abrdn Equity Income - Annual Financial Report
28/11/2024 07:00
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RNS Number : 9218N abrdn Equity Income Trust plc 28 November 2024
abrdn Equity Income Trust plc Annual Financial Report
for the year ended 30 September 2024
Legal Entity Identifier (LEI): 21380015XPT7BZISSQ74
Investment Objective
To provide shareholders with an above average income from their equity
investment, while also providing real growth in capital and income
Website
Up to date information can be found on the Company's website:
abrdnequityincome.com
Performance Highlights
Net asset value total return per Ordinary share(A) Share price total return per Ordinary share(A)
Year ended 30 September 2024 Year ended 30 September 2024
+13.3% +10.4%
Year ended 30 September 2023 +1.8% Year ended 30 September 2023 +11.4%
Revenue return per Ordinary share Discount to net asset value(A)
Year ended 30 September 2024 As at 30 September 2024
23.05p 3.0%
Year ended 30 September 2023 23.43p As at 30 September 2023 0.2%
Dividend per Ordinary share Ongoing charges ratio(A)
Year ended 30 September 2024 Year ended 30 September 2024
22.90p 0.86%
Year ended 30 September 2023 22.80p Year ended 30 September 2023 0.94%
(A) Considered to be an Alternative Performance Measure.
Highlights
30 September 2024 30 September 2023 % change
Capital
Net asset value per Ordinary share 331.5p 314.6p 5.4%
Ordinary share price 321.5p 314.0p 2.4%
Reference Index capital return(C) 4,511.0 4,127.2 9.3%
Discount of Ordinary share price to net asset value(A) 3.0% 0.2%
Total assets £180.9m £170.8m 5.9%
Shareholders' funds £158.4m £149.9m 5.7%
Gearing
Net gearing(A) 13.0% 11.3%
Earnings and Dividends
Revenue return per Ordinary share 23.05p 23.43p -1.6%
Total dividends for the year 22.90p 22.80p 0.4%
Dividend yield(A) 7.1% 7.3%
Expenses
Ongoing charges ratio(AB) 0.86% 0.94%
(A) Considered to be an Alternative Performance Measure.
(B) Calculated in accordance with AIC guidance issued in October 2020 to
include the Company's share of costs of holdings in investment companies on a
look-through basis.
(C) FTSE All-Share Index
For further information, please contact
Evan Bruce-Gardyne
abrdn Fund Managers Limited
Mobile: 07720 073216
Please note that past performance is not necessarily a guide to the future and
that the value of investments and the income from them may fall as well as
rise. Investors may not get back the amount they originally invested.
Chair's Statement
It has been another eventful year for the financial markets, with a positive
response to signs of a soft economic landing offsetting ongoing geopolitical
volatility. The UK Retail Price Index ("RPI") fell from 8.9% in September 2023
to 2.7% in September 2024 allowing the Bank of England to cut the base rate
for the first time since 2020.
Globally, a key theme for 2024 was that over half the world's population went
to the polls, including the UK general election and the selection of the next
US president. This inevitably increased the degree of reticence in equity
markets as investors opted to wait for any resulting policy changes which
could affect the outlook for the economy and equities, before committing
capital. Geopolitical fears have been accentuated by ongoing conflicts, their
impact on supply chains and the cost of goods.
A prolonged period of investor caution towards UK equities has resulted in a
wide gap between the valuation of UK equities and their global peers. Within
the UK equity market small and mid-cap companies have been particularly
unloved, reflecting fears over the prolonged stagnation in the UK economy. As
the year unfolded, investors began to respond to these low valuations, spurred
on by hopes of interest rate cuts and the rise in corporate activity. This is
reflected in the performance of the various UK Indices, the FTSE 250 and the
FTSE Small Cap indices both outperformed the FTSE 100 Index over the 12 months
to 30 September 2024, the first time that they have done so for three years.
Despite this, globally, the allocation of funds to UK equities remains low.
Against this backdrop the overall performance of your Company has been
positive, and the Board is pleased to see the Portfolio Manager's investment
thesis play out positively across a range of holdings, including an increase
in mergers and acquisitions ("M&A"), reflecting the compelling valuations
on offer. Thomas is focused on delivering income, while also looking to
identify companies with positive change that can, over time, deliver capital
growth for shareholders. The Portfolio Manager has maintained the investment
approach by continuing to invest across the market, providing access to small
and mid-cap shares trading on attractive valuations. For some time, this
approach has been out of favour, constraining returns, but as market
conditions gradually improve, it is encouraging to see that the Shareholders
are now starting to be rewarded. Please see the Portfolio Manager's Review for
more detail on the sources of the performance and income.
Earnings
Gross income generated by the Company's investments in the year ended 30
September 2024 was £12.6 million (2023: £12.5 million). The costs of
managing the portfolio, including administration costs, were down over 12%, as
a result of the change to the management fees which came into effect at the
start of the financial year as well as a significant reduction in the auditor
fee as a result of the move to Johnston Carmichael LLP. Interest costs on
the borrowings attributable to the revenue account were up from £401,000 to
£454,000, largely driven by the increase in average cost of borrowing during
the year. After tax, the income of the Company was £11.0 million, marginally
down from £11.1 million last year.
This resulted in the Company's earnings per share being 23.05 pence which was
1.6% lower than last year. Despite this decline in challenging markets, the
Board was encouraged that the dividend for the year is covered by the earnings
once again and without losing focus on overall performance.
Dividends
As a result of the earnings performance, the Board is declaring a fourth
interim dividend for 2024 of 5.8 pence per share which will be paid on 10
January 2025 to shareholders on the Register on 6 December 2024 with an
associated ex-dividend date of 5 December 2024. This takes the total dividend
for the year to 22.9 pence per share (2023: 22.8p), representing the 24th
consecutive annual dividend increase declared by the Company. At the time of
writing, the Company's shares are trading on a yield of 7%, which is among the
highest in the AIC UK Equity Income sector.
After payment of the fourth interim dividend and based on the current number
of shares in issue, 0.14 pence per share will be transferred to revenue
reserves which will be increased to 15.76 pence per share.
The Board is committed to maintaining and extending the Company's track record
of dividend growth. We therefore expect that, in the absence of any adverse
circumstances, in the coming financial year we will extend our track record to
25 consecutive years of dividend growth by paying a dividend of at least 23.0
pence per share. We believe that we are in a position to do this because the
most recent analysis from the Portfolio Manager indicates that the portfolio
will be able to cover this cost out of the current year earnings. We are also
carrying revenue reserves of £10.3 million in the balance sheet which we
could also utilise if needed. We expect that the first three interim dividends
will be 5.7 pence per share, payable in March, June and September and the
fourth interim will be at least 5.9 pence per share payable in January 2026.
Performance
The overall performance of your Company has been encouraging. The Net Asset
Value ("NAV") total return, with dividends reinvested at the ex-dividend date,
was 13.3% (2023: 1.8%), a fraction shy of the Company's reference index total
return (the FTSE All-Share Index) of 13.4%. The slight widening of the share
price discount resulted in a share price total return of 10.4% (2023:
11.4%). More detailed information on capital performance can be found in the
Portfolio Manager's Review and outlines stock-specific drivers that have
contributed to this performance. The Company's performance against its Key
Performance Indicators.
Whilst the UK equity market remains undervalued, we believe that Thomas'
portfolio construction provides an opportunity for re-rating that recognises
the underlying value of our investments. The Board remains focused on
improving performance and growing the dividend.
Premium & Discount
Over the last couple of years, the investment trust sector has been plagued by
wider discounts. The Company's share price ranged from trading at a premium
to NAV in the first couple of months of the financial year to briefly trading
at a discount to NAV of over 11% in March 2024 and then closing the financial
year at a discount of 3%. This experience was not unique to the Company. Many
trusts traded on a wider than usual discount, partially attributable to the
run up to the end of the tax year as investors realised capital gains ahead of
the reduction in Capital Gains Tax thresholds coming in on 6 April 2024. Once
that deadline passed, we saw demand pick up and the Company's discount
reverted to trading at around 5%. For all but about three weeks, in the year
ended 30 September 2024, the Company's discount was trading at a narrower
level than the average for the UK Equity Income investment trust sector.
While the Company was trading at a premium in the early months of the
financial year, the Company issued 135,000 shares at a premium to NAV, raising
just over £400,000. There were no shares bought back during the year. The
Board monitors the level of the premium / discount and will step in should it
believe that the impact of doing so would be in the best interests of
shareholders.
Borrowing facility
At the year end, the Company had drawn down £22.5 million (2023: £21
million) of its £30 million Revolving Credit Facility which will expire in
June 2026. The Board and Manager weigh up the cost of borrowing, which has
increased significantly over the last couple of years, versus the financial
benefit of gearing the portfolio. The Board continues to believe in the
long-term benefits of gearing and sees it as one of the potential benefits of
closed-end investment companies.
Online Investor Presentation
In order to encourage as much interaction as possible with our shareholders,
we will be hosting an online investor presentation, which will be held at 11:
30 am on Tuesday, 28 January 2025. At this event there will be a presentation
from the Portfolio Manager followed by an opportunity to ask live questions to
the Portfolio Manager and me. The online presentation is being held ahead of
the AGM to allow shareholders sufficient time to submit their proxy votes
after the presentation but prior to the AGM should they so wish. Full details
on how to register for the online event can be found on the Company's website
at abrdnequityincome.com.
Annual General Meeting
This year's Annual General Meeting ("AGM") will be held at abrdn's office, 18
Bishops Square, London, E1 6EG on Tuesday, 18 February 2025 at 11:30 am. The
meeting will include a presentation by the Portfolio Manager and will be
followed by lunch. This is a good opportunity for shareholders to meet the
Board and the Manager and the Board encourages you to attend.
Outlook
The start of the current financial year can definitely be described as
"interesting times" for an equity investor in the UK. In the first few weeks
of the new financial year, we have seen Rachel Reeves deliver Labour's first
budget statement for 14 years and the re-election of Donald Trump as the next
President of the United States after a four-year interlude. With those
events behind us, there is less uncertainty as to the medium-term outlook.
Conflicts in Ukraine and the Middle East have been ongoing for some time, but
it remains to be seen whether any escalation in these conflicts further
adversely affects the global stock markets.
The fiscal impact of the UK Government's intention to increase borrowing and
raise taxes, in particular Employer's National Insurance, will undoubtedly
have an impact on many UK companies. Whilst how this will manifest is not
clear, it is evident that the Government will need the economy to grow to
support much needed investment in infrastructure. Meanwhile Donald Trump's
economic agenda - a push for growth accompanied by tariffs - is likely to be
inflationary, both in the US and elsewhere. Consequently, the scale of
interest rate cuts that are expected, on either side of the Atlantic, appears
to be receding.
It is worth remembering that while we invest in companies listed in the UK,
many operate internationally, so the National Insurance increase will only
affect their UK payroll. The strengthening of the US Dollar that we have
witnessed since the start of the period has reversed the weakness seen in
August and September. A strengthening dollar negatively affects UK exporters
but is beneficial to investors in companies with operations outside the UK
generating sales in US Dollars and remitting the proceeds back to the UK. The
Portfolio Manager is aware of the sensitivities of the portfolio to such macro
variables. The resilient performance of the portfolio since the start of the
new financial year, despite these macro changes, would support the manager's
view that the portfolio has been structured on the basis of stock-specific
insights which makes it more resilient and less likely to be affected by sharp
changes in macro variables.
Against this backdrop the Portfolio Manager will continue to position the
portfolio in companies where we see the potential for a combination of
dividend yield, dividend growth and valuation re-rating with the aim of
delivering a further increase in the dividend in the coming year to extend the
track record to 25 years and to deliver this from the revenue earnings in the
year.
Sarika Patel
Chair
27 November 2024
Portfolio Manager's Review
Market Review
UK equities advanced over the 12 months to 30 September 2024 as investors
responded positively to signs of a soft landing for the UK economy as the rate
of inflation moderated, allowing the first-interest rate cut in four years.
Investor sentiment improved as the financial year progressed, as the prospect
of interest rate cuts helped reassure on the outlook for the global economy.
As a result, market leadership gradually broadened out, as reflected in the
outperformance of small and mid-cap companies over large caps, despite
heightened geopolitical instability caused by ongoing wars in Ukraine and the
Middle East.
After entering a mild recession in late 2023, the UK economy stabilised in the
early months of 2024, helping to ease fears that a prolonged period of high
interest rates would result in a major contraction in business activity and
consumer spending. A steady decline in the rate of inflation, eventually
falling into line with the official 2% target level in May 2024, prompted the
Bank of England to cut the base rate by 0.25% in August 2024, its first cut
since March 2020. Labour's landslide victory in the UK's general election in
July initially helped to reassure markets on political stability, although the
mood soured after the Government warned that tax rises would be necessary to
address the budget deficit. This hit business and consumer confidence in the
run-up to the Autumn Budget, constraining business investment and consumer
spending. At the same time, nervousness among bond market investors about the
new Government's fiscal discipline caused Gilt yields to increase, although
not on the same scale as at the Truss mini-budget two years earlier.
In the US, the Federal Reserve cut interest rates by 0.5% in September 2024,
marking the first cut in four years. This decision was taken against the
backdrop of slowing inflation and weakening labour markets. Chinese economic
growth continued to be held back by a slump in the real estate sector,
although hopes of more assertive stimulus measures helped to improve sentiment
towards the end of the period. Geopolitics remained febrile, with heightened
tensions in the Middle East and the ongoing conflict in Ukraine continuing to
weigh on sentiment.
The FTSE 100 Index rose 12.3% in total-return terms over the period, but
lagged indices in Europe and the US, as larger cap sectors were hit by a
strengthening in the value of Sterling against other major currencies, while a
sustained fall in the oil price weighed on oil companies. Conversely, the more
domestically focused FTSE 250 Index delivered a total return of 19.1% over the
12 months, buoyed by hopes that the Bank of England would make a number of
interest rate cuts. The performance of mid and small-cap companies was also
supported by a rise in merger and acquisition ("M&A") activity,
underlining the low valuations on offer in this part of the UK equity market.
Revenue Account
Dividends distributed by the portfolio's holdings came in at £12.6 million,
compared to £12.5 million received last year, representing a marginal
increase of 0.8%. While the income was largely unchanged, over 80% came from
UK-registered companies as compared to just over 19% coming from those
UK-listed, but overseas registered, companies. It should be noted that the
geographical source of the portfolio income is a function of the ideas
identified by our investment process, rather than being a target per se.
Special dividends accounted for over 5% of total income, coming from five
companies, as compared to less than 2% last year. While special dividends
within the portfolio have increased in the past year, we have observed the
continued preference for buybacks over special dividends among management
teams, reflecting their view that valuations are too cheap. We note that 25 of
the holdings, representing half the portfolio, conducted share buybacks during
the financial year. As share prices recover, it is likely that special
dividends will become more widespread.
The management and administration costs of running the Company were down over
12% in 2024 as compared to 2023. The management fee was renegotiated last
year, and this has led to a reduction of over 16% year on year, while
administration costs were down almost 10%, primarily driven by the reduction
in the audit fee which was a result of the review of the provision of audit
services in 2023. The cost savings of over £200,000 were offset by an
increase in overseas withholding tax which rose from £278,000 to £560,000,
meaning that the revenue return after taxation was £11.0 million, around
£99,000 lower than in 2023.
We are forecasting that the portfolio is currently delivering a gross dividend
yield, before costs, of 7%, based on the income expected to be generated over
the Company's financial year divided by the portfolio value at the year end,
representing a significant premium to the dividend yield of the FTSE All-Share
Index ("Reference Index") of 3.6% as of 30 September 2024. Interest rates have
started to decline with a further 0.25% rate cut in early November, setting
the scene for an increase in the gap between the rate we pay on the Company's
bank facility and the dividend yield we earn on the portfolio. The pace of
rate cuts is uncertain, but at the time of writing, money markets are
factoring in two rate cuts by September 2025.
Our focus on income, consistent with our investment process, allowed us to
cover the dividend again for the third consecutive year. Management teams
generally remained cautious on dividend payouts. This can be explained by the
sluggish global economy, elevated interest rates and geopolitical uncertainty,
as well as the continued preference for buybacks. The appreciation of Sterling
against other major currencies has also been a headwind given the high
percentage of sales investee companies generate overseas. The composition of
dividend payouts within the UK equity market has continued to evolve, with
weakness in mining payouts caused by lower commodity prices, offset by higher
bank payouts supported by higher interest rates.
Our investment process allows us to generate the portfolio income required to
cover the dividend while also seeking to achieve capital growth over time.
This reflects the emphasis we place on seeking out companies whose cash flow
and dividend potential is not effectively priced in by the market. Our
experience is that the stock market tends to reward such companies with a
higher valuation, providing shareholders with both income and capital growth.
One of the best examples of this approach playing out during the financial
year was Hargreaves Lansdown. Short term concerns over a prolonged period of
subdued inflows, linked to high interest rates and geopolitical tensions,
caused the shares to trade at an exceptionally low Price/Earnings multiple of
11x and a dividend yield of over 6%. We felt this was far too cheap for a
market leader with a very sticky customer base, so we progressively added to
the holding in 2022, 2023 and early 2024, building a sizeable holding. This
turned out to be the right decision, as a private equity bidder spotted this
valuation anomaly and took the company out at a steep premium.
We see this approach as highly repeatable, especially at a time when sentiment
towards UK equities is at such a low ebb, as this creates a large number of
"unrecognised change" situations with the potential to deliver both income and
capital growth. While we are not dependent on falling interest rates or
accelerating economic growth, we acknowledge that any improvement in the macro
backdrop would help to broaden the number of companies paying attractive
dividends, providing us with a greater range of income shares from which to
build a diversified portfolio. Overall, we remain confident that we are well
positioned to extend the Company's 24-year dividend growth track record in the
year ahead.
Portfolio Performance
The Company's net asset value ("NAV") total return was 13.3% for the period.
This was just behind of the total return of 13.4% for the Company's Reference
Index. Performance during the period was largely the result of
stock-specific drivers.
The portfolio saw a spike in M&A activity during the period, including
bids for Hargreaves Lansdown, DS Smith, Tyman and Centamin. This underlines
the benefits of our focus on valuation, as international bidders recognise the
gap between share prices and intrinsic value. We observed that many UK-listed
companies have struggled to close the gap with their global peers, and we had
positioned the portfolio accordingly. This was the largest contributor to the
performance of the Company.
Careful stock selection within defensive mega-cap companies helped performance
during the period. The holding in Imperial Brands surged by over 40% as
investors recognised consistent cash flow delivery by a new management team
whose strategy is to focus on their key brands in their most profitable
markets. Avoiding Reckitt Benckiser was helpful, as the company warned on
profits. Similarly, caution on Diageo and AstraZeneca paid off, although the
portfolio would have benefited if it had held Unilever.
Financial holdings were a positive driver of performance during the period.
The largest contributor to performance was CMC Markets which leapt by over
200% during the period on the publication of a string of positive
trading updates revealing higher than expected revenues, including
an increasing contribution from institutional clients, suggesting that
recent heavy investment in this area is beginning to pay off. We added to the
holding near the recent trough in the share price, amplifying the impact on
performance as the share price took off. Elsewhere in Financials, performance
benefited from holdings in Quilter, TP ICAP and Barclays, all of which
responded positively to better-than-expected results. These offset the
performance drag from the holding in Close Brothers which fell on concerns
over the risk of a potential sizeable customer redress following the
announcement of an FCA review into historic motor finance industry lending
practices before 2021.
Among the detractors to performance, Energy holdings struggled against the
backdrop of falling commodity prices, as energy demand softened as a result of
a weakening global economy, while commodity markets became inured to
geopolitical tensions. Diversified Energy declined as a collapse in the US
natural gas price impacted cash flows. The need for balance sheet flexibility,
allowing it to continue to focus on accretive acquisitions, ultimately led
to its decision to cut the dividend. Thungela Resources declined in response
to falling thermal coal prices, while Ithaca Energy fell on
the announcement of a rise in the North Sea Energy Profit Levy.
Finally, performance relative to the Reference Index was impacted by the
strong performance of lower yielding large cap growth shares Rolls-Royce,
RELX, 3i and Experian.
Activity
During the period we continued to identify investment opportunities that can
help to deliver on each aspect of the investment objective, looking for
companies that can exhibit a combination of dividend yield, dividend growth or
valuation re-rating.
The largest purchases during the period can be categorised into the following
groupings:
1. Domestic UK shares whose valuations are low relative to their history:
· Assura: The Company last owned the primary healthcare property group in
2021, selling the stock at a large premium to its NAV. The share price has
since slipped below its NAV as a result of higher interest
rates. Operationally the business remains strong, with good tenant demand
and a pipeline of new developments.
· Barratt Redrow: The business is trading strongly, with an improving
reservation rate. Barratt's acquisition of Redrow enabled significant cost
savings and revenue synergies, providing a trigger for the valuation to
re-rate from a very low multiple (below 1x NAV).
· Berkeley Group: This is one of the best operators in the housebuilding
sector, deploying its surplus cash into a new growth initiative, Build to
Rent, alongside a special dividend. Strong forward sales enabled management to
upgrade its guidance, with potential for further support from falling mortgage
rates. The valuation is well below its historical average.
2. Financials shares whose improving momentum is
not yet priced in:
· M&G: M&G is using strong cash generation from its life business
to invest in new sources of growth including an expansion into new
international markets. The high dividend yield implies scepticism on the
sustainability of the dividend, which we believe is misplaced in the context
of the operational progress being made across all its divisions.
· Petershill Partners: We added to this holding, observing that the
company's success in private markets fundraising is driving consistent growth
in assets under management and earnings. The share price is trading around 35%
below the NAV per share, which we see as a valuation opportunity given the
consistency its growth.
· Legal & General: We added to this holding, encouraged by ambitious
targets set at its Capital Markets Day in May, harnessing the synergies
between its divisions by growing its institutional retirement business and
generating the permanent capital to grow its asset management business.
3. Defensive shares whose low valuations reflect low expectations:
· National Grid: We took part in the rights issue to fund a five-year £60
billion energy transition investment plan, accelerating the connections of
renewable generation to the grid.
· Drax: We started a new holding in Drax which generates a rising
proportion of earnings from non-biomass areas, including hydro, pumped storage
and natural gas generation. This reduces its vulnerability to policy decisions
on biomass. The UK needs to maintain a high level of baseload electricity
given the intermittency of renewables, so we see Drax as part of the solution
for the UK government at a time of growing electricity demand.
· Imperial Brands: We added to the existing position. Since the arrival of
a new management team, the business has consistently delivered on the
profits guidance it provides to the market, focusing on getting the
operational basics right. Earnings growth is underpinned by a share buyback
programme equating to nearly 8% of the shares in issue on an annualised
basis, in addition to the 7% dividend yield.
· British American Tobacco: We saw the potential for a turnaround in
performance following a recent change in the management team. It is unusual
for one of the leading companies globally to be trading at such a low
valuation, with the dividend yield exceeding 10% at one point. Improving
operating trends became more apparent with the interim results in August,
sparking a positive share price response.
The largest sales during the period can be categorised into the following
groupings:
1. Selling out of M&A bid targets at a significant premium
· DS Smith: We sold out following a bidding war for the company between
International Paper and Mondi, eventually won by International Paper.
· Hargreaves Lansdown: We sold out following a bid for the company from a
consortium of CVC Capital Partners, Nordic Capital and the Abu Dhabi
Investment Authority.
· Tyman: We sold out following a bid for the company from US building
materials business Quanex.
· Centamin: We sold out following a bid for the company from Anglogold.
2. Moderating large positions sizes, notably in Financials and Resources:
· CMC Markets: Having added to the holding in January, the stock's
subsequent surge took the weighting to around 5% of the portfolio, at which
point we took some profits.
· NatWest/Barclays: We took some profits following a very sharp rally in
the share prices, as higher interest rates helped drive upgrades to net
interest income and return on equity forecasts.
· Glencore/Shell: Conscious of the heavy weighting in the Resources sector,
we scaled back the position sizes, attempting to diversify the portfolio's
sources of income.
· SSE: SSE's strong performance had taken the weighting to around 5%,
prompting us to take some profits.
3. Cutting back the number of shares by eliminating holdings that lack the catalysts necessary for a re-rating:
· Anglo American: We sold out in the wake of the decision by BHP to walk
away from its bid for the company, as the break-up plan appeared challenging.
· Vodafone: We sold out after Vodafone had completed the disposals of their
Italian and Spanish units. We expect industry pricing to remain difficult
until industry consolidation is allowed to take place.
· Hays: We sold out as the macro-economic backdrop was unhelpful, with a
mismatch between candidate and employer confidence causing a slowdown in
hiring activity.
Outlook
After bottoming out in mid-February, the NAV rose sharply in the following six
months. The portfolio's improving NAV performance reflects a combination of a
more benign macro backdrop and solid company results, providing the catalyst
for the holdings to deliver the valuation re-rating that we have long been
expecting. This has continued into the new financial year, strengthening our
confidence that the portfolio is well diversified across a board range of
macro drivers, allowing it to remain resilient through major events such as
the UK Budget and the US Presidential election.
Looking ahead, the performance of UK equities will be driven by a number of
factors, notably the prospects for interest rates and economic growth in the
UK and globally. After a brief period of more positive sentiment towards the
UK following Labour's landslide general election victory, the tone is once
again more sceptical as investors scrutinise the new Government's policies, in
particular the decision to increase taxes and borrowing in the budget.
Investors recognise that there is little room for manoeuvre on fiscal policy
given the state of government finances, but they would welcome any signs of
policy that would help to reverse the UK's long history of under-investment
and low productivity growth.
Trading at a Price/Earnings ratio of around 11.5x, UK equities are cheap
relative to other equity markets and their own history, creating a low bar for
share prices on the announcement of any positive news. Among developed
markets, Europe trades at a Price/Earnings ratio of 13.5x, Asia and Japan
trade at 14x and the US trades at over 20x. We see the valuation opportunity
within the UK equity market as two-fold:
1. The FTSE 100 Index generates 78% of its revenues outside the UK,
meaning that these are internationally focused businesses that should, but
often don't, trade at similar valuations to their global peers. We will
continue to seek out these valuation anomalies among large caps, which
represent 48.9% of the portfolio.
2. The FTSE 250 and Small Cap indices are far more domestically focused,
generating over 50% of their revenues in the UK, making them more dependent on
the UK economy. Recent Goldman Sachs research observes a tight inverse
correlation between the performance of the FTSE 250 Index (relative to the
FTSE 100 Index) and UK 10-year Gilt yields, as well as a strong positive
correlation between the FTSE 250's Price/Earnings ratio and current economic
activity levels. It is therefore understandable that investors will be
scrutinising government policies in the months ahead, seeking to establish
whether they will help to deliver higher levels of investment and productivity
growth, which could create the conditions for more sustainable economic
growth.
Regardless of the macro situation, we will continue to search across the UK
equity market for under-valued companies with the potential to deliver growth
that surprises the market. We are encouraged that during this financial year
we have uncovered a large number of companies that have delivered a
significant valuation re-rating, either due to better-than-expected results or
M&A. The identification of these companies can be extremely powerful for
the portfolio's performance as share prices go up due to higher earnings or a
higher Price/Earnings multiple. The higher NAV also provides an increased
capital base from which to generate portfolio income.
This year has demonstrated our ability to deliver a rising NAV at the same
time as delivering sufficient portfolio income to cover the dividend and
maintain the Company's 24-year track record of dividend growth. Our focus on
income is consistent with our investment process, as we believe that cash
generative companies that use their cash flow to pay attractive dividends and
buy back their own shares can also deliver excellent share price
performance. We continue to structure the portfolio in companies where we
see the potential for a combination of dividend yield, dividend growth and
valuation re-rating. The scale of the valuation re-rating opportunity can be
seen from the gap between the valuations of the holdings in the portfolio and
those of the wider market. At the time of writing, the portfolio has a median
Price/Earnings ratio of 9.4x and a median Price/Book ratio of 1.2x which
compares favourably with 12.5x and 1.7x respectively for the FTSE All-Share
(ex-Investment Trusts) Index. In a portfolio of 50 companies, 25 have been
buying back shares during this financial year. We have included individual
case studies of two companies seeing their valuations re-rate as their
successful cash flow delivery is reflected in their valuations.
Having engaged with shareholders, I have a clear understanding of what matters
most. I have listened to shareholders who tell me how important the high level
of income is for them at a time of an elevated cost of living. I have also
listened to shareholders who tell me that they want to see a growing NAV. This
year we delivered both, helped by careful portfolio construction and improving
market conditions. This shows that income and capital growth can be delivered
hand in hand. I am encouraged by the improving momentum of the portfolio, and
I am determined to deliver for shareholders in the year ahead.
Thomas Moore
Portfolio Manager
27 November 2024
Overview of Strategy
Business Model
The Company is an investment trust, and its Ordinary shares are listed on the
London Stock Exchange.
Investment Objective
The Company's objective is to provide shareholders with an above average
income from their equity investment, while also providing real growth in
capital and income.
Investment Policy
The Directors set the investment policy, which is to invest in a diversified
portfolio consisting mainly of quoted UK equities which will normally comprise
between 50 and 70 individual equity holdings.
In order to reduce risk in the Company without compromising flexibility:
· no holding within the portfolio should exceed 10% of total assets at the
time of acquisition; and
· the top ten holdings within the portfolio will not exceed 50% of net
assets.
The Company may invest in convertible preference shares, convertible loan
stocks, gilts and corporate bonds.
The Directors set the gearing policy within which the portfolio is managed.
The parameters are that the portfolio should operate between holding 5% net
cash and 15% net gearing. The Directors have delegated responsibility to the
Manager for the operation of the gearing level within the above parameters.
Delivering the Investment Objective
The Board delegates investment management services to abrdn. The team within
abrdn managing the Company's portfolio of investments has been headed up by
Thomas Moore since 2011.
The portfolio is invested on an index-agnostic basis. The process is based on
a bottom-up stock-picking approach where sector allocations are a function of
the sum of the stock selection decisions, constrained only by appropriate risk
control parameters. The aim is to Focus on Change by evaluating changing
corporate situations and identifying insights that are not fully recognised by
the market.
Idea Generation and Research
The vast majority of the investment insights are generated from information
and analysis from one-on-one company meetings. Collectively, more than 3,000
company meetings are conducted annually across abrdn. These meetings are used
to ascertain the company's own views and expectations of its future prospects
and the markets in which it operates. Through actively questioning the senior
management and key decision makers of companies, the portfolio managers and
analysts look to uncover the key changes affecting the business and the
materiality of their impact on company fundamentals within the targeted
investment time horizon.
Investment Process in Practice
The index-agnostic approach ensures that the weightings of holdings reflect
the conviction levels of the investment team, based on an assessment of the
management team, the strategy, the prospects and the valuation metrics. The
process recognises that some of the best investment opportunities come from
under-researched parts of the market, where the breadth and depth of the
analyst coverage that the Portfolio Manager can access provides the scope to
identify a range of investment opportunities.
The consequence of this is that the Company's portfolio often looks very
different from other investment vehicles providing their investors with access
to UK equity income. This is because the process focuses on conviction levels
rather than index weightings. This means that the Company may provide a
complementary portfolio to the existing portfolios of investors who prefer to
make their own decisions and manage their ISAs, SIPPs and personal dealing
accounts themselves. As at 30 September 2024, 51.1% (2023: 52.6%) of the
Company's portfolio is invested in companies outside the FTSE 100 Index.
The index-agnostic approach further differentiates the portfolio because it
allows the Portfolio Manager to take a view at a thematic level, concentrate
the portfolio's holdings in certain areas and avoid others completely. The
effect of this approach is that the weightings of the portfolio can be
expected to differ significantly from that of any index, and the returns
generated by the portfolio may reflect this divergence, particularly in the
short term.
The Manager's Approach to ESG
There is a broad understanding on the Board that a full and thorough
assessment of environmental, social and governance ("ESG") factors will allow
for better investment decisions to be made. ESG factors are considered
alongside financial and other fundamental factors in order to make the best
possible investment decisions at a stock picking and at a portfolio
construction level. It should be noted that the Company does not have a
sustainability objective and does not promote any sustainability
characteristics, nor does it specifically exclude any sectors from its
investment universe.
By considering ESG factors, the Board believes that the Portfolio Manager has
a more complete view of a company, including its risks and opportunities.
The analysts supporting the Portfolio Manager seek to determine which ESG
factors are financially material to form a forward-looking view of how a
business will manage risks and capture opportunities. The analysts focus on
what they deem to be the most material ESG factors to understand their impact
on a company's future business performance, financial position, and/or market
perception.
To advance this analysis on behalf of the Company's shareholders, the
Portfolio Manager has a very close relationship with the ESG specialists
within abrdn and there is an on-desk ESG analyst to assist in the research
process and ESG engagements with companies. Through the utilisation of third
party provided research, including MSCI and abrdn's inhouse ESG rating tools,
the team is able to identify, where appropriate, leaders and laggards, areas
of weakness and areas of strength.
It should be noted that as part of the investment process to identify
attractive investment opportunities, the Portfolio Manager must consider a
diverse range of companies, spanning a broad-spectrum of practices. An
important feature of the investment process is therefore active and meaningful
engagement to generate insights into underlying performance, with the
Company's approach to engagement set out below.
Proactive Company Engagement
The Manager believes that proactive company engagement ensures the holdings in
the portfolio remain or become better companies.
See the Case Studies for specific examples of the Company's engagement with investee companies.
The Manager's Approach to Engagement
Engagement is an important part of the Manager's investment process, the
Manager sees engagement not only as a right but as an obligation of investors,
in its role as owners of companies. The Manager engages actively and regularly
with companies in which it is or may become an investor.
The Manager believes that informed and constructive engagement helps to foster
better companies, enhancing the value of the Company's investments.
There are generally two core reasons for engagement:
to understand more about a company's strategy and performance or encourage
best practice and drive change.
Active engagement involves regular, candid communication with management teams
(or boards of directors) of portfolio companies to discuss a broad range of
issues that are material to sustain long-term returns, either positively or
negatively, including both risks and opportunities. The Manager's focus is on
the factors which it believes to have the greatest potential to enhance or
undermine the Company's investment case. Sometimes the Manager seeks more
information, exchanges views on specific issues, encourages better disclosure:
and at other times, encourages change (including either corporate strategy,
capital allocation, or climate change strategy). On the Company's behalf, the
Manager's engagements cover a range of issues, including but not limited to
board composition, remuneration, audit, climate change, labour issues, human
rights, bribery and corruption.
Promoting the Success of the Company
The Board's statement describes how the Directors have discharged their duties
and responsibilities over the course of the financial year under section 172
(1) of the Companies Act 2006 and how they have promoted the success of the
Company. That statement forms part of the Strategic Report.
Key Performance Indicators ("KPIs")
The Board assesses the performance of the Company against the range of KPIs
shown below over a variety of time periods, but has particular focus on the
long term, which the Board considers to be at least five years.
KPI Description
Net Asset Value ("NAV") Total Return While the Manager does not manage the portfolio with direct reference to any
relative to the FTSE All-Share Index particular index, the Board does review the performance against that of the
FTSE All-Share Index to provide context for the performance delivered.
The Company's NAV Total Return relative to the FTSE All Share Index since
2014.
Premium or discount to the NAV compared to the unweighted average of the The Board compares the discount of the Company's share price to its NAV when
discount of the peer group compared to the unweighted average discount of the other investment trusts in
the UK Equity Income sector.
A five-year chart showing the discount of the Company and for the UK Equity
Income sector.
Dividend growth compared to the The Company's objective is to provide shareholders with an above average
Retail Price Index ("RPI") income from their equity investment, while also providing real growth in
capital and income. Between 2012, the first full year after Thomas Moore
took over the role of Portfolio Manager, and the outbreak of the Covid-19
pandemic, the annual dividend growth of the portfolio exceeded inflation, as
measured by the RPI, indicating that shareholders had received real growth in
the dividends paid by the Company.
However, the income generated by the portfolio was significantly affected by
dividend cuts made by investee companies during 2020. While dividend payments
to shareholders have increased over the last three years, they have not kept
pace with RPI.
In setting the level of the dividend for the current financial year, the Board
has balanced the need to deliver a meaningful increase to shareholders and its
desire to continue rebuilding the revenue reserves. After payment of the
fourth interim dividend, and based on current shares in issue, 0.14 pence per
share will be transferred to revenue reserves.
Ongoing charges ratio relative to The Board monitors the Company's ongoing charges ratio against prior years and
comparator investment vehicles other similar sized companies in the peer group.
The Ongoing Charges Ratio for the year decreased moderately to 0.86% based on
average net assets over the year (2023: 0.94%).
Principal Risks and Uncertainties
The Board and Audit Committee carry out a regular review of the risk
environment in which the Company operates, changes to the environment and
individual risks. The Board also identifies emerging risks which might affect
the Company.
There are a number of principal risks and uncertainties which, if realised,
could have a material adverse effect on the Company and its financial
condition, performance and prospects. The Board, through the Audit Committee,
has carried out a robust assessment of the Company's principal and emerging
risks, which include those that would threaten its business model, future
performance, solvency, liquidity or reputation.
The principal risks and uncertainties faced by the Company are reviewed by the
Audit Committee in the form of a risk matrix and the Committee also gives
consideration to the emerging risks facing the Company.
The Board has identified the implications for the Company's investment
portfolio of a changing climate, and the increased use of artificial
intelligence, as emerging risks which it considers are likely to become more
relevant for the Company in the future.
The Board continues to assess these emerging risks and their impact on the
portfolio as they develop, including how investor sentiment is evolving
towards climate risk and how artificial intelligence may impact business
models in the future, and will consider how the Company may mitigate these
risks and any other emerging risks. The Board receives regular reporting
from the Manager on its approach to engagement with investees on a variety of
different topics.
The principal risks currently facing the Company, together with a description
of the mitigating actions the Board has taken, are set out in the table below.
The Board considers its risk appetite in relation to each principal risk and
monitors this on an ongoing basis. Where a risk is approaching or is outside
the tolerance level, the Board will consider taking action to manage the risk.
Currently, the Board considers the risks to be managed within acceptable
levels.
The principal risks associated with an investment in the Company's shares are
published monthly in the Company's factsheet and they can be found in the
pre-investment disclosure document ("PIDD") published by the Manager, both of
which are available on the Company's website.
Risk Trend Mitigating Action
Strategy - Risk Unchanged Through regular updates from the Manager, the Board monitors the relevance of
the Company's strategy, the performance of equity markets, the economic and
the Company's objectives or the investment trust sector as a whole become political environment, risks to the delivery of the Company's strategy in
unattractive to investors, leading to a fall in demand for the Company's light of the external environment and the discount/ premium at which the
shares. Company's shares trade relative to the net asset value and its peers.
The Board holds an annual strategy meeting and receives feedback from the
Company's broker on the Investment Trust sector in general, and more
specifically on the UK Equity Income sector, and the Company's relative
performance against peers. The Board also receive regular updates from the
Manager's investor relations team to help to better understand investor
sentiment towards the Company and its strategy.
Investment Performance - Risk Unchanged The Board recognises that market risk is significant in achieving performance
and it reviews and monitors the investment restrictions and guidelines it has
Market risk arises from volatility in prices of the Company's investments and set to ensure that they are appropriate.
the potential loss the Company could suffer through realising investments
following negative market movements.
The Board meets with the Manager on a regular basis and regularly receives
reports to discuss and consider the diversification of the portfolio, asset
allocation, stock selection and levels of gearing on a regular basis. The
Board also monitors the revenue forecasts, the costs of running the Company
Changes in general economic or market conditions (such as interest rates, and the Company's relative performance as compared to peers and the Reference
exchange rates and rates of inflation) as well as global political events and Index. The Board regularly reviews the impact of geopolitical instability and
trends, could substantially and adversely affect the prices of securities and, change on market risk.
as a consequence, the value of the Company's investment portfolio, its
prospects and share price.
The Board determines the Company's dividend policy and approves the level of
dividends payable to shareholders. Shareholders are invited to vote on the
Company's dividend policy to pay four interim dividends at each Annual General
Meeting.
Representatives of the Manager attend all Board meetings, and a detailed
formal appraisal of the Manager is carried out by the Remuneration &
Management Engagement Committee on an annual basis.
The Board engages with shareholders at its Annual General Meeting and Pre-AGM
Online Investor Event and with larger shareholders at least annually to listen
to sentiment towards the Company and its performance directly.
Exogenous risks such as health, social, financial, economic and geopolitical - Risk Rising The Board discusses current geopolitical and macroeconomic issues with the
Manager. During the year under review, such issues have included the UK's
the effects of instability or change arising from these risks could have an relationship within the European Union, investment risks arising from the
adverse impact on stock markets and the performance of the investment impact of events such as the invasion of Ukraine and increased military
portfolio and/or negatively impact the operations of the Company, Manager or tensions in the Middle East, investor attitudes towards equity markets, UK
key service providers. inflation, and the slowing of Chinese growth. More recently the Board has been
engaging with the Manager on the impact of the UK Budget and the US Election
results. The Board discusses with the Manager the steps that the Manager has
taken or might take to limit their impact on the portfolio and the operations
of the Company.
The Portfolio Manager's Review summarises the purchases and sales activity
during the period as the Company considered the new set of opportunities
arising from the meaningful change in market backdrop during the financial
year. The Manager is in regular communication with investee entities,
economists, and the wider market to determine the impact of the geopolitical
and economic environment on the portfolio.
The Board oversees the Manager's performance at each Board Meeting and at its
annual strategy meeting in August, formally considers whether the Company's
strategy remains fit for purpose, in the light of exogenous risks. The Board
also regularly discusses the economic environment, geopolitical risks,
industry trends and the potential impact on the Company with the Company's
broker.
Operational Risk - Risk Unchanged The Audit Committee receives, and reviews reports from the Manager on its
internal controls and risk management (including an annual ISAE Report). It
the Board delegates the operation of the business to third parties, the also receives and reviews reports from all its other significant service
principal delegate being the Manager. Failure of internal controls and poor providers on at least an annual basis, including on matters relating to
performance of any service provider could lead business continuity and cyber security. Written agreements are in place with
to disruption, reputational damage or loss to the Company. all third-party service providers.
The Manager monitors closely the control environments (Including cyber
security), and quality of services provided by third parties, including those
of the Depositary, through service level agreements, regular meetings, and key
performance indicators.
A formal appraisal of the Company's main third-party service providers is
conducted by the Remuneration & Management Engagement Committee on an
annual basis.
Governance Risk - Risk Unchanged The Board is aware of the importance of effective leadership and board
composition. The Board regularly reviews its composition and formally
the Directors recognise the impact that an ineffective board, unable to reviews the performance of the Board, Chair, and individual Directors through
discuss, review and make decisions, could have on the Company and its its performance
shareholders.
evaluation process on an annual basis. At each Board Meeting, Directors are
invited to disclose any interests or potential interests in business due to be
discussed.
All Directors are subject to annual shareholder re-election.
Discount/Premium to NAV - Risk reducing The Board keeps the level of the Company's discount/premium under review. As
explained in the Chair's Statement, the share price ranged from trading at a
a significant share price discount or premium to net asset value per share premium to NAV in the first couple of months of the financial year to briefly
could lead to high levels of uncertainty for shareholders. trading at over 11% discount to NAV in March 2024 and then closing the year
end at discount of 3.0%. For all but about three weeks, the Company's discount
was trading at a narrower level than the average for the UK Equity Income
investment trust sector.
The share price discount to NAV was 0.2% at 30 September 2023 and 3.0% at
30 September 2024.
The Company participates in the Manager's investment trust promotional
programme where the Manager has an annual programme of meetings with
institutional shareholders and reports back to the Board on these meetings.
Financial obligations - inadequate controls over financial record keeping and Risk Unchanged At each Board meeting, the Board reviews management accounts and
forecasting, the setting of an inappropriate gearing strategy or the breaching
revenue forecasts.
of loan covenants could result in the Company being unable to meet its
financial obligations, losses to the Company and its ability to continue The Directors set the gearing policy within which the portfolio is managed.
trading as a going concern. The parameters are that the portfolio should operate between holding 5% net
cash and 15% net gearing. The Directors have delegated responsibility to the
Manager for the operation of the gearing level within the above parameters.
The independent Auditor audits the Company's annual financial statements.
Legal and Regulatory Risks - the Company operates in a complex legal and Risk Unchanged The actions the Board takes to mitigate these extensive risks are to ensure
regulatory environment. As a UK company with shares publicly quoted on the that there is breadth and depth of expertise within the Board, and through the
London Stock Exchange, as an alternative investment fund and an investment appointment of reputable service providers to support the Company and its
trust, there are extensive legal and regulatory requirements. operations. The Board can instruct additional external professional support on
behalf of the Company, or the Directors individually should that be considered
necessary.
Promotional Activities
The Board recognises the importance of promoting the Company to current and
prospective investors both for improving liquidity and enhancing the value and
rating of the Company's shares. The Board believes one effective way to
achieve this is through subscription to, and participation in, the promotional
programme run by abrdn on behalf of a number of investment trusts under its
management. The Company's financial contribution to the programme is matched
by abrdn. The Company also supports abrdn's investor relations programme
which involves regional roadshows, promotional and public relations campaigns.
abrdn's promotional and investor relations teams report to the Board on a
quarterly basis giving analysis of the promotional activities as well as
updates on the shareholder register and any changes in the make-up of that
register.
The purpose of the promotional and investor relations programmes is both to
communicate effectively with existing shareholders and to gain new
shareholders, with the aim of improving liquidity and enhancing the value and
rating of the Company's shares. Communicating the long-term attractions of the
Company is key. Part of the promotional programme includes commissioning
independent paid for research on the Company, most recently from Kepler Trust
Intelligence Research Limited. A copy of the latest research note is available
from the Key Documents section of the Company's website.
On 26 January 2024, the Board hosted an online shareholder presentation where
the Portfolio Manager provided an update on the portfolio. The Portfolio
Manager and Chair also answered live questions from the audience.
On 29 August 2024, the Board hosted an in-person meeting for large
shareholders at which the Portfolio Manager provided an update on the
portfolio. Both of these events gave the Directors the opportunity to hear the
views of shareholders first hand.
Board Diversity
The Board's statement on diversity is set out in the Directors' Report.
At 30 September 2024, there were two male and two female Directors on the
Board. The Chair and the Senior Independent Director positions are both held
by women.
Modern Slavery Act
Due to the nature of its business, being a company that does not offer goods
and services to customers, the Board considers that the Company is not within
the scope of the Modern Slavery Act 2015 because it has no turnover. The
Company is therefore not required to make a slavery and human trafficking
statement. In any event, the Board considers the Company's supply chains,
dealing predominantly with professional advisers and service providers in the
financial services industry, to be low risk in relation to this matter.
Environmental, Social and Human Rights Issues
The Company has no employees. The Board has delegated the day-to-day
management and administrative functions to the Manager. There are therefore no
disclosures to be made in respect of employees.
The Company's socially responsible investment policy is set out below.
Active Engagement
Through engagement and exercising voting rights, the Manager actively works
with companies to improve corporate standards, transparency and
accountability.
The primary goal of the Manager is to generate the best long-term outcomes for
the Company in order to fulfil fiduciary responsibilities to shareholders and
this fits with one of the Manager's core principles as a business in how it
evaluates investments.
Responsible Investment
The Board is aware of its duty to act in the interests of the Company. The
Board acknowledges that there are risks associated with investment in
companies which fail to conduct business in a socially responsible manner and
has noted the Manager's policy on social responsibility. The Manager considers
social, environmental and ethical factors which may affect the performance or
value of the Company's investments as part of its investment process. In
particular, the Manager encourages companies in which investments are made to
adhere to best practice in the areas of ESG stewardship. The Manager believes
that this can best be achieved by entering into a dialogue with company
management to encourage them, where necessary, to improve their policies.
The Company's objective is to provide shareholders with an above average
income from their equity investment while also providing real growth in
capital and income. The Board and Manager believes this will be produced on a
sustainable basis by investments in companies which adhere to best practice.
Accordingly, the Manager will seek to favour companies which pursue best
practice.
Stewardship
The Company is committed to the UK's Stewardship Code and seeks to play its
role in supporting good stewardship of the companies in which it invests.
Responsibility for actively monitoring the activities of portfolio companies
has been delegated by the Board to the Manager which has sub-delegated that
authority to the Investment Manager. abrdn plc is a tier 1 signatory of the UK
Stewardship Code which aims to enhance the quality of engagement by investors
with investee companies in order to improve their socially responsible
performance and the long-term investment return to shareholders. While
delivery of stewardship activities has been delegated to the Manager and its
group, the Board acknowledges its role in setting the tone for the effective
delivery of stewardship on the Company's behalf.
The Board has also given discretionary powers to the Manager to exercise
voting rights on resolutions proposed by the investee companies within the
Company's portfolio. The Manager reports to the Board on a quarterly basis
on stewardship (including voting) issues.
Global Greenhouse Gas Emissions
All of the Company's activities are outsourced to third parties. The Company
therefore has no greenhouse gas emissions to report from the operations of its
business, nor does it have responsibility for any other emissions producing
sources under the Companies Act 2006 (Strategic Report and Directors' Reports)
Regulations 2013.
For the same reason as set out above, the Company considers itself to be a low
energy user under the SECR regulations and therefore is not required to
disclose energy and carbon information.
Task Force for Climate-related Financial Disclosures ("TCFD")
Under UK Listing Rules, the Company, as a closed ended investment company, is
exempt from complying with the Task Force on Climate-related Financial
Disclosures ("TCFD").
Whilst TCFD is currently not applicable to the Company, the Manager, as the
delegated Alternative Investment Fund Manager ("AIFM") is required to produce
a product level report on the Company in accordance with the FCA's rules and
guidance regarding the disclosure of climate-related financial information
consistent with TCFD Recommendations and Recommended Disclosures. These
disclosures are intended to help meet the information needs of market
participants, including institutional clients and consumers of financial
products, in relation to the climate-related impact and risks of the Manager's
TCFD in-scope business. The product level report on the Company is available
on the Manager's website at: invtrusts.co.uk.
Viability Statement
The Board considers that the Company is a long-term investment vehicle and,
for the purposes of this statement, has decided that three years is an
appropriate period over which to consider its viability. The Board considers
this to be an appropriate period for an investment trust company with a
portfolio of equity investments, and the financial position of the Company.
Taking into account the Company's current financial position and the potential
impact of its principal risks and uncertainties, the Directors have a
reasonable expectation that the Company will be able to continue in operation
and meet its liabilities as they fall due for a period of three years from the
date of this Report.
In assessing the viability of the Company over the review period, the
Directors have focused upon the following factors:
· The principal risks and uncertainties and the steps taken to mitigate
these risks.
· All of the Company's investments are traded on major stock exchanges and
there is a spread of investments held.
· The Company is closed ended in nature and therefore it is not required to
sell investments when shareholders wish to sell their shares.
· The performance of the Company's share price relative to its net asset
value during the financial year. The share price discount increased from
0.2% at 30 September 2023 to 3.0% at 30 September 2024, and the share price
traded at a small premium to NAV during the year.
· The Company's main liability is its bank loan of £22.5 million (2023:
£21 million), which represents net gearing of 13.0% (2023: 11.3%). This is
drawn from a £30 million (2023: £30 million) revolving credit facility with
The Royal Bank of Scotland International Limited, London Branch, which was
refinanced in June 2023 and is due to expire in June 2026.
· The Company' s cash balance, and money market funds, at 30 September 2024
amounted to £1.9 million (2023: £4.2 million).
· The levels of ongoing charges of 0.86% (2023: 0.94%).
· Shareholders' overwhelming voting in favour of the continuation of the
Company at the Annual General Meeting in February 2022. The next
continuation vote is due to take place at the Annual General Meeting to be
held in 2027.
When considering the risks, the Board reviewed the impact of stress testing on
the portfolio, including the effects of any future falls in investment
values. The Board has also had regard to matters such as a reduction in the
income generated in the portfolio, a material increase in interest rates, a
reduction in the liquidity of the portfolio or changes in investor sentiment,
all of which could have an impact on the Company's prospects and viability in
the future. The results of the stress tests have given the Board comfort
over the viability of the Company.
Taking into account all of these factors, the Company's current position and
the potential impact of the principal risks and uncertainties faced by the
Company, the Board has concluded that it 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 this assessment to 30 September 2027.
In assessing the Company's future viability, the Board has assumed that
investors will wish to continue to have exposure to the Company's activities,
in the form of a closed ended entity, the Company's long-term performance is
satisfactory, and the Company will continue to have access to sufficient
capital.
Future Strategy
The Board intends to maintain the Company's strategy set out in the Strategic
Report for the year ending 30 September 2025 as it is believed that these are
in the best interests of shareholders.
On behalf of the Board
Sarika Patel
Chair
27 November 2024
Promoting the Success of the Company
How the Board Meets its Obligations under Section 172 of the Companies Act 2006
The Board is required to describe to the Company's shareholders how the
Directors have discharged their duties and responsibilities over the course of
the financial year under Section 172 (1) of the Companies Act 2006 (the
"Section 172 Statement"). This statement provides an explanation of how the
Directors have promoted the success of the Company for the benefit of its
members as a whole, taking into account the likely long-term consequences of
decisions, the need to foster relationships with all stakeholders and the
impact of the Company's operations on the environment.
The Board takes its role very seriously in representing the interests of the
Company's shareholders. The Board which, at the year end, comprised four
independent Non-Executive Directors collectively has a broad range of skills
and experience across all major functions that affect the Company. The Board
is responsible for taking all decisions relating to the Company's investment
objective and policy, gearing, corporate governance, and strategy,
and for monitoring the performance of the Company's service providers.
The Board ensures that the Company operates in a transparent culture where all
parties are treated with respect and provided with the opportunity to offer
practical challenge and participate in debate to achieve the expectations of
shareholders and other stakeholders alike. The Board works very closely with
the Manager in reviewing how issues are handled, ensuring good governance and
responsibility in managing the Company's affairs, as well as visibility and
openness in how the affairs are conducted.
How the Board Engages with Stakeholders
The Board's main stakeholders have been identified as its shareholders, the
Manager and the Investment Manager, service providers, investee companies,
debt providers and the community at large and the environment.
A summary of the Board's approach to engagement with stakeholders is set out
below.
Stakeholder How We Engage
Shareholders Shareholders are key stakeholders and the Board places great importance on
communication with them. The Board welcomes all shareholders' views and aims
to act fairly to all shareholders. The Manager and the Company's broker
regularly meet with current and prospective shareholders to discuss
performance and shareholder feedback is discussed by the Directors at Board
meetings. In addition, Directors have an opportunity to meet shareholders at
the Annual General Meeting.
The Company subscribes to abrdn's investor relations programme in order to
maintain communication channels with the Company's shareholder base.
Regular updates are provided to shareholders through the Annual Report, Half
Yearly Report, monthly factsheets, Company announcements, including daily net
asset value announcements, and the Company's website.
The Company's Annual General Meeting provides a forum, both formal and
informal, for shareholders to meet and discuss issues with the Directors and
Manager. The Board encourages as many shareholders as possible to attend the
Company's Annual General Meeting and to provide feedback on the Company.
Manager (and Investment Manager) The Portfolio Manager's Review details the key investment decisions taken
during
the year. The Company has appointed abrdn Fund Managers Limited ("AFML") as
the Company's Manager, or AIFM, which sub-delegates investment management to
abrdn Investment Management Limited, which is known as the Investment Manager.
The Manager has continued to manage the Company's assets in accordance with
the mandate provided by shareholders, with oversight provided by the Board.
The Board regularly reviews the Company's performance against its investment
objective and the Board undertakes an annual strategy review meeting to ensure
that the Company is positioned well for the future delivery of its objective
for its stakeholders.
The Board receives presentations from the Manager at every Board meeting to
help it to exercise effective oversight of the Manager and the Company's
strategy.
The Board, through the Remuneration & Management Engagement Committee,
formally reviews the performance of the Manager at least annually.
Service Providers The Board seeks to maintain constructive relationships with the Company's
suppliers either directly or through the Manager with regular communications
and meetings.
The Remuneration & Management Engagement Committee conducts an annual
review of the performance, terms, and conditions of the Company's main service
providers to ensure they are performing in line with Board expectations,
carrying out their responsibilities and providing value for money.
Investee Companies The Board has delegated responsibility for monitoring the activities of
portfolio companies to the Manager which has sub-delegated that authority to
the Investment Manager.
The Board has also given discretionary powers to the Manager to exercise
voting rights on resolutions proposed by the investee companies within the
Company's portfolio. The Manager reports on a quarterly basis on stewardship
(including voting) issues.
Through engagement and exercising voting rights, the Manager actively works
with companies to improve corporate standards, transparency, and
accountability.
The Board monitors investments made and divested and questions the rationale
for investment and voting decisions made.
Debt Providers On behalf of the Board, the Manager maintains a positive working relationship
with The Royal Bank of Scotland International Limited, London Branch, the
provider of the Company's loan facility, and provides regular updates on
business activity and compliance with its loan covenants.
Environment and Community The Board and Manager are committed to investing in a responsible manner and
the Manager includes Environmental, Social and Governance ("ESG")
considerations into the research and analysis as part of the investment
decision-making process. Through the Investment Manager, the Board encourages
improvements in ESG practices and disclosures.
Specific Examples of Stakeholder Consideration during the Year
The importance of giving due consideration to the Company's stakeholders is
not a new requirement and is considered as part of every Board decision.
The Board considers its stakeholders at Board meetings and receives feedback
on the Investment Manager's interactions with them.
The Directors were particularly mindful of stakeholder considerations when
considering the following items during the year ended 30 September 2024:
Portfolio
The Portfolio Manager's Review details the key investment decisions taken
during the year. The overall shape and structure of the investment portfolio
is an important factor in delivering the Company's stated investment objective
and is reviewed at every Board Meeting. The Board also discusses the
performance in detail with the Portfolio Manager on a regular basis.
Dividend
The Board has determined the payment of a fourth interim dividend for the year
of 5.8 pence per Ordinary share. Following payment of the fourth interim
dividend, total dividends for the year will amount to 22.9 pence per Ordinary
share, a small increase compared to the previous year. In setting the level of
the dividend, the Board has balanced the need to deliver an increase to
shareholders and continuing the process of rebuilding the revenue reserve,
which was depleted during the height of Covid-19. Following payment of the
fourth interim dividend, and based on current shares in issue, 0.14 pence per
share will be transferred to revenue reserves.
Promoting the Company
On 26 January 2024, the Board hosted an online shareholder presentation where
the Portfolio Manager provided an update on the portfolio, and the Chair and
Portfolio Manager answered questions from the audience. Over 250 investors
signed up to the event. On 29 August 2024, the Company hosted a meeting for
large shareholders at which members of the Board were present and at which the
Portfolio Manager provided an update. Both these events gave the Directors the
opportunity to hear the views of shareholders first hand.
Pre-AGM Online Investor Event
The Board will be hosting an online investor presentation, which will be held
at 11:30am on Tuesday, 28 January 2025. At this event there will be a
presentation from the Portfolio Manager followed by an opportunity to ask live
questions of the Portfolio Manager and the Chair. The online presentation is
being held ahead of the Annual General Meeting to allow shareholders time to
submit their proxy votes after the presentation but prior to the Annual
General Meeting should they so wish. Full details on how to register for the
online event can be found on the Company's website at abrdnequityincome.com.
Issuance and Buy-Back of Shares
During the year, the Company issued 135,000 Ordinary shares from treasury to
meet investor demand, at a premium to the prevailing net asset value. The
Company did not buy-back any shares in the year.
The Board believes that the selective use of issuing share and share buybacks from treasury, when circumstances dictate, is in the best interest of all shareholders.
On behalf of the Board
Sarika Patel
Chair
27 November 2024
Results
Performance (total return)
1 year 3 years 5 years 10 years
30 September 2024 % % % %
Net asset value(A) 13.3 6.5 10.7 38.9
Share price(A) 10.4 13.3 17.7 39.0
Reference Index(B) 13.4 23.9 32.2 83.6
(A) Considered to be an Alternative Performance Measure.
(B) FTSE All-Share Index.
Source: abrdn/Morningstar/Factset
Ten Year Financial Record
Revenue
available Net Equity
Gross for Ordinary Revenue Ordinary Net asset Share Ongoing gearing / shareholders' Revenue
Year ended revenue shareholders return dividends value(A) price Discount(AB) charges(BC) (cash)(B) funds reserves(D)
30 September £'000 £'000 p p p p % % % £m (£m)
2015 6,107 5,361 17.18 14.70 440.7 439.0 0.4 0.94 7.7 195.6 6.88
2016 7,084 6,214 17.92 15.40 431.5 412.4 4.4 0.96 7.5 199.7 8.15
2017 7,957 7,044 19.23 17.10 478.6(E) 459.6 4.8 0.87 9.9 235.3(E) 9.41
2018 11,893 10,846 22.06 19.20 485.0 473.0 2.5 0.87 12.1 238.4 10.82
2019 11,791 10,687 21.74 20.50 411.8 381.5 7.4 0.91 13.7 201.5 11.58
2020 8,730 7,614 15.61 20.60 288.0 252.0 12.5 0.92 13.3 139.2 8.75
2021 10,642 9,693 20.06 21.20 380.8 349.0 8.4 0.93 13.5 182.9 8.49
2022 13,517 12,244 25.51 22.70 331.8 302.5 8.8 0.91 15.0 157.5 10.27
2023 12,598 11,109 23.43 22.80 314.6 314.0 0.2 0.94 11.3 149.9 10.18
2024 12,735 11,010 23.05 22.90 331.5 321.5 3.0 0.86 13.0 158.4 10.30
(A) Diluted for the effect of Subscription shares in issue for the year ended
30 September 2012 to 30 September 2016.
(B) Considered to be an Alternative Performance Measure.
(C) Calculated in accordance with AIC guidance issued in October 2020 to
include the Company's share of costs of holdings in investment companies on a
look-through basis. The figure for 30 September 2020 has been restated in
accordance with this guidance.
(D) Revenue reserves are reported prior to paying the final dividend or fourth
interim dividend in each year. For 2017 only, reserves are reported after
having deducted the third interim dividend.
(E) The 2017 Net Asset Value is calculated under Financial Reporting
Standards, but includes an adjustment for the third interim dividend which had
been declared, but not paid, at the year end.
Investment Portfolio
As at 30 September 2024
Valuation as at Valuation as at
30 September 2024 Weight 30 September 2023
Stock Key Sector £'000 % £'000
Imperial Brands Tobacco 8,462 4.8 4,945
National Grid Gas, Water and Multi-utilities 7,376 4.1 6,160
BHP Industrial Metals and Mining 7,239 4.1 4,612
British American Tobacco Tobacco 6,900 3.9 3,127
Berkeley Group Household Goods and Home Construction 6,812 3.8 -
BP Oil, Gas and Coal 6,515 3.7 8,862
Rio Tinto Industrial Metals and Mining 6,136 3.5 3,686
Conduit Holdings Non-life Insurance 5,778 3.2 4,267
SSE Electricity 5,575 3.1 7,294
Legal & General Life Insurance 5,551 3.1 3,051
Top ten investments 66,344 37.3
Petershill Partners Investment Banking and Brokerage Services 5,125 2.9 1,999
M&G Investment Banking and Brokerage Services 5,022 2.8 -
CMC Markets Investment Banking and Brokerage Services 4,852 2.7 2,146
Barclays Banks 4,430 2.5 5,420
HSBC Banks 4,347 2.4 4,400
OSB Group Finance and Credit Services 4,128 2.3 3,476
Shell Oil, Gas and Coal 4,056 2.3 8,771
TP ICAP Investment Banking and Brokerage Services 3,975 2.2 1,987
Assura Real Estate Investment Trusts 3,910 2.2 -
Galliford Try Construction and Materials 3,823 2.2 2,532
Top twenty investments 110,012 61.8
Chesnara Life Insurance 3,490 2.0 3,763
Drax Electricity 2,986 1.7 -
Ithaca Energy Oil, Gas and Coal 2,947 1.6 2,776
Quilter Investment Banking and Brokerage Services 2,940 1.6 1,898
Glencore Industrial Metals and Mining 2,924 1.6 6,210
Diversified Energy Oil, Gas and Coal 2,811 1.6 5,373
International Personal Finance Finance and Credit Services 2,801 1.6 2,368
BAE Systems Aerospace and Defence 2,702 1.5 3,102
Thungela Resources Oil, Gas and Coal 2,601 1.5 4,122
Harbour Energy Oil, Gas and Coal 2,459 1.4 1,366
Top thirty investments 138,673 77.9
NatWest Group Banks 2,450 1.4 5,194
Close Brothers Banks 2,448 1.4 5,604
Real Estate Investors Real Estate Investment Trusts 2,394 1.4 2,020
Speedy Hire Industrial Transportation 2,388 1.4 1,615
Barratt Redrow Household Goods and Home Construction 2,380 1.3 -
Energean Oil, Gas and Coal 2,375 1.3 -
DFS Furniture Retailers 2,248 1.3 2,014
Johnson Matthey Chemicals 2,210 1.2 -
Sabre Insurance Non-life Insurance 2,194 1.2 -
Inchcape Industrial Support Services 2,021 1.1 -
Top forty investments 161,781 90.9
Crest Nicholson Household Goods and Home Construction 1,992 1.1 -
Standard Chartered Banks 1,922 1.1 2,555
LondonMetric Real Estate Investment Trusts 1,889 1.1 2,849
Litigation Capital Investment Banking and Brokerage Services 1,844 1.0 2,268
Phoenix Life Insurance 1,705 1.0 1,471
Sirius Real Estate Real Estate Investment Trusts 1,638 0.9 -
CLS Holdings Real Estate Investment and Services 1,391 0.8 1,085
Ashmore Investment Banking and Brokerage Services 1,338 0.8 1,517
Man Group Investment Banking and Brokerage Services 1,334 0.7 -
Smurfit Kappa General Industrials 1,144 0.6 -
Top fifty investments 177,978 100.0
Total Portfolio 177,978 100.0
All investments are equity investments.
Sector Distribution
As at 30 September 2024
Portfolio Weightings %
Financials 37.9
Energy 13.4
Basic Materials 10.4
Utilities 8.9
Consumer Staples 8.7
Consumer Discretionary 7.5
Industrials 6.8
Real Estate 6.4
As at 30 September 2023
Portfolio Weightings %
Financials 36.6
Energy 18.9
Basic Materials 11.0
Industrials 10.1
Utilities 8.1
Consumer Staples 5.7
Consumer Discretionary 4.5
Real Estate 3.6
Healthcare 0.8
Telecommunications 0.7
Investment Case Studies
Berkeley Group (3.8% of the portfolio)
Berkeley Group is a UK housebuilder that was founded in 1976. The management
team is regarded as one of the best in the entire UK stock market. The current
CEO, Rob Perrins, joined Berkeley in 1994 and took over from the founder, Tony
Pidgley, in 2009. Berkeley is focused on London and the South-East of England,
having sold its regional business in 2003. It is currently developing 36 sites
in London and 34 sites outside London. The superior returns generated by
Berkeley in the past two decades can be attributed to its long-term approach
to its housing developments, having a very large land-bank and excellent order
book visibility. Berkeley is unusual in having expertise in developing large
brownfield regeneration sites. As one of the only housebuilders prepared to
take on these projects, this puts it in a strong position to acquire the land
at low cost, with an average plot cost of just £49,000 compared with typical
selling prices well over £500,000, supporting Return on Equity of around 15%
through the cycle.
Berkeley has particularly good visibility on its order book thanks to the
global appeal of its high-end London homes. Berkeley has developed strong
distribution in Asia where buyers are often willing to place orders for its
homes off-plan. The company's focus on London and the South-East reflects the
management team's view that this part of the UK will continue to see the
greatest upward pressure on house prices due to the mismatch between rising
demand for new homes and constrained supply. At the time of the 2024 results,
the CEO commented on the collapse in recent years caused by a combination of
factors including geopolitical disruption, political uncertainty and planning
policy complexities. His view is that, without focused policy intervention,
the UK could be heading towards just 100,000 new homes by 2026, compared with
the stated ambition of the UK Government to achieve 300,000 new homes.
Berkeley's strong balance sheet and high returns allows the company to
announce significant capital returns, including regular special dividends.
This has continued in recent years despite the tougher economic backdrop. The
CEO takes the view that Berkeley should retain the flexibility to pursue
growth or increase shareholder returns, depending on the stage of the cycle.
In its most recent results, management announced a large special dividend of
£283 million, as well as investing in medium term projects such as a new
Build to Rent initiative that will deliver the first new homes in 2027.
Analysts are forecasting that Berkeley will return over a quarter of its
market capitalisation in the three years to April 2027, underlining the
reliable, cash generative nature of the business. The share price valuation
appears attractive, trading at 1.4x NAV, towards the bottom of its 15-year
range of 1.2x to 2.7x NAV. The catalyst for a re-rating is likely to be a
pick-up in demand, as the economy improves, or an improvement in the planning
system. The Portfolio Manager bought a new holding in Berkeley Group in the
second half of the financial year, attracted by the visibility of its cash
flows and the potential to deliver positive surprises in the years to come as
activity levels pick up.
Galliford Try (2.2% of the portfolio)
Galliford Try is a leading UK construction business focused on three areas -
Building, Infrastructure and Specialist Services. The business became a
stand-alone construction group in 2020 when it de-merged its housebuilding
business, Linden Homes to Bovis Homes, to create Vistry. At the time of the
de-merger, Galliford Try received a £300 million cash payment from Vistry and
also transferred its debt to Vistry. This was important as it left Galliford
Try as a well-capitalised business, regarded by its customers as a reliable
counterparty and therefore putting it in a strong position to win positions on
long-term frameworks within the public sector and regulated industries. These
frameworks provide excellent revenue visibility, with 92% of FY25 revenues and
70% of FY26 revenues already secured at the time of its FY24 results in
mid-2024. The strong balance sheet also allowed the company to become an
industry leader on the treatment of its suppliers, making a commitment to
prompt payment of invoices, thereby underlining its commitment to ESG.
Galliford Try originally set ambitious targets in 2021, seeking to grow
revenues from £1.1 billion to £1.6 billion and operating margin from 2.0% to
3.0% by 2026. Having achieved these targets two years early, the company
announced new targets at its Capital Markets Day in May 2024. The CEO set
out upgraded revenue and operating margin targets - £2.2 billion revenues and
4.0% operating margin. The Portfolio Manager's confidence that Galliford Try
can achieve these targets is based on a number of factors. The market backdrop
has improved in recent years, with the entire industry shifting towards
greater pricing discipline, after a series of high-profile company failures in
the previous decade caused by over-indebted balance sheets and over-aggressive
assumptions when bidding on contracts. Galliford Try has taken a conservative
approach to risk management, ensuring appropriate terms and conditions when
bidding on contracts, sticking carefully to minimum margin thresholds and
requiring board approval for larger bids. The growing need to upgrade the UK's
deteriorating infrastructure has created a large number of bidding
opportunities, meaning that Galliford Try can be extremely selective when
choosing which contracts it will accept. This has driven its focus on low-risk
contracts in the public sector, with a focus on sectors such as Water where
there is a huge runway for growth. Galliford Try is also moving up the value
chain, using its incumbent position in Building and Infrastructure to grow in
Specialist Services such as fire protection. It has also re-established
itself in Affordable Homes, which is a division where it has historic
expertise, having operated in this area before selling the division to Bovis
at the time of the de-merger.
The Portfolio Manager considers Galliford Try to be a good example of how it
can deliver for our shareholders on both income and capital growth. The
dividend outlook is supported by the strong balance sheet and high revenue
visibility. This has allowed the management team to announce special dividends
and buybacks, alongside an attractive ordinary dividend (dividend yield around
5%). The share price is supported by the strong earnings growth outlook,
while the Portfolio Manager also sees potential for valuation re-rating, as
the low-teens Price/Earnings ratio does not reflect the growth potential. The
new 2030 targets would imply mid-high teens earnings and dividend growth by
2030. The share price is also supported by cash and infrastructure investments
of 208p/share. The Portfolio Manager added to the holding in February 2020,
shortly after the de-merger of Linden Homes, and purchased more shares in
October/November 2023 as it gained conviction in the delivery of the strategic
plan.
Directors' Report (extract)
The Directors present their report and the audited financial statements of the
Company for the year ended
30 September 2024.
Results and Dividends
Interim dividends of 5.7 pence per share were paid in March, June and
September 2024. The Board has declared that a fourth interim dividend for
the year to 30 September 2024 of 5.8 pence per share is payable on 10 January
2025 to shareholders on the register on 6 December 2024. The ex-dividend date
is 5 December 2024.
Principal Activity and Status
The Company is registered as a public limited company in England and Wales
under company number 2648152. The Company is an investment company within
the meaning of Section 833 of the Companies Act 2006, carries on business as
an investment trust and is a member of the Association of Investment
Companies.
The Company has applied for and has been accepted as an investment trust under
Sections 1158 and 1159 of the Corporation Tax Act 2010 and Part 2 Chapter 1 of
Statutory Instrument 2011/2999. This approval relates to accounting periods
commencing on or after 1 October 2012. The Directors are of the opinion that
the Company has conducted its affairs so as to be able to retain such
approval.
The Company intends to manage its affairs so that its Ordinary shares continue
to be a qualifying investment for inclusion in the stocks and shares component
of an Individual Savings Account.
Capital Structure and Voting Rights
The Company's issued share capital at 30 September 2024 consisted of
47,781,522 Ordinary shares of 25 pence each (2023: 47,646,522) and there were
1,397,245 Ordinary shares held in treasury (2023: 1,532,245), representing
2.8% (2023: 3.1%) of the issued share capital as at that date.
During the year, no Ordinary shares were bought back into treasury (2023:
100,417) and 135,000 Ordinary shares were issued from treasury (2023:
275,000).
There have been no changes to the Company's capital structure or voting rights
since the year end.
At a general meeting of the Company, each Ordinary shareholder is entitled to
one vote on a show of hands and, on a poll, to one vote for every Ordinary
share held.
Management Agreement
The Company has appointed abrdn Fund Managers Limited ("AFML"), a wholly owned
subsidiary of abrdn plc, as its alternative investment fund manager (the
"Manager"). AFML has been appointed to provide investment management, risk
management, administration and company secretarial services, and promotional
activities to the Company. The Company's portfolio is managed by abrdn
Investment Management Limited (the "Investment Manager") by way of a group
delegation agreement in place between AFML and the Investment Manager.
In addition, AFML has sub-delegated administrative and secretarial services to
abrdn Holdings Limited.
With effect from 1 October 2023, the Company's management fee is calculated as
0.55% of net assets (previously the Company's management fee was calculated as
0.65% per annum of net assets up to £175 million and at a rate of 0.55% of
net assets above this threshold).
The Manager also receives a separate fee for the provision of promotional
activities to the Company.
Further details of the fees payable to the Manager are shown in notes 3 and 4
to the financial statements.
The management agreement is terminable on not less than six months' notice. In
the event of termination by the Company on less than the agreed notice period,
compensation is payable to the Manager in lieu of the unexpired notice period.
External Agencies
The Board has contractually delegated to external agencies, including the
Manager and other service providers, certain services including: the
management of the investment portfolio, the day-to-day accounting and company
secretarial requirements, the depositary services (which include the custody
and safeguarding of the Company's assets) and the share registration services.
Each of these contracts was entered into after full and proper consideration
by the Board of the quality and cost of services offered in so far as they
relate to the affairs of the Company. In addition, ad hoc reports and
information are supplied to the Board as requested.
Substantial Interests
Information provided to the Company by major shareholders pursuant to the
FCA's Disclosure, Guidance and Transparency Rules are published by the Company
via a Regulatory Information Service.
The table below sets out the interests in 3% or more of the issued share
capital of the Company, of which the Board was aware as at 30 September 2024.
Shareholder Number of Ordinary shares % held
Hargreaves Lansdown 11,995,187 25.1
Interactive Investor 11,962,449 25.0
A J Bell 3,091,579 6.5
Charles Stanley 2,916,174 6.1
HSDL 2,712,616 5.7
The Company has not been notified of any changes to these holdings as at the
date of this Report.
Directors
Sarika Patel is the Chair, Caroline Hitch is the Senior Independent Director,
Mark Little is Chair of the Audit Committee and Nick Timberlake is Chair of
the Remuneration & Management Engagement Committee.
The Chair is responsible for providing effective leadership to the Board, by
setting the tone of the Company, demonstrating objective judgement and
promoting a culture of openness and debate. The Chair facilitates effective
contribution from each Director and encourages active engagement. In
conjunction with the Company Secretary, the Chair ensures that Directors
receive accurate, timely and clear information to assist them with effective
decision-making. The Chair acts upon the results of the Board evaluation
process by recognising strengths and addressing any weaknesses and also
ensures that the Board engages with major shareholders and that all Directors
understand shareholder views.
The Senior Independent Director acts as a sounding board for the Chair and
acts as an intermediary for other Directors, when necessary. Working closely
with the Remuneration & Management Engagement Committee, the Senior
Independent Director takes responsibility for an orderly succession process
for the Chair and leads the annual appraisal of the Chair's performance. The
Senior Independent Director is also available to shareholders to discuss any
concerns they may have.
The Directors attended scheduled Board and Committee meetings during the year
ended 30 September 2024 as follows (with their eligibility to attend the
relevant meetings in brackets):
Board Meetings Audit Committee Meetings Remuneration & Management
Engagement
Committee
Meetings
Sarika Patel 4 (4) 2 (2) 1 (1)
Caroline Hitch 4 (4) 2 (2) 1 (1)
Mark Little 4 (4) 2 (2) 1 (1)
Nick Timberlake 4 (4) 2 (2) 1 (1)
Jeremy Tigue (A) 2 (2) 1 (1) 0 (0)
(A) Retired from the Board on 20 February 2024.
The Board meets more frequently when business needs require and met an
additional four times during the financial year.
All Directors will retire and being eligible, will offer themselves for
re-election at the Annual General Meeting.
The Board believes that all the Directors remain independent of the Manager
and free from any relationship which could materially interfere with the
exercise of their judgement on issues of strategy, performance, resources and
standards of conduct. The Board believes that, collectively, it has the
requisite high level and range of business, investment and financial
experience to enable it to provide clear and effective leadership and proper
governance of the Company. Following formal performance evaluations, each
Director's performance continues to be effective and demonstrates commitment
to the role, and their individual performances contribute to the long-term
sustainable success of the Company. The Board therefore recommends the
re-election of each of the Directors at the Annual General Meeting.
Board's Policy on Tenure
In normal circumstances, it is the Board's expectation that Directors will not
serve beyond the Annual General Meeting following the ninth anniversary of
their appointment. However, the Board takes the view that independence of
individual Directors is not necessarily compromised by length of tenure on the
Board and that continuity and experience can add significantly to the Board's
strength. The Board believes that recommendation for re-election should be on
an individual basis following a rigorous review which assesses the
contribution made by the Director concerned, but also taking into account the
need for regular refreshment
and diversity.
Board Diversity Policy
The Board recognises the importance of having a range of skilled and
experienced individuals with the right knowledge represented on the Board in
order to allow it to fulfil its obligations. The Board also recognises the
benefits and is supportive of the principle of diversity in its recruitment of
new Board members. The Board will not display any bias for age, gender, race,
sexual orientation, socio-economic background, religion, ethnic or national
origins or disability in considering the appointment of its Directors. In view
of its size, the Board will continue to ensure that all appointments are made
on the basis of merit against the specification prepared for each appointment.
In doing so, the Board will take account of the targets set out in the FCA's
Listing Rules, which are set out in the tables below.
The Board has resolved that the Company's year-end date is the most
appropriate date for disclosure purposes. The following information has been
provided by each Director through the completion of questionnaires. There
have been no changes since the year end.
Board Gender as at 30 September 2024
Number of Board members Percentage of the Board Number of senior positions on the Board Number in executive management Percentage of executive management
Men 2 50%
n/a n/a n/a
(note 3) (note 3) (note 3)
Women 2 50%
(note 1)
Board Ethnic Background as at 30 September 2024
Number of Board members Percentage of the Board Number of senior positions on the Board Number in executive management Percentage of executive management
White British or other White 3 75%
(including minority-white groups)
n/a n/a n/a
(note 3) (note 3) (note 3)
Asian 1 25%
(note 2)
Notes:
1. Meets the target that at least 40% of Directors are women as set out in
UKLR6.6.6(9)(a)(i)
2. Meets the target that at least one individual on the Board is from a
minority ethnic background as set out in UKLR6.6.6(9)(a)(iii)
3. This column is not applicable as the Company is externally managed and
does not have any Executive staff. Specifically, it does not have a CEO or
CFO. The Company considers that the roles of Chairman of the Board, Senior
Independent Director and Chairs of the Audit Committee and Remuneration &
Management Engagement Committee are senior Board positions and, accordingly,
that the Company meets the requirements that at least one of the senior Board
positions is held by a woman as set out in LR.6.6.6(9)(a)(ii)
Directors' and Officers' Liability Insurance
The Company's Articles of Association provide for each of the Directors to be
indemnified out of the assets of the Company against any liabilities incurred
by them as a Director of the Company in defending proceedings, or in
connection with any application to the Court in which relief is granted.
Directors' and Officers' liability insurance cover has been maintained
throughout the year at the expense of the Company.
Management of Conflicts of Interest
The Board has a procedure in place to deal with a situation where a Director
has a conflict of interest. As part of this process, each Director prepares a
list of other positions held and all other conflict situations that may need
to be authorised either in relation to the Director concerned or his or her
connected persons. The Board considers each Director's situation and decides
whether to approve any conflict, taking into consideration what is in the best
interests of the Company and whether the Director's ability to act in
accordance with his or her wider duties is affected. Each Director is required
to notify the Company Secretary of any potential, or actual, conflict
situations that will need authorising by the Board. Authorisations given by
the Board are reviewed at each Board meeting.
Financial Instruments
The financial risk management objectives and policies arising from its
financial instruments and the exposure of the Company to risk are disclosed in
note 15 to the financial statements.
Corporate Governance
The Company is committed to high standards of corporate governance. The Board
is accountable to the Company's shareholders for good governance and this
statement describes how the Company has applied the principles identified in
the UK Corporate Governance Code as published in July 2018 (the "UK Code"),
which is available on the Financial Reporting Council's (the "FRC") website:
frc.org.uk.
The Board has also considered the principles and provisions of the AIC Code of
Corporate Governance as published in February 2019 (the "AIC Code"). The AIC
Code addresses the principles and provisions set out in the UK Code, as well
as setting out additional provisions on issues that are of specific relevance
to the Company. The AIC Code is available on the AIC's website: theaic.co.uk.
It includes an explanation of how the AIC Code adapts the principles and
provisions set out in the UK Code to make them relevant for investment
companies.
The Board considers that reporting against the principles and provisions of
the AIC Code, which has been endorsed by the FRC, provides more relevant
information to shareholders.
The Board confirms that, during the year, the Company complied with the
principles and provisions of the AIC Code and the relevant provisions of the
UK Code, except as set out below.
The UK Code includes provisions relating to:
· interaction with the workforce (provisions 2, 5 and 6).
· the role and responsibility of the chief executive (provisions 9 and 14).
· requirement to establish a nomination committee and describe the work of
the nomination committee (provisions 17 and 23).
· the chair shall not be a member of the audit committee (provision 24).
· the need for an internal audit function (provision 25).
· previous experience of the chairman of a remuneration committee
(provision 32); and
· executive directors' remuneration (provisions 33 and
36 to 40).
The Board considers that these provisions, with the exception of the
requirement to establish a nomination committee and describe the work of the
nomination committee, are not relevant to the position of the Company, being
an externally managed investment company. In particular, all of the Company's
day-to-day management and administrative functions are outsourced to third
parties. As a result, the Company has no executive directors, employees or
internal operations. The Board has determined that there is no need for the
Company to have a standalone Nomination Committee given the number of
Directors on the Board. The functions traditionally undertaken by a
nomination committee are fulfilled by the Board.
The Company has therefore not reported further in respect of these provisions.
Full details of the Company's compliance with the AIC Code of Corporate
Governance can be found on its website.
Board Committees
The Board has appointed two committees, as set out below. Copies of their
terms of reference, which clearly define the responsibilities and duties of
each committee, are available on the Company's website, or upon request from
the Company. The terms of reference of each of the committees are reviewed and
re-assessed by the Board for their adequacy on an ongoing basis.
Audit Committee
The role and function of the Audit Committee is covered in the Audit Committee
Report.
Remuneration & Management Engagement Committee
The Remuneration & Management Engagement Committee comprises the full
Board and is chaired by Nick Timberlake. The main responsibilities of the
Committee include:
· monitoring and evaluating the performance of the Manager.
· reviewing at least annually the continued retention of the Manager.
· reviewing at least annually the terms of appointment of the Manager
including, but not limited to, the level and method of remuneration and the
notice period of the Manager.
· reviewing the performance and remuneration of the other key service
providers to the Company; and
· determining the Directors' remuneration policy and level of remuneration.
The Committee met once during the year to 30 September 2024 and undertook a
review of the management of the Company and its performance. Following
conclusion of the review, the Committee recommended to the Board that the
continuing appointment of the Manager and other key service providers was in
the best interests of the shareholders and the Company as a whole.
Going Concern
The Company's assets consist mainly of equity shares in companies listed on
recognised stock exchanges and are considered by the Board to be realisable
within a short timescale under normal market conditions. The Board has set
overall limits for borrowing and reviews regularly the Company's level of
gearing, cash flow projections and compliance with banking covenants, when
applicable. The Board has also performed stress testing and liquidity
analysis.
The Company's Articles of Association require that at every fifth Annual
General Meeting, the Directors shall propose an ordinary resolution to effect
that the Company continues as an investment trust. An ordinary resolution
approving the continuation of the Company for five years was passed at the
Annual General Meeting on 4 February 2022. The next continuation vote will
take place at the Annual General Meeting to be held in 2027.
As at 30 September 2024, the Company had a £30 million (2023: £30 million)
revolving credit facility with The Royal Bank of Scotland International
Limited, London Branch. £22.5 million was drawn at the end of the financial
year (2023: £21 million). The revolving credit facility matures on 23 June
2026.
The Directors are mindful of the Principal Risks and Uncertainties disclosed
in the Strategic Report and they believe that the Company has adequate
financial resources to continue its operational existence for a period of not
less than 12 months from the date of approval of this Report. They have
arrived at this conclusion having confirmed that the Company's diversified
portfolio of realisable securities is sufficiently liquid and could be used to
meet short-term funding requirements were they to arise. They have also
reviewed the revenue and ongoing expenses forecasts for the coming year.
Accordingly, the Directors believe that it is appropriate to continue to adopt
the going concern basis in preparing the financial statements.
Accountability and Audit
The Directors who held office at the date of approval of this Directors'
Report confirm that, so far as they are each aware, there is no relevant audit
information of which the Company's Auditor is unaware; and each Director has
taken all the steps that he/she ought to have taken as a Director to make
himself/herself aware of any relevant audit information and to establish that
the Company's Auditor is aware of that information.
Independent Auditor
As explained in the Audit Committee's Report, Johnston Carmichael LLP was
appointed as the Company's Auditor by shareholders at the Annual General
Meeting on 20 February 2024.
The Board will propose resolutions at the Annual General Meeting to re-appoint
Johnston Carmichael LLP as the Company's Auditor for the ensuing year and to
authorise the Directors to determine its remuneration.
Relations with Shareholders
The Directors place a great deal of importance on communications with
shareholders. Shareholders and investors may obtain up to date information on
the Company through its website and from the Manager by emailing
equity.income@abrdn.com.
The Board's policy is to communicate directly with shareholders and their
representative bodies without the involvement of the management group
(including the Company Secretary or the Manager) in situations where direct
communication is required, and representatives from the Manager meet with
major shareholders on at least an annual basis in order to gauge their views,
and report back to the Board on these meetings. In addition, the Company
Secretary only acts on behalf of the Board, not the Manager, and there is no
filtering of communication. At each Board meeting the Board receives full
details of any communication from shareholders to which the Chair responds
personally
as appropriate.
The Company's Annual General Meeting provides a forum for communication
primarily with private shareholders and is attended by the Board. The Manager
makes a presentation to the meeting and all shareholders have the opportunity
to put questions to both the Board and the Manager at the meeting. The Board
will also be hosting an Online Pre-AGM Investor Session to engage directly
with shareholders, regardless of their location. Details on how to register
for the event are set out in the Chair's Statement.
The notice of the Annual General Meeting is sent out at least 20 working days
in advance of the meeting. All shareholders have the opportunity to put
questions to the Board and Manager at the meeting.
Additional Information
Where not provided elsewhere in the Directors' Report, the following provides
the additional information required to be disclosed by Part 15 of the
Companies Act 2006.
There are no restrictions on the transfer of Ordinary shares in the Company
issued by the Company other than certain restrictions which may from time to
time be imposed by law (for example, the Market Abuse Regulation). The Company
is not aware of any agreements between shareholders that may result in a
transfer of securities and/or voting rights.
The rules governing the appointment of Directors are set out in the Directors'
Remuneration Report. The Company's Articles of Association may only be amended
by a special resolution passed at a general meeting of shareholders.
The Company is not aware of any significant agreements to which it is a party
that take effect, alter or terminate upon a change of control of the Company
following a takeover. Other than the management agreement with the Manager,
the Company is not aware of any contractual or other agreements which are
essential to its business which could reasonably be expected to be disclosed
in the Directors' Report.
Audit Committee's Report
The Audit Committee presents its Report for the year ended 30 September 2024.
Committee Composition
During the financial year the Committee was chaired by Mark Little. Mark
Little is a Chartered Accountant and has recent and relevant financial
experience.
The Committee comprises all Non-Executive Directors. Given the size of the
Board, and the skillset and continued independence of Sarika Patel, the Board
believes that it is appropriate for all the independent Directors, including
the Chair of the Board, to constitute the Audit Committee. The Board is
satisfied that the Committee as a whole has competence relevant to the
investment trust sector.
Functions of the Audit Committee
The principal role of the Audit Committee is to assist the Board in relation
to the reporting of financial information, the review of financial controls
and the management of risk.
The Committee has defined terms of reference which are reviewed and
re-assessed for their adequacy on at least an annual basis. Copies of the
terms of reference are published on the Company's website and are available
from the Company on request.
The Committee's main functions are listed below:
· to review and monitor the internal control systems and risk management
systems (including review of non-financial risks) on which the Company is
reliant (the Directors' statement on the Company's internal controls and risk
management is set out below).
· to consider whether there is a need for the Company to have its own
internal audit function.
· to monitor the integrity of the half-yearly and annual financial
statements of the Company and any formal announcements relating to the
Company's financial performance, by reviewing, and challenging where
necessary, the actions and judgements of the Manager.
· to review, and report to the Board on, the significant financial
reporting issues and judgements made in connection with the preparation of the
Company's financial statements, half-yearly financial reports, any formal
announcements relating to the Company's financial performance.
· to review the content of the Annual Report and advise the Board on
whether, taken as a whole, it is fair, balanced and understandable and
provides the information necessary for shareholders to assess the Company's
position and performance, business model and strategy.
· to meet with the Auditor to review the proposed audit programme of work
and the findings of the Auditor. The Committee shall also use this as an
opportunity to assess the effectiveness of the audit process.
· to develop and implement policy on the engagement of the Auditor to
supply non-audit services. Non-audit fees paid to the Auditor during the year
under review amounted to £nil (2023 £nil). All non-audit services must be
approved in advance by the Audit Committee and will be reviewed in the light
of relevant guidance and statutory requirements regarding the provision of
non-audit services by the external audit firm, and the need to maintain the
Auditor's independence.
· to review a statement from the Manager detailing the arrangements in
place within the Manager whereby staff may, in confidence, escalate concerns
about possible improprieties in matters of financial reporting or other
matters.
· to make recommendations to the Board in relation to the appointment of
the Auditor and to approve the remuneration and terms of engagement of the
Auditor; and
· to monitor and review the Auditor's independence, objectivity,
effectiveness, resources and qualification, taking into consideration relevant
UK professional and regulatory requirements.
Activities During the Year
The Audit Committee met twice during the year when, amongst other things, it
considered the Annual Report and the Half-Yearly Financial Report in detail.
Representatives of the Manager's internal audit, risk and compliance
departments reported to the Committee at these meetings on matters such as
internal control systems, risk management and the conduct of the business in
the context of its regulatory environment. No significant weaknesses in the
control environment were identified. The Committee, therefore, concluded that
there were no significant issues which required to be reported to the Board.
The Financial Reporting Council (the "FRC") Audit Quality Review ("AQR") team
completed an inspection of the audit of the financial statements for the year
ended 30 September 2023. It is the FRC's usual practice to carry out such
reviews on annual reports of a selection of companies each year. This was a
limited inspection covering only certain aspects of the audit. We have
considered the report, and the result of the review raised no issues which
cause doubt on the quality of abrdn Equity Trust Income plc's external audit.
Internal Controls and Risk Management
The Board confirms that there is an ongoing process for identifying,
evaluating and managing the Company's significant business and operational
risks, that has been in place for the year ended 30 September 2024 and up to
the date of approval of the Annual Report, is regularly reviewed by the Board
and accords with the FRC's guidance on internal controls.
The Board has overall responsibility for ensuring that there is a system of
internal controls and risk management in place and a process for reviewing its
effectiveness. Day-to-day measures have been delegated to the Manager with an
effective process of reporting to the Board for supervision and control. The
system of internal controls and risk management is designed to meet the
Company's particular needs and the risks to which it is exposed. Accordingly,
the system of internal control and risk management is designed to manage,
rather than eliminate, the risk of failure to achieve business objectives and,
by its nature, can only provide reasonable and not absolute assurance against
material misstatement or loss.
The design, implementation and maintenance of controls and procedures to
safeguard the assets of the Company and to manage its affairs properly extends
to operational and compliance controls and risk management. The Board, through
the Audit Committee, has prepared its own risk register which lists potential
risks including those set out in the Strategic Report. The Board considers the
potential cause and possible effect of these risks as well as reviewing the
controls in place to mitigate them.
Clear lines of accountability have been established between the Board and the
Manager. The Board receives regular reports covering key performance and risk
indicators and considers control and compliance issues brought to its
attention. In carrying out its review, the Board has had regard to the
activities of the Manager, including its internal audit and compliance
functions.
The Board has reviewed the Manager's process for identifying and evaluating
the significant risks faced by the Company and the policies and procedures by
which these risks are managed. The Board has also reviewed the effectiveness
of the Manager's system of internal control including its annual internal
controls report prepared in accordance with the International Auditing and
Assurance Standards Board's International Standard on Assurances Engagements
("ISAE") 3402, "Assurance Reports on Controls at a Service Organisation". Any
weaknesses identified are reported to the Audit Committee and timetables are
agreed for implementing improvements to systems. The implementation of any
remedial action required is monitored and feedback provided to the Audit
Committee.
The key components designed to provide effective internal control are outlined
below:
· written agreements are in place which specifically define the roles and
responsibilities of the Manager and other third-party service providers.
These agreements are reviewed periodically by the Board.
· the Board and Manager have agreed clearly defined investment criteria,
specified levels of authority and exposure limits. Reports on these issues,
including performance statistics and investment valuations, are regularly
submitted to the Board.
· the Manager prepares forecasts and management accounts which allow the
Board to assess the Company's activities and review its performance.
· as a matter of course the Manager's internal audit and compliance
departments continually review its operations.
· bi-annually, the Audit Committee carries out an assessment of internal
controls by considering documentation from the Manager, including the internal
audit and compliance functions and reports to the Board on its conclusions;
and
· the Audit Committee reviews internal control reports from its third-party
service providers including the Depositary, BNP Paribas S.A., London Branch
and the Registrar, Computershare Investor Services PLC.
The Board has considered the need for an internal audit function. The Company
has no employees, and the day-to-day management of the Company's assets has
been delegated to abrdn which has its own compliance and internal control
systems. The Board has therefore decided to place reliance on those systems
and internal audit procedures and has concluded that it is not necessary for
the Company to have its own internal audit function.
Financial Statements and Significant Issues
During its review of the Company's financial statements for the year ended 30
September 2024, the Audit Committee considered the following significant
issues, in particular those communicated by the Auditor during its planning
and reporting of the year-end audit:
Valuation, Existence and Ownership of Investments
How the issue was addressed - The Company uses the services of an independent
depositary (BNP Paribas S.A., London Branch) (the "Depositary") to hold the
assets of the Company. An annual internal control report is received from the
Depositary and reviewed by the Audit Committee. This provides details of the
Depositary's control environment. The investment portfolio is reconciled
regularly by the Manager. The portfolio is reviewed and verified by the
Manager on a regular basis and management accounts, including a full portfolio
listing, are prepared quarterly and are considered at the quarterly meetings
of the Board. The valuation of investments is undertaken in accordance with
the accounting policies disclosed in notes 1(b) and 1(c) to the financial
statements.
The Committee satisfied itself that there were no issues associated with the
valuation, existence and ownership of the investments which required to be
addressed.
Recognition of Dividend Income
How the issue was addressed - The recognition of dividend income is undertaken
in accordance with accounting policy note 1(d) to the financial statements.
Special dividends are allocated to the capital or revenue accounts according
to the nature of the payment and the specific circumstances. Management
accounts are reviewed by the Board on a quarterly basis and discussions take
place with the Manager regarding the allocation of any special dividends that
have been received.
The Committee concluded that there were no issues associated with the
recognition of dividend income which required to be addressed.
Review of Financial Reporting
The Committee, when considering the draft Annual Report and financial
statements for the year ended 30 September 2024, concluded that taken as a
whole, it is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company's position and performance,
business model and strategy. In reaching this conclusion, the Committee has
assumed that the reader of the Annual Report and financial statements would
have a reasonable knowledge of the investment industry in general and of
investments trusts in particular.
Review of Independent Auditor
The Audit Committee has reviewed the effectiveness of the independent Auditor,
Johnston Carmichael LLP ("Johnston Carmichael"), including:
· Independence - the Auditor discusses with the Audit Committee, at least
annually, the steps it takes to ensure its independence and objectivity and
makes the Committee aware of any potential issues, explaining all relevant
safeguards.
· Quality of audit work - including the ability to resolve issues in a
timely manner (identified issues are satisfactorily and promptly resolved),
its communications/presentation of outputs (the explanation of the audit plan,
any deviations from it and the subsequent audit findings are comprehensive and
comprehensible) and working relationship with management (the Auditor has a
constructive working relationship with the Manager).
· Quality of people and service - including continuity and succession plans
(the audit team is made up of sufficient, suitably experienced staff with
provision made for knowledge of the investment trust sector and retention on
rotation of the senior statutory auditor).
· Fees - including current and proposed fees for future years.
Details of the amounts paid to Johnston Carmichael LLP during the year for
audit services are set out in note 4 to the financial statements.
Tenure of the Independent Auditor
Johnston Carmichael LLP was appointed as the Company's independent Auditor and
approved by shareholders at the Annual General Meeting on 20 February 2024. In
accordance with present professional guidelines the senior statutory auditor
is rotated after no more than five years. The year ended 30 September 2024
is the first year during which the present senior statutory auditor has
served.
The next compulsory audit tender of the Company is due to take place by 2034
in compliance with the FRC Guidance on audit tenders.
The Committee is satisfied with the quality of the work and service carried
out by Johnston Carmichael LLP and with the level of fees. The Committee is
also satisfied that Johnston Carmichael LLP is independent and therefore
supports the recommendation to the Board that the re-appointment of Johnston
Carmichael LLP be put to shareholders for approval at the Annual General
Meeting.
On behalf of the Audit Committee
Mark Little
Chair of the Audit Committee
27 November 2024
Statement of Directors' Responsibilities in Respect of the Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors are required to prepare the
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 UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in the financial
statements.
· assess the Company's ability to continue as a going concern, disclosing,
as applicable, matters related to going concern; 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
enable them to ensure that its financial statements comply with the Companies
Act 2006. They are responsible for such internal control as they determine is
necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error, and 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, Directors' Report, Directors' Remuneration
Report and Statement of Corporate Governance that comply with that law and
those regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website, but not
for the content of any information included on the website that has been
prepared or issued by third parties. Legislation in the UK governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
The Directors confirm that to the best of their knowledge:
· the financial statements have been prepared in accordance with applicable
accounting standards and give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company; and
· the Strategic Report and Directors' Report include 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 the
Company faces.
The Board considers the Annual Report and accounts, 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.
On behalf of the Board
Sarika Patel
Chair
27 November 2024
Statement of Comprehensive Income
2024 2023
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Net gains/(losses) on investments at fair value 9 - 9,452 9,452 - (6,443) (6,443)
Currency losses - - - - (1) (1)
Income 2 12,735 219 12,954 12,598 - 12,598
Investment management fee 3 (252) (588) (840) (302) (704) (1,006)
Administrative expenses 4 (459) - (459) (508) - (508)
Net return before finance costs and taxation 12,024 9,083 21,107 11,788 (7,148) 4,640
Finance costs 5 (454) (1,060) (1,514) (401) (936) (1,337)
Return before taxation 11,570 8,023 19,593 11,387 (8,084) 3,303
Taxation 6 (560) - (560) (278) - (278)
Return after taxation 11,010 8,023 19,033 11,109 (8,084) 3,025
Return per Ordinary share 8 23.05p 16.80p 39.85p 23.43p (17.05p) 6.38p
The total column of this statement represents the profit and loss account of
the Company.
All revenue and capital items in the above statement derive from continuing
operations.
The accompanying notes are an integral part of the financial statements.
Statement of Financial Position
2024 2023
Notes £'000 £'000
Fixed assets
Investments at fair value through profit or loss 9 177,978 165,734
Current assets
Debtors 10 1,411 1,611
Investments in AAA-rated money market funds 1,311 3,027
Cash and short-term deposits 591 1,196
3,313 5,834
Current liabilities
Creditors: amounts falling due within one year
Bank loan 11 (22,462) (20,941)
Other creditors 11 (414) (754)
(22,876) (21,695)
Net current liabilities (19,563) (15,861)
Net assets 158,415 149,873
Capital and reserves
Called-up share capital 12 12,295 12,295
Share premium account 52,043 52,043
Capital redemption reserve 12,616 12,616
Capital reserve 13 71,161 62,735
Revenue reserve 10,300 10,184
Equity shareholders' funds 158,415 149,873
Net asset value per Ordinary share 14 331.54p 314.55p
The financial statements were approved by the Board of Directors and
authorised for issue on 27 November 2024 and were signed on its behalf by:
Sarika Patel
Chair
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Equity
For the year ended 30 September 2024
Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Balance at 30 September 2023 12,295 52,043 12,616 62,735 10,184 149,873
Return after taxation(A) - - - 8,023 11,010 19,033
Sale of own shares from treasury - - - 403 - 403
Dividends paid during the year 7 - - - - (10,894) (10,894)
Balance at 30 September 2024 12,295 52,043 12,616 71,161 10,300 158,415
For the year ended 30 September 2023
Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Balance at 30 September 2022 12,295 52,043 12,616 70,276 10,269 157,499
Return after taxation(A) - - - (8,084) 11,109 3,025
Purchase of own shares for treasury - - - (315) - (315)
Sale of own shares from treasury - - - 858 - 858
Dividends paid during the year 7 - - - - (11,194) (11,194)
Balance at 30 September 2023 12,295 52,043 12,616 62,735 10,184 149,873
(A) per the Statement of Comprehensive Income.
The capital reserve at 30 September 2024 is split between realised gains of
£78,223,000 and unrealised losses of £7,062,000 (30 September 2023: realised
gains of £80,674,000 and unrealised losses of £17,939,000).
The Company's reserves available to be distributed by way of dividends or
buybacks which includes the revenue reserve and the realised element of the
capital reserve amount to £88,523,000 (30 September 2023 : £90,858,000).
The accompanying notes are an integral part of the financial statements.
Notes to the Financial Statements
For the year ended 30 September 2024
1. Accounting policies
(a) Basis of accounting and going concern. The Financial Statements have been
prepared in accordance with Financial Reporting Standard 102 and with the
Statement of Recommended Practice 'Financial Statements of Investment Trust
Companies and Venture Capital Trusts' issued in July 2022. They have also been
prepared on the assumption that approval as an investment trust will continue
to be granted. The Financial Statements have been prepared on a going concern
basis.
The Company had net current liabilities at the year end. The Company's assets
consist mainly of equity shares in companies listed on recognised stock
exchanges and are considered by the Board to be realisable within a short
timescale under normal market conditions. The Board has set overall limits for
borrowing and reviews regularly the Company's level of gearing, cash flow
projections and compliance with banking covenants, when applicable. The Board
has also performed stress testing and liquidity analysis.
The Company's Articles require that at every fifth AGM, the Directors shall
propose an Ordinary Resolution to effect that the Company continues as an
investment trust. An Ordinary Resolution approving the continuation of the
Company for the next five years was passed at the AGM on 4 February 2022. The
next continuation vote will take place at the AGM to be held in 2027.
As at 30 September 2024, the Company had a £30 million (2023: £30 million)
revolving credit facility with The Royal Bank of Scotland International
Limited, London Branch. £22.5 million was drawn at the end of the financial
year (2023: £21 million). The revolving credit facility matures on 23 June
2026. A replacement option will be sought in advance of the expiry of the
facility, or should the Board decide not to renew this facility, any
outstanding borrowing would be repaid through the proceeds of equity sales as
required.
The Directors are mindful of the Principal Risks and Uncertainties disclosed
in the Strategic Report and they believe that the Company has adequate
financial resources to continue its operational existence for a period of not
less than 12 months from the date of approval of this Report. They have
arrived at this conclusion having confirmed that the Company's diversified
portfolio of realisable securities is sufficiently liquid and could be used to
meet short-term funding requirements were they to arise. They have also
reviewed the revenue and ongoing expenses forecasts for the coming year and
expect to secure a replacement facility upon expiry of the current facility.
Accordingly, the Directors believe that it is appropriate to continue to adopt
the going concern basis in preparing the financial statements.
As an investment fund the Company has the option under FRS 102, which it has
taken, not to present a cash flow statement. A cash flow statement is not
required when an investment fund meets all the following conditions:
substantially all of the entity's investments are highly liquid, substantially
all of the entity's investments are carried at market value, and the entity
provides a Statement of Changes in Equity. The Directors have assessed that
the Company meets all of these conditions.
The accounting policies applied are unchanged from the prior year and have
been applied consistently.
All values are rounded to the nearest thousand pounds (£'000) except where
indicated otherwise.
(b) Investments. Investments have been designated upon initial recognition as fair
value through profit or loss in accordance with IAS 39. As permitted by FRS
102, the Company has elected to apply the recognition and measurement
provisions of IAS 39 Financial Instruments. This is done because all
investments are considered to form part of a group of financial assets which
is evaluated on a fair value basis, in accordance with the Company's
documented investment strategy, and information about the grouping is provided
internally on that basis.
Investments are recognised and de-recognised at trade date where a purchase or
sale is under a contract whose terms require delivery to be made within the
timeframe established by the market concerned and are measured initially at
fair value. Subsequent to initial recognition, investments are valued at fair
value. For listed investments, this is deemed to be bid market prices or
closing prices for SETS stocks sourced from the London Stock Exchange. SETS is
the London Stock Exchange electronic trading service covering most of the
market including all the FTSE All-Share and the most liquid AIM constituents.
Gains and losses arising from changes in fair value are included in net profit
or loss for the period as a capital item in the Statement of Comprehensive
Income and are ultimately recognised in the capital reserve.
(c) Investments in AAA-rated money market funds. Money market funds investments
are used by the Company to provide additional short-term liquidity. Due to
their short-term nature, they are recognised in the Financial Statements as a
current asset and are included at fair value through profit and loss.
The Company invests in a AAA-rated money-market fund, Aberdeen Standard
Liquidity Fund, which is managed by abrdn Investments Limited. The share class
of the money market fund in which the Company invests does not charge a
management fee.
(d) Income. Income from equity investments, including taxes deducted at source, is
included in revenue by reference to the date on which the investment is quoted
ex-dividend. Special dividends are credited to revenue or capital according to
the circumstances. The Company carries out special cum-dividend and special
ex-dividend trades as a portfolio management tool to both enhance income and
manage long-term positions. The income generated from such trades is allocated
to the revenue column of the Statement of Comprehensive Income and recognised
on the date of the transaction. This has the effect of increasing income and
is offset by a decrease in unrealised gains/(losses) on investments. Foreign
income is converted at the exchange rate applicable at the time of receipt.
Interest receivable on cash at bank and in hand and on the money market fund
is accounted for on an accruals basis.
(e) Expenses and interest payable. Expenses are accounted for on an accruals
basis. Expenses are charged to capital when they are incurred in connection
with the maintenance or enhancement of the value of investments. In this
respect, the investment management fee and relevant finance costs are
allocated between revenue and capital in line with the Board's expectation of
returns from the Company's investments over the long term in the form of
revenue and capital respectively (see notes 3 and 5).
Transaction costs incurred on the purchase and disposal of investments are
recognised as a capital item in the Statement of Comprehensive Income.
(f) Dividends payable. Interim dividends are accounted for when they are paid.
Final dividends are accounted on the date that they are approved by
shareholders.
(g) Capital and reserves
Called-up share capital. Share capital represents the nominal value of
Ordinary shares issued. This reserve is not distributable.
Share premium account. The share premium account represents the premium above
nominal value received by the Company on issuing shares net of issue costs.
This reserve is not distributable.
Capital redemption reserve. The capital redemption reserve represents the
nominal value of Ordinary shares repurchased and cancelled. This reserve is
not distributable.
Capital reserve. Gains or losses on realisation of investments and changes in
fair values of investments are included within the capital reserve. The
capital element of the management fee and relevant finance costs are charged
to this reserve. Any associated tax relief is also credited to this reserve.
The part of this reserve represented by realised capital gains is available
for distribution by way of a dividend and for the purpose of funding share
buybacks.
Revenue reserve. The revenue reserve represents accumulated revenue profits
retained by the Company that have not currently been distributed to
shareholders as a dividend.
(h) Taxation. The tax expense represents the sum of the tax currently payable and
deferred tax. Tax payable is based on the taxable profit for the year. Taxable
profit differs from profit before tax as reported in the Statement of
Comprehensive Income because it excludes items of income or expense 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 Statement of Financial Position date.
Deferred taxation is recognised in respect of all timing differences that have
originated but not reversed at the Statement of Financial Position date where
transactions or events that result in an obligation to pay more or a right to
pay less tax in future have occurred at the Statement of Financial Position
date measured on an undiscounted basis and based on enacted tax rates. This is
subject to deferred tax assets only being recognised if it is considered more
likely than not that there will be suitable profits from which the future
reversal of the underlying timing differences can be deducted. Timing
differences are differences arising between the Company's taxable profits and
its results as stated in the accounts that arise from the inclusion of income
and expenses in tax assessments in periods different from those in which they
are recognised in the accounts.
Owing to the Company's status as an investment trust company, and the
intention to continue meeting the conditions required to obtain approval in
the foreseeable future, the Company has not provided deferred tax on any
capital gains and losses arising on the revaluation or disposal of
investments.
(i) Cash and cash equivalents. Cash comprises bank balances and cash held by the
Company. Cash equivalents are short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.
(j) Bank borrowings. Interest bearing bank loans and overdrafts are recorded
initially at fair value, being the proceeds received, net of direct issue
costs. They are subsequently measured at amortised cost. Finance charges,
including premiums payable on settlement or redemption and direct issue costs,
are accounted for on an accruals basis in the Statement of Comprehensive
Income using the effective interest rate method and are added to the carrying
amount of the instrument to the extent that they are not settled in the period
in which they arise.
(k) Treasury shares. When the Company purchases its Ordinary shares to be held in
treasury, the amount of the consideration paid, which includes directly
attributable costs, is net of any tax effect, and is recognised as a deduction
from the capital reserve. When these shares are sold subsequently, the amount
received is recognised as an increase in equity, and any resulting surplus on
the transaction is transferred to the share premium account and any resulting
deficit is transferred from the capital reserve.
(l) Judgements and key sources of estimation uncertainty. Disclosure is required
of judgements and estimates made by management in applying the accounting
policies that have a significant effect on the Financial Statements. Special
dividends are assessed and credited to capital or revenue according to their
circumstances and are considered to require significant judgement. The
Directors do not consider there to be any significant estimates within the
financial statements.
2. Income
2024 2023
£'000 £'000
Income from investments
UK investment income
Ordinary dividends 9,283 8,191
Special dividends 644 101
Special dividends - capital 219 -
Stock dividends 255 101
10,401 8,393
Overseas and Property Income Distribution investment income
Ordinary dividends 2,321 3,998
Special dividends - 85
Stock dividends 131 52
2,452 4,135
12,853 12,528
Other income
Money-market interest 96 67
Bank interest 5 3
101 70
Total income 12,954 12,598
Included in income from investments is £1,161,000 (2023: £195,000) relating
to income from special cum-dividend and special ex-dividend trades. This has
an equal and opposite effect on unrealised gains/(losses) on investments.
3. Investment management fee
2024 2023
£'000 £'000
Charged to revenue reserve 252 302
Charged to capital reserve 588 704
840 1,006
The Company has an agreement with abrdn Fund Managers Limited ("AFML") for the
provision of management services, under which investment management services
have been delegated to abrdn Investment Management Limited. The contract is
terminable by either party on not less than six months' notice.
With effect from 01 October 2023, the management fee is charged at 0.55% of
the Company's net assets (previously 0.65% on the first £175 million of the
Company's net assets, reduced to 0.55% above £175 million). The fee is
payable quarterly in arrears and is chargeable 30% to revenue and 70% to
capital (see note 1(e) for further detail). The balance of fees due at the
year-end was £219,000 (2023: £245,000).
4. Administrative expenses
2024 2023
£'000 £'000
Directors' fees 136 127
Employers' National Insurance 8 7
Fees payable to the Company's Auditor (excluding VAT):
- for the audit of the annual financial statements(A) 37 65
Professional fees 3 14
Depositary fees 19 19
Promotional activities(A)B 109 109
Other expenses 147 167
459 508
A Johnston Carmichael LLP was appointed as the Company's independent Auditor
by shareholders at the Annual General Meeting on 20 February 2024. In 2023,
KPMG LLP was the Company's independent Auditor.
(A) The Company has an agreement with AFML for the provision of promotional
activities. Fees paid under the agreement during the year were £109,000
(2023: £109,000). At 30 September 2024, £55,000 was due to AFML (2023:
£27,000).
With the exception of fees payable to the Company's auditor, irrecoverable VAT
has been included under the relevant expense line above. Irrecoverable VAT on
fees payable to the Company's auditor is included within other expenses.
The Company has no employees.
5. Finance costs
2024 2023
£'000 £'000
On bank loans and overdrafts:
Charged to revenue reserve 454 401
Charged to capital reserve 1,060 936
1,514 1,337
Finance costs are chargeable 30% to revenue and 70% to capital (see note
1(e)).
6. Taxation
2024 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
(a) Analysis of charge for the year
Overseas withholding tax 560 - 560 278 - 278
(b) Factors affecting total tax charge for the year. The corporation tax rate was
25% (2023: 22%). The total tax assessed for the year is lower (2023: lower)
than that resulting from applying the standard rate of corporation tax in the
UK.
A reconciliation of the Company's total tax charge is set out below:
2024 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Return before taxation 11,570 8,023 19,593 11,387 (8,084) 3,303
Corporation tax at a rate of 25% (2023: 22%) 2,892 2,006 4,898 2,505 (1,778) 727
Effects of:
Non-taxable UK dividends (2,563) - (2,563) (1,891) - (1,891)
Non-taxable overseas dividends (475) - (475) (826) - (826)
Expenses not deductible for tax purposes 2 - 2 2 - 2
(Gains)/losses on investments not relievable - (2,418) (2,418) - 1,417 1,417
Excess management expenses and loan relationship losses 144 412 556 210 361 571
Irrecoverable overseas withholding tax 560 - 560 278 - 278
Total taxation 560 - 560 278 - 278
At 30 September 2024, the Company had unutilised management expenses and loan
relationship losses of £36,810,000 (2023: £34,587,000). No deferred tax
asset has been recognised on the unutilised management expenses and loan
relationship losses as it is unlikely that the Company will generate suitable
taxable profits in the future that these tax losses could be deducted against.
7. Dividends on Ordinary shares
2024 2023
£'000 £'000
Amounts recognised as distributions to equity holders in the year:
Fourth interim dividend for 2023 of 5.70p per share (2022: 6.50p) 2,724 3,079
First interim dividend for 2024 of 5.70p per share (2023: 5.70p) 2,723 2,700
Second interim dividend for 2024 of 5.70p per share (2023: 5.70p) 2,724 2,700
Third interim dividend for 2024 of 5.70p per share (2023: 5.70p) 2,723 2,715
10,894 11,194
The fourth interim dividend of 5.80p per Ordinary share, payable on 10 January
2025 to shareholders on the register on 6 December 2024 has not been included
as a liability in the financial statements.
The total dividends paid and proposed in respect of the financial year, which
is the basis on which the requirements of Sections 1158-1159 of the
Corporation Tax Act 2010 are considered, are set out below.
2024 2023
£'000 £'000
First interim dividend for 2024 of 5.70p per share (2023: 5.70p) 2,723 2,700
Second interim dividend for 2024 of 5.70p per share (2023: 5.70p) 2,724 2,700
Third interim dividend for 2024 of 5.70p per share (2023: 5.70p) 2,723 2,715
Fourth interim dividend for 2024 of 5.80p per share (2023: 5.70p) 2,771 2,724
10,941 10,839
8. Return per Ordinary share
2024 2023
£'000 p £'000 p
Basic
Revenue return 11,010 23.05 11,109 23.43
Capital return 8,023 16.80 (8,084) (17.05)
Total return 19,033 39.85 3,025 6.38
Weighted average number of Ordinary shares in issue(A) 47,766,631 47,415,968
(A) Calculated excluding shares held in Treasury where applicable.
9. Investments
2024 2023
£'000 £'000
Fair value through profit or loss
Opening book cost 183,673 195,060
Opening fair value losses on investments held (17,939) (15,330)
Opening fair value 165,734 179,730
Movements in the year:
Purchases at cost 80,819 46,738
Sales - proceeds (78,027) (54,291)
Gains/(losses) on investments 9,452 (6,443)
Closing fair value 177,978 165,734
Closing book cost 185,259 183,673
Closing fair value losses on investments held (7,281) (17,939)
Closing fair value 177,978 165,734
The Company received £78,027,000 (2023: £54,291,000) from investments sold
in the year. The book cost of these investments when they were purchased was
£79,452,000 (2023: £58,125,000). These investments have been revalued over
time and until they were sold any unrealised gains/(losses) were included in
the fair value of the investments.
Transaction costs. During the year, expenses were incurred in acquiring or
disposing of investments classified as fair value through profit or loss.
These have been expensed through capital and are included within losses on
investments in the Statement of Comprehensive Income. The total costs were as
follows:
2024 2023
£'000 £'000
Purchases 408 206
Sales 48 37
Total 456 243
10. Debtors: amounts falling due within one year
2024 2023
£'000 £'000
Amounts due from brokers - 148
Net dividends and interest receivable 1,377 1,078
Other debtors 34 385
1,411 1,611
11. Creditors: amounts falling due within one year
2024 2023
£'000 £'000
Bank loan 22,500 21,000
Unamortised loan arrangement expenses (38) (59)
22,462 20,941
Other creditors
Amounts due to brokers - 305
Investment management fee payable 219 245
Sundry creditors 195 204
414 754
On 23 June 2023, the Company agreed a new three-year £30 million revolving
credit facility with the Royal Bank of Scotland International Limited, which
expires on 23 June 2026.
The facility agreement contains the following covenants:
- The Company's gross assets will not be less than £120 million at any time.
- The Company's total net debt will not exceed 25% of net asset value at any
time.
- The Company should hold a minimum of 45 eligible investments.
All covenants were complied with throughout the year.
At 30 September 2024 and at the date of signing this Report, £22.5 million
had been drawn down from the facility, at a SONIA rate of 6.45%. This is due
to mature on 23 December 2024.
12. Called-up share capital
2024 2023
£'000 £'000
Issued and fully paid:
Ordinary shares of 25p each
Opening balance of 47,646,522 (2023: 47,471,939) Ordinary shares 11,912 11,868
Buyback of nil (2023: 100,417) Ordinary shares - (25)
Issue of 135,000 (2023: 275,000) Ordinary shares 34 69
Closing balance of 47,781,522 (2023: 47,646,522) Ordinary shares 11,946 11,912
Treasury shares
Opening balance of 1,532,245 (2023: 1,706,828) Treasury shares 383 427
Buyback of nil (2023: 100,417) Ordinary shares to Treasury - 25
Issue of 135,000 (2023: 275,000) Ordinary shares from Treasury (34) (69)
Closing balance of 1,397,245 (2023: 1,532,245) treasury shares 349 383
12,295 12,295
During the year, nil Ordinary shares (2023: 100,417) were repurchased for a
consideration of £nil (2023: £315,000), and 135,000 Ordinary shares (2023:
275,000) were issued from Treasury for a consideration of £403,000 (2023:
£858,000). At the year end the number of shares held in Treasury was
1,397,245 (2023: 1,532,245).
13. Capital reserve
2024 2023
£'000 £'000
Opening balance 62,735 70,276
Unrealised gains/(losses) on investment holdings 10,877 (2,612)
Losses on realisation of investments at fair value (1,206) (3,831)
Currency losses - (1)
Investment management fee charged to capital (588) (704)
Finance costs charged to capital (1,060) (936)
Buyback of Ordinary shares into treasury - (315)
Issue of Ordinary shares from treasury 403 858
Closing balance 71,161 62,735
The capital reserve includes investment holding losses amounting to
£7,281,000 (2023: losses of £17,939,000) as disclosed in note 9.
14. Net asset value per share
The net asset value per share and the net assets attributable to Ordinary
shares at the end of the year calculated in accordance with the Articles of
Association were as follows:
2024 2023
Basic
Total shareholders' funds (£'000) 158,415 149,873
Number of Ordinary shares in issue at year end(A) 47,781,522 47,646,522
Net asset value per share 331.54p 314.55p
(A) Excludes shares in issue held in treasury where applicable.
15. Financial instruments
Risk management. The Company's financial instruments comprise securities and
other investments, cash balances, loans and debtors and creditors that arise
directly from its operations; for example, in respect of sales and purchases
awaiting settlement, and debtors for accrued income. The Company also has the
ability to enter into derivative transactions for the purpose of managing
currency and market risks arising from the Company's activities.
The main risks the Company faces from its financial instruments are (i) market
price risk (comprising interest rate risk, currency risk and other price
risk), (ii) liquidity risk and (iii) credit risk.
The Board regularly reviews and agrees policies for managing each of these
risks. The Manager's policies for managing these risks are summarised below
and have been applied throughout the year.
(i) Market risk. The fair value or future cash flows of a financial instrument
held by the Company may fluctuate because of changes in market prices.
This market risk comprises three elements - interest rate risk, currency risk
and other price risk.
Interest rate risk
Interest rate movements may affect:
- the level of income receivable on cash deposits;
- interest payable on the Company's variable rate borrowings.
The possible effects on fair value and cash flows that could arise as a result
of changes in interest rates are taken into account when making investment and
borrowing decisions.
It is the Company's policy to increase its exposure to equity market price
risk through the judicious use of borrowings. When borrowed funds are invested
in equities, the effect is to magnify the impact on Shareholders' funds of
changes - both positive and negative - of revenue and capital returns.
Interest rate profile
The interest rate risk profile of the portfolio of financial assets and
liabilities at the Statement of Financial Position date was as follows:
Weighted
average Weighted
period for average
which interest Fixed Floating
rate is fixed rate rate rate
As at 30 September 2024 Years % £'000 £'000
Assets
Investments in AAA-rated money-market funds - 5.11 - 1,311
Cash deposits - 3.45 - 591
Total assets - - - 1,902
Liabilities
Bank loans 0.25 6.45 22,462 -
Total liabilities - - 22,462 -
Weighted
average Weighted
period for average
which interest Fixed Floating
rate is fixed rate rate rate
As at 30 September 2023 Years % £'000 £'000
Assets
Investments in AAA-rated money-market funds - 5.38 - 3,027
Cash deposits - 3.69 - 1,196
Total assets - - - 4,223
Liabilities
Bank loans 0.22 6.68 20,941 -
Total liabilities - - 20,941 -
The weighted average interest rate is based on the current yield of each
asset, weighted by its market value. The weighted average interest rate on
bank loans is based on the interest rate payable, weighted by the total value
of the loans.
The floating rate assets consist of investments in AAA-rated money-market
funds and cash deposits on call earning interest at prevailing market rates.
All financial liabilities are measured at amortised cost.
Maturity profile. The Company did not hold any assets at 30 September 2024 or
30 September 2023 that had a maturity date. The £22.5 million (2023: £21
million) loan drawn down had a maturity date of 23 December 2024 (2023: 21
December 2023) at the Statement of Financial Position date.
Interest rate sensitivity. The sensitivity analysis below has been determined
based on the exposure to interest rates at the Statement of Financial Position
date and with the stipulated change taking place at the beginning of the
financial year and held constant throughout the reporting period in the case
of instruments that have floating rates.
If interest rates had been 100 basis points higher or lower and all other
variables were held constant, the Company's:
- profit for the year ended 30 September 2024 would decrease/increase by
£206,000 (2023: decrease/increase by £168,000). This is mainly attributable
to the Company's exposure to interest rates on its fixed rate borrowings and
floating rate cash balances.
Currency risk. All of the Company's investments are in Sterling. The Company
can be exposed to currency risk when it receives dividends in currencies other
than Sterling. The current policy is not to hedge this risk, but this policy
is kept under constant review by the Board.
Other price risk. Other price risks (i.e. changes in market prices other than
those arising from interest rate or currency risk) may affect the value of the
quoted investments.
It is the Board's policy to hold an appropriate spread of investments in the
portfolio in order to reduce the risk arising from factors specific to a
particular sector. The Manager actively monitors market prices throughout
the year and reports to the Board. The investments held by the Company are
listed on the London Stock Exchange.
Other price risk sensitivity. If market prices at the Statement of Financial
Position date had been 10% higher or lower while all other variables remained
constant, the return attributable to ordinary shareholders and equity for the
year ended 30 September 2024 would have increased/decreased by £17,798,000
(2023: increase/decrease of £16,573,000). This is based on the Company's
equity portfolio held at each year end.
(ii) Liquidity risk. This is the risk that the Company will encounter difficulty in
meeting obligations associated with financial liabilities.
Liquidity risk is not considered to be significant as the Company's assets
comprise mainly readily realisable securities, which can be sold to meet
funding commitments if necessary. Short-term flexibility is achieved through
the use of loan and overdraft facilities (note 11).
(iii) Credit risk. This is failure of the counterparty to a transaction to discharge
its obligations under that transaction that could result in the Company
suffering a loss.
The risk is not significant, and is managed as follows:
- where the investment manager makes an investment 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;
- investment transactions are carried out with a large number of brokers,
whose credit-standing and credit rating is reviewed periodically by the
investment manager, and limits are set on the amount that may be due from any
one broker;
- cash and money invested in AAA money market funds are held only with
reputable institutions.
None of the Company's financial assets are secured by collateral or other
credit enhancements.
Credit risk exposure. In summary, compared to the amount in the Statement of
Financial Position, the maximum exposure to credit risk at 30 September was as
follows:
2024 2023
Statement of Statement of
Financial Position Maximum exposure Financial Position Maximum exposure
£'000 £'000 £'000 £'000
Current assets
Debtors 1,411 1,411 1,611 1,611
Investments in AAA-rated money market funds 1,311 1,311 3,027 3,027
Cash and short-term deposits 591 591 1,196 1,196
3,313 3,313 5,834 5,834
None of the Company's financial assets is past due or impaired.
Fair values of financial assets and financial liabilities. The fair value of
borrowings is not materially different to the accounts value in the financial
statements of £22,462,000 (note 11).
16. Fair value hierarchy
FRS 102 requires an entity to classify fair value measurements using a fair
value hierarchy that reflects the significance of the inputs used in making
the measurements. The fair value hierarchy shall have the following
classifications:
Level 1: unadjusted quoted prices 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 (i.e. developed using market data) for the asset or liability,
either directly or indirectly.
Level 3: inputs are unobservable (i.e. for which market data is unavailable)
for the asset or liability.
All of the Company's investments are in quoted equities (2023: same) that
are actively traded on recognised stock exchanges, with their fair value being
determined by reference to their quoted bid prices at the reporting date. The
total value of the investments (2024: £177,978,000; 2023: £165,734,000) have
therefore been deemed as Level 1. The investment in AAA rated money market
funds of £1,311,000 (2023: £3,027,000) is considered to be Level 2 under the
fair value hierarchy of FRS 102 due to not trading in an active market.
17. Capital management policies and procedures
The Company's capital management objectives are:
- to ensure that the Company will be able to continue as a going concern; and
- to maximise the income and capital return to its equity shareholders through
an appropriate balance of equity capital and debt. The Board normally seeks to
limit gearing to 15% of net assets. At the year end the Company had gearing of
13.0% of net assets (2023: 11.3%).
The Board monitors and reviews the broad structure of the Company's capital on
an ongoing basis. This review includes the nature and planned level of
gearing, which takes account of the Manager's views on the market and the
extent to which revenue in excess of that which is required to be distributed
should be retained.
The Company's objectives, policies and processes for managing capital are
unchanged from the preceding accounting period. Any year end positions are
presented in the Statement of Financial Position.
The Company does not have any externally imposed capital requirements.
18. Contingent liabilities
As at 30 September 2024 there were no contingent liabilities (2023: none).
19. Segmental Information
The Company is engaged in a single segment of business, which is to invest in
equity securities. All of the Company's activities are interrelated and each
activity is dependent on the others. Accordingly, all significant operating
decisions are based on the Company as one segment.
20. Related party transactions and transactions with the Manager
Related party transactions. Fees payable during the year to the Directors and
their interests in shares of the Company are considered to be related party
transactions and are disclosed within the Directors' Remuneration Report. The
balance of fees due to Directors at the year-end was £31,000 (2023:
£33,000).
Transactions with the Manager. abrdn Fund Managers Limited received fees for
its services as Manager. Further details are provided in notes 3 and 4.
Alternative Performance Measures
Alternative performance measures ('APM') are numerical measures of the
Company's current, historical or future performance, financial position or
cash flows, other than financial measures defined or specified in the
applicable financial framework. The Company's applicable financial framework
includes FRS 102 and the AIC SORP.
The Directors assess the Company's performance against a range of criteria
which are viewed as particularly relevant for closed-ended investment
companies. Where the calculation of an APM is not detailed within the
financial statements, an explanation of the methodology employed is provided
below:
Discount & premium
A discount is the percentage by which the market price of an investment trust
is lower than the Net Asset Value ("NAV") per share. A premium is the
percentage by which the market price per share of an investment trust exceeds
the NAV per share.
30 September 2024 30 September 2023
Share price 321.50p 314.00p
Net asset value per share 331.54p 314.55p
Discount 3.0% 0.2%
Dividend yield
Dividend yield measures the dividend per share as a percentage of the share
price per share.
30 September 2024 30 September 2023
Share price 321.50p 314.00p
Dividend per share 22.90p 22.80p
Dividend yield 7.1% 7.3%
Net gearing
Net gearing measures the total borrowings less cash and cash equivalents
divided by Shareholders' funds, expressed as a percentage. Under AIC reporting
guidance cash and cash equivalents includes amounts due from and to brokers at
the period end as well as cash and short-term deposits.
30 September 2024 30 September 2023
£'000 £'000
Total borrowings a 22,462 20,941
Cash and short-term deposits 591 1,196
Investments in AAA-rated money-market funds 1,311 3,027
Amounts due from brokers - 148
Amounts payable to brokers - (305)
Total cash and investments in AAA-rated money-market funds b 1,902 4,066
Gearing (borrowings less cash & investments in AAA-rated money-market c=(a-b) 20,560 16,875
funds)
Shareholders' funds d 158,415 149,873
Net gearing e=(c/d) 13.0% 11.3%
Ongoing charges ratio
The ongoing charges ratio has been calculated in accordance with guidance
issued by the AIC, which is defined as the total of investment management fees
and recurring administrative expenses and expressed as a percentage of the
average daily net asset values published throughout the period.
30 September 2024 30 September 2023
£'000 £'000
Investment management fees 840 1,006
Administrative expenses 459 508
Less: non-recurring charges(A) (1) (27)
Ongoing charges a 1,298 1,487
Average net assets b 150,930 158,676
Ongoing charges ratio c=(a/b) 0.86% 0.94%
(A) Comprises professional fees not expected to recur.
(B) Calculated in accordance with AIC guidance issued in October 2020 to
include the Company's share of costs of holdings in investment companies on a
look-through basis.
The ongoing charges ratio provided in the Company's Key Information Document
is calculated in line with the PRIIPs regulations, which includes financing
and transaction costs.
Total return
NAV and share price total returns show how the NAV and share price has
performed over a period of time in percentage terms, taking into account both
capital returns and dividends paid to shareholders. Share price and NAV total
returns are monitored against open-ended and closed-ended competitors, and the
Reference Index, respectively.
Share
Year ended 30 September 2024 NAV Price
Opening at 1 October 2023 a 314.6p 314.0p
Closing at 30 September 2024 b 331.5p 321.5p
Price movements c=(b/a)-1 5.4% 2.4%
Dividend reinvestment(A) d 7.9% 8.0%
Total return c+d 13.3% 10.4%
Share
Year ended 30 September 2023 NAV Price
Opening at 1 October 2022 a 331.8p 302.5p
Closing at 30 September 2023 b 314.6p 314.0p
Price movements c=(b/a)-1 (5.2%) 3.8%
Dividend reinvestment(A) d 7.0% 7.6%
Total return c+d 1.8% 11.4%
(A) NAV total return involves investing the net dividend in the NAV of the
Company with debt at fair value on the date on which that dividend goes
ex-dividend. Share price total return involves reinvesting the net dividend in
the share price of the Company on the date on which that dividend goes
ex-dividend.
Additional Notes to the Annual Financial Report
The Annual General Meeting will be held at abrdn's offices, 18 Bishops Square,
London, E1 6EG on Tuesday, 18 February 2025 at 11:30 am The Annual Financial
Report Announcement is not the Company's statutory accounts. The above results
for the year ended 30 September 2024 have been agreed with the auditor and are
an abridged version of the Company's full accounts, which have been approved
and audited with an unqualified report. The 2023 and 2024 statutory accounts
received unqualified reports from the Company's auditor and did not include
any reference to matters to which the auditor drew attention by way of
emphasis without qualifying the reports, and did not contain a statement under
s.498(2) or 498(3) of the Companies Act 2006. The financial information for
2023 is derived from the statutory accounts for 2022 which have been delivered
to the Registrar of Companies. The 2024 accounts will be filed with the
Registrar of Companies in due course.
The Annual Report and Accounts will be posted to shareholders in December
2024. Copies will be available during normal business hours from the
Secretary, abrdn Holdings Limited, 1 George Street, Edinburgh EH2 2LL or from
the Company's website, abrdnequityincome.com *.
Please note that past performance is not necessarily a guide to the future and
that the value of investments and the income from them may fall as well as
rise and may be affected by exchange rate movements. Investors may not get
back the amount they originally invested.
By order of the Board
abrdn Holdings Limited
Company Secretary
27 November 2024
* Neither the Company's website nor the content of any website accessible from
hyperlinks on it (or any other website) is (or is deemed to be) incorporated
into, or forms (or is deemed to form) part of this announcement.
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