REG - British Empire Sec - Annual Financial Report <Origin Href="QuoteRef">BTEM.L</Origin> - Part 2
10/11/2014 09:54
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half of our investment cost returned to us since we first bought shares in 2012 for an overall return of +31%, an
impressive performance given that we believe much of the portfolio value remains to be crystallised upon exits.
Of the 15 closed-end funds held over the year, only Ashmore Global Opportunities delivered a negative return. Despite three
returns of capital at NAV made as part of its realisation policy, the position registered a 4.3% decline, caused in large
part by the write-down of its investment in a Brazilian ethanol producer on the back of a government decision not to remove
caps on gasoline prices.
During the first half of the year, we took advantage of a narrowing discount to sell out of our long-standing and
successful investment in Electra Private Equity.
Asian Holding Companies
This area of the portfolio contributed 1.3 percentage points to overall return, with the largest performances coming from
Jardine Matheson and Hyundai Motor Company preference shares. These two holdings increased in value by 11% and 34% over the
year respectively.
The stake in Hyundai Motor Company was acquired via the preference shares which were trading on a 47% discount to the
ordinary share. Over an eight month period, the discount between the preference shares and the ordinary shares narrowed to
its tightest historic level at 28% whilst the discount between the ordinary shares and the NAV remained unchanged. We sold
this position less than seven months after acquiring it and realised a 34% profit.
Jardine Matheson continues to deliver strong performance. In a year of fairly muted performance for Asian markets (the MSCI
Asia Pacific ex-Japan total return was +6%), Jardine Matheson's NAV total return (including dividends) was 13.2% and its
share price total return was 11%.
Conglomerates
This area contributed 1 percentage point to overall performance and it made up on average 10.5% of the portfolio over the
course of the year. The main contributor to performance from this segment of the portfolio was Vivendi, whose share price
increased by 12.4% over the period. At the start of the year, Vivendi made up 7% of your Company, whereas by the year end
we had reduced this to 2%. During the course of the year, Vivendi announced the sales of several businesses which it owned
and this has been well received by investors. The company has moved away from a conglomerate structure in favour of a more
focused media business and this process has resulted in a sharp contraction in the discount at which Vivendi trades. We
used the narrowing discount to exit a large part of our investment on discounts of between 5% and 10% to estimated NAV.
Other Investments
In addition to the Asian and European holding companies, we also held investments in Wm Morrison, the UK supermarket chain,
in one Turkish holding company (Doğan), in two Canadian holding companies (Dundee Corporation and Power Corp) and in
Hudson's Bay, the Canadian retailer.
This area of the portfolio detracted 2.2 percentage points from performance, with the largest cost coming from the
investment in Wm Morrison. We believed that the company, with asset backing from its freehold estate and following a sharp
decline in its share price, looked good value early in 2014. The shares have continued to fall as the operational
challenges facing the supermarket industry from the low-cost operators continue unabated. There are early signs that Wm
Morrison may be gaining back some market share. Capital is being released from its property portfolio and the shares are
trading below the value of that real estate. Sentiment towards the company and the broader sector is extremely bearish. In
the event that sentiment turns, there should be upside in the shares from current very depressed levels.
The second largest negative contributor in this section was Doğan Holdings, which is active in the Turkish media and energy
sectors. Our position in Doğan decreased in value by 27% over the year, as the weak economic backdrop and perceived
political risk in the local media sector weighed on the shares. Nevertheless, we were encouraged by management's decisive
action to tackle the inefficient group structure by buying out minorities in their main listed media asset at an attractive
price. At a 67% discount to our estimated NAV and with cash at the holding company level almost covering the share price,
the shares are cheaply valued.
Dundee Corp was a relatively disappointing holding for us over the year as it returned a negative 16.4% in Pound Sterling
terms. Some of this reflects a strong Pound Sterling, which strengthened by over 9% during the period against the Canadian
Dollar. We have confidence in the quality of the underlying assets, which include gold and other precious metals, a private
wealth management business and property. Whilst some of these have been out of favour this year, we believe the very wide
discount of 44% more than reflects this and there should be scope for improved performance in future given the very good
long-term track record of the company.
Mitra Energy, British Empire's only unlisted holding and a 0.7% of NAV position at the start of the year, was written down
by 63% over the year due to proposals being announced for a reverse take-over and associated discounted equity raise to
shore up the company's balance sheet.
Property
Property had an average weighting over the period of 15%, contributing 0.2 percentage points over the twelve months with
assets in North America, Europe, Asia and Australia.
There were positive returns from British Land in the UK, from Westfield in Australia, and from Suntec REIT in Singapore.
These were offset by negative returns at Immofinanz and Forterra Trust.
GAGFAH, our largest contributor within property, was sold in July. The share price rose by 37% over the year up until our
sale as several identified hurdles were met and the company traded in line with NAV.
We also sold our Hong Kong property positions during the year. Planning permission for affordable housing has not yet been
granted to Henderson Land and with no clarity on time horizon we exited our position. Great Eagle, our other Hong Kong
property position, successfully sold three hotels into a REIT structure. Disappointingly, management decided to reinvest
the proceeds instead of returning capital to shareholders as anticipated.
In Europe, Immofinanz, an Austrian listed company, spun off its German and Austrian residential arm, Buwog, to existing
shareholders while retaining a 49% stake. Our holding in Buwog is performing well, with a share price rise of 13% since
listing in April. Immofinanz, with exposure to Russia and Eastern Europe, is trading on a 50% discount to NAV.
As discussed earlier, we purchased retail asset owner Westfield. This company separated its assets into two companies:
Scentre owning its Australian and New Zealand assets, while Westfield retained its other global assets. We sold our Scentre
position as it traded on a single digit discount to NAV and we maintain our Westfield shares, giving us exposure to high
quality retail assets in North America and Europe on a 20% discount to NAV.
The holding in Forterra Trust proved costly, with our position declining in value by 38% over the year. Delays to the
completion of their flagship retail and office development, The Place, Shanghai, weighed on the shares. Once complete,
however, the development will allow for the resumption of dividend payments and we see considerable upside with the shares
on a 63% discount to NAV.
Liquidity
Net liquidity at the year end was 1.7%, whilst it was 15.1% at the start of the year, reflecting the deployment of cash
into the opportunities described in this report.
Share Buybacks
During the year, the Company purchased 9.394m of its own shares. These are being held in treasury. The effect of the
buybacks was to increase NAV per share by 0.83 percentage points.
Outlook for the portfolio
Economic activity in the developed economies has remained subdued since the financial crisis in 2008. It has taken years
for many of these economies to regain their pre-crisis levels and there are some that still have a way to go to attain that
level. Perhaps the anaemic recovery is to be expected given the overhang of unprecedented levels of debt across the
developed world in combination with ageing populations. Whatever the cause of the disappointing growth, it has left the
perception of a degree of slack in the developed economies and given cover to Central Banks to pursue highly accommodative
monetary policies. Easy monetary policies have continued for six years following the initial crisis. We will, of course,
never know the counter-factual case of how economies would have fared in the absence of ultra-low interest rates and
Central Bank bond buying. The effects of these policies on markets, however, have been pronounced. The low yields available
on high-quality government bonds have led to a search for yield elsewhere. Yields on other asset classes have been forced
down and risk premia compressed. Asset price valuations have been elevated and volatility has been exceptionally low.
Can this state of affairs continue?
Despite being tested by rising geopolitical risks, in the Middle East and Ukraine in particular, markets have remained calm
up until the last few weeks. It may be that the accommodative monetary policies have anaesthetised investors against such
short-term pain, although recent gyrations in markets are testing that thesis.
Undoubtedly, monetary policy in major developed economies will remain 'easy' for the next year in comparison with long-term
historical averages. A challenge for investors, however, may arise from the increasingly divergent economic outlook for the
developed economies. Persistent deflationary pressures in the Eurozone are likely to lead to further monetary stimulus,
while in the US the economic recovery is slow but steady and is driving expectations for a gradual scaling-back of monetary
stimulus. The US Federal Reserve is expected to end its asset purchases in late 2014 and to start raising US policy rates
in the middle of 2015. The UK economy is also performing relatively well and the Bank of England is also expected to
commence raising rates in 2015.
Central Banks will, no doubt, be hoping to execute their next moves without unduly alarming the markets. This may prove
difficult as investors begin to react to the divergent outlook not only for economies but also interest rates and currency
cross rates. We should probably expect that volatility will increase from historical lows in many markets and that some
high valuation levels may not be sustainable.
From our perspective, the end of quantitative easing should have a positive impact, as investors become more discerning
about which stocks to own. Correlations between securities have decreased and this is an environment in which good stock
pickers ought to do well. The "lower for longer" backdrop and buoyant credit and IPO markets remains supportive of
companies wishing to extract value from their assets by way of disposals, spin-offs, reorganisations and returns of
capital.
In this environment, the opportunity for discounts to contract and for NAVs to grow is strong. This is what we have been
seeing within our universe of stocks during the period. It is reflected by the fact that a larger number of holdings than
in recent history were sold at very narrow discounts. In many cases, the growth in the NAVs of these companies has also
been in excess of that of benchmarks as companies have taken advantage of strong capital markets to realise value for their
shareholders.
Encouragingly, we are still able to identify opportunities to invest our capital in companies that we believe have
fundamentally attractive valuations, have the potential to deliver strong NAV growth over the long term and also have
genuine catalysts for discounts to narrow. Whilst it is true that there have been several examples of marked discount
contraction in the portfolio, it remains a stock specific trend rather than a structural trend as it was in 2006. For these
reasons, the level of liquidity in the portfolio is lower than it has been in recent years.
Valuation levels have risen along with the market, and downside risk is consequently greater. We seek to defend ourselves
from such a risk in a number of ways. The first is to be certain that we are not overpaying for the companies we own; that
their valuations are not overly stretched and appear reasonable relative to historic metrics as well as the prospects for
that company. The second is by focusing on discounts. We do not wish to hold on to stocks where discounts have narrowed and
the risk of capital loss from the discount widening is high. And, thirdly, we try to identify stocks where the wide
discounts are genuine mis-pricings rather than value traps. By having a process that seeks to understand why discounts
exist, we try to avoid value traps - companies where there are good reasons for discounts to exist - and only invest in
those where the discounts are a genuine opportunity for outperformance.
The continued outperformance of the US market over Europe is now an extended multi-year phenomenon. US valuations look
increasingly expensive versus Europe. At some point, this trend may be subject to reversal. Although we cannot be confident
of the timing, any such move would be positive for your Company's portfolio.
As ever, the short-term direction of stock markets is hard to predict. Our investment process has delivered outperformance
over the long term. After a period in which our style has been out of favour, it appears that the current market
environment is more conducive to our approach. We are confident in the quality of the portfolio and in its potential to
deliver strong returns for shareholders in future years.
Directors
Strone Macpherson
Steven Bates
Andrew Robson
Susan Noble
Nigel Rich
Management Agreement
Asset Value Investors Limited is the Company's appointed Investment Manager, and was engaged under the terms of an
Investment Management Agreement effective from 5 May 2004 and varied with effect from 1 October 2008 and 1 October 2013. On
17 July 2014, this agreement was terminated, and a new Investment Management Agreement (the 'IMA'), under which AVI was
appointed as the Company's Alternative Investment Fund Manager (in compliance with the requirements of the Alternative
Investment Fund Managers' Directive), was put into place. The IMA is terminable by one year's notice from either party,
other than for "cause".
The management fee provisions under the new IMA are in all material respects equivalent to those in the previous
agreement.
The Investment Manager is entitled to a management fee of 0.70% of the net assets of the Company, calculated quarterly by
reference to the net assets at the preceding quarter end and paid monthly.
Going Concern
The Directors have carefully reviewed the Group's current financial resources and the projected expenses of the Group for
the next 12 months. On the basis of that review and as the majority of net assets are securities which are traded on
recognised stock exchanges, the Directors are satisfied that the Company's resources are adequate for continuing in
business for the foreseeable future and that it is appropriate to prepare the Group's financial statements on a going
concern basis.
The full Annual Report contains the following statements regarding responsibility for the Annual Report and financial
statements (references in the following statements are to pages in the Annual Report).
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance
with applicable United Kingdom law and regulations. Company law requires the Directors to prepare Group and Company
financial statements for each financial year. Under that law they are required to prepare Group financial statements in
accordance with International Financial Reporting Standards as adopted by the EU ('IFRS') and have elected to prepare the
parent Company financial statements on the same basis. They are also responsible for ensuring that the Annual Report
includes information required by the Disclosure Rules of the UK Listing Authority.
The Group and Company financial statements are required by law and IFRS to present fairly the financial position of the
Group and Company and the financial performance and cash flows of the Group and Company for the relevant period. The
Companies Act 2006 (the 'Act') provides, in relation to such financial statements, that references in the relevant part of
the Act to financial statements giving a true and fair view are references to their achieving a fair presentation. In
preparing the Group and Company financial statements the Directors are required to:
● select suitable accounting policies and apply them consistently in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors;
● make judgements and estimates which are reasonable and prudent;
● state whether the financial statements have been prepared in compliance with IFRS, subject to any material departures disclosed and explained therein;
● provide additional disclosures where compliance with the specific requirements of IFRS are considered to be insufficient to enable users to understand the impact of particular transactions, events and conditions on the financial position and performance; and
● prepare financial statements on a going concern basis unless it is inappropriate to presume that the Group or Company will continue in business.
Financial statements of the Company are published on the Company's website at www.british-empire.co.uk. The Directors are
responsible for ensuring the maintenance and integrity of the information relating to the Company published on this
website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
The Directors are also responsible for ensuring that the Company complies with the provisions of the Disclosure Rules of
the UK Listing Authority which, with regard to corporate governance, require the Company to disclose how it has applied the
principles, and complied with the provisions, of the corporate governance code applicable to the Company.
Declaration
The Directors listed above, being the persons responsible, hereby confirm to the best of their knowledge:
● that 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 Group;
● that in the opinion of the Board, the Annual Report and Accounts taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Company's performance, business model and strategy; and
● the Strategic Report and the Investment Manager's Review include a fair review of the development and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that the Group faces.
Non-statutory Accounts
The financial information set out below does not constitute the Company's statutory accounts for the year ended 30
September 2014 but is derived from those accounts. Statutory accounts for the year ended 30 September 2014 will be
delivered to the Registrar of Companies in due course. The Auditors have reported on those accounts; their report was (i)
unqualified, (ii) did not include a reference to any matters to which the Auditors drew attention by way of emphasis
without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act
2006. The text of the Auditors' report can be found in the Company's full Annual Report and Accounts on the Company's
website at
www.british-empire.co.uk.
Consolidated Statement of Comprehensive Income
of the Group for the year ended 30 September 2014
2014 Revenue return 2014 2014 2013 Revenue return 2013Capital 2013
Capital Total return Total
return
Notes £'000 £'000 £'000 £'000 £'000 £'000
Income
Investment income 2 18,208 - 18,208 28,796 - 28,796
Gains on investments held at fair value 8 - 41,595 41,595 - 80,029 80,029
Losses on Equities Index Unsecured Loan Stock 2013 held at fair value - - - - (1,166) (1,166)
Exchange (losses)/gains 16 - (1,210) (1,210) - 776 776
18,208 40,385 58,593 28,796 79,639 108,435
Expenses
Investment management fee 3 (1,773) (4,136) (5,909) (2,353) (2,353) (4,706)
Other expenses (including irrecoverable VAT) 3 (1,715) - (1,715) (1,332) (144) (1,476)
Profit before finance costs and tax 14,720 36,249 50,969 25,111 77,142 102,253
Finance costs 4 (369) (868) (1,237) (1,360) (7) (1,367)
Profit before taxation 14,351 35,381 49,732 23,751 77,135 100,886
Taxation 5 (524) - (524) (1,976) 8 (1,968)
Profit for the year 13,827 35,381 49,208 21,775 77,143 98,918
Earnings per Ordinary Share 7 9.29p 23.76p 33.05p 13.90p 49.24p 63.14p
On a total basis, the Company did not have any income or expense that was not included in consolidated profit for the year.
Accordingly, the "Profit for the year", on a total basis, is also the "Total Comprehensive Income for the year" for the
Company, as defined in IAS1 (revised) and no separate Statement of Comprehensive Income for the Company has been
presented.
The total column of this statement is the profit and loss account of the Group. The revenue return and capital return
columns are supplementary and are prepared under the guidance published by the Association of Investment Companies.
All items in the above statement derive from continuing operations.
All income is attributable to the equity holders of British Empire Securities and General Trust plc. There are no minority
interests.
The accompanying notes are an integral part of the financial statements.
Consolidated and Company Statements of Changes in Equity
for the year ended 30 September 2014
Ordinary share capital Capital redemption reserve Share premium Capital Merger Revenue Total
reserve reserve reserve
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Group
For the year ended 30 September2014
Balance as at 30 September 2013 16,001 2,934 28,078 716,486 41,406 39,550 844,455
Ordinary Shares bought back and held in treasury - - - (47,058) - - (47,058)
Total comprehensive income for the year - - - 35,381 - 13,827 49,208
Ordinary dividends paid (see note 6) - - - - - (15,831) (15,831)
Special dividends paid (see note 6) - - - - - (3,790) (3,790)
Balance as at 30 September 2014 16,001 2,934 28,078 704,809 41,406 33,756 826,984
For the year ended 30 September 2013
Balance as at 30 September 2012 16,001 2,934 28,078 664,536 41,406 38,270 791,225
Ordinary Shares bought back and held in treasury - - - (25,193) - - (25,193)
Total comprehensive income for the year - - - 77,143 - 21,775 98,918
Ordinary dividends paid (see note 6) - - - - - (14,972) (14,972)
Special dividends paid (see note 6) - - - - - (5,523) (5,523)
Balance as at 30 September 2013 16,001 2,934 28,078 716,486 41,406 39,550 844,455
Company
For the year ended 30 September2014
Balance as at 30 September 2013 16,001 2,934 28,078 718,248 41,406 37,788 844,455
Ordinary Shares bought back and held in treasury - - - (47,058) - - (47,058)
Total comprehensive income for the year - - - 33,619 - 15,589 49,208
Ordinary dividends paid (see note 6) - - - - - (15,831) (15,831)
Special dividends paid (see note 6) - - - - - (3,790) (3,790)
Balance as at 30 September 2014 16,001 2,934 28,078 704,809 41,406 33,756 826,984
For the year ended 30 September 2013
Balance as at 30 September 2012 16,001 2,934 28,078 666,301 41,406 36,505 791,225
Ordinary Shares bought back and held in treasury - - - (25,193) - - (25,193)
Total comprehensive income for the year - - - 77,140 - 21,778 98,918
Ordinary dividends paid (see note 6) - - - - - (14,972) (14,972)
Special dividends paid (see note 6) - - - - - (5,523) (5,523)
Balance as at 30 September 2013 16,001 2,934 28,078 718,248 41,406 37,788 844,455
The accompanying notes are an integral part of the financial statements.
Consolidated and Company Balance Sheets
as at 30 September 2014
Company Group
2014 2013 2014 2013
Notes £'000 £'000 £'000 £'000
Non-current assets
Investments held at fair value through profit or loss 8 839,033 848,366 838,783 846,354
839,033 848,366 837,783 846,354
Current assets
Receivables 10 3,225 8,349 3,225 8,349
Cash and cash equivalents 5,994 7,124 5,994 7,126
9,219 15,473 9,219 15,475
Total assets 848,252 863,839 848,002 861,829
Current liabilities
Payables 11 (6,313) (4,437) (6,063) (2,427)
(6,313) (4,437) (6,063) (2,247)
Total assets less current liabilities 841,939 859,402 841,939 859,402
Non-current liabilities
8 1/8 per cent Debenture Stock 2023 12 (14,936) (14,928) (14,936) (14,928)
Provision for deferred tax 13 (19) (19) (19) (19)
Net assets 826,984 844,455 826,984 844,455
Equity attributable to equity shareholders
Ordinary share capital 14 16,001 16,001 16,001 16,001
Capital redemption reserve 2,934 2,934 2,934 2,934
Share premium 28,078 28,078 28,078 28,078
Capital reserve 704,809 718,248 704,809 716,486
Merger reserve 41,406 41,406 41,406 41,406
Revenue reserve 33,756 37,788 33,756 39,550
Total equity 15 826,984 844,455 826,984 844,455
Net asset value per Ordinary Share - basic 15 575.92p 551.97p 575.92p 551.97p
Number of shares in issue excluding Treasury Shares 14 143,594,872 152,988,888 143,594,872 152,988,888
The financial statements were approved by the Board of British Empire Securities and General Trust plc on 7 November 2014
and were signed on its behalf by:
PSS Macpherson Chairman
The accompanying notes are an integral part of the financial statements.
Registered in England & Wales No. 28203
Consolidated and Company Cash Flow Statements
for the year ended 30 September 2014
Company Group
Notes 2014£'000 2013£'000 2014£'000 2013£'000
Reconciliation of profit before taxation to net cash inflow from operating activities
Profit before taxation 49,732 100,886 49,732 100,886
Losses on Equities Index Unsecured Loan Stock 2013 held at fair value - 1,166 - 1,166
Realised exchange losses/(gains) on currency balances 1,210 (776) 1,210 (776)
Gains on investments held at fair value through profit or loss (39,833) (80,026) (41,595) (80,029)
Purchases of investments (700,340) (711,162) (700,340) (711,162)
Sales of investments 754,801 744,465 754,801 744,465
Decrease/(increase) in other receivables 1,146 (1,620) 1,146 (1,620)
(Decrease)/increase in creditors (1,455) 442 305 445
Taxation (426) (920) (426) (920)
Amortisation of debenture issue expenses 8 7 8 7
Net cash inflow from operating activities 64,843 52,462 64,841 52,462
Financing activities
Dividends paid 6 (19,621) (20,495) (19,621) (20,495)
Payments for Ordinary Shares bought back and held in treasury (45,142) (25,193) (45,142) (25,193)
Redemption of Equities Index Unsecured Loan Stock 2013 12 - (8,204) - (8,204)
Cash outflow from financing activities (64,763) (53,892) (64,763) (53,892)
(Decrease)/increase in cash and cash equivalents 80 (1,430) 78 (1,430)
Exchange movements (1,210) 776 (1,210) 776
Change in cash and cash equivalents (1,130) (654) (1,132) (654)
Cash and cash equivalents at beginning of year 7,124 7,778 7,126 7,780
Cash and cash equivalents at end of year 16 5,994 7,124 5,994 7,126
The accompanying notes are an integral part of the financial statements.
Notes to the Financial Statements
1. Accounting policies
The financial statements of the Group and the Company have been prepared in accordance with International Financial
Reporting Standards ('IFRS') as adopted by the European Union. These comprise standards and interpretations approved by the
International Accounting Standards Board ('IASB'), together with interpretations of the International Accounting Standards
and Standing Interpretations Committee approved by the International Accounting Standards Committee ('IASC') that remain in
effect, to the extent that IFRS have been adopted by the European Union.
The functional currency of the Group is Pounds Sterling because this is the currency of the primary economic environment in
which the Group operates. The financial statements are also presented in Pounds Sterling rounded to the nearest thousand,
except where otherwise indicated.
(a) Basis of preparation
The principal accounting policies adopted are set out below. Where presentational guidance set out in the Statement of
Recommended Practice (the 'SORP') for investment trusts issued by the AIC in January 2009 is consistent with the
requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the
recommendations of the SORP.
(b) Adoption of new and revised standards
At the date of authorisation of these financial statements, the following Standards, which have not been applied in these
financial statements, were in issue but were not yet effective (and in some cases had not yet been adopted by the EU):
International Accounting Standards (IAS/IFRS) Effective for periods
beginning on or after
IAS 27 Reissued as IAS27 Consolidated and Separate Financial Statements (as amended in 2011) 1 January 2014
IAS 28 Investments in Associates and Joint Ventures 1 January 2014
IFRS 9 Financial Instruments: Classification and Measurement 1 January 2015
IFRS 10 Consolidated Financial Statements 1 January 2014
IFRS 11 Joint Arrangements 1 January 2014
IFRS 12 Disclosure of Interests in Other Entities 1 January 2014
The Company does not believe that there will be a material impact on the consolidated financial statements from the
adoption of these standards/interpretations.
(c) Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the
Company (its subsidiary) made up to 30 September each year. Control is achieved where the Company has the power to govern
the financial and operating policies of an entity so as to obtain benefits from its activities. All intra-group
transactions, balances, income and expenses are eliminated on consolidation.
As permitted by Section 408 of the Companies Act 2006, no Company Statement of Comprehensive Income has been prepared. The
profit for the year for the Company is £49,208,000 (2013: £98,918,000).
(d) Presentation of Statement of Comprehensive Income
In order to reflect better the activities of an investment trust company and in accordance with guidance issued by the AIC,
supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital
nature has been presented alongside the Statement of Comprehensive Income. The Company is registered as a UK Investment
Company under Section 833 of the Companies Act 2006. Additionally, net revenue is the measure which the Directors believe
appropriate in assessing the Company's compliance with certain requirements set out in Section 1159 of the Corporation Tax
Act 2010.
(e) Use of estimates
The preparation of financial statements requires the Group to make estimates and judgements that affect items reported in
the Group and Company Balance Sheet and Consolidated Statement of Comprehensive Income and the disclosure of contingent
assets and liabilities at the date of the financial statements. Although these estimates are based on best knowledge of
current facts, circumstances and, to some extent, future events and actions, the Group's actual results may ultimately
differ from those estimates, possibly significantly. Unquoted equity investments that the Group holds are not traded and,
as such, the prices are more uncertain than those more widely traded securities. The unquoted investments are valued by
reference to valuation techniques approved by the Directors and in accordance with the International Private Equity and
Venture Capital Valuation ('IPEVC') guidelines as described in note 1(i).
(f) Income
Dividends receivable are included in revenue on an ex-dividend basis except where, in the opinion of the Board, the
dividend is capital in nature, in which case it is included in capital. UK dividends are included net of tax credits.
Overseas dividends are included gross of any withholding tax.
Where the Company has elected to receive scrip dividends in the form of additional shares rather than in cash, the amount
of the cash dividend foregone is recognised as income. Any excess in the value of the shares received over the amount of
the cash dividend is recognised in capital.
Interest receivable from fixed interest securities is included in revenue on a time apportionment basis using the effective
interest method.
(g) Expenses
All expenses and interest payable are accounted for on an accruals basis. Expenses have been charged to revenue except as
follows:
● the management fee has been allocated 30% (2013: 50%) to revenue and 70% (2013: 50%) to capital within the Consolidated Statement of Comprehensive Income;
● expenses which are incidental to the purchase or sale of an investment are recognised within the Consolidated Statement of Comprehensive Income as a capital item; and
● expenses are presented as capital where a connection with the maintenance or enhancement of the value of investments can be demonstrated.
(h) Taxation
The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on the taxable profit for the year. Taxable profit differs from profit before tax as
reported in the Consolidated 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 Group's
liability for current tax is calculated using tax rates that were enacted or substantially enacted at the Balance Sheet
date.
In line with the recommendations of the SORP, the allocation method used to calculate tax relief on expenses presented
against capital returns in the supplementary information in the Consolidated Statement of Comprehensive Income is the
"marginal basis". Under this basis, if taxable income is capable of being offset entirely by expenses presented in the
revenue return column of the Consolidated Statement of Comprehensive Income, then no tax relief is transferred to the
capital return column.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and
liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is
accounted for using the balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary
differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available
against which deductible temporary differences can be utilised. Deferred tax is charged or credited in the Consolidated
Statement of Comprehensive Income, except when it relates to items charged or credited directly to equity, in which case
the deferred tax is also dealt with within equity.
Investment trusts which have approval as such under Section 1158 of the Corporation Tax Act 2010 are not liable for
taxation on capital gains.
(i) Investments held at fair value through profit or loss
When a purchase or sale is made under a contract, the terms of which require delivery within the timeframe of the relevant
market, the investments concerned are recognised or derecognised on the trade date.
The Group's business is investing in financial assets with a view to profiting from their total return in the form of
income and capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value
basis in accordance with the documented investment strategy and information is provided internally on that basis to the
Group's Board of Directors. Accordingly, upon initial recognition, the investments are designated by the Group as 'held at
fair value through profit or loss' and are described in the financial statements as investments held at fair value.
All investments are designated as held at fair value upon initial recognition and are measured at subsequent reporting
dates at fair value, which for listed investments is either the bid price or the last traded price, depending on the
convention of the exchange on which the investment is quoted.
Fair values for unquoted investments, or investments for which the market is inactive, are established by using various
valuation techniques in accordance with the IPEVC guidelines. These may include recent arm's length market transactions,
the current fair value of another instrument which is substantially the same, discounted cash flow analysis and option
pricing models. Where there is a valuation technique commonly used by market participants to price the instrument and that
technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, that
technique is utilised. Where no reliable fair value can be estimated for such instruments, they are carried at cost subject
to any provision for impairment.
Foreign exchange gains and losses for fair value through profit or loss on investments are included within the changes in
their fair value.
(j) Movements in fair value
Changes in fair value of investments are recognised in the Consolidated Statement of Comprehensive Income as a capital
item. On disposal, realised gains and losses are also recognised in the Consolidated Statement of Comprehensive Income as
capital items.
(k) Cash and cash equivalents
Cash comprises cash in hand and at the bank and short-term deposits. Cash equivalents are short-term, highly liquid
investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in
value.
(l) Dividends payable
Dividends are recognised in the period in which they are declared.
(m) Foreign currency translation
Transactions in currencies other than Pounds Sterling are recorded at the rates of exchange prevailing on the date of the
transaction. Items that are denominated in foreign currencies are retranslated at the rates prevailing on the Balance Sheet
date. Foreign exchange differences arising on translation are recognised in the Consolidated Statement of Comprehensive
Income.
(n) Finance costs
Finance costs are accounted for on an accruals basis using the effective interest method and have been allocated 30% (2013:
100%) to revenue and 70% (2013: nil) to capital. This complies with the Statement of Recommended Practice for Financial
Statements of Investment Trust Companies, which require the finance costs of the Debenture Stock to be allocated between
revenue and capital in the same proportions as the management fee.
(o) Debenture pricing
The 8 1/8 per cent Debenture Stock 2023 is valued at amortised cost under the effective interest method and secured by a
floating charge over all assets of the Company. Costs in relation to arranging the debt finance of the 8 1/8 per cent
Debenture Stock 2023 have been capitalised and are amortised over the term of the finance. Further details of the Debenture
Stock are disclosed in notes 12 and 17.
(p) Capital Reserve
Capital reserve - other - The following are taken to this reserve:
● gains and losses on the disposal of investments.
● amortisation of issue expenses;
● costs of share buybacks;
● exchange difference of a capital nature; and
● expenses, together with the related taxation effect, allocated to this reserve in accordance with the above policies.
Capital reserve - investment holding gains - The following are taken to this reserve:
● increase and decrease in the valuation of investments held at the year end.
(q) Merger Reserve
The merger reserve represents the share premium on shares issued on the acquisition of Selective Assets Trust plc on 13
October 1995.
(r) Segmental reporting
The Directors are of the opinion that the Group is engaged in a single segment of business, being the investment business.
Consequently, no business segmental analysis is provided.
2. Income
2014£'000 2013£'000
Income from investments
Listed investments 18,195 28,709
Other income
Deposit interest 13 15
Interest received on Norwegian withholding tax reclaims - 66
Underwriting commission - 6
13 87
Total income 18,208 28,796
Income from investments:
Equity securities 18,068 28,489
Fixed interest securities 127 220
18,195 28,709
Total income comprises:
Dividends 18,068 28,489
Interest 140 301
Underwriting commission - 6
18,208 28,796
3. Investment management fee and other expenses
2014 2014 2013 2013
Revenue Capital 2014 Revenue Capital 2013
return return Total return return Total
£'000 £'000 £'000 £'000 £'000 £'000
Management fee† 1,773 4,136 5,909 2,353 2,353 4,706
1,773 4,136 5,909 2,353 2,353 4,706
Other expenses:
Directors' emoluments - fees 133 - 133 132 - 132
Auditor's remuneration - audit 34 - 34 24 - 24
Auditor's remuneration - taxation 13 - 13 12 - 12
Auditor's remuneration - other services to the Group 8 - 8 17 - 17
Marketing costs 475 - 475 204 - 204
Printing and postage costs 68 - 68 80 - 80
Registrar fees 94 - 94 100 - 100
Custodian fees 275 - 275 275 - 275
Depositary fees 28 - 28 - - -
Advisory and professional fees 261 - 261 149 - 149
Irrecoverable VAT 162 - 162 83 - 83
Other expenses 164 - 164 256 144 400
1,715 - 1,715 1,332 144 1,476
† Net of the fee of £nil (2013: £42,000) paid to Phoenix Administration Services Limited for company secretarial services.
For the year
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