REG - Alliance Trust PLC - Final Results <Origin Href="QuoteRef">ATST.L</Origin> - Part 2

Alliance TrustAnnouncement

06/03/2015 07:01

- Part 2: For the preceding part double click  ID:nRSF7182Ga 

Company is invested. 
 
Chief Financial Officer 
 
We made good progress during 2014 to deliver the financial and risk and
control framework necessary to drive our 2020 Vision. 
 
We understand the importance of the dividend to shareholders at this time. Our
total dividend yield of 2.6% at the year end, makes us one of the highest
yielding companies in our peer group. The chart on page 24 of the Annual
Report shows how the growth in the dividend has comfortably outstripped
inflation over the last 48 years. In the last five years, when interest rates
have been running at 0.5%, our total dividend has grown by an average of 8.7%
per year. 
 
We significantly reduced our costs whilst continuing to ensure we meet our
current and future regulatory responsibilities. Outsourcing of our middle and
back office investment process delivered a single, scalable and cost effective
solution. It also ensured that these services will develop in line with
industry best practice. 
 
We also took advantage of the current low interest rate environment by issuing
£100m of unsecured fixed-rate long-term debt at attractive rates, with our
private placement debt issuance being three times oversubscribed. 
 
We strive to continue to deliver clear and concise reporting. We have
therefore reduced the length of our Annual Report this year. By seeking to
implement integrated reporting in future years we hope that our reporting will
continue to benefit all our stakeholders. 
 
What dividend have we declared for 2014 and what guidance are we giving for
2015? 
 
The Company has distributed the net income earned from its investment
portfolio as dividends to shareholders, with the excess above our minimum
dividend guidance treated as a special dividend, in line with our dividend
policy. In 2014 this has resulted in a 3% increase in the ordinary dividend
and a total dividend increase of 14.3%. Our fourth interim dividend of 2.4585p
per share will be paid on 31 March 2015 with a special dividend of 2.546p
payable on 30 June 2015. 
 
Included in the special dividend this year is £8m received from Alliance Trust
Finance. This subsidiary is no longer required and we have started the process
of winding it up. In line with our dividend policy, its distributable reserves
of £8m have been paid to the Company. There are a further £8m of reserves
which, as part of the winding up process, will become distributable to
shareholders in due course. 
 
In the absence of any unforeseen developments for 2015 we expect to be able to
recommend a 3% increase on the 2014 ordinary dividend to a total of 10.13p,
payable quarterly. 
 
Why have we changed the way we report our Group results? 
 
An amendment to accounting standard, IFRS 10 "Consolidated Financial
Statements", became effective from 1 January 2014. The Company is now
categorised as an 'investment entity' and is therefore required to value any
investment in a subsidiary at its fair value through the income statement in
accordance with IAS 39 Financial Instruments, unless the subsidiary provides
services that relate directly to the Company's investment activities. We
reviewed all of the activities of our subsidiaries and, other than Alliance
Trust Services, which continues to be consolidated in the accounts, all of the
Company's subsidiaries are now valued at fair value through the income
statement. The Group Financial Statements on pages 68 to 104 of the Annual
Report therefore now comprise the results of the Company and Alliance Trust
Services only, with prior year comparatives restated. 
 
How do we calculate the Ongoing Charges Ratio (OCR)? 
 
The OCR is calculated as the recurring expenses of running the Trust, divided
by our average net assets over the year. We have complied with the guidance
issued by the Association of Investment Companies and have excluded the
expenses incurred by the Company's subsidiaries, as these do not relate to
running the investment company. In accordance with the guidance, we have
included in the OCR the appropriate proportion of the ongoing charges of any
underlying funds which represent substantial investments, defined as more than
5% of our portfolio. Our investment in Alliance Trust Investments Global
Thematic Opportunities Fund constitutes a substantial investment. 
 
What is integrated reporting? 
 
Integrated reporting is a way of showing how an organisation's strategy,
governance, performance and prospects, in the context of its external
environment, lead to the creation of value in the short, medium and long term.
Companies that have adopted integrated reporting embed non-financial
performance measures within their annual report, alongside the more common
financial performance measures, to show how these add value for shareholders. 
 
Each company is different, and should focus on those nonfinancial matters
which are material to its own business. We have made our first steps towards
integrated reporting within this annual report, setting out how our investment
process assesses the sustainability of the companies in which we invest and
providing information on the measures which underpin our Investing for
Generations strategy. We will continue to develop this in future years'
reports. 
 
What are we doing to keep control of our expenses? 
 
This year we took a number of decisions which significantly reduced our cost
base, whilst continuing to ensure we deliver on our 2020 Vision and meet our
current and future regulatory responsibilities. In September 2014 we announced
£2m of cost savings as a result of the reorganisation of the equity team and
associated support functions such as our former in-house economic research
team. We have also implemented further cost savings from which we expect to
save a further £1m per year. 
 
We expect that the Company's share of these combined savings will amount to
£2m, or 9% of 2013 expenses, of which £0.7m has been achieved this year. The
Company's costs reduced by 3% as a result in 2014 to £20.8m. Our OCR reduced
to 0.60% in 2014 from 0.75%. We will continue to apply strict cost controls
across the business. 
 
How do we recharge internal costs to our subsidiaries? 
 
Alliance Trust Investments earns fees on the capital invested by the Trust in
the funds it manages. The fees reflect market rates payable to a seed capital
investor. The Trust includes such fees in its administration expenses. The
Fixed Income team are charged 100% to Alliance Trust Investments. Prior to the
restructure of the SRI and Global Equity teams into a unified Equities team in
September 2014, the Global Equity team also managed the equity portfolio of
the Trust. The cost of the Global Equity team was split between Alliance Trust
Investments and the Trust according to the average assets under administration
during the period. Following the reorganisation, the costs of the Equities
team were recharged between Alliance Trust Investments and the Trust according
to the same methodology. Both Alliance Trust Investments and Alliance Trust
Savings are also allocated a share of indirect expenses according either to
the subsidiaries' service usage or according to average headcount, as
appropriate. 
 
What is the cost of our buyback programme? 
 
In 2014 we repurchased 1.2% of our shares compared with 0.3% in 2013. Since
the introduction of our flexible buyback policy in 2011 the Company has bought
back and cancelled 16.3% of its shares at a cost of £392m. This has
contributed to a reduction in volatility of the discount during a period of
turbulent market conditions and to a narrowing of the discount from 17.1% to
12.4% since 2011. The Board remains committed to the ongoing flexible use of
buybacks, taking into account the Company's discount relative to the peer
group. Whilst we bought back 10% of our shares in 2011 during the first year
of our flexible buyback policy we stated at that time we would not expect to
maintain this level of buyback activity in normal market conditions. 
 
Why have we taken out long-term debt? 
 
In late July 2014 we issued £100m fixed rate 15 year unsecured debt at 4.28%
as we believe that this pricing is attractive and is expected to enhance
shareholder returns over the life of the facility in line with the Company's
investment objective. The average cost of borrowing for the Trust remains a
very competitive 2.2% at the year end. 
 
Risk 
 
Risk Management Framework 
 
The Group has a Risk Management Framework that provides a robust and
comprehensive approach for the identification and management of key risks
facing the business. 
 
The Framework helps in the assessment and management of current and future
risks. Principal Risk categories include Strategic, Market, Operational and
Regulatory & Conduct Risk. 
 
The Risk Management Framework supports the ICAAP (Internal Capital Adequacy
Assessment Process) process, assisting in determining the capital requirements
of the Group. 
 
Risk Appetite 
 
Risk appetite statements have been approved by the Board and provide the basis
for the level of risk the Group is prepared to accept. A suite of risk
appetite metrics have been agreed and activity is monitored against stated
triggers and limits. 
 
Risk Governance Committees 
 
The Board Risk Committee comprises Non-Executive Directors, with delegated
responsibility from the Board to provide oversight and challenge to the
appropriateness of the risk management framework and the forward looking risks
facing the Group. 
 
The Risk Management Committee, chaired by the Chief Financial Officer and
comprising members of the senior management of the Group, ensures that the key
risks are identified, monitored, assessed and controlled. 
 
The Committees receive reports of Risk Exposures and Events, as well as
discussing any breaches of the agreed risk appetite. 
 
Risk and Control Self Assessment (RCSA) 
 
The RCSA is the methodology that allows our business areas to identify and
assess risks, and define and perform quarterly testing of controls. Individual
risk and control owners are assigned with explicit responsibility for the
ongoing monitoring and management of risks. This is reinforced through minimum
standards communicated via the Group Policy Framework. 
 
Quarterly risk outlook workshops are undertaken to consider and assess
potential changes to the risk profile of the Group. The risk function
undertakes a review and challenge of the RCSA and underlying evidence. 
 
Effectiveness of the Risk Function 
 
The Risk and Compliance function is subject to regular review, both in terms
of resource and the appropriateness of the skills that reside within the team.
In addition, the Board Risk Committee and Risk Management Committee are
subject to effectiveness reviews with improvements being identified and
implemented where required. 
 
Principal Risks 
 
In common with other financial services organisations, our business model
results in a number of inherent risks which are continuously monitored and
managed. The risks have been categorised as Strategic, Market, Operational and
Regulatory & Conduct Risks. The principal risks and their mitigants are noted
below. 
 
 Strategic Risks               RisksBuilding investment credibility is dependent on the performance of the portfolio. The ability to pay a steadily increasing dividend depends upon portfolio structure and income generation. The Trust may borrow for investment purposes and borrowing     
                               facilities may not be renewed. A lack of understanding of the Trust and its objectives could lead to a lack of demand and a widening of the discount to Net Asset Value. Political and economic uncertainty generates risk to achieving strategic objectives.   
                               MitigantsWe regularly report and monitor the performance of the Trust and the income derived from investments. Borrowing levels and facilities require the prior approval of the Board. The Trust's investment strategy has been widely communicated and        
                               meetings are also held with key institutional shareholders. We assess the implications of political and economic uncertainty and establish internal working groups to monitor potential risks as required.                                                      
 Market Risks                  RisksThe Trust currently invests primarily in equities and fixed income securities and its principal risks are therefore market related and include counterparty and market risk (currency, interest rate and other price risk). An explanation of these risks  
                               is included in Note 23 on pages 93 to 97 of the Annual Report. Over The Counter (OTC) derivatives are used in the fixed income funds managed by Alliance Trust Investments both for efficient portfolio management and for investment purposes. If investments  
                               fall in value, any borrowings will magnify the extent of this loss. MitigantsThe Asset Allocation Committee meets at least quarterly to oversee the allocation of capital between and among the asset classes approved by the Board. Exposure to market risk is 
                               assessed through stress and scenario testing of the Group's portfolios. Compliance with investment risk parameters and policies is also monitored and regularly reported. Counterparty/concentration limits are in place for all financial instruments including 
                               bank deposits and debt levels are regularly monitored and reported. The majority of the Trust's investments are in quoted equities that are readily realisable.                                                                                                 
 Operational Risks             RisksFinancial services organisations are exposed to operational risk, as a consequence of operating in a complex financial environment. Key operational risks include the availability and reliability of our core systems, reliance on third party suppliers  
                               to deliver against service levels, processing failures, IT security issues (including cyber risk) and operational errors. These include dealing errors, administration breaches, loss of key personnel and failure to manage and deliver change initiatives.    
                               MitigantsPolicies have been implemented to set direction on the management of all operational risks. Business Continuity plans are maintained and tested annually. Our supplier management framework controls risks from significant third party service        
                               providers. The Group operates an anti-financial crime policy and controls to minimise exposure to fraud, money laundering and market abuse. Our segregation of duties and oversight of controls mitigate against the risk of conflict of interest and process   
                               failures. We manage projects rigorously under our Change Management Framework and robust IT security controls are in place. The Group recognises the increasing risk of cyber attack against its services and data. Our systems and controls are rigorously     
                               assessed on an ongoing basis to ensure they remain appropriate to mitigate against the changing risks faced and include deployment of industry standard tools and processes. Training modules have been developed and risk objectives embedded to ensure        
                               delivery of appropriate corporate culture behaviours.                                                                                                                                                                                                           
 Regulatory and Conduct Risks  RisksThe Financial Services sector continues to experience significant regulatory change at national and international level. During the year, Alliance Trust PLC has been approved by the FCA as a manager under the Alternative Investment Fund Manager       
                               Directive. The profile of conduct risk is ever increasing including the continued strengthening and evolution of the regulatory framework. Key aspects of conduct risks include the appropriateness of products and services, marketing campaigns and financial 
                               promotions, product design and development, complaint resolution, management of conflicts, and corporate culture. MitigantsThe Group maintains a forward radar of forthcoming regulatory changes. We have a Change Management Framework to help deliver         
                               regulatory change. We have system based controls and monitoring systems to ensure compliance with relevant regulations. Our responsibilities under AIFMD include the appointment of a Depositary who undertake verification activities and we monitor leverage  
                               against limits and gearing parameters which are agreed by the Board. Customer outcome management information is reviewed at Board and Committee level, with actions taken to ensure the customer is at the heart of our business and includes an assessment of  
                               future business initiatives and risk outlook.                                                                                                                                                                                                                   
 
 
The Group operates a three tier line of defence. The key attributes of each
line of defence are shown below. 
 
 1st line of defence                                                                                                                                                       2nd line of defence                                                                                                                                                                                                                                                                                                                                                                                                                                 3rd line of defence                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
 Business management are responsible for th