.0% over the year to 31 May 2017, compared to the rise of 24.5% in the FTSE All-Share index.
Portfolio Strategy and Review
The portfolio delivered a strongly positive return, but failed to match the rise of the index. Performance relative to the index was held back by the portfolio’s minimal exposure to the mining sector and the zero weighting in HSBC, whose share price benefited from the impact of weak sterling.
Holdings in the tobacco sector again delivered a strongly positive contribution to performance – despite a lack of enthusiasm for “bond proxies” (companies offering low stable growth, steady dividends and low volatility) that prevailed through much of the period. The sector was boosted by mergers and acquisitions activity, continuing the trend for consolidation among the major global players. Reynolds American accepted a cash and shares offer from British American Tobacco, creating a combined entity well-positioned to exploit next generation products, particularly the US e-cigarette market. The deal is expected to be concluded in the third quarter of 2017.
BAE Systems also contributed positively to performance; the defence conglomerate delivered an encouraging full year update, highlighted by £1 billion increases in both sales and revenues, rising cash flows and a growing order book, with the CEO emphasising the improved outlook for defence budgets as a tailwind for the company’s long-term return generation.
Some of the companies added to the portfolio as part of its realignment were notable for their strong contributions to performance. In anticipation of both rising inflation and interest rates, the new holdings in the financial sector performed strongly, including major banks Barclays and Lloyds, and insurer Aviva. The market began to see through the bad news for UK banking majors and the positive contributions from Barclays and Lloyds were supported by improving confidence in banks’ capital positioning and a steepening yield curve.
The share price of the thread and zip maker Coats, another new holding, rose 75%. An injection by the Company of £255 million into its pension schemes on instruction from The Pensions Regulator was viewed positively by the market and, more recently, its prospects were boosted by a major contract to supply braid material to Caterpillar Inc, the world’s leading manufacturer of construction and mining equipment.
The owner of British Airways and Iberia, International Consolidated Airlines, overcame Brexit turbulence through the second half of 2016, reporting better than expected pre-tax profit growth in full-year results. Other positive contributors among the portfolio’s new holdings included JD Sports Fashion, Cairn Homes and Aldermore.
The portfolio’s holdings in companies particularly exposed to the weakening in sterling and perceived challenges to the UK economy performed poorly in the aftermath of the EU referendum. The stock market was also inclined to de-rate companies which warned of lower profits.
Notable amongst these was the holding in Capita, which fell sharply in value as it downgraded full year earnings forecasts, blaming a range of issues including delayed client decision-making since the EU referendum. The shares were subsequently sold.
BT also detracted from performance – an update on accounting irregularities in the group’s Italian division prompted a sharp sell-off, which worsened after a profit warning from the company highlighted a more challenged outlook for domestic public services contracts. Issues with Ofcom over its Openreach subsidiary and over its pension fund deficit have distracted investors from the company’s strengths – notably the growth potential of its mobile business following the acquisition of EE and its consistent cash flow.
As reported in the half-year financial report the share price of Circassia Pharmaceuticals fell sharply on news that its cat allergy drug had failed to meet the primary end point of Phase III trials. While this was very disappointing and surprising news – the drug had performed well in Phase II trials – it is noteworthy that Circassia retains significant cash on its balance sheet and that, over the past year, the company has also made significant diversification into respiratory drugs, devices and technologies. Confirming this, Circassia saw its share price rise in March as it confirmed a new strategic collaboration with AstraZeneca in combating respiratory disease.
Other holdings to deliver negative share price performance included domestically focused Derwent London, GAME Digital, N. Brown and Secure Trust Bank.
Outlook
Despite the ongoing rally, the UK equity market valuation does not look overstretched at a headline level and is currently trading at around 14 times 12-month forward earnings. At both stock and sector level there still appear to be a number of undervalued companies, particularly in domestic cyclicals and the portfolio has been tilted in that direction. The consumption component of GDP has surprised on the upside since the EU referendum, but it will be interesting to see how this trend fares against a backdrop of higher headline inflation resulting from sterling weakness. It has been assumed that wage growth would keep pace with and mitigate headline CPI, preserving disposable incomes; however, recent months’ wage data has fallen behind and it is fair to say that this has started to become a cause for some concern.
In this regard the bounce in sterling in response to the government’s call for a snap general election brought some relief with strengthened sterling alleviating some pressure from imported food and energy prices, reducing the onus on wage growth to preserve consumers’ spending power.
At the same time, strong sterling, if sustained, could present some headwinds for sectors which have benefited from currency related upgrades since the referendum, such as mining and energy. This portfolio is underweight in these areas, but the movements of sterling will remain the key macro factor to watch in the near term. The surprise outcome of the general election and the opening weeks of Brexit negotiations have provided additional political uncertainty, but I remain confident in the underlying strength of the companies in the Portfolio.
Beyond the UK, the outlook for US interest rates and economic growth remains uncertain as President Trump struggles to enact the pro-growth elements of his agenda necessary to free up budget for tax cuts. Against that, his recent interaction with President Xi of China appears to have been successful, which may alleviate some concerns around trade.
Against this backdrop, the market continues to present opportunities to invest in undervalued companies with strong balance sheets, strong performance track records and established market positions, which are well-equipped to weather further uncertainty ahead.
James Goldstone
Portfolio Manager
31 July 2017
.
STRATEGIC REPORT
UK EQUITY SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 31 MAY 2017
Ordinary shares listed in the UK unless stated otherwise
|
COMPANY |
SECTOR† |
MARKET
VALUE
£’000 |
% OF
PORTFOLIO |
| Barclays |
Banks |
3,944 |
4.7 |
| BP |
Oil & Gas Producers |
3,287 |
3.9 |
| Reynolds American – US common stock |
Tobacco |
2,956 |
3.5 |
| Lloyds Bank |
Banks |
2,673 |
3.2 |
| Aviva |
Life Insurance |
2,464 |
2.9 |
| Legal & General |
Life Insurance |
2,268 |
2.7 |
| RELX |
Media |
2,174 |
2.6 |
| British American Tobacco |
Tobacco |
1,936 |
2.3 |
| BAE Systems |
Aerospace & Defence |
1,936 |
2.3 |
| Imperial Brands |
Tobacco |
1,898 |
2.2 |
| Shire |
Pharmaceuticals & Biotechnology |
1,885 |
2.2 |
| JD Sports Fashion |
General Retailers |
1,834 |
2.2 |
| Safestyle UK |
General Retailers |
1,640 |
1.9 |
| Next |
General Retailers |
1,631 |
1.9 |
| Coats |
General Industrials |
1,536 |
1.8 |
| Roche – Swiss common stock |
Pharmaceuticals & Biotechnology |
1,535 |
1.8 |
| Rentokil Initial |
Support Services |
1,515 |
1.8 |
| BTG |
Pharmaceuticals & Biotechnology |
1,485 |
1.8 |
| Dairy Crest |
Food Producers |
1,419 |
1.7 |
| SSE |
Electricity |
1,399 |
1.7 |
| Cairn Homes |
Household Goods & Home Construction |
1,394 |
1.6 |
| Provident Financial |
Financial Services |
1,354 |
1.6 |
| BT |
Fixed Line Telecommunications |
1,354 |
1.6 |
| Babcock International |
Support Services |
1,311 |
1.6 |
| Saga |
General Retailers |
1,304 |
1.5 |
| Centrica |
Gas, Water & Multiutilities |
1,282 |
1.5 |
| HomeServe |
Support Services |
1,215 |
1.4 |
| Ashtead |
Support Services |
1,197 |
1.4 |
| easyJet |
Travel & Leisure |
1,170 |
1.4 |
| Johnson Service |
Support Services |
1,166 |
1.4 |
| Acacia Mining |
Mining |
1,156 |
1.4 |
| TP ICAP |
Financial Services |
1,131 |
1.3 |
| BCA Marketplace |
Financial Services |
1,115 |
1.3 |
| McBride |
Household Goods & Home Construction |
1,110 |
1.3 |
| Smith & Nephew |
Health Care Equipment & Services |
1,056 |
1.3 |
| Summit Germany |
Real Estate Investment & Services |
1,052 |
1.2 |
| Derwent London |
Real Estate Investment Trusts |
1,014 |
1.2 |
| Aldermore |
Banks |
994 |
1.2 |
| Chesnara |
Life Insurance |
966 |
1.1 |
| Victoria |
Household Goods & Home Construction |
964 |
1.1 |
| Drax |
Electricity |
950 |
1.1 |
| Xafinity |
Financial Services |
950 |
1.1 |
| Sigma Capital |
Financial Services |
940 |
1.1 |
| Micro Focus |
Software & Computer Services |
884 |
1.0 |
| N Brown |
General Retailers |
870 |
1.0 |
| Randgold Resources |
Mining |
844 |
1.0 |
| P2P Global Investments |
Equity Investment Instruments |
814 |
1.0 |
| Hollywood Bowl |
Travel & Leisure |
784 |
0.9 |
| Novartis – Swiss common stock |
Pharmaceuticals & Biotechnology |
772 |
0.9 |
| Compass |
Travel & Leisure |
769 |
0.9 |
| Howden Joinery |
Support Services |
765 |
0.9 |
| Mears |
Support Services |
744 |
0.9 |
| Zegona Communications |
Non-equity Investment Instruments |
742 |
0.9 |
| Secure Trust Bank |
Banks |
736 |
0.9 |
| International Consolidated Airline |
Travel & Leisure |
730 |
0.9 |
| AJ Bell – Unquoted |
Financial Services |
714 |
0.8 |
| Hibernia REIT – Irish common stock |
Real Estate Investment Trusts |
708 |
0.8 |
| Just Eat |
General Retailers |
701 |
0.8 |
| Harworth |
Real Estate Investment & Services |
693 |
0.8 |
| Hadrian's Wall Secured Investments |
Equity Investment Instruments |
491 |
|
| – C shares |
|
110 |
0.7 |
| Sherborne Investors Guernsey B – A shares |
Financial Services |
567 |
0.7 |
| Gamma Communications |
Mobile Telecommunications |
564 |
0.7 |
| Melrose Industries |
Construction & Materials |
474 |
0.6 |
| Vectura |
Pharmaceuticals & Biotechnology |
472 |
0.6 |
| Tungsten |
Financial Services |
444 |
0.5 |
| PRS REIT |
Real Estate Investment Trusts |
443 |
0.5 |
| Balfour Beatty |
Construction & Materials |
378 |
0.4 |
| Circassia Pharmaceuticals |
Pharmaceuticals & Biotechnology |
284 |
0.3 |
| Thomas Cook |
Travel & Leisure |
272 |
0.3 |
| esure |
Non-life Insurance |
222 |
0.3 |
| GAME Digital |
General Retailers |
170 |
0.2 |
| HaloSource |
Chemicals |
9 |
– |
| Nimrod Sea Assets |
Equity Investment Instruments |
3 |
– |
| Barclays Bank – Nuclear Power Notes 28 Feb 2019 |
Non-equity Investment Instruments |
1 |
– |
| Total Investments (75) |
|
84,734 |
100.0 |
† FTSE Industry Classification Benchmark.
.
STRATEGIC REPORT
GLOBAL EQUITY INCOME SHARE PORTFOLIO
MANAGER’S REPORT
Investment Objective
The investment objective of the Global Equity Income Share Portfolio is to provide an attractive and growing level of income return and capital appreciation over the long term, predominantly through investment in a diversified portfolio of equities worldwide.
Market and Economic Review
Global equity markets delivered strong returns over the year to 31 May 2017. Geopolitical concerns faded quickly in 2016 and markets rallied strongly after both the Brexit result in the UK and the US Presidential election. A resurgent risk appetite and an increasingly positive economic outlook meant that global equity markets enjoyed a strong start to 2017. Optimism that the US administration’s pro-growth policies were likely to boost corporate profitability drove market sentiment. Encouraging economic growth, improved consumer demand and strengthening manufacturing conditions globally helped to deliver solid performances from all the main regions. By May, the UK, Europe and the US reported their strongest first quarter earnings growth in nearly six years, helped by a rebound in global activity. Yet potential headwinds to the global growth story remained. Elections in the UK, Germany and Italy were all still looming as Brexit negotiations were yet to begin, while in the US President Trump’s ability to implement spending and tax-cut plans had begun to look far from certain.
Portfolio Performance
The Portfolio’s net asset value total return over the 12 months to the end of May 2017, with dividends reinvested, was 29.2%, compared to 31.3% for the MSCI World index (£, total return, net of withholding tax).
Performance attribution – by Sector
Year to 31 May 2017
Portfolio Strategy and Review
The portfolio’s underperformance versus the benchmark MSCI World Index in the period was mainly attributed to our positions in the telecoms and health care sectors.
Within telecoms, BT, China Mobile and Orange were all weak performers. BT had a challenging year with alleged accounting fraud being investigated in Italy, falling demand in the public sector, and plans to cut the dividend next year. A slowdown in TV subscribers on the back of weaker broadband growth in the fourth quarter added to the sense that the consumer-end of the telecoms market is getting tougher. The company was then hit with a record fine by Ofcom, the UK telecoms regulator, after it was found to have artificially reduced compensation payments to companies including Vodafone and TalkTalk for delays in connecting broadband lines. The share price of China Mobile fell when it announced that revenue for this year could decrease as a result of its plan to cancel roaming fees and subscription fees and, a year after Orange’s ambitious four-way merger plan collapsed, its share price has continued to struggle.
Health care stocks – and pharmaceuticals in particular - were negatively impacted by President Trump’s comments on pricing. He has promised to change the way firms compete against each other to price products, leading to uncertainty for the pharmaceutical industry globally as it awaits changes to policy. Pfizer, Gilead Sciences, Novartis, Amgen and Roche were all among the weakest performing stocks.
In terms of positive performance, the key drivers were US and European financials, which benefited from rising bond yields, faster economic growth and the prospects of loosening regulations under a Trump presidency. This development has been particularly positive for our bank holdings, including US banks JPMorgan Chase and Citigroup, as well as Spain’s Caixabank, and Nordea, a bank that services primarily the Scandinavian countries and Baltic states. One of the most significant causes for optimism has been the prospect of higher interest rates ahead of the US Federal Reserve raising interest rates in June and signalling a further rate rise for later this year.
Portfolio changes
Whilst portfolio activity during June 2016 was limited, we banked some profits from our strong performing tobacco holdings British American Tobacco and Philip Morris International in July, re-allocating the proceeds to a new position in British multinational defence, security and aerospace company BAE Systems. In our view, the outlook appears to be improving as defence budgets expand, despite some shorter-term headwinds.
In August, we sold our holdings in Hong Kong-based Cheung Kong Property Holdings, after strong stock performance, and in US-based global logistics provider United Parcel Service, re-allocating some of the proceeds to add a new position US pharmaceutical company Gilead Sciences. Gilead has a dominant share of the HIV market as well as a successful Hepatitis C franchise and is highly cash generative.
In September, we banked some profit from Philip Morris International, European media company RTL and US-based Las Vegas Sands, re-allocating some of the proceeds to build-up our positions in Gilead Sciences and kitchenware and home furnishings company Williams-Sonoma.
In October, we sold our holding in Hong Kong-based international banking group Standard Chartered and the remaining holding in RTL after strong share performance. We re-allocated the proceeds to introduce new positions in Germany’s chemical company BASF, US-based global diversified financial service provider Citigroup and natural gas and crude oil company Canadian Natural Resources.
Overall, there was limited portfolio activity during November. However, we introduced a new position in global stock exchange and diversified data services provider Nasdaq, which in our view has a strong fee-based business model.
In January 2017 we sold our holding in American Express after strong share performance, our technology holding in Japan’s Canon and our position in Hong Kong-based CK Hutchison, owner of mobile and broadband provider Three. In turn, we re-allocated some of the proceeds to diversify our exposure to financials, adding US-based Wells Fargo and Spain’s Caixabank. Whilst Wells Fargo still faces some operational headwinds, we believe the bank offers attractive growth potential from its sizable, high quality retail operation as steady growth in the US economy continues. A leading player in Spain’s mass retail banking sector, Caixabank has a strong capital base and, in our view, it is well-positioned to benefit from the on-going recovery in Europe’s banking sector. We also introduced a position in Japan’s Nexon, a developer of PC and mobile games. A major player in the rapidly expanding mobile gaming market, Nexon maintains an attractive product pipeline and, in our view, is well-positioned to expand its market share in China.
In April and May, we further reduced and then sold our holding in Phillip Morris International, re-allocating some capital to start a small position in South Korea’s Hyundai Motor. During May we also introduced a new holding in the Dutch supermarket group Ahold Delhaize, which has a large presence in the US. We believe that the shareholder-friendly management team is focused on stability and cash generation.
Outlook
Our global outlook remains one of slow and prolonged economic growth, against a backdrop of some market uncertainty. The surprise outcome of the UK general election in June and its potential impact on Brexit negotiations have added to this uncertainty. Other factors include the forthcoming elections in Germany and Italy, while in the US President Trump’s ability to implement spending and tax-cut plans is far from certain. With the European economic recovery continuing to gain ground, we remain optimistic that a number of European companies offer compelling relative valuation opportunities and should benefit from the combined tailwinds of a weak euro and loose monetary policy. In Asia, we also see positive signs of structural reform in a number of countries. We had hoped the election of President Trump would herald more infrastructure spending in the US, as well as a simplification of the tax code. However, those policies may be severely watered down. Meanwhile the US market looks expensive to us on many measures.
Overall, our strategy remains consistent: to invest in high quality companies at attractive valuations. We view such companies as those that can sustain profit margins and deliver positive returns through the economic cycle. We see growing and sustainable dividends as clear evidence of these sorts of companies. In aggregate, therefore, we target companies that offer attractive yields, sustainable income and capital upside.
Nick Mustoe
Portfolio Manager
31 July 2017
.
STRATEGIC REPORT
GLOBAL EQUITY INCOME SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 31 MAY 2017
Ordinary shares unless stated otherwise
|
COMPANY |
INDUSTRY GROUP† |
COUNTRY† |
MARKET
VALUE
£’000 |
% OF
PORTFOLIO |
| JPMorgan Chase |
Banks |
US |
2,196 |
3.2 |
| Caixabank |
Banks |
Spain |
2,107 |
3.0 |
| Novartis |
Pharmaceuticals, Biotechnology & Life Sciences |
Switzerland |
2,075 |
3.0 |
| Microsoft |
Software & Services |
US |
2,067 |
3.0 |
| Orange |
Telecommunication Services |
France |
1,948 |
2.8 |
| British American Tobacco |
Food Beverage & Tobacco |
UK |
1,915 |
2.8 |
| Chevron |
Energy |
US |
1,906 |
2.8 |
| ING |
Banks |
Netherlands |
1,891 |
2.7 |
| BP |
Energy |
UK |
1,698 |
2.5 |
| Taiwan Semiconductor Manufacturing |
Semiconductors & Semiconductor Equipment |
Taiwan |
1,684 |
2.4 |
| Airbus |
Capital Goods |
France |
1,679 |
2.4 |
| Pfizer |
Pharmaceuticals, Biotechnology & Life Sciences |
US |
1,672 |
2.4 |
| United Technologies |
Capital Goods |
US |
1,662 |
2.4 |
| Total |
Energy |
France |
1,625 |
2.3 |
| Statoil |
Energy |
Norway |
1,524 |
2.2 |
| RELX |
Commercial & Professional Services |
Netherlands |
1,493 |
2.2 |
| Deutsche Post |
Transportation |
Germany |
1,492 |
2.1 |
| Intesa Sanpaolo |
Banks |
Italy |
1,469 |
2.1 |
| Roche |
Pharmaceuticals, Biotechnology & Life Sciences |
Switzerland |
1,441 |
2.1 |
| Legal & General |
Insurance |
UK |
1,435 |
2.1 |
| BT |
Telecommunication Services |
UK |
1,417 |
2.0 |
| Wells Fargo |
Banks |
US |
1,372 |
2.0 |
| Aon – A shares |
Insurance |
US |
1,333 |
1.9 |
| Royal Dutch Shell – A shares |
Energy |
Netherlands |
1,319 |
1.9 |
| Deutsche Boerse |
Diversified Financials |
Germany |
1,318 |
1.9 |
| Citigroup |
Banks |
US |
1,317 |
1.9 |
| Nielsen |
Commercial & Professional Services |
US |
1,268 |
1.8 |
| Allianz |
Insurance |
Germany |
1,220 |
1.8 |
| Gilead Sciences |
Pharmaceuticals, Biotechnology & Life Sciences |
US |
1,214 |
1.8 |
| easyJet |
Transportation |
UK |
1,204 |
1.7 |
| Canadian Natural Resources |
Energy |
Canada |
1,168 |
1.7 |
| Amgen |
Pharmaceuticals, Biotechnology & Life Sciences |
US |
1,147 |
1.7 |
| Adecco |
Commercial & Professional Services |
Switzerland |
1,145 |
1.7 |
| BAE Systems |
Capital Goods |
UK |
1,141 |
1.6 |
| Hiscox |
Insurance |
UK |
1,139 |
1.6 |
| PNC Financial Services |
Banks |
US |
1,096 |
1.6 |
| Amcor |
Materials |
Australia |
1,087 |
1.6 |
| China Mobile – R |
Telecommunication Services |
Hong Kong |
1,040 |
1.5 |
| Ahold Delhaize |
Food & Staples Retailing |
Netherlands |
1,037 |
1.5 |
| Las Vegas Sands |
Consumer Services |
US |
1,015 |
1.5 |
| BASF |
Materials |
Germany |
967 |
1.4 |
| Booker |
Food & Staples Retailing |
UK |
946 |
1.4 |
| Nasdaq |
Diversified Financials |
US |
929 |
1.3 |
| Nordea |
Banks |
Sweden |
905 |
1.3 |
| Centrica |
Utilities |
UK |
870 |
1.2 |
| Union Pacific |
Transportation |
US |
857 |
1.2 |
| Williams-Sonoma |
Retailing |
US |
759 |
1.1 |
| Nexon |
Software & Services |
Japan |
739 |
1.1 |
| Yue Yuen Industrial |
Consumer Durables & Apparel |
Hong Kong |
703 |
1.0 |
| Honda Motor |
Automobiles & Components |
Japan |
589 |
0.9 |
| Zhejiang Expressway – H |
Transportation |
Hong Kong |
580 |
0.8 |
| London Stock Exchange |
Diversified Financials |
UK |
555 |
0.8 |
| Hyundai Motor – preference shares |
Automobiles & Components |
South Korea |
466 |
0.7 |
| Kangwon Land |
Consumer Services |
South Korea |
449 |
0.6 |
|
|
|
69,290 |
100.0 |
† MSCI and Standard & Poor’s Global Industry Classification Standard.
H: H-Shares – shares issued by companies incorporated in the People’s Republic of China (PRC) and listed on the Hong Kong Stock Exchange.
R: Red Chip Holdings – holdings in companies incorporated outside the PRC, listed on the Hong Kong Stock Exchange, and controlled by PRC entities by way of direct or indirect shareholding and/or representation on the board.
.
STRATEGIC REPORT
BALANCED RISK SHARE PORTFOLIO
MANAGER’S REPORT
Investment Objective
The investment objective of the Balanced Risk Portfolio is to provide shareholders with an attractive total return in differing economic and inflationary environments, and with low correlation to equity and bond market indices by gaining exposure to three asset classes: debt securities, equities, and commodities.
Market and Economic Review
After a mixed start to the Company’s financial year, equities posted positive returns across most markets over the third and fourth quarters of 2016 on dovish language from central banks as they continued to contend with low growth and below target inflation. Bond prices were generally firm until the fourth quarter of 2016 as the low growth and inflation kept central banks on hold from raising rates or revising their existing accommodative policies, but government bonds saw yields increase across all major markets approaching the end of the calendar year. Commodities started the financial year well, but pulled back during the third quarter of 2016 when price behaviour became divided, with cyclical complexes enjoying gains while agricultural commodity fortunes were mixed and precious metals fell.
Equity markets kicked off 2017 with a strong start in Europe and Hong Kong while other developed markets also enjoyed gains. This continued to the Company’s year end with all equity markets except for US small caps continuing to push higher, with those markets outside of the US enjoying a performance edge. Bonds enjoyed a surge in prices in February and, with the exception of Japan, blue-chip government bond markets continued to post gains to the Company’s year end. Across commodity complexes, metals managed robust gains through the first quarter of 2017, while energy and agricultural commodity prices struggled. Then, up to the year end, commodity prices largely retrenched, with declines in agriculture, energy and industrial metals, while precious metals managed slight gains.
Portfolio Performance
The Balanced Risk Portfolio posted a positive return for the year of 9.7%, compared with the benchmark, Merrill Lynch 3 month Libor plus 5%, return of 5.5%.
Portfolio Strategy and Update
The Balanced Risk strategy seeks to achieve returns through balancing risk exposure between three asset classes: developed market equities, global government bonds and commodities. The asset class weightings are determined using a proprietary investment process, with assets being selected according to three key criteria: a correlation matrix to ensure diversification; the ability to generate excess returns relative to cash; and specific liquidity and transparency criteria. Exposure to the asset classes is principally obtained through highly liquid and transparently priced exchange-traded futures contracts, with cash and cash equivalents being held as collateral.
For the year to 31 May 2017 exposure to equities was the largest positive contributor to performance by some margin. Bonds and commodities also posted positive returns.
After a mixed June 2016, with Japan and Europe selling off while the UK, US and Hong Kong markets enjoyed gains, equity markets led results for the fiscal year. Performance was positive for developed equity markets during the third quarter of 2016 which continued to rise on dovish policies from central banks as they tried to stimulate real growth and inflation across their respective economies through a combination of extremely low rates and, in the case of the Bank of Japan and European Central Bank (ECB), outright asset purchases. Equity performance over the fourth quarter of 2016 continued to be positive, but was more varied. US exposures started off weak while European and Asian exposures performed well. Then, through the middle of the quarter, roles reversed with US equities and Asian exposures performing well on the surprise US presidential election outcome and attendant economic optimism, while European and Asian shares fell.
2017 started well for equities with all six markets in which the strategy invests generating positive returns in the first quarter. Hong Kong and European equities led the other markets, with UK equities and US large caps close behind. Japan and US small caps posted mild gains. Equity markets went on to finish the fiscal year strongly. Leadership largely came from markets outside the US, with the UK, Hong Kong and Japan leading while Europe and US large caps saw more modest appreciation. The sole market to record a loss was US small caps, which struggled after the initial pop in performance on the heels of the Trump victory. UK equities posted strong performance as the Conservative Party’s lead over the Labour Party increased to double-digits in polls (although the victory turned out to be narrow). Hong Kong equities were carried along with attractive gains in emerging markets. European equities benefited from better industrial production figures and continue to have the support of an accommodative central bank. In the US, the divergence between large cap and small cap is fostering concerns of poor breadth with fewer stocks driving large cap indices higher while the median stock is struggling.
Bond markets also contributed positively to results during the fiscal year. To start the period, tepid economic growth and below trend inflation kept central banks on hold. Additionally, safe haven demand triggered in the run up to the UK’s EU referendum and by renewed volatility among commodities in July and August, together with fears that concerns about Deutsche Bank could lead to European banking contagion in September, helped to suppress yields through to the end of the third quarter of 2016. A different story for bond markets unfolded during the fourth quarter of 2016, though, when government bonds became the largest drag on the Portfolio’s results. Over that period, yields across developed market sovereign bonds rose meaningfully on a combination of factors, including constant messaging from the US Federal Reserve (Fed) about the need for higher rates accompanied by a rate hike in December in the US, while in Europe, messages from the ECB about the likely tapering of policy accommodation had yields in bunds and gilts shooting higher to levels that were only partially offset by demand late in the calendar year as investors sought shelter from the latest round of Italian bank fears. Australian, Japanese and Canadian bonds traded off in sympathy with the other markets, ending one of the toughest quarters for bonds in recent memory.
The first quarter of 2017, in contrast, was mildly positive for bonds as strong results across most markets in February were able to overcome the weak beginning and end of the quarter as continued risk appetite for equities, coupled with the rate increase in the US and talk of curtailing bond purchases in Europe, diminished investor demand for safe haven assets. The run up to the Company’s financial year end was stronger, with five of the six bond markets posting gains. Australia led all markets as Chinese import and export data came in weaker than expected. The shortfall in these numbers contributed to commodity weakness and directly impacted Australia as it is a major commodity exporter, particularly to China. This combination created demand for safe haven assets, which sent bond prices up and yields lower. US Treasury bonds also posted attractive returns despite continued talk about additional rate increases and the potential for the Fed to begin to de-lever its balance sheet. Canadian bonds posted strong returns on commodity weakness, while the UK and German bond markets posted milder gains.
Commodity performances were mixed throughout the fiscal year, but their return was positive in aggregate. Commodities started the fiscal year on a positive footing as the rally earlier in the 2016 calendar year continued into June, bolstered by some safe haven demand on the outcome of the UK’s Brexit vote and subsidence of Chinese economic fears. However, the third quarter was negative. Agriculture prices suffered as crop reports indicated improvement in expected yields, particularly in the soy complex. Energy prices remained depressed in response to the ongoing supply glut in crudes and distillates such as unleaded gasoline. Industrial metals had a neutral impact as weakness in the middle of the quarter was offset when surprise at the strength of Chinese manufacturing data in the later part of the period boosted prices of aluminium and copper. Precious metals were a mild contributor as silver traded in line with industrial metals. In the fourth quarter of 2016, commodities detracted from results in aggregate, but diverged at the complex level. Energy added to results as early period weakness on oversupply gave way to strong gains as the Organization of the Petroleum Exporting Countries (OPEC) finally came to an agreement on production freezes and on economic optimism in the wake of the Trump victory. Industrial metals also contributed to results, particularly copper. However, agriculture finished the quarter lower with strong declines in sugar prices and to a lesser extent coffee, while precious metals were broadly weak on a combination of a strong dollar and the Fed not only finally raising rates after months of debate, but also putting forth a strong rate forecast.
Commodity prices continued to struggle into the first quarter of 2017, with mixed results across complexes as energy and agriculture retreated, while industrial and precious metals advanced. Energy prices fell hardest as high inventories and rising US production reversed the advance made from recent global production cuts. Agriculture struggled as better weather and signs of improving crop yields weighed on prices. Precious metals found renewed strength on signs of rising inflation and fading US dollar strength, while industrial metals got a boost from better Chinese economic data and ongoing optimism regarding the potential for a US infrastructure build-out. Commodity exposure ended the fiscal year with losses in three of the four complexes. Agricultural exposures detracted most as sugar, the soy complex, cotton, coffee and wheat all traded off. The overarching issue affecting prices for these commodities was oversupply relative to demand due to robust harvest estimates and, in the case of sugar, limited import demand from India and fears of increased import tariffs in China. Corn and live cattle were the lone bright spots in the complex. Energy commodities also struggled as investors pushed prices down on reports of increased oil rig counts across major producing regions and the lack of a definitive announcement from OPEC about extending the production cuts established in the fourth quarter of 2016. In May, OPEC did finally announce an agreement to extend cuts, which pushed prices sharply higher before the exuberance wore off, leaving West Texas Intermediate (WTI) and Brent crude down. Most distillates also finished lower with the exception of heating oil and gasoline. Industrial metal prices retreated in response to the disappointing Chinese data. Precious metals were the only complex to see higher prices with silver outpacing gold, albeit with rather modest gains.
Outlook
The second half of 2017 may well find reduced monetary policy support and possibly the beginning of monetary tightening, assuming central banks view economic data as being supportive of such actions. Politics remains a wildcard, as tension and discord have become the standard with angry voters making it challenging, if not impossible, for representatives to collaborate and forge solutions.
Despite the daunting challenges policy makers face, global economic conditions have improved slightly and remain stable. Headline unemployment rates remain low with job growth showing some improvement despite tepid wage growth rates. Top line inflation numbers have shown some uptick globally, but this is mostly due to the pick up in year-on-year gains in energy prices.
The Portfolio’s latest tactical positioning maintains overweights to all six equity markets in which the Portfolio invests, but with reductions in the UK, US large caps and Europe. Positioning in bonds has moved to underweight across all six markets represented in the Portfolio. In commodities, the posture in agriculture has shifted from defensive to constructive. In energy, every exposure is underweight except for heating oil, which is neutral. In metals, the overweights to gold and silver have been reduced, while the overweight to copper has been strengthened and the overweight to aluminium has been maintained.
Scott Wolle
Portfolio Manager
31 July 2017
.
STRATEGIC REPORT
BALANCED RISK SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 31 MAY 2017
|
YIELD
% |
MARKET
VALUE
£’000 |
% OF
NET
ASSETS |
| Short-Term Investments |
|
|
|
| Short-Term Investment Company (Global Series) |
0.310 |
2,440 |
29.2 |
| UK Treasury Bill 13 Nov 2017 |
0.105 |
1,498 |
17.9 |
| UK Treasury Bill 20 Nov 2017 |
0.092 |
2,997 |
35.9 |
| UK Treasury Bill 27 Nov 2017 |
0.087 |
1,399 |
16.8 |
| Total Short Term Investments |
|
8,334 |
99.8 |
|
|
|
|
| Hedge Funds(1) |
|
|
|
| Harbinger Class PE Holdings |
|
16 |
0.2 |
| Harbinger Class L Holdings |
|
2 |
– |
| Total Hedge Funds |
|
18 |
0.2 |
| Total Fixed Asset Investments |
|
8,352 |
100.0 |
(1) The hedge fund investments are residual holdings of the previous investment strategy, which are awaiting realisation of underlying investments.
Derivative instruments held in the Balanced Risk Share Portfolio are shown on the following page. At the year end all the derivative instruments held in the Balanced Risk Share Portfolio were exchange traded futures contracts. Holdings in futures contracts that are not exchange traded are permitted as explained in the investment policy on page 30.
STRATEGIC REPORT
BALANCED RISK SHARE PORTFOLIO
LIST OF DERIVATIVE INSTRUMENTS
AT 31 MAY 2017
|
NOTIONAL
EXPOSURE
£’000 |
NOTIONAL
EXPOSURE
AS % OF
NET ASSETS |
| Government Bond Futures: |
|
|
| Australia |
2,277 |
24.0 |
| Canada |
2,254 |
23.8 |
| UK |
1,407 |
14.8 |
| Germany |
990 |
10.4 |
| US |
595 |
6.3 |
| Japan |
211 |
2.2 |
| Total Bond Futures (6) |
7,734 |
81.5 |
|
|
|
| Equity Futures: |
|
|
| Europe |
774 |
8.2 |
| Japan |
769 |
8.1 |
| Hong Kong |
760 |
8.0 |
| UK |
751 |
7.9 |
| US large cap |
653 |
6.9 |
| US small cap |
528 |
5.5 |
| Total Equity Futures (6) |
4,235 |
44.6 |
|
|
|
| Commodity Futures: |
|
|
| Agriculture |
|
|
| Cotton |
253 |
2.7 |
| Sugar |
233 |
2.5 |
| Soybean meal |
231 |
2.5 |
| Soy bean |
213 |
2.2 |
| Corn |
87 |
0.9 |
| Coffee |
76 |
0.8 |
| Soybean oil |
60 |
0.6 |
| Wheat |
50 |
0.5 |
| Energy |
|
|
| Gasoline |
206 |
2.2 |
| Brent crude |
160 |
1.7 |
| Natural Gas |
129 |
1.4 |
| Gas-oil (diesel) |
107 |
1.1 |
| WTI crude |
76 |
0.8 |
| New York Harbor ultra-low sulphur diesel |
49 |
0.5 |
| Precious Metals |
|
|
| Gold |
394 |
4.2 |
| Silver |
269 |
2.8 |
| Industrial Metals |
|
|
| Copper |
330 |
3.5 |
| Aluminium |
260 |
2.7 |
| Total Commodity Futures (18) |
3,183 |
33.6 |
|
|
|
| Total Derivative Instruments (30) |
15,152 |
159.7 |
The targeted annualised risk (volatility of monthly returns) for the portfolio as listed above is analysed as follows:
| ASSET CLASS |
RISK |
CONTRIBUTION |
| Bonds |
3.2% |
32.8% |
| Equities |
4.2% |
43.3% |
| Commodities |
2.3% |
23.9% |
|
9.7% |
100.0% |
.
STRATEGIC REPORT
MANAGED LIQUIDITY SHARE PORTFOLIO
MANAGER’S REPORT
Investment Objective
The investment objective of the Managed Liquidity Portfolio is to produce an appropriate level of income return combined with a high degree of security.
Market and Economic Review
Having held the Bank Rate at 0.5% since 2009, through some periods when investors began to expect a hiking cycle, the Bank of England finally made a change in August 2016 – cutting the rate to 0.25%! This decision is less surprising when seen in context. The Bank reacted to the widely unexpected referendum vote for the UK to leave the European Union with a package of measures to support the economy, also including a term funding scheme and a £60 billion programme of asset purchases. The Bank made no other changes to the Rate in this period.
The exact boost this support gave is unknown, but the rate of growth in the UK economy has increased in recent quarters, from an annual rate (seasonally adjusted) of 1.6% in the first quarter of 2016 to 2.0% in the first quarter of 2017. A sharp fall in the value of sterling increased the competitiveness of UK exports, but has also helped inflation to rise. The headline CPI inflation measure rose from 0.3% to 2.9% in the 12 months to May. In part this was due to the stabilisation and then recovery of commodity prices. Core CPI, which does not include the more volatile energy and food prices that are included in the headline rate, rose from 1.2% to 2.6%.
As the Federal Reserve has extended its series of rate rises, there has been speculation about an increasing appetite for hikes by the Bank of England’s Monetary Policy Committee. However, in this period only one of the nine members has voted for an increase, calling for a 0.5% rate in April and May. The subsequent June meeting saw the Bank adopt a more hawkish stance with three of the nine members voting for an increase.
In interbank lending markets, over the period sterling three-month LIBOR, the interest rate at which the largest banks lend money to one another, fell from 0.59% to 0.29%. Two year gilt yields fell from 0.43% to 0.13%.
Portfolio Performance
The Managed Liquidity Portfolio NAV total return for the year ended 31 May 2017 was 0.0%.
Portfolio Strategy and Review
Our investment strategy is achieved by investing in the Invesco Perpetual Money Fund and the Sterling Liquidity Portfolio of Short-Term Investments Company (Global Series) plc, each of which invests in a diversified portfolio of high quality sterling denominated short-term money market instruments.
The Invesco Perpetual Money Fund has positions in a number of government, quasi-government and corporate bonds. In order to limit the exposure to interest rate risk and credit risk (the likelihood of an issuer defaulting), these bonds are both short dated and of high quality. The fund also holds some floating rate bonds whose interest rates are reset at regular intervals and so can further mitigate the effect of rising interest rates on fund performance.
The Sterling Liquidity Portfolio of the Short-Term Investments Company (Global Series) plc invests in high quality sterling denominated money market instruments such as commercial paper, certificates of deposit, medium term notes, time deposits and asset-backed commercial paper. At 31 May 2017 the Sterling Liquidity Portfolio was rated AAAm by Standard and Poor’s and AAAmmf by Fitch Ratings.
Outlook
Although we see very limited value in the yields of UK gilts at current levels, particularly in instruments with longer maturities, we do not expect UK interest rates to rise quickly from this level. However, the Invesco Perpetual Money Fund continues to hold a number of floating rate notes. The interest rates on these bonds reset at regular intervals and so can mitigate the effect of rising rates on fund performance.
Stuart Edwards
Portfolio Manager
31 July 2017
.
STRATEGIC REPORT
MANAGED LIQUIDITY SHARE PORTFOLIO
LIST OF INVESTMENTS
AS AT 31 MAY
|
2017 |
2016 |
|
MARKET
VALUE
£’000 |
% OF
PORTFOLIO |
MARKET
VALUE
£’000 |
% OF
PORTFOLIO |
| Invesco Perpetual Money Fund* |
4,900 |
89.9 |
4,894 |
92.1 |
| Short-Term Investment Company (Global Series) |
548 |
10.1 |
418 |
7.9 |
|
5,448 |
100.0 |
5,312 |
100.0 |
* At the year end the Managed Liquidity Share Portfolio held 5.85% (2016: 9.90%) of the shares in the Invesco Perpetual Money Fund.
.
STRATEGIC REPORT
BUSINESS REVIEW
Invesco Perpetual Select Trust plc is a UK investment company with four Share classes, each of which has separate investment objectives, as set out below, and is represented by a separate Portfolio. The strategy the Board follows to achieve its overall objective and those of each Share class is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These are also set out below.
The business model the Company has adopted to achieve its objective has been to contract the services of Invesco Fund Managers Limited (‘IFML’ or the ‘Manager’) to manage the portfolios in accordance with the Board’s strategy and under its oversight. The Manager is also responsible for providing company secretarial, marketing, accounting and general administration services. In practice, many of these services are performed under delegated authority by Invesco Asset Management Limited (IAML), a company related to IFML. References to the Manager in this annual financial report should consequently be considered to include both entities. Invesco Perpetual is a business name of both IFML and IAML.
All administrative support is provided by third parties under the oversight of the Board. In addition to the management and administrative functions of the Manager, the Company has contractual arrangements with Capita Asset Services to act as registrar and BNY Mellon Trust & Depositary (UK) Limited as depositary. The depositary has delegated safekeeping of the Company’s investments to The Bank of New York Mellon (London Branch).
Investment Policy
The Company’s and respective Share classes’ investment objectives, investment policies and risk and investment limits combine to form the ‘Investment Policy’ of the Company.
The Company
Investment Objective and Policy
The Company’s investment objective is to provide shareholders with a choice of investment strategies and policies, each intended to generate attractive risk-adjusted returns.
The Company’s share capital comprises four Share classes: UK Equity Shares, Global Equity Income Shares, Balanced Risk Shares and Managed Liquidity Shares, each of which has its own separate portfolio of assets and attributable liabilities. The investment objectives, policies and risks and limits of the Portfolios for these classes follow. With the exception of borrowings, the limits for the Company and the four Share classes are measured at the point of acquisition of investments, unless otherwise stated.
Investment Limits of the Company
The Board has prescribed limits on the Investment Policy of the Company, which include the following:
– no more than 15% of the gross assets of the Company may be invested in a single investment; and
– no more than 10% of the gross assets of the Company may be invested in other listed investment companies.
UK Equity Share Portfolio
Investment Objective
The investment objective of the UK Equity Portfolio is to provide shareholders with an attractive real long-term total return by investing primarily in UK quoted equities.
Investment Policy and Risk
The UK Equity Portfolio is invested primarily in UK equities and equity-related securities of UK companies across all market sectors.
The Manager invests the UK Equity Portfolio so as to maximise exposure to the most attractive sectors and securities, within a portfolio structure that reflects the Manager’s view of the macroeconomic environment. The Manager does not set out to manage the risk characteristics of the UK Equity Portfolio relative to the FTSE All-Share Index (the ‘benchmark index’) and the investment process may result in potentially very significant over or underweight positions in individual sectors versus the benchmark. The size of weightings will reflect the Manager’s view of the attractiveness of a security and the degree of conviction held. If a security is not considered to be a good investment, it will not be held in the UK Equity Portfolio, irrespective of its weight in the benchmark index.
The Manager controls the stock-specific risk of individual securities by ensuring that the UK Equity Portfolio is always diversified across market sectors. In-depth and continual analysis of the fundamentals of investee companies allows the Manager to assess the financial risks associated with any particular security.
It is expected that, typically, the Portfolio will hold between 45 and 80 securities.
The Directors believe that the use of borrowings can enhance returns to shareholders and the UK Equity Portfolio will generally use borrowings in pursuing its investment objective.
Investment Limits
The Board has prescribed limits on the investment policy of the UK Equity Portfolio, which include the following:
– no more than 12% of the gross assets of the UK Equity Portfolio may be held in a single investment;
– no more than 10% of the gross assets of the UK Equity Portfolio may be held in other listed investment companies;
– no more than 20% of the gross assets of the UK Equity Portfolio may be held in overseas assets; and
– borrowings may be used to raise equity exposure up to a maximum of 25% of the net assets of the UK Equity Portfolio where it is considered appropriate.
Global Equity Income Share Portfolio
Investment Objective
The investment objective of the Global Equity Income Portfolio is to provide an attractive and growing level of income return and capital appreciation over the long term, predominantly through investment in a diversified portfolio of equities worldwide.
Investment Policy and Risk
The Portfolio will be invested predominantly in a portfolio of listed, quoted or traded equities worldwide, but may also hold other securities from time to time including, inter alia, fixed interest securities, preference shares, convertible securities and depositary receipts. Investment may also be made in regulated or authorised collective investment schemes. The Portfolio will not invest in companies which are not listed, quoted or traded at the time of investment, although it may have exposure to such companies where, following investment, the relevant securities cease to be listed, quoted or traded. The Manager will at all times invest and manage the Portfolio’s assets in a manner that is consistent with spreading investment risk, but there will be no rigid industry, sector, region or country restrictions.
The Portfolio may utilise derivative instruments including index-linked notes, contracts for differences, covered options and other equity-related derivative instruments for efficient portfolio management and investment purposes. Any use of derivatives for investment purposes will be made on the basis of the same principles of risk spreading and diversification that apply to the Portfolio’s direct investments, as described above.
It is expected that, typically, the Portfolio will hold between 45 and 80 securities.
The Directors believe that the use of borrowings can enhance returns to shareholders, and the Global Equity Income Portfolio may use borrowings in pursuing its investment objective.
The Company’s foreign currency investments will not be hedged to sterling as a matter of general policy. However, the Manager may employ currency hedging, either back to sterling or between currencies (i.e. cross hedging of portfolio investments).
Investment Limits
The Board has prescribed the following limits on the investment policy of the Global Equity Income Portfolio:
– no more than 20% of the gross assets of the Global Equity Income Portfolio may be invested in fixed interest securities;
– no more than 10% of the gross assets of the Global Equity Income Portfolio may be held in a single investment;
– no more than 10% of the gross assets of the Global Equity Income Portfolio may be held in other listed investment companies; and
– borrowings may be used to raise equity exposure up to a maximum of 20% of the net assets of the Global Equity Income Portfolio, when it is considered appropriate to do so.
Balanced Risk Share Portfolio
Investment Objective
The investment objective of the Balanced Risk Portfolio is to provide shareholders with an attractive total return in differing economic and inflationary environments, and with low correlation to equity and bond market indices by gaining exposure to three asset classes: debt securities, equities and commodities.
Investment Policy and Risk
The Portfolio utilises two main strategies: the first seeks to balance the risk contribution from each of three asset classes (equities, bonds and commodities), with the aim of reducing the probability, magnitude and duration of capital losses, and the second seeks to shift tactically the allocation among the assets with the aim of improving expected returns.
The Portfolio is constructed so as to achieve appropriate diversity and to balance risk by asset class (bonds, equities and commodities) and by asset within each asset class. Neutral risk weighting is achieved when each asset class contributes an equal proportion of the total Portfolio risk and each asset contributes an equal proportion of the total risk for its respective asset class. The Manager is permitted to actively vary asset class weightings, subject to a maximum of 150% and a minimum of 50% of each asset class’ neutral weight. The Manager is also permitted to actively vary individual asset weightings, provided the asset class guidelines are not violated. Asset weights may not be less than zero (short) and may on occasion exceed twice the neutral weight.
The Portfolio will be mainly invested directly in highly liquid and transparently priced exchange-traded futures contracts, with cash and cash equivalents being held as collateral. However, the Portfolio may also be invested in equities, equity-related securities and debt securities (including floating rate notes). Financial derivative instruments (including but not limited to futures and total return swaps) are used only to achieve long exposure to the three asset classes. The Portfolio may also use financial derivative instruments, including currency futures and forwards, for efficient portfolio management, hedging and investment purposes. Financial derivative instruments will not be used to create net short positions in any asset class. The derivatives portfolio will typically comprise between 20 and 33 investment positions.
It is expected that the Portfolio’s investments will mainly be denominated in sterling. Any non-sterling derivative investments may be hedged back into sterling at the discretion of the Manager when it is economic to do so.
Investment Limit
The Board has prescribed the following limits on the investment policy of the Balanced Risk Portfolio:
– the aggregate notional amount of financial derivative instruments positions may not exceed 250% of the net assets of the Balanced Risk Portfolio; and
– no more than 10% of the gross assets of the Balanced Risk Portfolio may be held in other listed investment companies.
Managed Liquidity Share Portfolio
Investment Objective
The investment objective of the Managed Liquidity Portfolio is to produce an appropriate level of income return combined with a high degree of security.
Investment Policy and Risk
The Managed Liquidity Portfolio invests in a range of sterling-based or related money market fund assets (which may include transferable securities, money market instruments, warrants, collective investment schemes and deposits), either directly or indirectly through money market funds, including funds managed by Invesco Perpetual or its associated companies.
The Managed Liquidity Portfolio generally invests in money market funds authorised as UCITS schemes (Undertakings for Collective Investments in Transferable Securities, being open ended retail investment funds in the EU), which are required under governing regulations to provide a prudent spread of risk. In the event that the Managed Liquidity Portfolio is invested directly in securities and instruments, the Manager will observe investment restrictions and risk diversification policies that are consistent with UCITS regulations.
Investment Limits
The Board has prescribed limits on the investment policy of the Managed Liquidity Portfolio, which include the following:
– no more than 10% of the gross assets of the Managed Liquidity Portfolio may be held in a single investment, other than authorised money market funds or high quality sovereign debt securities; and
– no more than 5% of the gross assets of the Managed Liquidity Portfolio may be held in unquoted investments, other than authorised money market funds.
Investors should note that the Managed Liquidity Shares are not designed to replicate the returns or other characteristics of a bank or building society deposit or money market fund.
Performance
The Board reviews the performance of the Company by reference to a number of Key Performance Indicators, at either a Company or Portfolio level, which include the following:
• Investment Performance
• Dividends
• Discount/Premium
• Ongoing Charges
Investment Performance
To assess investment performance the Board monitors the net asset value (NAV) performance of the individual Share classes relative to that of benchmark indices it considers to be appropriate. However, given the requirements and constraints of the investment objectives and policies followed, no index can be expected to fully represent the performance that might reasonably be expected from any one or all of the Company’s Share classes.
The NAV total return performance of each of the Portfolios over the year to 31 May 2017 and of relevant benchmark indices were as follows:
| UK Equity Portfolio |
22.0% |
| FTSE All-Share Index |
24.5% |
|
|
| Global Equity Income Portfolio |
29.2% |
| MSCI World Index (£) |
31.3% |
|
|
| Balanced Risk Portfolio |
9.7% |
| 3 month LIBOR plus 5% |
5.5% |
|
|
| Managed Liquidity Portfolio |
0.0% |
Source: Thomson Reuters Datastream.
Other performance periods, together with share price total returns, are shown on page 2.
Dividends
UK Equity Shares
The Directors have set a target of at least maintaining, in the absence of unforeseen circumstances, the level of annual UK Equity dividends per share from year to year. Further, they have implemented a model of declaring (with payment in the month following) three equal interim dividends in July, October and January with a ‘wrap-up’ fourth interim in April. Depending on the level of income received in each quarter, and in the year, these four dividends may be enhanced with contributions from capital profits to achieve the target.
The Directors have declared and paid four interim dividends for the year ended 31 May 2017 totalling 6.25p per UK Equity Share (2016: 6.15p) of which 5.38p was met from revenue earned in the year. The year’s revenue was enhanced by the receipt of £39,000 (2016: £264,000) of non-recurring special dividends, equivalent to 0.10p (2016: 0.66p). Net revenue for the year ended 31 May 2017 for the UK Equity Portfolio was £2,102,000 (2016: £2,321,000). The aggregate of dividends paid in respect of the year was £2,434,000 (2016: £2,459,000).
A first interim dividend for the year to 31 May 2018 of 1.45p was declared on 12 July 2017, setting the level for the next two dividends, in the absence of unforeseen circumstances.
Global Equity Income Shares
The Directors have set a target of at least maintaining, in the absence of unforeseen circumstances, the level of Global Equity Income dividends per share from year to year. In common with the UK Equity Shares, they have also implemented a model of declaring (with payment in the month following) three equal interim dividends in July, October and January with a ‘wrap-up’ fourth interim in April.
The Directors have declared and paid four interim dividends for the year ended 31 May 2017 totalling 6.4p (2016: 6p) per Global Equity Income Share of which 5.62p was met from revenue earned in the year. Net revenue for the year for the Global Equity Income Portfolio was £1,839,000 (2016: £1,782,000). The aggregate of dividends paid in respect of the year was £2,092,000 (2016: £1,946,000).
A first interim dividend for the year to 31 May 2018 of 1.45p was declared on 12 July 2017, setting the level for the next two dividends, in the absence of unforeseen circumstances.
Balanced Risk Shares
In order to maximise the capital return on the Balanced Risk Shares, the Directors only intend to declare dividends on the Balanced Risk Shares to the extent required, having taken into account the dividends paid on the other Share classes, to maintain the Company’s status as an investment trust under section 1158 of the Corporation Tax Act 2010.
No dividends are required to be declared or paid for the year to retain investment trust status.
Managed Liquidity Shares
The Board intends to declare dividends on the Managed Liquidity Portfolio prior to each conversion, subject to the level of income available.
There was a net revenue loss for the year for the Managed Liquidity Portfolio of £2,000 (2016: £7,000) as a consequence of continued very low interest rates. In view of the administrative costs involved, no interim dividend was declared on the Managed Liquidity Shares for the year ended 31 May 2017 (2016: nil).
Discount/(Premium)
The Company has a discount control policy in place for all four Share classes, whereby the Company offers to issue or buy back Shares of all classes with a view to maintaining the market price of the shares at close to their respective net asset values, and by so doing, avoid significant overhangs or shortages in the market. It is the Board’s policy to buy back shares and to sell shares from treasury on terms that do not dilute the net asset value attributable to existing shareholders at the time of the transaction.
The ongoing implementation of this policy is dependent upon the authorities to buy back and issue shares being renewed by shareholders. Notwithstanding the intended effect of this policy, there can be no guarantee that the Company’s shares will trade at close to their respective net asset values. Shareholders should also be aware that there is a risk that this discount policy may lead to a reduction in the size of the Company over time.
The Manager and the Board closely monitor movements in the Company’s share prices and dealings in the Company’s shares. Share movements in the year are summarised on page 34. At 31 May 2017, the share prices, net asset values (NAV) and the discount or premium of the four Share classes were as follows:
|
2017 |
2016 |
|
SHARE CLASS |
NET ASSET
VALUE
(PENCE) |
SHARE
PRICE
(PENCE) |
DISCOUNT |
NET ASSET
VALUE
(PENCE) |
SHARE
PRICE
(PENCE) |
DISCOUNT |
| UK Equity |
193.5 |
192.0 |
0.8% |
164.3 |
162.5 |
1.1% |
| Global Equity Income |
198.6 |
197.5 |
0.6% |
159.2 |
156.0 |
2.0% |
| Balanced Risk |
134.7 |
133.5 |
0.9% |
122.8 |
119.3 |
2.9% |
| Managed Liquidity |
103.2 |
101.5 |
1.6% |
103.1 |
101.0 |
2.1% |
The following charts show the (discount)/premium at which the Shares traded over the two years to 31 May 2017.
Source: Thomson Reuters Datastream.
Ongoing Charges
The expenses of managing the Company are reviewed by the Board at every meeting. The Board aims to minimise the ongoing charges figure which provides a guide to the effect on performance of all annual operating costs of the Company. The ongoing charges figure is calculated by dividing the annualised ongoing charges, including those charged to capital, by the average net asset value during the year, expressed as a percentage.
At the year end the ongoing charges figure of the Company and that for the different Share classes, excluding any performance fees, were as follows:
|
COMPANY |
UK
EQUITY |
GLOBAL
EQUITY
INCOME |
BALANCED
RISK |
MANAGED
LIQUIDITY |
| 2017 |
0.93% |
0.94% |
0.94% |
1.18% |
0.19% |
| 2016 |
0.95% |
0.96% |
0.95% |
1.19% |
0.39% |
It is anticipated that the UK Equity and Global Equity Income ongoing charges will reduce further in the coming year as a result of the management fee revisions agreed since the year end.
During the past year neither the UK Equity nor Global Equity Income Portfolios outperformed their benchmarks. In addition, the UK Equity Portfolio wrote back £280,000 of performance fee previously provided, and the impact follows:
|
COMPANY |
UK
EQUITY |
| 2017 |
–0.20% |
–0.41% |
| 2016 |
0.31% |
0.61% |
Financial Position
Assets and Liabilities
The Company’s balance sheet on page 65 shows the assets and liabilities at the year end. Details of the Company’s borrowing facility are shown in note 12 of the financial statements on page 79, with interest paid (finance costs) in note 5.
Due to the readily realisable nature of the Company’s assets, cash flow does not have the same significance as for an industrial or commercial company. The Company’s principal cash flows arise from the purchase and sales of investments and the income from investments against which must be set the costs of borrowing and management expenses.
Borrowing Policy
Borrowing policy is under the control of the Board, which has established effective parameters for the Portfolios. Borrowing levels are regularly reviewed. As part of the Company’s Investment Policy, the approved borrowing limits are 25% of the net assets of the UK Equity Portfolio and 20% of net assets of the Global Equity Income Portfolio. The Balanced Risk Portfolio does not use borrowings, but is geared by means of the derivative instruments used to implement its investment policy. The Managed Liquidity Portfolio does not use borrowings.
Issued Share Capital
All Share classes have a nominal value of 1p per Share.
The following table summarises the Company’s share capital at the year end and movements during the year.
|
UK
EQUITY |
GLOBAL
EQUITY
INCOME |
BALANCED
RISK |
MANAGED
LIQUIDITY |
| NUMBER OF SHARES |
|
|
|
|
| Shares in issue at the year end: |
|
|
|
|
| – excluding treasury |
38,009,455 |
32,747,913 |
7,043,885 |
5,195,265 |
| – held in treasury |
7,518,540 |
4,054,000 |
4,298,000 |
7,101,785 |
| Movements during the year: |
|
|
|
|
| Increase/(decrease) arising from conversions |
(458,228) |
756,061 |
(97,231) |
(446,900) |
| Shares bought back into treasury |
(1,545,540) |
(636,000) |
(58,000) |
(264,000) |
| Average price thereon |
170.4p |
176.1p |
129.6p |
101.0p |
No shares have been issued or bought back since the year end.
Further details on net changes in issued share capital are set out in note 14 to the financial statements on pages 79 and 80. No treasury shares were cancelled in the year.
Current and Future Developments
As part of the Company’s overall strategy, the Company seeks to manage its affairs so as to maximise returns for shareholders. The Board also has a longer-term objective to increase the size of the Company in the belief that increasing the assets of the Company in this way will make the Company’s Shares more attractive to investors and improve the liquidity of the Shares.
Details of trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the portfolio managers’ reports and further details as to the risks affecting the Company are set out under ‘Principal Risks and Uncertainties’ below.
Principal Risks and Uncertainties
The audit committee regularly undertakes a robust assessment of the risks the Company faces, on behalf of the Board (see Audit Committee Report on pages 42 to 44).
The following are considered to be the most significant risks to the Company and to shareholders in relation to their investments in the Company. Further details of risks and risk management policies as they relate to the financial assets and liabilities of the Company are detailed in note 17 to the financial statements.
Investment Objectives
There is no guarantee that the Investment Policy of the Company and of each Portfolio will provide the returns sought by the Company. There can be no guarantee, therefore, that the Company will achieve its investment objectives.
The Board monitors the performance of the Company and each Portfolio and has established guidelines to ensure that the Investment Policy of the Company and each Portfolio is pursued by the Manager.
Market Movements and Portfolio Performance
Individual Portfolio performance is substantially dependent on the performance of the securities (including derivative instruments) held within the Portfolio. The prices of these securities are influenced by many factors including the general health of regional and worldwide economies; interest rates; inflation; government policies; industry conditions; political and diplomatic events; tax laws; environmental laws; and by the demand from investors. The Manager strives to maximise the total return from Portfolios, but the investments held are influenced by market conditions and the Board acknowledges the external influences on the performance of each Portfolio. Further risks specifically applicable to the Balanced Risk Shares are set out on page 37.
The performance of the Manager is carefully monitored by the Board, and the continuation of the Manager’s mandates is reviewed each year. The Board has established guidelines to ensure that the investment policies of each class of Share are pursued by the Manager.
For a fuller discussion of the economic and market conditions facing the Company and the current and future performance of the different Portfolios of the Company, please see both the Chairman’s Statement on pages 3 to 5 and the portfolio managers’ reports starting on page 7.
Risks Applicable to the Company’s Shares
Shares in the Company are designed to be held over the long-term and may not be suitable as short-term investments. There can be no guarantee that any appreciation in the value of the Company’s Shares will occur and investors may not get back the full value of their investments. Owing to the potential difference between the mid-market price of the Shares and the prices at which they are sold, there is no guarantee that their realisable value will reflect their mid-market price.
The market value of a Share, as well as being affected by its net asset value (NAV), is also influenced by investor demand, its dividend yield, where applicable, and prevailing interest rates, amongst other things. As such, the market value of a Share can fluctuate and may not reflect its underlying NAV. Shares may therefore trade at discounts to their NAVs. However, the Board has adopted a discount control policy that applies to all Share classes and the Board and the Manager monitor the market rating of each Share class.
Past performance of the Company’s Shares is not necessarily indicative of future performance.
While it is the intention of the Directors to pay dividends to holders of the UK Equity, Global Equity Income and Managed Liquidity Shares, this will be affected by the returns achieved by the respective Portfolios and the dividend policy adopted by the Board. Accordingly, the amount of dividends paid to shareholders may fluctuate. Any change in the tax or accounting treatment of dividends received or other returns may also affect the level of dividend paid on the Shares in future years. The Directors have resolved, in the absence of unforeseen circumstances, to supplement revenue with capital profits in order to pay equity Portfolio dividends at specified target levels (see pages 4 and 5).
Viability and Compulsory Conversion of a Class of Share
It is possible that through poor performance, market sentiment, or otherwise, lack of demand for one of the Company’s share classes could result in the relevant Portfolio becoming too small to be viable. The Board monitors share conversions and Portfolio sizes and liaises with the Manager on the continued viability of each Share class. The Board has received assurances from the Manager that the size of the portfolios is not critical to the Manager being able to continue to offer its investment management services in respect of any of the Company’s four portfolio strategies.
The continued listing on the Official List of each class of Share is dependent on at least 25% of the Shares in that class being held in public hands. This means that if more than 75% of the Shares of any class were held by, inter alia, the Directors, persons connected with Directors or persons interested in 5% or more of the relevant Shares, the listing of that class of Share might be suspended or cancelled. The Listing Rules state that the FCA may allow a reasonable period of time for the Company to restore the appropriate percentage if this rule is breached, but in the event that the listing of any class of Shares were cancelled the Company would lose its investment trust status.
Accordingly, if at any time the Board considers that the listing of any class of Share on the Official List is likely to be cancelled and the loss of such listing would mean that the Company would no longer be able to qualify for approval as an investment trust under section 1158 of the Corporation Tax Act 2010, the Board may serve written notice on the holders of the relevant Shares requiring them to convert their Shares into another Share class.
Liability of a Portfolio for the Liabilities of Another Portfolio
The Directors intend that, in the absence of unforeseen circumstances, each Portfolio will effectively operate as if it were a stand-alone company. However, investors should be aware of the following factors:
• As a matter of law, the Company is a single entity. Therefore, in the event that any of the Portfolios has insufficient funds or assets to meet all of its liabilities, on a winding-up or otherwise, such a shortfall would become a liability of the other Portfolios and would be payable out of the assets of the other Portfolios in such proportions as the Board may determine; and
• The Companies Act 2006 prohibits the Directors from declaring any dividends in circumstances where the Company’s assets represent less than one and a half times the aggregate of its liabilities. If the Company were to incur material liabilities in the future, a significant fall in the value of the Company’s assets as a whole may affect the Company’s ability to pay dividends on a particular class of Share, even though there are distributable profits attributable to the relevant Portfolio.
Gearing
Performance may be geared by use of the £25 million 364 day multicurrency revolving credit facility. The Company also has an uncommitted overdraft facility of up to 10% of net assets. There is no guarantee that these facilities will be renewed at maturity or on terms acceptable to the Company. If it were not possible to renew these facilities or replace them with one from another lender, the amounts owing by the Company would need to be funded by the sale of securities.
The Balanced Risk Portfolio may also be geared (by up to 250%, according to the investment policy set out on page 30) by means of the derivative instruments in which it invests. This is discussed separately below, under the heading: Additional Risks Applicable to Balanced Risk Shares.
Gearing levels of the different Portfolios will change from time to time in accordance with the respective portfolio managers’ assessments of risk and reward. Where market exposure is geared, any reduction in the value of the geared Portfolio’s investments may lead to a correspondingly greater percentage reduction in its NAV (which is likely to affect Share prices adversely). Any reduction in the number of Shares in issue (for example, as a result of buy backs) will, in the absence of a corresponding reduction in borrowings, result in an increase in a Portfolio’s gearing.
Whilst the use of borrowings by the Company should enhance the total return on a particular class of Share where the return on the underlying securities is rising and exceeds the cost of borrowing, it will have the opposite effect where the underlying return is falling, further reducing the total return on that Share class. Similarly, the use of gearing by investment companies or funds in which the Company invests increases the volatility of those investments.
Hedging
The Company may use derivatives to hedge its exposure to currency or other risks and for the purpose of efficient portfolio management. There may be a correlation between price movements in the underlying securities, currency or index, on the one hand, and price movements in the investments, which are the subject of the hedge, on the other hand. In addition, an active market may not exist for a particular hedging derivative instrument at any particular time.
Regulatory and Tax Related
The Company is subject to various laws and regulations by virtue of its status as a public limited investment company registered under the Companies Act 2006, its status as an investment trust and its listing on the London Stock Exchange. Loss of investment trust status could lead to the Company being subject to Capital Gains Tax on the sale of its investments. A serious breach of other regulatory rules could lead to suspension from the London Stock Exchange, a fine or a qualified Audit Report. Other control failures, either by the Manager or any other of the Company’s service providers, could result in operational or reputational problems, erroneous disclosures or loss of assets through fraud, as well as breaches of regulations.
The Manager reviews the level of compliance with the Corporation Tax Act 2010 and other financial regulatory requirements on a daily basis. All transactions, income and expenditure are reported to the Board. The Board regularly considers the risks to which the Company is exposed, the measures in place to control them and the potential for other risks to arise. The Board ensures that satisfactory assurances are received from service providers. The depositary and the Manager’s compliance and internal audit officers report regularly to the Company’s Audit Committee.
The risks and risk management policies and procedures as they relate to the financial assets and liabilities of the Company are also detailed in note 16 to the financial statements.
Additional Risks Applicable to Balanced Risk Shares
The use of financial derivative instruments forms part of the investment policy and strategy of the Balanced Risk Portfolio. The Portfolio’s ability to use these instruments may be limited by market conditions, regulatory limits and tax considerations. The absence of a liquid market for any particular instrument at any particular time may inhibit the ability of the Manager to liquidate a financial derivative instrument at an advantageous price. However, the Manager actively seeks the most liquid means of obtaining the required exposures. The financial derivative instruments used for the strategy are geared instruments and the aggregate notional exposure will usually exceed the net asset value of the Portfolio. Whilst this could result in greater fluctuations in the net asset value, and consequently the share price, the use of leverage is normally necessary to achieve the target volatility required to meet the return objective. The degree of leverage inherent in futures trading potentially means that a relatively small price movement in a futures contract may result in an immediate and substantial loss and it would be necessary to increase the collateral held at the clearing broker to cover such loss. This is mitigated by the Company not using financial derivative instruments to create net short positions in any asset class combined with holding cash balances sufficient to meet collateral requirements.
Reliance on Third Party Service Providers
The Company has no employees and the Directors have all been appointed on a non-executive basis. The Company is therefore reliant upon the performance of third party service providers for its executive function. In particular, the Manager performs services that are integral to the operation of the Company and the custodian appointed by the depositary holds assets on its behalf. Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to successfully pursue its Investment Policy.
The Manager may be exposed to reputational risks. In particular, the Manager may be exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its reputation. Any damage to the reputation of the Manager could result in potential counterparties and third parties being unwilling to deal with the Manager and by extension the Company. This could have an adverse impact on the ability of the Company to successfully pursue its Investment Policy.
Viability Statement
The Company is an investment company which operates as a collective investment vehicle, designed and managed for long term investment. The Board considers long term for this purpose to be at least three years and so has assessed the Company’s viability over this period. However, the life of the Company is not intended to be limited to that or any other period.
In assessing the viability of the Company the Board considered the principal risks to which it is exposed, as set out on pages 34 to 37, together with mitigating factors. The risks of failure to meet the Company’s and the Portfolios’ investment objectives, contributory market and investment risks and the challenges of lack of scale were considered to be of particular importance. The Board also took into account the capabilities of the Manager and the varying market conditions already experienced by the Company since its launch in 2006. On the question of scale, the Board has concluded that if an individual Portfolio became too small it should not cause the Company itself to be unviable.
In terms of financial risks to viability, materially all of the investments comprising the portfolios are readily realisable. The equity portfolios also produce a stream of dividend income, which may fluctuate but which the Board expects to continue. The Company has no long term liabilities and the total value of the portfolios is a multiple of the value of the Company’s short term liabilities and annual operating costs. Consequently, there appears little to no prospect of the Company not being able to meet its financial obligations as they fall due in the next three years.
Based on the above, the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.
Corporate Governance
The Board is committed to maintaining high standards of Corporate Governance. The Corporate Governance Statement required by the UKLA Listing Rules is set out on page 41.
Audit Committee Report
The extended audit committee report required by the UK Corporate Governance Code is set out on pages 42 to 44. There are no areas of concern in relation to the financial statements to bring to the attention of shareholders.
Board Diversity
The Company’s policy on diversity is set out on page 46. At the year end the Board comprised four male and one female non-executive Directors resulting in female representation of 20%. Summary biographical details of all the Directors are set out on page 39. The Company has no employees.
Social and Environmental Matters
As an investment company with no employees, property or activities outside investment, environmental policy has limited application. The Manager considers various factors when evaluating potential investments. While a company’s policy towards the environment and social responsibility, including with regard to human rights, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not make investment decisions on environmental and social grounds alone. The Manager applies the United Nations Principles for Responsible Investment.
Modern Slavery Act
The Company is an investment vehicle and does not provide goods or services in the normal course of its business, or have customers. Accordingly, the Directors consider that the Company is not within the scope of the Modern Slavery Act 2015.
This Strategic Report was approved by the Board on 31 July 2017.
Invesco Asset Management Limited
Company Secretary
.
DIRECTORS’ RESPONSIBILITIES STATEMENT
in respect of the preparation of the annual financial report
The Directors are responsible for preparing the annual financial report in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under the law the Directors have elected to prepare financial statements in accordance with UK Accounting Standards, including FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland.’ Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and which enable them to ensure that the financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, a Directors’ Report, which includes a Corporate Governance Statement, and a Directors’ Remuneration Report that comply with that law and those regulations.
The Directors confirm that:
• in so far as they are aware, there is no relevant audit information of which the Company’s Auditor is unaware; and
• each Director has taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s Auditor is aware of that information.
The Directors of the Company each confirm to the best of their knowledge that:
• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position, net return and cash flows of the Company; and
• this annual financial report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that it faces.
The Directors consider that this annual financial report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
Signed on behalf of the Board of Directors
Patrick Gifford
Chairman
31 July 2017
.
INCOME STATEMENT
FOR THE YEAR ENDED 31 MAY
|
2017 |
2016 |
|
NOTES |
REVENUE
£’000 |
CAPITAL
£’000 |
TOTAL
£’000 |
REVENUE
£’000 |
CAPITAL
£’000 |
TOTAL
£’000 |
| Gains/(losses) on investments |
9 |
– |
24,452 |
24,452 |
– |
(4,065) |
(4,065) |
| Gains/(losses) on derivative instruments |
10 |
45 |
775 |
820 |
66 |
(80) |
(14) |
| Foreign exchange gains |
|
– |
104 |
104 |
– |
18 |
18 |
| Income |
2 |
4,910 |
699 |
5,609 |
5,023 |
– |
5,023 |
| Management fees |
3 |
(283) |
(645) |
(928) |
(261) |
(579) |
(840) |
| Performance fees |
3 |
– |
280 |
280 |
– |
(401) |
(401) |
| Other expenses |
4 |
(428) |
(4) |
(432) |
(426) |
(2) |
(428) |
|
|
|
|
|
|
|
|
| Net return before finance costs and taxation |
|
4,244 |
25,661 |
29,905 |
4,402 |
(5,109) |
(707) |
| Finance costs |
5 |
(54) |
(126) |
(180) |
(62) |
(144) |
(206) |
|
|
|
|
|
|
|
|
| Return before taxation |
|
4,190 |
25,535 |
29,725 |
4,340 |
(5,253) |
(913) |
| Taxation on ordinary activities |
6 |
(242) |
– |
(242) |
(199) |
– |
(199) |
|
|
|
|
|
|
|
|
| Return after taxation for the financial year |
|
3,948 |
25,535 |
29,483 |
4,141 |
(5,253) |
(1,112) |
|
|
|
|
|
|
|
|
| Basic return per ordinary share: |
7 |
|
|
|
|
|
|
| – UK Equity Share Portfolio |
|
5.38p |
29.67p |
35.05p |
5.81p |
(8.38)p |
(2.57)p |
| – Global Equity Income Share Portfolio |
|
5.62p |
40.05p |
45.67p |
5.51p |
(5.58)p |
(0.07)p |
| – Balanced Risk Share Portfolio |
|
0.13p |
11.81p |
11.94p |
0.60p |
(1.35)p |
(0.75)p |
| – Managed Liquidity Share Portfolio |
|
(0.04)p |
– |
(0.04)p |
(0.14)p |
0.04p |
(0.10)p |
The total column of this statement represents the Company’s profit and loss account, prepared in accordance with UK Accounting Standards. The return after taxation is the total comprehensive income and therefore no statement of comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the year. Income statements for the different Share classes are shown on pages 11, 17, 24 and 27 for the UK Equity, Global Equity Income, Balanced Risk and Managed Liquidity Share Portfolios respectively.
The accompanying notes are an integral part of this statement.
.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
FOR THE YEAR ENDED 31 MAY
|
SHARE
CAPITAL
£’000 |
SHARE
PREMIUM
ACCOUNT
£’000 |
SPECIAL
RESERVE
£’000 |
CAPITAL
REDEMPTION
RESERVE
£’000 |
CAPITAL
RESERVES
£’000 |
REVENUE
RESERVE
£’000 |
TOTAL
£’000 |
| At 31 May 2015 |
1,059 |
1,290 |
83,157 |
343 |
49,326 |
538 |
135,713 |
| Cancellation of deferred shares |
– |
– |
(2) |
2 |
– |
– |
– |
| Shares issued from treasury |
– |
– |
2,654 |
– |
– |
– |
2,654 |
| Shares bought back and held in treasury |
– |
– |
(252) |
– |
– |
– |
(252) |
| Share conversions |
3 |
– |
(3) |
– |
– |
– |
– |
| Return per the income statement |
– |
– |
– |
– |
(5,253) |
4,141 |
(1,112) |
| Dividends – note 8 |
– |
– |
(302) |
– |
– |
(4,103) |
(4,405) |
|
|
|
|
|
|
|
|
| At 31 May 2016 |
1,062 |
1,290 |
85,252 |
345 |
44,073 |
576 |
132,598 |
| Cancellation of deferred shares |
– |
– |
(2) |
2 |
– |
– |
– |
| Shares bought back and held in treasury |
– |
– |
(4,125) |
– |
– |
– |
(4,125) |
| Share conversions |
(2) |
– |
2 |
– |
– |
– |
– |
| Return per the income statement |
– |
– |
– |
– |
25,535 |
3,948 |
29,483 |
| Dividends – note 8 |
– |
– |
(585) |
– |
– |
(3,941) |
(4,526) |
| As at 31 May 2017 |
1,060 |
1,290 |
80,542 |
347 |
69,608 |
583 |
153,430 |
The accompanying notes are an integral part of this statement.
.
BALANCE SHEET
AS AT 31 MAY 2017
|
NOTES |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
TOTAL
£’000 |
| Fixed assets |
|
|
|
|
|
|
| Investments held at fair value through profit or loss |
9 |
84,734 |
69,290 |
8,352 |
5,448 |
167,824 |
|
|
|
|
|
|
|
| Current assets |
|
|
|
|
|
|
| Derivative assets held at fair value through profit or loss |
10 |
– |
– |
209 |
– |
209 |
| Debtors |
11 |
454 |
451 |
479 |
2 |
1,386 |
| Cash and cash equivalents |
|
148 |
167 |
626 |
51 |
992 |
|
|
602 |
618 |
1,314 |
53 |
2,587 |
| Creditors: amounts falling due within one year |
|
|
|
|
|
|
| Derivative liabilities held at fair value through profit or loss |
10 |
– |
– |
(142) |
– |
(142) |
| Other creditors |
12 |
(11,795) |
(4,859) |
(39) |
(142) |
(16,835) |
| Net current (liabilities)/assets |
|
(11,193) |
(4,241) |
1,133 |
(89) |
(14,390) |
| Provision |
13 |
(4) |
– |
– |
– |
(4) |
| Net assets |
|
73,537 |
65,049 |
9,485 |
5,359 |
153,430 |
| Shareholders’ funds |
|
|
|
|
|
|
| Share capital |
14(a) |
455 |
368 |
114 |
123 |
1,060 |
| Share premium |
15 |
– |
– |
1,290 |
– |
1,290 |
| Special reserve |
15 |
37,810 |
32,832 |
5,076 |
4,824 |
80,542 |
| Capital redemption reserve |
15 |
73 |
78 |
24 |
172 |
347 |
| Capital reserve |
15 |
34,949 |
31,338 |
3,079 |
242 |
69,608 |
| Revenue reserve |
15 |
250 |
433 |
(98) |
(2) |
583 |
| Shareholders’ funds |
|
73,537 |
65,049 |
9,485 |
5,359 |
153,430 |
| Net asset value per ordinary share |
16 |
193.5p |
198.6p |
134.7p |
103.2p |
|
These financial statements were approved and authorised for issue by the Board of Directors on 31 July 2017.
Signed on behalf of the Board of Directors
Patrick Gifford
Chairman
The accompanying notes are an integral part of this statement.
.
BALANCE SHEET
AS AT 31 MAY 2016
|
NOTES |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
TOTAL
£’000 |
| Fixed assets |
|
|
|
|
|
|
| Investments held at fair value through profit or loss |
9 |
73,579 |
57,669 |
7,698 |
5,312 |
144,258 |
|
|
|
|
|
|
|
| Current assets |
|
|
|
|
|
|
| Derivative assets held at fair value through profit or loss |
10 |
– |
– |
388 |
– |
388 |
| Debtors |
11 |
477 |
570 |
191 |
8 |
1,246 |
| Cash and cash equivalents |
|
629 |
701 |
654 |
917 |
2,901 |
|
|
1,106 |
1,271 |
1,233 |
925 |
4,535 |
| Creditors: amounts falling due within one year |
|
|
|
|
|
|
| Derivative liabilities held at fair value through profit or loss |
10 |
– |
– |
(68) |
– |
(68) |
| Other creditors |
12 |
(8,674) |
(6,997) |
(26) |
(146) |
(15,843) |
| Net current (liabilities)/assets |
|
(7,568) |
(5,726) |
1,139 |
779 |
(11,376) |
| Provision |
13 |
(284) |
– |
– |
– |
(284) |
| Net assets |
|
65,727 |
51,943 |
8,837 |
6,091 |
132,598 |
| Shareholders’ funds |
|
|
|
|
|
|
| Share capital |
14(a) |
460 |
361 |
114 |
127 |
1,062 |
| Share premium |
15 |
– |
– |
1,290 |
– |
1,290 |
| Special reserve |
15 |
41,589 |
32,834 |
5,277 |
5,552 |
85,252 |
| Capital redemption reserve |
15 |
73 |
78 |
24 |
170 |
345 |
| Capital reserve |
15 |
23,355 |
18,237 |
2,239 |
242 |
44,073 |
| Revenue reserve |
15 |
250 |
433 |
(107) |
– |
576 |
| Shareholders’ funds |
|
65,727 |
51,943 |
8,837 |
6,091 |
132,598 |
| Net asset value per ordinary share |
16 |
164.3p |
159.2p |
122.8p |
103.1p |
|
.
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MAY
|
NOTES |
2017
£’000 |
2016
£’000 |
| Cash flows from operating activities |
|
|
|
| Net return before finance costs and taxation |
|
29,905 |
(707) |
| Tax on overseas income |
|
(242) |
(199) |
| Adjustments for: |
|
|
|
| Purchase of investments |
|
(74,206) |
(33,832) |
| Sale of investments |
|
74,792 |
35,866 |
| Sale of futures |
|
1,066 |
(272) |
|
|
1,652 |
1,762 |
| (Gains)/losses on investments |
|
(24,452) |
4,065 |
| (Gains)/losses on derivatives |
|
(820) |
14 |
| (Increase)/decrease in debtors |
|
(276) |
75 |
| Decrease in creditors and provision |
|
(263) |
(40) |
| Scrip dividends |
|
(32) |
(86) |
| Foreign exchange differences |
|
(104) |
(18) |
| Net cash inflow from operating activities |
|
5,368 |
4,866 |
| Cash flows from financing activities |
|
|
|
| Interest paid on loan |
|
(180) |
(207) |
| Increase/(decrease) in bank borrowing |
|
1,450 |
(750) |
| Net proceeds from issue of shares |
|
- |
2,654 |
| Share buy back costs |
|
(4,125) |
(252) |
| Equity dividends paid |
8 |
(4,526) |
(4,405) |
| Net cash outflow from financing activities |
|
(7,381) |
(2,960) |
| Net (decrease)/increase in cash and cash equivalents |
|
(2,013) |
1,906 |
| Cash and cash equivalents at the start of the year |
|
2,901 |
977 |
| Foreign exchange differences |
|
104 |
18 |
| Cash and cash equivalents at the end of the year |
|
992 |
2,901 |
| Cash flow from operating activities includes: |
|
|
|
| Interest received |
|
64 |
73 |
| Dividends received |
|
5,152 |
4,384 |
.
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting policies
Accounting policies describe the Company’s approach to recognising and measuring transactions during the year and the position of the Company at the year end.
The principal accounting policies are set out below.
(a) Basis of preparation
(i) Accounting Standards applied
The financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice (UK GAAP)) and with the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in November 2014 as amended in January 2017. The financial statements are issued on a going concern basis as disclosed on page 48.
The accounting policies applied to these financial statements are consistent with those applied for the year ended 31 May 2016 and the previous year, albeit the Directors have chosen not to adopt the exemption to present a cash flow statement (2016: exemption adopted).
(ii) Definitions used in the financial statements
‘Portfolio’ the UK Equity Share Portfolio, the Global Equity Income Share Portfolio, the Balanced Risk Share Portfolio and/or the Managed Liquidity Share Portfolio (as the case may be). Each comprises, or may include, an investment portfolio, derivative instruments, cash, loans, debtors and other creditors, which together make up the net assets as shown in the balance sheet.
‘Share’ UK Equity Share, Global Equity Income Share, Balanced Risk Share, Managed Liquidity Share and/or Deferred Share (as the case may be).
The financial statements for the Company comprise the income statement, reconciliation of movements in shareholders’ funds, the total column of the balance sheet and the company totals shown in the notes to the financial statements.
The UK Equity, Global Equity Income, Balanced Risk and Managed Liquidity Share Portfolios’ income statements and summaries of net assets do not represent statutory accounts, are not required under UK Generally Accepted Accounting Practice and are not audited. These have been disclosed to assist shareholders’ understanding of the assets and liabilities, and income and expenses of the different Share classes.
In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the income statement between items of a revenue and capital nature has been presented alongside the income statement.
(iii) Functional and presentational currency
The Financial Statements are presented in sterling, which is the Company’s functional and presentation currency and is the currency of the Company’s share capital and the predominant currency in which the Company’s shareholders operate. This is also the currency in which these accounts are prepared.
(iv) Transactions and balances
Transactions in foreign currency, whether of a revenue or capital nature, are translated to sterling at the rates of exchange ruling on the dates of such transactions. Foreign currency assets and liabilities are translated to sterling at the rates of exchange ruling at the balance sheet date. Any gains or losses, whether realised or unrealised, are taken to the capital reserve or to the revenue account, depending on whether the gain or loss is of a capital or revenue nature. All gains and losses are recognised in the income statement.
(b) Financial instruments
The Company has chosen to apply the provisions of Sections 11 and 12 of FRS102 in full in respect of the financial instruments.
(i) Recognition of financial assets and financial liabilities
The Company recognises financial assets and financial liabilities when the Company becomes a party to the contractual provisions of the instrument. The Company will offset financial assets and financial liabilities if the Company has a legally enforceable right to set off the recognised amounts and interests and intends to settle on a net basis.
(ii) Derecognition of financial assets
The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial asset that is created or retained by the Company is recognised as an asset.
(iii) Derecognition of financial liabilities
The Company derecognises financial liabilities when its obligations are discharged, cancelled or expire.
(iv) Trade date accounting
Purchases and sales of financial assets are recognised on trade date, being the date on which the Company commits to purchase or sell the assets.
(v) Classification and measurement of financial assets and financial liabilities
Financial assets
The Company’s investments, including financial derivative instruments, are classified as held at fair value through profit or loss.
Financial assets held at fair value through profit or loss are initially recognised at fair value, which is taken to be their cost, with transaction costs expensed in the income statement, and are subsequently valued at fair value.
Fair value for investments, including financial derivative instruments, that are actively traded in organised financial markets is determined by reference to stock exchange quoted bid prices at the balance sheet date. For investments that are not actively traded or where active stock exchange quoted bid prices are not available, fair value is determined by reference to a variety of valuation techniques including broker quotes and price modelling. Where there is no active market, unlisted/illiquid investments are valued by the Directors at fair value with regard to the International Private Equity and Venture Capital Valuation Guidelines and on recommendations from Invesco’s Pricing Committee, both of which use valuation techniques such as earnings multiples, recent arm’s length transactions and net assets.
Financial liabilities
Financial liabilities, excluding financial derivative instruments but including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method.
(c) Derivatives and hedging
Derivative instruments are valued at fair value in the balance sheet. Derivative instruments may be capital or revenue in nature and, accordingly, changes in their fair value are recognised in revenue or capital in the income statement as appropriate.
Forward currency contracts entered into for hedging purposes are valued at the appropriate forward exchange rate ruling at the balance sheet date. Profits or losses on the closure or revaluation of positions are included in capital reserves.
Futures contracts may be entered into for hedging purposes and any profits and losses on the closure or revaluation of positions are included in capital reserves. Where futures contracts are used for investment exposure any income element arising on bond futures is recognised as a gain on derivative instruments in the income statement and shown in revenue.
(d) Cash and cash equivalents
Cash and cash equivalents may comprise cash (including short term deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value) as well as cash equivalents, including money market funds. Investments are regarded as cash equivalents if they meet all of the following criteria: highly liquid investments held in the Company’s base currency that are readily convertible to a known amount of cash, are subject to an insignificant risk of change in value and provide a return no greater than the rate of a three-month high quality government bond. For the Balanced Risk and Managed Liquidity Portfolios, cash and cash equivalents do not include investments in Short Term Investments Company (Global Series) plc as this forms part of those Portfolio’s fixed assets.
(e) Income
Dividend income from investments is recognised when the shareholders’ right to receive payment has been established, normally the ex-dividend date. UK dividends are stated net of related tax credits. Interest income arising from cash is recognised on an accruals basis and underwriting commission is recognised as earned. Special dividends are taken to income unless they arise from a return of capital, when they are allocated to capital in the income statement. Income from fixed income securities is recognised in the income statement using the effective interest method.
(f) Expenses and finance costs
All expenses are accounted for on an accruals basis. Expenses are charged to the income statement and shown in revenue except where expenses are presented as capital items when a connection with the maintenance or enhancement of the value of the investments held can be demonstrated and thus management fees and finance costs are charged to revenue and capital to reflect the Directors’ expected long-term view of the nature of the investment returns of each Portfolio.
Expenses charged to the Company in relation to a specific Portfolio are charged directly to that Portfolio.
Expenses charged to the Company that are common to more than one Portfolio are allocated between those Portfolios in the same proportions as the net assets of each Portfolio at the latest conversion date.
Finance costs are accounted for on an accruals basis using the effective interest rate method.
The management fees and finance costs are charged in accordance with the Board’s expected split of long-term returns, in the form of capital gains and income, to the applicable Portfolio as follows:
|
PORTFOLIO |
REVENUE
RESERVE |
CAPITAL
RESERVE |
|
UK Equity |
30% |
70% |
|
Global Equity Income |
30% |
70% |
|
Balanced Risk |
30% |
70% |
|
Managed Liquidity |
100% |
– |
Any entitlement to any investment performance fee which is attributable to the UK Equity and/or the Global Equity Income Portfolio is allocated 100% to capital as it is principally attributable to the capital performance of the investments in that Portfolio.
(g) Dividends
Dividends are accrued in the financial statements when there is an obligation to pay the dividends at the balance sheet date.
(h) Taxation
Tax expense represents the sum of tax currently payable and deferred tax. Any tax payable is based on taxable profit for the period. Taxable profit differs from profit before tax as reported in the income statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
For the Company, any allocation of tax relief to capital is based on the marginal basis, such that tax allowable capital expenses are offset against taxable income. Where individual Portfolios have extra tax capacity arising from unused tax allowable expenses which can be used by a different Portfolio, this extra tax capacity is transferred between the Portfolios at a valuation of 1% of the amount transferred.
Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax or a right to pay less tax in the future have occurred. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements. Deferred taxation assets are recognised where, in the opinion of the Directors, it is more likely than not that these amounts will be realised in future periods.
A deferred tax asset has not been recognised in respect of surplus management expenses as the Company is unlikely to have sufficient future taxable revenue to offset against these.
Investment trusts which have approval under the appropriate tax regulations are not liable for taxation on capital gains.
2. Income
This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.
|
2017 |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
COMPANY
TOTAL
£’000 |
| Income from investments |
|
|
|
|
|
| UK dividends: |
|
|
|
|
|
| – ordinary dividends |
2,060 |
559 |
– |
– |
2,619 |
| – special dividends |
39 |
– |
– |
– |
39 |
|
2,099 |
559 |
– |
– |
2,658 |
| UK scrip dividends |
17 |
15 |
– |
– |
32 |
| Overseas dividends |
|
|
|
|
|
| – ordinary dividends |
355 |
1,776 |
9 |
2 |
2,142 |
| Unfranked investment income |
42 |
– |
– |
7 |
49 |
| Interest from Treasury bills |
– |
– |
15 |
– |
15 |
|
2,513 |
2,350 |
24 |
9 |
4,896 |
| Other income |
|
|
|
|
|
| Deposit interest |
– |
– |
2 |
– |
2 |
| Other |
– |
– |
– |
12 |
12 |
| Total income |
2,513 |
2,350 |
26 |
21 |
4,910 |
| 2016 |
|
|
|
|
|
| Income from investments |
|
|
|
|
|
| UK dividends: |
|
|
|
|
|
| – ordinary dividends |
1,955 |
524 |
– |
– |
2,479 |
| – special dividends |
240 |
– |
– |
– |
240 |
|
2,195 |
524 |
– |
– |
2,719 |
| UK scrip dividends |
48 |
38 |
– |
– |
86 |
| Overseas dividends |
|
|
|
|
|
| – ordinary dividends |
422 |
1,596 |
11 |
2 |
2,031 |
| – special dividends |
24 |
60 |
– |
– |
84 |
| Unfranked investment income |
41 |
– |
– |
12 |
53 |
| Interest from Treasury bills |
– |
– |
27 |
– |
27 |
|
2,730 |
2,218 |
38 |
14 |
5,000 |
| Other income |
|
|
|
|
|
| Deposit interest |
– |
– |
1 |
1 |
2 |
| Underwriting commission |
9 |
– |
– |
– |
9 |
| Other |
– |
– |
– |
12 |
12 |
| Total income |
2,739 |
2,218 |
39 |
27 |
5,023 |
There were £699,000 special dividends recognised in capital during the year (2016: £nil) in respect of the UK Equity Portfolio.
3. Management and performance fees
This note shows the fees paid to the Manager. These are made up of the individual Portfolio management fees calculated quarterly on the basis of their net asset values and the performance fees of the UK Equity and Global Equity Income Portfolios.
|
2017 |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
COMPANY
TOTAL
£’000 |
| Management fee: |
|
|
|
|
|
| – charged to revenue |
135 |
121 |
21 |
6 |
283 |
| – charged to capital |
316 |
281 |
48 |
– |
645 |
| Total management fee |
451 |
402 |
69 |
6 |
928 |
| Performance fee provision written back to capital |
(280) |
– |
– |
– |
(280) |
| 2016 |
|
|
|
|
|
| Management fee: |
|
|
|
|
|
| – charged to revenue |
130 |
99 |
19 |
13 |
261 |
| – charged to capital |
303 |
231 |
45 |
– |
579 |
| Total management fee |
433 |
330 |
64 |
13 |
840 |
| Performance fee charged to capital |
401 |
– |
– |
– |
401 |
Details of the investment management agreement are given on page 49 in the Directors’ Report.
The performance fee accrued is solely in respect of the UK Equity Portfolio. No performance fee was earned for the UK Equity Portfolio during the year (2016: £401,000).
No performance fee is payable on the Global Equity Income Portfolio for the current or previous year. Any underperformance must be fully set off by over-performance before any performance fee can be paid. Movements on the Global Equity Income Portfolio’s underperformance carried forward follow:
|
2017
£’000 |
2016
£’000 |
| Underperformance bought forward |
607 |
476 |
| Underperformance in the year |
171 |
131 |
| Underperformance carried forward |
778 |
607 |
4. Other expenses
The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified.
|
2017 |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
COMPANY
TOTAL
£’000 |
| Charged to revenue: |
|
|
|
|
|
| Directors’ fees(i) |
64 |
52 |
9 |
5 |
130 |
| Auditor’s fees(ii): |
|
|
|
|
|
| – for the audit of the financial statements |
13 |
12 |
2 |
1 |
28 |
| Other expenses(iii) |
122 |
107 |
30 |
11 |
270 |
|
199 |
171 |
41 |
17 |
428 |
| Charged to capital: |
|
|
|
|
|
| Custodian transaction charges |
1 |
3 |
– |
– |
4 |
| Total |
200 |
174 |
41 |
17 |
432 |
| 2016 |
|
|
|
|
|
| Charged to revenue: |
|
|
|
|
|
| Directors’ fees(i) |
65 |
51 |
9 |
5 |
130 |
| Auditor’s fees(ii): |
|
|
|
|
|
| – for the audit of the financial statements |
14 |
11 |
2 |
1 |
28 |
| – for other services relating to tax compliance |
4 |
3 |
1 |
– |
8 |
| Other expenses(iii) |
126 |
90 |
29 |
15 |
260 |
|
209 |
155 |
41 |
21 |
426 |
| Charged to capital: |
|
|
|
|
|
| Custodian transaction charges |
1 |
1 |
– |
– |
2 |
| Total |
210 |
156 |
41 |
21 |
428 |
(i) The Directors’ Remuneration Report provides information on Directors’ fees. Included within other expenses is £11,000 (2016: £10,000) of employer’s national insurance payable on Directors’ fees. As at 31 May 2017, the amount outstanding on Directors’ fees and employer’s national insurance was £24,000 (2016: £19,000).
(ii) Auditor’s fees are shown excluding VAT, which is included in other expenses.
(iii) Includes fees for depositary, broker and registrar, and also printing, postage and listing costs.
5. Finance costs
Finance costs are the cost of borrowing facilities. These are made up of costs incurred to have the facility in place and any interest charged when the facility is used.
|
2017 |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
COMPANY
TOTAL
£’000 |
| Interest payable on borrowings |
|
|
|
|
|
| repayable within one year as follows: |
|
|
|
|
|
| Charged to revenue |
36 |
18 |
– |
– |
54 |
| Charged to capital |
83 |
4 |
– |
– |
126 |
| Total |
119 |
61 |
– |
– |
180 |
| 2016 |
|
|
|
|
|
| Interest payable on borrowings |
|
|
|
|
|
| repayable within one year as follows: |
|
|
|
|
|
| Charged to revenue |
37 |
25 |
– |
– |
62 |
| Charged to capital |
87 |
57 |
– |
– |
144 |
| Total |
124 |
82 |
– |
– |
206 |
6. Taxation
As an investment trust, the Company pays no tax on capital gains. However, the Company suffers tax on certain overseas dividends that is irrecoverable and this note shows details of the tax charge. In addition, this note clarifies the basis for the Company having no deferred tax asset or liability.
(a) Tax charge
|
2017 |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
COMPANY
TOTAL
£’000 |
|
Overseas tax |
41 |
201 |
– |
– |
242 |
|
2016 |
|
|
|
|
|
|
Overseas tax |
42 |
157 |
– |
– |
199 |
The accounting policy for taxation is disclosed in note 1(h).
(b) Reconciliation of tax charge
|
2017 |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
COMPANY
TOTAL
£’000 |
|
Return before taxation |
13,737 |
15,141 |
849 |
(2) |
29,725 |
|
|
|
|
|
|
|
|
Theoretical tax at the current UK Corporation Tax rate of 19.83% (2016: 20.00%) |
2,724 |
3,003 |
168 |
– |
5,895 |
|
Effect of: |
|
|
|
|
|
|
– Non-taxable losses on investments and derivatives |
(2,186) |
(2,663) |
(154) |
– |
(5,003) |
|
– Non-taxable losses/(gains) on foreign exchange |
2 |
– |
(22) |
– |
(20) |
|
– Non-taxable scrip dividends |
(3) |
(3) |
– |
– |
(6) |
|
– Non-taxable UK dividends |
(394) |
(111) |
– |
– |
(505) |
|
– Non-taxable UK special dividends |
(8) |
– |
– |
– |
(8) |
|
– Non-taxable overseas dividends |
(70) |
(352) |
– |
– |
(422) |
|
– Non-taxable overseas special dividends |
(139) |
– |
– |
– |
(139) |
|
– Overseas tax |
41 |
201 |
– |
– |
242 |
|
– Excess of allowable expenses over taxable income |
74 |
126 |
8 |
– |
208 |
|
Tax charge for the year |
41 |
201 |
– |
– |
242 |
|
|
|
|
|
|
|
|
2016 |
|
|
|
|
|
|
Return before taxation |
(986) |
134 |
(56) |
(5) |
(913) |
|
Theoretical tax at the current UK Corporation Tax rate of 20.00% (2015: 20.83%) |
(197) |
27 |
(11) |
(1) |
(182) |
|
Effect of: |
|
|
|
|
|
|
– Non-taxable losses on investments and derivatives |
513 |
301 |
16 |
– |
830 |
|
– Non-taxable losses/(gains) on foreign exchange |
(1) |
2 |
(5) |
– |
(4) |
|
– Non-taxable scrip dividends |
(10) |
(8) |
– |
– |
(18) |
|
– Non-taxable UK dividends |
(370) |
(105) |
– |
– |
(475) |
|
– Non-taxable UK special dividends |
(48) |
– |
– |
– |
(48) |
|
– Non-taxable overseas dividends |
(84) |
(331) |
– |
– |
(415) |
|
– Non-taxable overseas special dividends |
(5) |
– |
– |
– |
(5) |
|
– Overseas tax |
42 |
157 |
– |
– |
199 |
|
– Excess of allowable expenses over taxable income |
202 |
114 |
– |
1 |
317 |
|
Tax charge for the year |
42 |
157 |
– |
– |
199 |
Given the Company’s status as an investment trust, and the intention to continue meeting the conditions required to retain such status for the foreseeable future, the Company has not provided any UK corporation tax on any realised or unrealised capital gains or losses arising on investments.
(c) Factors that may affect future tax charges
The Company has excess management expenses and loan relationship deficits of £11,018,000 (2016: £9,971,000) that are available to offset future taxable revenue. A deferred tax asset of £1,873,000 (2016: £1,795,000), measured at the standard corporation tax substantively enacted rate of 17% (2016: 18%) has not been recognised in respect of these expenses since the Directors believe that there will be no taxable profits in the future against which the deferred tax assets can be offset.
7. Basic return per Ordinary Share
Return per share is the amount of gain (or loss) generated for each share class in the financial year divided by the weighted average number of the shares in issue.
Basic revenue, capital and total return per ordinary share is based on each of the returns after taxation shown by the income statement for the applicable Share class and on the following numbers of Shares being the weighted average number of Shares in issue throughout the year for each Share class:
|
WEIGHTED AVERAGE
NUMBER OF SHARES |
|
| SHARE |
2017 |
2016 |
| UK Equity |
39,070,682 |
39,958,921 |
| Global Equity Income |
32,711,960 |
32,364,967 |
| Balanced Risk |
7,109,098 |
7,452,162 |
| Managed Liquidity |
5,574,251 |
5,228,172 |
8. Dividends
Dividends represent distributions of income less expenses to shareholders. Dividends are paid as an amount per share held.
Dividends paid for each applicable Share class, which represent distributions for the purpose of s1159 of the Corporation Tax Act 2010, are as follows:
|
2017 |
2016 |
|
NUMBER
OF SHARES |
DIVIDEND
RATE (PENCE) |
TOTAL
£’000 |
NUMBER
OF SHARES |
DIVIDEND
RATE (PENCE) |
TOTAL
£’000 |
| UK Equity |
|
|
|
|
|
|
| First interim |
39,763,023 |
1.40 |
557 |
39,792,732 |
1.20 |
478 |
| Second interim |
39,317,155 |
1.40 |
550 |
40,118,405 |
1.20 |
481 |
| Third interim |
39,047,478 |
1.40 |
547 |
40,026,774 |
1.20 |
480 |
| Fourth interim |
38,030,323 |
2.05 |
780 |
39,974,044 |
2.55 |
1,020 |
|
|
|
|
|
|
|
|
|
6.25 |
2,434 |
|
6.15 |
2,459 |
| Global Equity Income |
|
|
|
|
|
|
| First interim |
32,377,852 |
1.40 |
453 |
31,530,677 |
1.40 |
441 |
| Second interim |
32,609,001 |
1.40 |
457 |
31,892,746 |
1.40 |
447 |
| Third interim |
32,695,170 |
1.40 |
457 |
32,995,312 |
1.40 |
462 |
| Fourth interim |
32,947,505 |
2.20 |
725 |
33,108,029 |
1.80 |
596 |
|
|
|
|
|
|
|
|
|
6.40 |
2,092 |
|
6.00 |
1,946 |
|
|
|
|
|
|
|
| Total paid in respect of the year |
|
|
4,526 |
|
|
4,405 |
No dividends have been paid to Balanced Risk and Managed Liquidity shareholders during the year (2016: nil).
The Company’s dividend policy permits the payment of dividends by the UK Equity and Global Equity Income Portfolios from capital. An analysis of dividends paid for the year from revenue and capital follows.
|
2017 |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
COMPANY
TOTAL
£’000 |
| Dividends paid in respect of the year: |
|
|
|
| – from revenue |
2,102 |
1,839 |
3,941 |
| – from capital |
332 |
253 |
585 |
|
2,434 |
2,092 |
4,526 |
|
2016 |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
COMPANY
TOTAL
£’000 |
| Dividends paid in respect of the year: |
|
|
|
| – from revenue |
2,321 |
1,782 |
4,103 |
| – from capital |
138 |
164 |
302 |
|
2,459 |
1,946 |
4,405 |
9. Investments held at fair value
The portfolio is made up of investments which are listed, i.e. traded on a regulated stock exchange, and a small proportion of investments which are valued by the Directors as they are unlisted or not regularly traded. Gains and losses are either:
• realised, usually arising when investments are sold; or
• unrealised, being the difference from cost of those investments still held at the year end.
(a) Analysis of investments by listing status
|
2017
£’000 |
2016
£’000 |
| UK listed investments |
100,596 |
87,317 |
| UK unlisted investments |
714 |
750 |
| Overseas listed investments(i) |
66,496 |
56,173 |
| Unquoted hedge fund investments |
18 |
18 |
|
167,824 |
144,258 |
(i) Includes the Short-Term Investments Company (Global Series) plc positions held by the Balanced Risk Portfolio of £2,440,000 (2016: £2,190,000) and Managed Liquidity Portfolio of £548,000 (2016: £418,000).
(b) Analysis of investment gains/(losses)
|
|
2017
£’000 |
2016
£’000 |
|
Opening valuation |
144,258 |
149,849 |
|
Movements in year: |
|
|
|
Purchases at cost |
73,749 |
31,998 |
|
Sales – proceeds |
(74,635) |
(33,524) |
|
Sales – net realised gains on sales |
21,527 |
3,664 |
|
Movement in investment holding gains in year |
2,925 |
(7,729) |
|
Closing valuation |
167,824 |
144,258 |
|
Closing book cost |
136,391 |
115,750 |
|
Closing investment holding gains |
31,433 |
28,508 |
|
Closing valuation |
167,824 |
144,258 |
|
Realised gains based on historical cost |
21,527 |
3,664 |
|
Movement in investment holding gains/(losses) in year |
2,925 |
(7,729) |
|
(Losses)/gains on investments |
24,452 |
(4,065) |
(c) Transaction costs
Transaction costs were £110,000 (2016: £57,000) on purchases and £55,000 (2016: £42,000) on sales.
10. Derivative instruments
Derivative instruments are contracts whose price is derived from the value of other securities or indices. The Balanced Risk Portfolio uses futures, which represent agreements to buy or sell commodities or financial instruments at a pre-determined price in the future.
Excluding forward currency contracts used for currency hedging purposes.
|
2017
£’000 |
2016
£’000 |
| Opening derivative assets held at fair value through profit and loss |
388 |
159 |
| Opening derivative liabilities held at fair value through profit and loss |
(68) |
(125) |
| Opening net derivative liabilities held at fair value shown in balance sheet |
320 |
34 |
| Closing derivative assets held at fair value through profit and loss |
209 |
388 |
| Closing derivative liabilities held at fair value through profit and loss |
(142) |
(68) |
| Closing net derivative assets held at fair value shown in balance sheet |
67 |
320 |
| Movement in derivative holding gains |
(253) |
286 |
| Net realised gains on derivative instruments |
1,028 |
(366) |
| Net capital gain/(loss) on derivative instruments as shown in the income statement |
775 |
(80) |
| Net income arising on derivatives |
45 |
66 |
| Total gain/(loss) on derivatives instruments |
820 |
(14) |
The derivative assets/liabilities shown in the balance sheet are the unrealised gains/losses arising from the revaluation to fair value of futures contracts held in the Balanced Risk Share Portfolio, as shown on page 23.
11. Debtors
Debtors are amounts due to the Company, such as monies due from brokers for investments sold and income which has been earned (accrued) but not yet received.
|
2017
£’000 |
2016
£’000 |
| Amounts due from brokers |
28 |
164 |
| Collateral pledged for futures contracts |
443 |
176 |
| Taxation recoverable |
166 |
165 |
| Prepayments and accrued income |
749 |
741 |
|
1,386 |
1,246 |
12. Other creditors
Creditors are amounts owed by the Company, and include any bank loans, amounts due to brokers for the purchase of investments and amounts owed to suppliers, such as the Manager and auditor.
|
2017
£’000 |
2016
£’000 |
| Bank loan |
15,200 |
13,750 |
| Taxation payable |
137 |
137 |
| Amounts due to brokers |
119 |
594 |
| Performance fee accrued |
1,021 |
1,021 |
| Accruals |
358 |
341 |
|
16,835 |
15,843 |
At the year end the Company had a maximum uncommitted overdraft facility of 10% of net assets and a £25 million (2016: £25 million) committed 364 day multicurrency revolving credit facility, which is due for renewal on 18 May 2018 (2016: 19 May 2017), both with The Bank of New York Mellon. The interest payable on the credit facility is based on LIBOR +0.85% on amounts drawndown.
13. Provision
The provision arises from the UK Equity Portfolio’s performance fee. The movements on the performance fee provision are as follows:
|
2017
£’000 |
2016
£’000 |
| Provision bought forward |
284 |
313 |
| Underperformance offset in year |
(280) |
– |
| Transferred to performance fee accrued |
– |
(29) |
| Provision carried forward |
4 |
284 |
14. Share capital
Share capital represents the total number of shares in issue.
All shares have a nominal value of 1 penny.
(a) Movements in Share Capital During the Year
Issued and fully paid:
|
|
UK
EQUITY |
GOLBAL
EQUITY
INCOME |
BALANCED
RISK |
MANAGED
LIQUIDITY |
TOTAL
SHARE
CAPITAL |
|
ORDINARY SHARES (NUMBER) |
|
|
|
|
|
|
At 31 May 2016 |
40,013,223 |
32,627,852 |
7,199,116 |
5,906,165 |
85,746,356 |
|
Shares bought back into treasury |
(1,545,540) |
(636,000) |
(58,000) |
(264,000) |
(2,503,540) |
|
Arising on share conversion: |
|
|
|
|
|
|
– August 2016 |
(130,868) |
231,149 |
(91,769) |
(55,664) |
(47,152) |
|
– November 2016 |
115,323 |
86,169 |
(7,487) |
(336,027) |
(142,022) |
|
– February 2017 |
(421,615) |
418,335 |
2,025 |
(55,209) |
(56,464) |
|
– May 2017 |
(21,068) |
20,408 |
– |
– |
(660) |
|
At 31 May 2017 |
38,009,455 |
32,747,913 |
7,043,885 |
5,195,265 |
82,996,518 |
|
TREASURY SHARES (NUMBER) |
|
|
|
|
|
|
At 31 May 2016 |
5,973,000 |
3,418,000 |
4,240,000 |
6,837,785 |
20,468,785 |
|
Shares bought back into treasury |
1,545,540 |
636,000 |
58,000 |
264,000 |
2,503,540 |
|
At 31 May 2017 |
7,518,540 |
4,054,000 |
4,298,000 |
7,101,785 |
22,972,325 |
|
ORDINARY SHARES OF 1 PENNY EACH (£’000) |
|
|
|
|
|
At 31 May 2016 |
400 |
327 |
72 |
59 |
858 |
|
Shares bought back into treasury |
(15) |
(6) |
(1) |
(3) |
(25) |
|
Arising on share conversion: |
|
|
|
|
|
|
– August 2016 |
(2) |
2 |
– |
(1) |
(1) |
|
– November 2016 |
1 |
1 |
– |
(3) |
(1) |
|
– February 2017 |
(4) |
4 |
– |
– |
– |
|
– May 2017 |
– |
– |
– |
– |
– |
|
At 31 May 2017 |
380 |
328 |
71 |
52 |
831 |
|
TREASURY SHARES OF 1 PENNY EACH (£’000) |
|
|
|
|
|
At 31 May 2016 |
60 |
34 |
42 |
68 |
204 |
|
Shares bought back into treasury |
15 |
6 |
1 |
3 |
25 |
|
At 31 May 2017 |
75 |
40 |
43 |
71 |
229 |
|
TOTAL SHARE CAPITAL (£’000) |
|
|
|
|
|
|
Ordinary share capital |
380 |
328 |
71 |
52 |
831 |
|
Treasury share capital |
75 |
40 |
43 |
71 |
229 |
|
At 31 May 2017 |
455 |
368 |
114 |
123 |
1,060 |
|
Average buy back price |
170.4p |
176.1p |
129.6p |
101.0p |
|
The total cost of share buy backs was £4,126,000 (2016: £252,000). As part of the conversion process 256,895 (2016: 226,861) deferred shares of 1p each were created and subsequently cancelled during the year. No deferred shares were in issue at the start or end of the year.
No ordinary shares were issued from treasury during the year (2016: 550,000 UK Equity Shares and 1,120,000 Global Equity Income Shares).
(b) Movements in Share Capital after the Year End
No shares have been issued or bought back since the year end.
(c) Voting Rights
Rights attaching to the Shares are described in the Directors’ Report on page 50.
(d) Deferred Shares
The Deferred shares do not carry any rights to participate in the Company’s profits, do not entitle the holder to any repayment of capital on a return of assets (except for the sum of 1p) and do not carry any right to receive notice of or attend or vote at any general meeting of the Company. Any Deferred shares that arise as a result of conversions of Shares are cancelled in the same reporting period.
(e) Future Convertibility of the Shares
Shares are convertible at the option of the holder into any other class of Share. Further conversion details are given on the inside front cover and in the Shareholder Information on page 98.
15. Reserves
This note explains the different reserves attributable to shareholders. The aggregate of the reserves and share capital (see previous note) make up total shareholders’ funds.
The share premium comprises the net proceeds received by the Company following the issue of new shares, after deduction of the nominal amount of 1 penny and any applicable costs. The special reserve arose from the cancellation of the share premium account, in January 2007, and is available as distributable profits to be used for all purposes under the Companies Act 2006, including buy back of shares and payment of dividends. The capital redemption reserve arises from the nominal value of shares bought back and cancelled; this and the share premium are non-distributable.
Capital investment gains and losses are shown in note 9(b), and form part of the capital reserve. The revenue reserve shows the net revenue retained after payments of any dividends. The capital and revenue reserves are distributable.
16. Net asset value per Share
The total net assets (total assets less total liabilities) attributable to a share class are often termed shareholders’ funds and are converted into net asset value per share by dividing by the number of shares in issue.
The net asset value per Share and the net assets attributable at the year end were as follows:
| ORDINARY SHARES |
2017 |
2016 |
|
NET ASSET
VALUE PER
SHARE
PENCE |
NET ASSETS
ATTRIBUTABLE
£’000 |
NET ASSET
VALUE PER
SHARE
PENCE |
NET ASSETS
ATTRIBUTABLE
£’000 |
| UK Equity |
193.5 |
73,537 |
164.3 |
65,727 |
| Global Equity Income |
198.6 |
65,049 |
159.2 |
51,943 |
| Balanced Risk |
134.7 |
9,485 |
122.8 |
8,837 |
| Managed Liquidity |
103.2 |
5,359 |
103.1 |
6,091 |
Net asset value per Share is based on the net assets and on the number of Shares in issue (excluding Treasury Shares) for each Share class at the year end.
17. Financial instruments
This note summarises the risks deriving from the financial instruments that comprise the Company’s assets and liabilities.
The Company’s financial instruments comprise the following:
– investments in equities, fixed interest securities and liquidity funds which are held in accordance with the Company’s investment objectives and the investment objectives of the four Portfolios;
– short-term debtors, creditors and cash arising directly from operations;
– short-term forward foreign currency and futures contracts; and
– bank loans and short-term overdrafts, used to finance operations.
The financial instruments held in each of the four investment portfolios are shown on pages 10, 16, 22, 23 and 27.
The accounting policies in note 1 include criteria for the recognition and the basis of measurement applied for these financial instruments. Note 1 also includes the basis on which income and expenses arising from financial assets and liabilities are recognised and measured.
The Company’s principal risks and uncertainties are outlined in the Strategic Report on pages 34 to 37. This note expands on risk areas in relation to the Company’s financial instruments. The portfolios are managed in accordance with the Company’s investment policies and objectives, which are set out on pages 28 to 31. The management process is subject to risk controls, which the Audit Committee reviews on behalf of the Board, as described on pages 43 and 44.
The principal risks that an investment company faces in its portfolio management activities are set out below:
Market risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk:
Currency risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in foreign exchange rates;
Interest rate risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market interest rates; and
Other price risk – arising from fluctuations in the fair value or future cash flows of a financial instrument for reasons other than changes in foreign exchange rates or market interest rates, whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market.
Liquidity risk – arising from any difficulty in meeting obligations associated with financial liabilities.
Credit risk, incorporating counterparty risk – arising from financial loss for a company where the other party to a financial instrument fails to discharge an obligation.
Risk Management Policies and Procedures
As an investment trust the Company invests in equities and other investments for the long-term in accordance with its investment policies so as to meet its investment objectives. In pursuing its objectives, the Company is exposed to a variety of risks that could result in a reduction in the Company’s net assets or a reduction of the profits available for dividends. The risks applicable to the Company and the Directors’ policies for managing these risks follow. These have not changed from those applying in the previous year.
The Directors have delegated to the Manager the responsibility for the day-to-day investment activities of the Company as more fully described in the Directors’ Report.
The main risk that the Company faces arising from its financial instruments is market risk – this risk is reviewed in detail below. Since the Company mainly invests in quoted investments and derivative instruments traded on recognised exchanges, liquidity risk and credit risk are significantly mitigated.
17.1 Market Risk
Market risk arises from changes in the fair value or future cash flows of a financial instrument because of movements in market prices. Market risk comprises three types of risk: currency risk (17.1.1), interest rate risk (17.1.2) and other price risk (17.1.3).
The Company’s portfolio managers assess the individual investment portfolio exposures when making each investment decision for their Portfolios, and monitor the overall level of market risk on the whole of their investment portfolio on an ongoing basis. The Board meets at least quarterly to assess risk and review investment performance for the four Portfolios and the Company, as disclosed in the Board Responsibilities section of the Directors’ Report on page 45. Borrowings can be used by the UK Equity and Global Equity Income Portfolios, which will increase the Company’s exposure to market risk and volatility. The borrowing limits for these Portfolios are 25% and 20% of attributable net assets, respectively.
17.1.1 Currency Risk
A majority of the Global Equity Income Portfolio, derivative instruments in the Balanced Risk Portfolio and a small proportion of the UK Equity Portfolio consist of assets, liabilities and income denominated in currencies other than sterling. As a result, movements in exchange rates will affect the sterling value of those items.
Management of Currency Risk
The portfolio managers monitor the separate Portfolios’ exposure to foreign currencies on a daily basis and report to the Board on a regular basis. Forward foreign currency contracts can be used to limit the Company’s exposure to anticipated future changes in exchange rates and to achieve portfolio characteristics that assist the Company in meeting its investment objectives in line with its investment policies. All contracts are limited to currencies and amounts commensurate with the exposure to those currencies. No such contracts were in place at the current or preceding year end. Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is accrued and its receipts.
Foreign Currency Exposure
The fair value or amortised cost of the Company’s monetary items that have foreign currency exposure at 31 May are shown below. Where the Company’s equity investments (which are not monetary items) are priced in a foreign currency they have been included separately in the analysis in order to show the overall level of exposure.
UK EQUITY PORTFOLIO:
|
CURRENCY |
DEBTORS
(DUE FROM
BROKERS AND
DIVIDENDS)
£’000 |
CASH/
(OVERDRAFT)
AT BANK
£’000 |
CREDITORS
(DUE TO
BROKERS AND
ACCRUALS)
£’000 |
CURRENCY
EXPOSURE ON
NET MONETARY
ITEMS
£’000 |
INVESTMENTS
AT FAIR VALUE
THROUGH
PROFIT OR
LOSS THAT
ARE EQUITIES
£’000 |
TOTAL NET
CURRENCY
£’000 |
| YEAR ENDED 31 MAY 2017 |
|
|
|
|
|
| Euro |
2 |
– |
– |
2 |
3,154 |
3,156 |
| Swiss Franc |
48 |
– |
– |
48 |
2,307 |
2,355 |
| US Dollar |
– |
– |
– |
– |
2,959 |
2,959 |
|
50 |
– |
– |
50 |
8,420 |
8,470 |
| YEAR ENDED 31 MAY 2016 |
|
|
|
|
|
| Swiss Franc |
48 |
– |
– |
48 |
3,867 |
3,915 |
| US Dollar |
– |
– |
– |
– |
4,714 |
4,714 |
|
48 |
– |
– |
48 |
8,581 |
8,629 |
GLOBAL EQUITY INCOME PORTFOLIO:
|
CURRENCY |
DEBTORS
(DUE FROM
BROKERS AND
DIVIDENDS)
£’000 |
CASH/
(OVERDRAFT)
AT BANK
£’000 |
CREDITORS
(DUE TO
BROKERS AND
ACCRUALS)
£’000 |
TOTAL FOREIGN
CURRENCY
EXPOSURE ON
NET MONETARY
ITEMS
£’000 |
INVESTMENTS
AT FAIR VALUE
THROUGH
PROFIT OR
LOSS THAT
ARE EQUITIES
£’000 |
TOTAL NET
FOREIGN
CURRENCY
EXPOSURE |
| YEAR ENDED 31 MAY 2017 |
|
|
|
|
|
| Australian Dollar |
– |
– |
– |
– |
1,087 |
1,087 |
| Canadian Dollar |
– |
– |
– |
– |
1,168 |
1,168 |
| Euro |
63 |
– |
– |
63 |
19,565 |
19,628 |
| Hong Kong dollar |
42 |
– |
– |
42 |
2,323 |
2,365 |
| Japanese Yen |
4 |
– |
– |
4 |
1,328 |
1,332 |
| Korean Won |
– |
– |
(104) |
(104) |
915 |
811 |
| Norwegian krone |
29 |
– |
– |
29 |
1,524 |
1,553 |
| Swedish krona |
57 |
9 |
– |
66 |
905 |
971 |
| Swiss Franc |
– |
– |
– |
– |
4,661 |
4,661 |
| Taiwanese Dollar |
– |
– |
– |
– |
1,684 |
1,684 |
| US Dollar |
68 |
– |
– |
68 |
21,810 |
21,878 |
|
263 |
9 |
(104) |
168 |
56,970 |
57,138 |
| YEAR ENDED 31 MAY 2016 |
|
|
|
|
|
| Australian Dollar |
– |
– |
– |
– |
915 |
915 |
| Chinese Renminbi |
18 |
– |
– |
18 |
– |
18 |
| Euro |
137 |
– |
– |
137 |
12,788 |
12,925 |
| Hong Kong Dollar |
25 |
– |
– |
25 |
2,860 |
2,885 |
| Japanese Yen |
5 |
– |
– |
5 |
1,307 |
1,312 |
| Norwegian Krone |
26 |
– |
– |
26 |
1,286 |
1,312 |
| Swedish Krona |
– |
– |
– |
– |
924 |
924 |
| Swiss Franc |
45 |
– |
– |
45 |
5,041 |
5,086 |
| Taiwan New Dollar |
– |
– |
– |
– |
1,101 |
1,101 |
| US Dollar |
147 |
– |
(209) |
(62) |
18,864 |
18,802 |
|
403 |
– |
(209) |
194 |
45,086 |
45,280 |
BALANCED RISK PORTFOLIO:
|
DERIVATIVE
ASSETS AT
FAIR VALUE
THROUGH
PROFIT OR
LOSS
£’000 |
CASH
AT
BANK*
£’000 |
DERIVATIVE
LIABILITIES
AT FAIR
VALUE
THROUGH
PROFIT OR
LOSS
£’000 |
DEBTORS DUE
FROM/
(CREDITORS
DUE TO)
BROKERS &
DIVIDENDS/
(ACCRUALS)
£’000 |
TOTAL
FOREIGN
CURRENCY
EXPOSURE
ON NET
MONETARY
ITEMS
£’000 |
INVESTMENTS
AT FAIR
VALUE
THROUGH
PROFIT OR
LOSS THAT
ARE EQUITIES
£’000 |
TOTAL NET
FOREIGN
CURRENCY
EXPOSURE
£’000 |
| YEAR ENDED 31 MAY 2017 |
|
|
|
|
|
|
|
| Australian Dollar |
82 |
73 |
– |
(32) |
123 |
– |
123 |
| Canadian Dollar |
15 |
65 |
– |
19 |
99 |
– |
99 |
| Euro |
49 |
84 |
– |
24 |
157 |
– |
157 |
| Hong Kong Dollar |
3 |
83 |
– |
45 |
131 |
– |
131 |
| Japanese Yen |
14 |
46 |
– |
14 |
74 |
– |
74 |
| US Dollar |
19 |
198 |
(142) |
357 |
432 |
18 |
450 |
|
182 |
549 |
(142) |
427 |
1,016 |
18 |
1,034 |
| YEAR ENDED 31 MAY 2016 |
|
|
|
|
|
|
|
| Australian Dollar |
31 |
20 |
– |
(7) |
44 |
– |
44 |
| Canadian Dollar |
5 |
10 |
– |
21 |
36 |
– |
36 |
| Euro |
26 |
50 |
– |
40 |
116 |
– |
116 |
| Hong Kong Dollar |
9 |
18 |
– |
25 |
52 |
– |
52 |
| Japanese Yen |
20 |
17 |
– |
16 |
53 |
– |
53 |
| US Dollar |
280 |
124 |
(68) |
45 |
381 |
18 |
399 |
|
371 |
239 |
(68) |
140 |
682 |
18 |
700 |
* Cash includes collateral pledged for futures contracts.
Foreign Currency Sensitivity
The preceding exposure analysis is based on the Company’s monetary foreign currency financial instruments held at each balance sheet date and takes account of forward foreign exchange contracts, if used, that offset the effects of changes in currency exchange rates.
The effect of strengthening or weakening of sterling against other currencies to which the Company is exposed is calculated by reference to the volatility of exchange rates during the year using the standard deviation of currency fluctuations against the mean, giving the following exchange rate fluctuations:
|
2017 |
2016 |
| £/Australian Dollar |
+/– 4.9% |
+/– 4.6% |
| £/Canadian Dollar |
+/– 3.6% |
+/– 3.8% |
| £/Euro |
+/– 3.0% |
+/– 4.2% |
| £/Hong Kong Dollar |
+/– 4.3% |
+/– 3.6% |
| £/Japanese Yen |
+/– 4.7% |
+/– 7.7% |
| £/Korean Won |
+/– 4.8% |
+/– 3.2% |
| £/Norwegian Krone |
+/– 4.1% |
+/– 3.5% |
| £/Swedish Krona |
+/– 2.4% |
+/– 4.6% |
| £/Swiss Franc |
+/– 3.3% |
+/– 3.4% |
| £/Taiwan Dollar |
+/– 5.5% |
+/– 2.8% |
| £/US Dollar |
+/– 4.3% |
+/– 3.7% |
The tables that follow illustrate the exchange rate sensitivity of revenue and capital returns arising from the Company’s financial non-sterling assets and liabilities for the year for the UK Equity, Global Equity Income and Balanced Risk Portfolios using the exchange rates shown above.
If sterling had strengthened against the currencies shown by the table above, this would have had the following after tax effect:
UK EQUITY PORTFOLIO:
|
2017 |
2016 |
|
REVENUE
RETURN |
CAPITAL
RETURN |
TOTAL
RETURN |
REVENUE
RETURN |
CAPITAL
RETURN |
TOTAL
RETURN |
| Euro |
– |
(95) |
(95) |
– |
– |
– |
| Swiss Franc |
(4) |
(76) |
(80) |
(5) |
(131) |
(136) |
| US Dollar |
(7) |
(127) |
(134) |
(16) |
(174) |
(190) |
|
(11) |
(298) |
(309) |
(21) |
(305) |
(326) |
GLOBAL EQUITY INCOME PORTFOLIO:
|
2017 |
2016 |
|
REVENUE
RETURN |
CAPITAL
RETURN |
TOTAL
RETURN |
REVENUE
RETURN |
CAPITAL
RETURN |
TOTAL
RETURN |
| Australian Dollar |
(2) |
(53) |
(55) |
(1) |
(42) |
(43) |
| Canadian Dollar |
– |
(42) |
(42) |
– |
– |
– |
| Euro |
(18) |
(587) |
(605) |
(27) |
(540) |
(567) |
| Hong Kong Dollar |
(4) |
(100) |
(104) |
(1) |
(104) |
(105) |
| Japanese Yen |
(2) |
(62) |
(64) |
(3) |
(101) |
(104) |
| Korean Won |
– |
(39) |
(39) |
– |
– |
– |
| Norwegian Krone |
(3) |
(62) |
(65) |
(3) |
(45) |
(48) |
| Swedish Krona |
(1) |
(22) |
(23) |
– |
(43) |
(43) |
| Swiss Franc |
(2) |
(154) |
(156) |
(8) |
(171) |
(179) |
| Taiwan Dollar |
(2) |
(93) |
(95) |
(1) |
(31) |
(32) |
| US Dollar |
(24) |
(938) |
(962) |
(9) |
(701) |
(710) |
|
(58) |
(2,152) |
(2,210) |
(53) |
(1,778) |
(1,831) |
BALANCED RISK PORTFOLIO:
|
2017 |
2016 |
|
REVENUE
RETURN |
CAPITAL
RETURN |
TOTAL
RETURN |
REVENUE
RETURN |
CAPITAL
RETURN |
TOTAL
RETURN |
| Australian Dollar |
(1) |
(6) |
(7) |
– |
(2) |
(2) |
| Canadian Dollar |
– |
(4) |
(4) |
– |
(1) |
(1) |
| Euro |
– |
(5) |
(5) |
– |
(5) |
(5) |
| Hong Kong Dollar |
– |
(6) |
(6) |
– |
(2) |
(2) |
| Japanese Yen |
– |
(3) |
(3) |
– |
(4) |
(4) |
| US Dollar |
– |
(19) |
(19) |
(1) |
(15) |
(16) |
|
(1) |
(43) |
(44) |
(1) |
(29) |
(30) |
If sterling had weakened against the currencies shown, the effect would have been the converse.
17.1.2 Interest Rate Risk
Interest rate movements may affect:
– the fair value of the investments in fixed-interest rate securities;
– the level of income receivable on cash deposits; and
– the interest payable on variable rate borrowings.
Management of interest rate risk
The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account as part of the portfolio management and borrowings processes of the portfolio managers. The Board reviews on a regular basis the investment portfolio and borrowings. This encompasses the valuation of fixed-interest and floating rate securities and gearing levels.
When the Company has cash balances, they are held in variable rate bank accounts yielding rates of interest dependent on the base rate of the custodian. The Company has a £25 million (2016: £25 million), 364 day multicurrency revolving credit facility which is due for renewal on 18 May 2018. The Company uses the facility when required at levels approved and monitored by the Board.
Interest rate exposure
At 31 May the exposure of financial assets and financial liabilities to interest rate risk is shown by reference to:
– floating interest rates (giving cash flow interest rate risk) – when the interest rate is due to be reset; and
– fixed interest rates (giving fair value interest rate risk) – when the financial instrument is due for repayment.
The following table sets out the financial assets and financial liabilities exposure at the year end:
|
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
TOTAL
£’000 |
| 2017 |
|
|
|
|
|
| Exposure to floating interest rates: |
|
|
|
|
|
| Investments held at fair value through profit or loss* |
– |
– |
2,440 |
5,448 |
7,888 |
| Cash and cash equivalents |
148 |
167 |
626 |
51 |
992 |
| Bank loans |
(10,600) |
(4,600) |
– |
– |
(15,200) |
|
(10,452) |
(4,433) |
3,066 |
5,499 |
(6,320) |
| Exposure to fixed interest rates: |
|
|
|
|
|
| Investments held at fair value through profit or loss including UK Treasury Bills |
– |
– |
5,894 |
– |
5,894 |
| Net exposure to interest rates |
(10,452) |
(4,433) |
8,960 |
5,499 |
(426) |
| 2016 |
|
|
|
|
|
| Exposure to floating interest rates: |
|
|
|
|
|
| Investments held at fair value through profit or loss* |
– |
– |
2,190 |
5,312 |
7,502 |
| Cash and cash equivalents |
629 |
701 |
654 |
917 |
2,901 |
| Bank loans |
(7,150) |
(6,600) |
– |
– |
(13,750) |
|
(6,521) |
(5,899) |
2,844 |
6,229 |
(3,347) |
| Exposure to fixed interest rates: |
|
|
|
|
|
| Investments held at fair value through profit or loss including UK Treasury Bills |
– |
– |
5,490 |
– |
5,490 |
| Net exposure to interest rates |
(6,521) |
(5,899) |
8,334 |
6,229 |
2,143 |
* Comprises holdings in the Short-Term Investments Company (Global Series) plc and Invesco Perpetual Money Fund.
The income on the Invesco Perpetual Money Fund and Short Term Investments Company (Global Series) plc investments is affected by interbank lending rates; the principal amount should normally remain stable regardless of interest rate movements.
Interest rate sensitivity
At the maximum possible borrowing of £25 million (2016: £25 million), the effect over one year of a 0.5% movement in interest rates would result in a £125,000 (2016: £125,000) maximum movement in the Company’s income and net assets.
The effect over one year of a 1% movement in the interest rates on fixed interest investments held at fair value through profit and loss would result in a £28,000 (2016: £15,000) maximum movement in the Company’s income and net assets.
The above exposure and sensitivity analysis are not representative of the year as a whole, since the level of exposure changes frequently throughout the year.
17.1.3 Other Price Risk
Other price risks (i.e. changes in market prices other than those arising from interest rate risk or currency risk) may affect the value of the equity investments, but it is the business of the portfolio managers to manage the Portfolios to achieve the best returns they can.
Management of Other Price Risk
The Directors monitor the market price risks inherent in the investment portfolios by meeting regularly to review performance.
The Company’s investment portfolios are the result of the Manager’s investment processes and as a result are not wholly correlated with the individual Portfolios’ benchmarks or the markets in which the Portfolios invest. The value of the investment portfolios will not move in line with the markets but will move as a result of the performance of the shares held within the investment portfolios.
If the value of an investment portfolio moved by 10% at the balance sheet date, the profit after tax and net assets for the year would increase/decrease by the following amounts:
|
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
| 2017 |
|
|
|
|
| Profit after tax increase/decrease due to rise/fall of 10% |
8,473 |
6,929 |
835 |
545 |
| 2016 |
|
|
|
|
| Profit after tax increase/decrease due to rise/fall of 10% |
7,358 |
5,767 |
770 |
531 |
17.2 Liquidity Risk
Management of liquidity risk
Liquidity risk is minimised as the investments held by the Company’s four portfolios are diversified and the majority are readily realisable securities which can be sold to meet funding commitments. If required, the Company’s borrowing facilities provide additional long-term and short-term flexibility.
The Directors' policy is that in normal market conditions short-term borrowings be used to manage short term liabilities and working capital requirements rather than to realise investments.
Liquidity risk
The contractual maturities of financial liabilities at the year end, based on the earliest date on which payment can be required, are as follows:
|
UK EQUITY
3 MONTHS
OR LESS
£’000 |
GLOBAL
EQUITY
INCOME
MORE THAN
3 MONTHS
£’000 |
BALANCED
RISK
3 MONTHS
OR LESS
£’000 |
MANAGED
LIQUIDITY
3 MONTHS
OR LESS
£’000 |
MORE THAN
3 MONTHS
£’000 |
3 MONTHS
OR LESS
£’000 |
COMPANY
TOTAL
£’000 |
| 2017 |
|
|
|
|
|
|
|
| Bank loan |
10,600 |
– |
4,600 |
– |
– |
– |
15,200 |
| Amount due to brokers |
1 |
– |
104 |
14 |
– |
– |
119 |
| Other creditors and accruals |
173 |
– |
155 |
25 |
– |
142 |
495 |
| Performance fee accrued and provided |
– |
1,025 |
– |
– |
– |
– |
1,025 |
| Derivative financial instruments |
– |
– |
– |
61 |
81 |
– |
142 |
|
10,774 |
1,025 |
4,859 |
100 |
81 |
142 |
16,981 |
| 2016 |
|
|
|
|
|
|
|
| Bank loan |
7,150 |
– |
6,600 |
– |
– |
– |
13,750 |
| Amount due to brokers |
332 |
– |
261 |
– |
– |
1 |
594 |
| Other creditors and accruals |
171 |
– |
136 |
26 |
– |
145 |
478 |
| Performance fee accrued and provided |
– |
1,305 |
– |
– |
– |
– |
1,305 |
| Derivative financial instruments |
– |
– |
– |
68 |
– |
– |
68 |
|
7,653 |
1,305 |
6,997 |
94 |
– |
146 |
16,195 |
|
|
|
|
|
|
|
|
|
|
17.3 Credit Risk
Credit risk is that the failure of the counterparty in a transaction to discharge its obligations under that transaction could result in the Company suffering a loss.
This risk is managed as follows:
– investment transactions are carried out with a selection of brokers, approved by the Manager and settled on a delivery versus payment basis. Brokers’ credit ratings are regularly reviewed by the Manager, so as to minimise the risk of default to the Company;
– the derivative financial instruments are all exchange traded and the exchange guarantees their settlement;
– the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the daily review of failed trade reports and the use of daily stock and cash reconciliations. Only approved counterparties are used;
– the Company’s ability to operate in the short-term may be adversely affected if the Company’s Manager, other outsource service providers, or their delegates suffer insolvency or other financial difficulties. The Board reviews annual controls reports from major service providers;
– where an investment is made in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Company of default; and
– cash balances are limited to a maximum of £2.5 million for each Portfolio with any one deposit taker (other than cash collateral on derivative instruments), with only deposit takers approved by the Manager being used. Cash held at brokers includes any cash collateral on futures contracts and during the year only one futures clearing broker, Merrill Lynch, was used.
The following table sets out the maximum credit risk exposure at the year end:
|
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
TOTAL
£’000 |
| 2017 |
|
|
|
|
|
| Bonds (UK Treasury bills) |
– |
– |
5,894 |
– |
5,894 |
| Invesco Perpetual Money Fund |
– |
– |
– |
4,900 |
4,900 |
| Cash held as short term investment(1) |
– |
– |
2,440 |
548 |
2,988 |
| Unquoted securities |
714 |
– |
18 |
– |
732 |
| Derivative financial Instruments |
– |
– |
67 |
– |
67 |
| Debtors(2) |
454 |
451 |
479 |
2 |
1,386 |
| Cash and cash equivalents |
148 |
167 |
626 |
51 |
992 |
|
1,316 |
618 |
9,524 |
5,501 |
16,959 |
| 2016 |
|
|
|
|
|
| Bonds (UK Treasury bills) |
– |
– |
5,490 |
– |
5,490 |
| Invesco Perpetual Money Fund |
– |
– |
– |
4,894 |
4,894 |
| Cash held as short term investment(1) |
– |
– |
2,190 |
418 |
2,608 |
| Unquoted securities |
750 |
– |
18 |
– |
768 |
| Derivative financial Instruments |
– |
– |
320 |
– |
320 |
| Debtors(2) |
477 |
570 |
191 |
9 |
1,247 |
| Cash and cash equivalents |
629 |
701 |
654 |
917 |
2,901 |
|
1,856 |
1,271 |
8,863 |
6,238 |
18,228 |
(1) Comprises holdings in the Short-Term Investments Company (Global Series) plc.
(2) Cash collateral pledged for futures contracts of £444,000 is included in debtors (2016: £176,000).
18. Fair Values of Financial Assets and Financial Liabilities
‘Fair value’ in accounting terms is the amount at which an asset can be bought or sold in a transaction between willing parties, i.e. a market-based, independent measure of value. This note sets out the fair value hierarchy comprising three ‘levels’ and the aggregate amount of investments in each level.
The financial assets and financial liabilities are either carried in the balance sheet at their fair value (investments and derivative instruments), or the balance sheet amount is a reasonable approximation of fair value.
FRS 102 as amended for fair value hierarchy disclosures (March 2016) sets out three fair value levels. These are:
Level 1 – The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable (ie developed using market data) for the asset or liability, either directly or indirectly.
Level 3 – Inputs are unobservable (ie for which market data is unavailable) for the asset or liability.
Categorisation within the hierarchy is determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability.
The valuation techniques used by the Company are explained in the accounting policies note. The majority of the Company’s investments are quoted equity investments and Treasury bills which are deemed to be Level 1. Level 2 comprises all other quoted fixed income investments, the UK Equity Portfolio’s holdings of Barclays Bank Nuclear Power Notes, derivative instruments and liquidity funds held in the Balanced Risk and Managed Liquidity Portfolios. Level 3 investments comprise any unquoted securities and the remaining hedge fund investments of the Balanced Risk Portfolio.
|
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
TOTAL
£’000 |
| 2017 |
|
|
|
|
|
| Financial assets at fair value through profit or loss: |
|
|
|
|
|
| Level 1 |
84,019 |
69,290 |
5,894 |
– |
159,203 |
| Level 2 |
1 |
– |
2,649 |
5,448 |
8,098 |
| Level 3 |
714 |
– |
18 |
– |
732 |
| Total for financial assets |
84,734 |
69,290 |
8,561 |
5,448 |
168,033 |
|
|
|
|
|
|
| Financial liabilities: |
|
|
|
|
|
| Level 2 – Derivative instruments |
– |
– |
142 |
– |
142 |
| 2016 |
|
|
|
|
|
| Financial assets at fair value through profit or loss: |
|
|
|
|
|
| Level 1 |
72,827 |
57,669 |
5,490 |
– |
135,986 |
| Level 2 |
2 |
– |
2,578 |
5,312 |
7,892 |
| Level 3 |
750 |
– |
18 |
– |
768 |
| Total for financial assets |
73,579 |
57,669 |
8,086 |
5,312 |
144,646 |
|
|
|
|
|
|
| Financial liabilities: |
|
|
|
|
|
| Level 2 – Derivative instruments |
– |
– |
68 |
– |
68 |
A reconciliation of the fair value movement in Level 3 is set out below.
|
UK
EQUITY
£’000 |
BALANCED
RISK
£’000 |
TOTAL
£’000 |
| 2017 |
|
|
|
| Opening fair value |
750 |
18 |
768 |
| Sales – proceeds |
– |
(4) |
(4) |
| Sales – net realised losses |
– |
(1) |
(1) |
| Movement in investment holding gains |
(36) |
5 |
(31) |
| Closing fair value of Level 3 |
714 |
18 |
732 |
| 2016 |
|
|
|
| Opening fair value |
730 |
23 |
753 |
| Sales – proceeds |
– |
(8) |
(8) |
| Sales – net realised losses |
– |
(4) |
(4) |
| Movement in investment holding gains |
20 |
7 |
27 |
| Closing fair value of Level 3 |
750 |
18 |
768 |
19. Capital Management
This note is designed to set out the Company’s objectives, policies and processes for managing its capital. The capital is funded from monies invested in the Company by shareholders (both initial investment and any retained amounts) and any borrowings by the Company.
The Company’s total capital employed at 31 May 2017 was £168,360,000 (2016: £146,348,000) comprising borrowings of £15,200,000 (2016: £13,750,000) and equity share capital and other reserves of £153,430,000 (2016: £132,598,000).
The Company’s total capital employed is managed to achieve the Company’s investment objective and policy as set out on pages 28 to 31, including that borrowings may be used to raise equity exposure up to a maximum of 25% of net assets. At the balance sheet date, gross gearing of 15.5% (2016: 16.0%) and equalled net gearing. The Company’s policies and processes for managing capital are unchanged from the preceding year.
The main risks to the Company’s investments are shown in the Directors’ Report under the ‘Principal Risks and Uncertainties’ section on pages 34 to 37. These also explain that the Company has borrowing facilities which can be used in accordance with each Portfolio's investment objectivity and policy and that this will amplify the effect on equity of changes in the value of the portfolio.
The Board can also manage the capital structure directly since it has taken the powers, which it is seeking to renew, to issue and buy back shares and it also determines dividend payments.
The Company is subject to externally imposed capital requirements with respect to the obligation and ability to pay dividends by Corporation Tax Act 2010 and by the Companies Act 2006, respectively, and with respect to the availability of the overdraft facility, by the terms imposed by the lender. The Board regularly monitors, and has complied with, the externally imposed capital requirements. This is unchanged from the prior year.
Borrowings comprise any drawings on the credit and/or overdraft facilities, details of which are given in note 12.
20. Contingencies, guarantees and financial commitments
Any liabilities the Company is committed to honour but which are dependent on a future circumstance or event occurring would be disclosed in this note if any existed.
There were no contingencies, guarantees or financial commitments of the Company at the year end (2016: £nil).
21. Related party transactions and transactions with the Manager
A related party is a company or individual who has direct or indirect control or who has significant influence over the Company. Under accounting standards, the Manager is not a related party.
Under UK GAAP, the Company has identified the Directors as related parties. The Directors’ remuneration and interests have been disclosed on pages 54 to 56 with additional disclosures in note 4. No other related parties have been identified.
Details of the Manager’s services and fees are disclosed in the Directors’ Report on page 49 and note 3.
22. Post Balance Sheet Events
Any significant events that occurred after the Company’s financial year end but before the signing of the balance sheet will be shown here.
There are no significant events after the end of the reporting period requiring disclosure.
.
The financial information set out above does not constitute the Company’s statutory accounts for the year ended 31 May 2017. The financial information for 2016 is derived from the statutory accounts for the year ended 31 May 2016, which have been delivered to the Registrar of Companies. The auditor has reported on the 2016 accounts; the audit report was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain a statement under section 498 of the Companies Act 2006. The statutory accounts for the year ended 31 May 2017 have been finalised and audited but have not yet been delivered to the Registrar of Companies.
The audited annual financial report will be available to shareholders, and will be delivered to the Registrar of Companies, shortly. Copies may be obtained during normal business hours from the Company’s Registered Office, from its correspondence address, 6th Floor, 125 London Wall, London EC2Y 5AS, and via the web pages of all of the Share classes on the Manager’s website at www.invescoperpetual.co.uk/investmenttrusts .
The Annual General Meeting will be held on 21 September 2017 at 11.30am at 6th Floor, 125 London Wall, London EC2Y 5AS.
By order of the Board
Invesco Asset Management Limited
31 July 2017
Contacts:
Angus Pottinger 020 3753 1000
Paul Griggs 020 3753 1000
