Dunedin Inc.Growth - Annual Financial Report
06/04/2023 07:00
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RNS Number : 5414V Dunedin Income Growth Inv Tst PLC 06 April 2023
DUNEDIN INCOME GROWTH INVESTMENT TRUST PLC
Legal Entity Identifier (LEI): 549300PPXLZPR5JTL763
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 JANUARY 2023
Investment Objective
The Company's objective is to achieve growth of income and capital from a
portfolio invested mainly in companies listed or quoted in the United Kingdom
that meet the Company's sustainable and responsible investing criteria as set
by the Board.
Benchmark
The Company's benchmark is the FTSE All-Share Index (total return).
Performance is measured on a net asset value total return basis over the
long-term.
Management
The Company's Manager is abrdn Fund Managers Limited ("aFML", the "AIFM" or
the "Manager") which has delegated the investment management of the Company to
abrdn Investments Limited (the "Investment Manager"). Both companies are
wholly owned subsidiaries of abrdn plc.
For further information, please contact:
William Hemmings
abrdn Fund Managers Limited
0207 463 6223
Luke Mason
abrdn Fund Managers Limited
0207 463 5971
Performance Highlights
Net asset value total return(AB) Earnings per share (revenue)
+2.4% 13.0p
2022 +8.1% 2022 12.9p
Ongoing charges(A) Share price total return(A)
0.64% (0.9)%
2022 0.59% 2022 +12.5%
Premium/(discount) to net asset value(AB) Dividends per Ordinary share
(2.9)% 13.1p
2022 0.3% 2022 12.9p
(A) Alternative Performance Measure.
(B) With debt at fair value, dividends reinvested.
Calendar and Financial Highlights
Calendar
Online shareholder presentation 3 May 2023
Annual General Meeting (Dundee) 16 May 2023
Expected payment dates of quarterly dividends 30 May 2023
25 August 2023
24 November 2023
23 February 2024
Half year end 31 July 2023
Expected announcement of results for the September 2023
six months ending 31 July 2023
Financial year end 31 January 2024
Expected announcement of results for the April 2024
year ending 31 January 2024
Financial Highlights
31 January 2023 31 January 2022 % change
Total assets (£'000) 492,105 507,344 (3.00)
Equity shareholders' funds (£'000) 448,605 464,579 (3.44)
Market capitalisation (£'000) 435,898 459,310 (5.10)
Net asset value per Ordinary share 302.57p 313.56p (3.50)
Net asset value per Ordinary share with debt at fair value(A) 302.80p 309.03p (2.01)
Share price (mid) 294.00p 310.00p (5.16)
FTSE All-Share Index 4,255.72 4,191.81 +1.52
Premium/(discount) (difference between share price and net asset value)
Premium/(discount) where borrowings are deducted at fair value(A) (2.91%) +0.31%
Gearing
Net gearing(A) 7.11% 8.41%
Dividends and earnings
Total return per share 1.92p 23.78p
Revenue return per share 13.02p 12.87p +1.17
Total dividend per share for the year 13.10p 12.90p +1.55
Dividend cover(A) 0.99 1.00
Revenue reserves
Prior to payment of third and final dividends(B) 16.07p 15.95p
After payment of third and final dividends(BC) 8.97p 9.05p
Operating costs
Ongoing charges(AD) 0.64% 0.59%
(A) Considered to be an Alternative Performance Measure.
(B) Calculated by dividing the revenue reserve per the Statement of Financial
Position by the number of shares in issue at the reporting date per note 16.
(C) Third interim dividend for the year ended 31 January 2023 of 3.00p per
share (2022 - 3.00p). Final dividend for the year ended 31 January 2023 of
4.10p per share (2022 - final dividend of 3.90p). See note 16 for further
details.
(D) Calculated in accordance with the latest AIC guidance issued in October
2020 to increase the scope of reporting the look-through costs of holdings in
investment companies.
Strategic Report
Chairman's Statement
The Company was launched in Dundee in 1873 and this year we celebrate its
150(th) anniversary. In an eventful and difficult year for markets, the
Company produced a positive absolute net asset value total return of 2.4% and
delivered an increase in its dividend for the 12th year in succession,
providing a dividend yield of 4.5% at the year end. In recognition of its
heritage, the Company's AGM this year will be held in Dundee.
A book entitled "The History of Dunedin Income Growth Trust PLC" is available
on the Company's website.
Performance
In a difficult year for markets, your Company delivered a positive absolute
return for the year ended 31 January 2023, albeit this lagged the return of
the wider market in what was a positive year for UK equities in a global
context. The Company's net asset value ("NAV") increased by 2.4% on a total
return basis, underperforming the FTSE All-Share Index which produced a total
return of 5.2%.
Emerging from the shadow of Covid, 2022 proved to be an eventful year,
dominated by the Russian invasion of Ukraine, the highest levels of inflation
in a generation and a consequential rapid rise in interest rates, not to
mention producing the shortest tenured Prime Minister in British political
history. Despite all of this, UK equities proved more resilient than many
global markets, benefitting from their exposure to more "old economy" sectors,
particularly commodities, and their relatively low starting valuations.
While the portfolio's total return trailed the FTSE All-Share Index, it
delivered a positive absolute return. Returns in the market were more highly
concentrated than usual, with just 23% of companies outperforming in the FTSE
All-Share Index. The best performing sectors were energy, defence and mining
which are typically sectors in which the Company is, and has been,
underweight, given the investment approach. Given the backdrop, we believe
this to be a creditable result given the strategic focus of the portfolio on
high quality companies with an emphasis on dividend growth and sustainability,
which we believe will deliver more sustainable returns over the medium to long
term.
Despite the headwinds to performance, partly driven by our distinct approach
and style, the Company has delivered a NAV total return of 29.7% compared to
the benchmark return of 23.1% over five years, and over the same period ranks
5th out of 20 in the AIC UK Equity Income sector by NAV total return.
The Board recognises the importance of the dividend return to shareholders and
we are pleased to report that the portfolio has seen continued revenue growth,
with revenue earnings per share reaching another record high and some way
above our original expectations for the year.
Although underperforming over the short term, the NAV total return of the
Company remains ahead of the benchmark and peers over the longer term and it
is encouraging that the Company's shares are trading at a tighter discount
than the average of the UK equity income sector. The portfolio remains highly
differentiated to its peer group, offering a highly active, relatively
concentrated strategy, with a sustainability overlay that remains unique
within the sector and rare within the wider investment trust universe.
From an Environmental, Social and Governance ("ESG") perspective we recognise
the growing backlash against the consideration of ESG factors by portfolio
managers and asset owners, particularly in North America. In addition, there
is significant scepticism about the ESG claims of many portfolio managers. We
believe it is correct to apply intellectual rigour and challenge to
sustainability claims being made by investors and companies alike. This should
raise the standard of ESG integration and responsible investment globally.
We remain committed to the sustainability ambitions of the Company and believe
it is the right approach when investing for the long term and to deliver
sustainable and growing dividends. We expect that investors will return their
focus towards this segment of the market as environmental and social risks
rise and asset owners turn their attention to the impact of their holdings.
For us, this is about both avoiding risks and taking advantage of
opportunities to invest behind the powerful demand trends stemming from the
climate transition and social equality. The conflict in Ukraine has only
served to accelerate the energy transition in order to address security of
supply. It has also thrown a social spotlight on companies with both
governments and consumers forcing businesses to divest their operations in
Russia. Social awareness is likely to become a bigger dynamic and risk.
Earnings
Income increased by 2.0% during the year, reflecting good progress in dividend
distributions from companies in the portfolio, helping to mitigate the lack of
the very large one-off dividends we had received during the previous year,
notably from the mining sector, as well as GlaxoSmithKline's rebasing of its
dividend following the demerger of Haleon. The revenue return per share
increased by 1.2% reaching an all-time high of 13.0p, growing slightly less
than income due mainly to higher withholding taxes on overseas income.
Dividend
Having paid three quarterly dividends of 3.0p per share, we are proposing a
final dividend of 4.1p per share, payable on 30 May 2023 to shareholders on
the register on 5 May 2023. This will make a total dividend of 13.1p per share
for the year, an increase of 1.6% on last year. This will be the 39th year out
of the past 43 that the Company has grown its dividend, with the distribution
maintained in the other four years. Furthermore, having increased the dividend
in every year since 2011, the Company is classified as a 'next generation of
dividend heroes' by the Association of Investment Companies, being one of the
27 investment trusts that have raised their dividend for 10 to 19 consecutive
years.
Following payment of the final dividend, we will have utilised 0.08p per share
of the Company's revenue reserves, meaning that 8.97p per share will be
available to support future distributions, representing approximately 70% of
the current annual dividend cost. The net revenue earned during the financial
year represents 99.4% of the proposed dividend cost for the year. The Company
has drawn 2.6p per share from revenue reserves since January 2019, both
through the transition away from higher yielding, lower growth companies and,
particularly in 2020/21, when 1.9p per share was utilised from revenue
reserves following the impact of the Covid pandemic on the portfolio. It is
our intention that revenue reserves are used to support the dividend in
periods when the natural income generating capacity of the portfolio is
impacted by one-off factors, rather than to increase dividends to levels that
may not be sustained by underlying revenue account performance.
The resilient revenue account performance of the Company over recent years,
and through the Covid pandemic compared with many of its peers, is note
worthy.
Over recent years the Investment Manager has, as noted, been reducing the
Company's dependence on higher yielding, lower growth companies and enhancing
the Company's longer term potential for both faster dividend growth and better
capital performance. The Company delivered a record level of revenue earnings
per share during the year and, although the rate of dividend increase for the
year lags the rate of inflation, the increased dividend of 13.1p per share
represents a yield of 4.5% based on the share price of 294p at the end of the
year, compared to a notional yield of 3.7% from the FTSE All-Share Index. Our
distribution policy remains to grow the dividend faster than inflation over
the medium term and, with the Company's robust revenue reserves and the
healthy underlying dividend growth of the companies within the portfolio, we
believe that the policy remains well supported, although its delivery may
prove more challenging if inflation remains persistently high.
As explained in more detail in the Directors' Report, during the year, the
Board decided that, going forward, amounts of unclaimed dividends greater than
12 years old, which are returned annually to the Company by the Registrar in
accordance with the Company Articles of Association, would be donated to
charity. Accordingly, the Company made a donation of £16,000 (2022: £nil) to
the abrdn Charitable Foundation, which directs funding to charities around the
world.
Gearing
The Board believes that the sensible use of modest financial gearing, whilst
amplifying market movements in the short term, will enhance returns of both
capital and income to shareholders over the long term. We also recognise the
benefit that having a reasonable proportion of long-term fixed rate funding
provides to managing the Revenue Account, through greater certainty over
financing costs.
The Company currently employs two sources of gearing. The £30 million loan
notes maturing in 2045, and a £30 million multi-currency revolving credit
facility that expires in July 2023. A Sterling equivalent of £13.8 million
was drawn down at the year end. The Board will make a further announcement
with regard to the multi-currency revolving facility in due course.
With debt valued at par, the Company's net gearing decreased from 8.4% to 7.1%
during the year. This decline was due to holding a higher cash balance at the
year end. The Board believes this remains a relatively conservative level of
gearing and, with part of the revolving credit facility undrawn, this provides
the Company with financial flexibility should opportunities to deploy
additional capital arise.
Discount
The share price total return for the year of -0.9% underperformed the NAV
total return, reflecting a move from a small premium of 0.3% at the end of
last year to a modest discount of 2.9% as at 31 January 2023 (on a cum-income
basis with borrowings stated at fair value).
During the year, 100,000 shares were issued at a premium to the NAV.
As stated above, the Board believes that the successful implementation by the
Investment Manager of the investment strategy should enhance the Company's
longer-term potential for improved performance. In recent years, we have seen
a re-rating of the shares and the Board believes a consistent rating of the
Company's shares close to the underlying asset value is of significant benefit
to shareholders. As in previous years, we will seek shareholders' permission
at the forthcoming AGM to buy back shares and issue new shares.
Annual General Meeting and Online Shareholder Presentation
AGM
The AGM will be held at 12 noon on 16 May 2023 at V&A Dundee, 1 Riverside
Esplanade, Dundee DD1 4EZ. The meeting will include a presentation from the
Investment Manager and will be followed by lunch.
We encourage all shareholders to complete and return the Proxy Form enclosed
with the Annual Report so as to ensure that your votes are represented at the
meeting. If you hold your shares in the Company via a share plan or a platform
and would like to attend and/or vote at the AGM, then you will need to make
arrangements with the relevant administrator. For this purpose, investors who
hold their shares in the Company via the abrdn Investment Plan for Children,
Share Plan or ISA will find a Letter of Direction enclosed. Shareholders are
encouraged to complete and return their Proxy Forms / Letters of Direction in
accordance with the instructions.
Online Shareholder Presentation
In order to encourage as much interaction as possible with our shareholders,
and especially for those who are unable to attend the AGM, we will also be
hosting an Online Shareholder Presentation, which will be held at 11.00 am on
3 May 2023. At this event you will receive a presentation from the Investment
Manager and have the opportunity to ask live questions of the Chairman and the
Investment Manager. The online presentation is being held ahead of the AGM to
allow shareholders to submit their proxy votes subsequently.
Full details on how to register for the online event can be found at:
https://bit.ly/abrdn-dunedin-income (https://bit.ly/abrdn-dunedin-income)
Details are also contained on the Company's website.
Amendment to Investment Policy (Overseas Exposure)
During the year, the Board and Investment Manager reviewed the guidelines
governing the management of the portfolio and determined that the part of the
investment policy relating to the limit on the exposure to investments in
companies listed or quoted overseas should be amended from its current limit
of 20% to a new limit of 25%. This higher limit will provide the Investment
Manager with greater flexibility to invest in overseas companies but does not
represent a change in the way that the portfolio is managed and it is not a
material change to the investment policy that would require shareholder
approval. The change will take effect on 1 May 2023.
Outlook
Over recent years the Company has undergone a significant shift in its
portfolio to focus more on total return and dividend growth and adjusted its
mandate to formally incorporate a greater focus on sustainability. While the
past two financial years have been a difficult period for relative
performance, the Board believes that this is the correct strategy to deliver
earnings and dividend growth over the longer term. The volatile economic and
political environment that has been unleashed by both the rapid tightening in
global monetary policy and the conflict in the Ukraine should further support
a focus on resilience, although we recognise some of the headwinds to the
Investment Manager's style of investment that these conditions have created in
the recent years.
As we look forward, there are some reasons for cautious optimism. Commodity
prices have retreated, particularly natural gas. This could lead to the
prospect of falling energy bills for consumers as we move through 2023.
Government finances are in better shape than anticipated at the time of the
mini budget in October, as energy price caps have proved less expensive than
originally expected. Supply chain disruption is easing, freight rates have
fallen sharply and Europe has managed to navigate the energy price crisis. The
US consumer has, so far at least, remained resilient and China has removed its
Covid related restrictions far more quickly than had been envisaged.
Meanwhile, the market valuation of UK equities is attractive on an absolute
and relative basis.
We also believe that the income growth of the Company is not overly dependent
on interest rates or commodity prices, albeit a lack of exposure to these
elements has been a detractor to performance over the past 18 months. These
are both areas where forecasting accuracy is notoriously low. That gives your
portfolio managers a higher degree of confidence on the likely path of income
generation. We believe the balance of the portfolio means it is well set to
navigate volatile markets and demonstrate resilience in a range of different
market environments.
That all said, inflation remains high and the impact of the significant
tightening in monetary policy has arguably yet to be fully felt in the real
economy. Yield curve inversion tends to be a precursor to a recession and it
is likely still too early to signal that we will avoid an outright economic
contraction. In such an environment, we think it is important to maintain a
relatively well balanced portfolio. Against a challenging backdrop, the
Investment Manager's focus on investing in companies with pricing power,
strong balance sheets and with greater exposure to structural, rather than
cyclical, growth should offer greater resilience in both capital and income
generation. The Company's track record over the past five years adopting this
strategy remains creditable.
The Board is confident that the Company is well-positioned to deliver relative
total return outperformance over the medium and long term. This, combined with
the ambition to grow the dividend in real terms over the medium term, should
enable the Company's shares to continue to trade close to NAV and return to
real growth in dividend distributions.
David Barron
Chairman
5 April 2023
Overview of Strategy
Business
The Company is an investment trust with a premium listing on the London Stock
Exchange.
Investment Objective
The Company's objective is to achieve growth of income and capital from a
portfolio invested mainly in companies listed or quoted in the United Kingdom
that meet the Company's sustainable and responsible investing criteria as set
by the Board.
Investment Policy
In pursuit of its objective, the Company's investment policy is to invest in
high quality companies with strong income potential and providing an
above-average portfolio yield.
The Company may only make material changes to its investment policy (including
the level of gearing set by the Board) with the approval of shareholders in
the form of an ordinary resolution.
Risk Diversification
The Company maintains a diversified portfolio consisting, substantially, of
equity or equity-related securities, and it can invest in other financial
instruments. The Company is invested mainly in companies listed or quoted in
the
United Kingdom and can invest up to 20% of its gross assets overseas.
It is the policy of the Company to invest no more than 15% of its gross assets
in other listed investment companies and no more than 15% of its gross assets
in any one company.
Gearing
The Board is responsible for determining the gearing strategy for the Company,
with day-to-day gearing decisions being made by the Manager within the remit
set by the Board. The Board has set its gearing limit at a maximum of 30% of
the net asset value at the time of draw down. Gearing is used selectively to
leverage the Company's portfolio in order to enhance returns where and to the
extent considered appropriate.
Delivering the Investment Objective
The Directors are responsible for determining the Company's investment
objective and investment policy. Day-to-day management of the Company's assets
has been delegated, via the AIFM, to the Investment Manager.
Benchmark
The Company's benchmark is the FTSE All-Share Index (total return).
Performance is measured on a net asset value total return basis over the
long-term.
Promoting the Success of the Company
The Board's statement below 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 for the benefit of the members as a whole.
Key Performance Indicators ("KPIs")
The Board uses a number of financial performance measures to assess the
Company's success in achieving its objective and determining the progress of
the Company in pursuing its investment policy. The main KPIs are shown in
the table below.
KPI Description
Performance of NAV against benchmark index and comparable investment trusts The Board measures the Company's NAV total return performance against the
total return of the benchmark index - the FTSE All-Share Index. The Board also
monitors performance relative to a peer group of investment trusts which have
similar objectives, policies and yield characteristics.
Revenue return per Ordinary share The Board monitors the Company's net revenue return.
Dividend per Ordinary share The Board monitors the Company's annual dividends per Ordinary share.
Share price performance The Board monitors the performance of the Company's share price on a total
return basis.
Premium/discount to NAV The premium/discount of the share price relative to the NAV per share is
monitored by the Board.
Ongoing charges The Board monitors the Company's operating costs carefully.
Principal Risks and Uncertainties
The Board carries out a regular review of the risk environment in which the
Company operates, changes to the environment and individual risks. The Board
also considers emerging risks which might affect the Company. The Board
receives updates from the Manager on the risks that could affect the Company.
During the year, the prominent emerging risk was inflation and the resultant
volatility that it created in global stock markets. In addition, the conflict
in Ukraine and continued tensions between China and the USA have created
geo-political uncertainties which have further increased market risk and
volatility.
There are a number of other risks which, if realised, could have a material
adverse effect on the Company and its financial condition, performance and
prospects. The Board 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 and emerging risks and uncertainties faced by the Company are
reviewed by the Audit Committee in the form of risk matrices.
The principal risks and uncertainties facing the Company at the current time,
together with a description of the mitigating actions the Board has taken, are
set out in the table below.
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 Mitigating Action
Investment objectives - a lack of demand for the Company's shares due to its Board review. The Board formally reviews the Company's objectives
objectives becoming unattractive to investors could result in a widening of
and strategies for achieving them on an annual basis, or more regularly
the discount of the share price to its underlying NAV and a fall in the value
if appropriate.
of its shares.
Shareholder communication. The Board is cognisant of the importance of regular
communication with shareholders. Directors attend meetings with the Company's
largest shareholders and meet other shareholders at the Annual General Meeting
and, as explained in the Chairman's Statement, the Company will hold an online
shareholder presentation in advance of the Annual General Meeting this year
including the opportunity for an interactive question and answer session. The
Board reviews shareholder correspondence and investor relations reports and
also receives feedback from the Company's Stockbroker.
Discount monitoring. The Board, through the Manager, keeps the level of
discount under constant review. The Board is responsible for the Company's
share buy back policy and is prepared to authorise the use of share buy backs
to provide liquidity to the market and try to limit any widening of the
discount.
Investment strategies - the Company adopts inappropriate investment strategies Adherence to investment guidelines. The Board sets investment guidelines and
in pursuit of its objectives which could result in investors avoiding the restrictions which the Manager follows, covering matters such as asset
Company's shares, leading to a widening of the discount and poor investment allocation, diversification, gearing, currency exposure and use of
performance. derivatives, as well as the Company's sustainable and responsible investment
criteria. These guidelines are reviewed regularly and the Manager reports on
compliance with them at Board meetings.
In order to ensure adequate diversification, the Board has set absolute limits
on maximum holdings and exposures in the portfolio at the time of investment,
which are in addition to the limits contained in the Company's investment
policy, including the following:
· No more than 10% of gross assets to be invested in any single stock; and
· The top five holdings should not account for more than 40% of gross
assets.
Regular shareholder communication and discount monitoring, as above.
Investment performance - the appointment or continuing appointment of an Monitoring of performance. The Board meets the Investment Manager on a regular
investment manager with inadequate resources, skills or expertise or which basis and keeps under close review (inter alia) its resources and adherence to
makes poor investment decisions. This could result in poor investment investment processes, including in relation to the Company's sustainable and
performance, a loss of value for shareholders and a widening discount. responsible investment criteria. The Board also keep under review the adequacy
of risk controls and investment performance.
Management Engagement Committee. A detailed formal appraisal of the Manager is
carried out annually by the Management Engagement Committee.
Income/dividends - the Company adopts an unsustainable dividend policy Revenue forecasting and monitoring. The Manager presents detailed forecasts of
resulting in cuts to or suspension of dividends to shareholders, or one which income and expenditure covering both the current and subsequent financial
fails to meet investor demands. years at Board meetings. Dividend income received is compared to forecasts and
variances analysed.
Use of reserves. The Company has built up revenue reserves which are available
to smooth dividend distributions to shareholders should there be a shortfall
in revenue returns.
Financial/market - insufficient oversight or controls over financial risks, Management controls. The Manager has a range of procedures and controls
including market risk, foreign currency risk, liquidity risk and credit risk relating to the Company's financial instruments, including a review of
could result in losses to the Company. investment risk parameters by its Investment Risk department and a review of
credit worthiness of counterparties by its Counterparty Credit Risk team.
Foreign currency hedging. It is not the Company's policy to hedge foreign
currency exposure but the Company may, from time to time, partially mitigate
it by drawing down borrowings in foreign currencies.
Board review. As stated above, the Board sets investment guidelines and
restrictions which are reviewed regularly and the Manager reports on
compliance with them at Board meetings.
Further details of the Company's financial instruments and risk management are
included in note 19 to the financial statements.
Gearing - gearing accentuates the effect of rises or falls in the market value Gearing restrictions. The Board sets gearing limits within which the Manager
of the Company's investment portfolio on its NAV. An inappropriate level of can operate.
gearing at a time of falling values could result in a significant fall in the
value of the Company's net assets and share price. Such a fall in the value of Monitoring. Both the limits and actual levels of gearing are monitored on an
the Company's net assets could result in a breach of loan covenants and ongoing basis by the Manager and at regular Board meetings. In the event of a
trigger demands for early repayment or require investments to be sold to meet possible impending covenant breach, appropriate action would be taken to
any shortfall. This could result in further losses. reduce borrowing levels.
Scrutiny of loan agreements. The Board takes advice from the Manager and the
Company's lawyers before approving details of loan agreements. Care is taken
to ensure that covenants are appropriate and unlikely to be breached.
Limits on derivative exposure. The Board has set limits on derivative
exposures and positions are monitored at regular Board meetings.
Regulatory - changes to, or failure to comply with, relevant regulations Board awareness. The Directors have an awareness of the more important
(including the Companies Act, The Financial Services and Markets Act, The regulations and are provided with information on changes by the Association of
Alternative Investment Fund Managers Directive, accounting standards, Investment Companies. In terms of day to day compliance with regulations, the
investment trust regulations, the Packaged Retail and Insurance-based Board is reliant on the knowledge and expertise of the Manager. However, where
Investment Product Regulations, the Listing Rules, Disclosure Guidance and necessary, the Board engages the service of external advisers. In addition,
Transparency Rules and Prospectus Rules) could result in fines, loss of all Directors are encouraged to attend relevant training courses.
reputation, reduced demand for the Company's shares and potentially loss of an
advantageous tax regime. Management controls. The Manager's company secretariat and accounting teams
use checklists to aid compliance and these are backed by the Manager's
compliance monitoring programme and risk based internal audit investigations.
Operational (including cyber-crime) - the Company is reliant on services Agreements. Written agreements are in place defining the roles and
provided by third parties (in particular those of the Manager and the responsibilities of all third party service providers.
Depositary) and any control gaps and failures in their operations could expose
the Company to loss or damage. Internal control systems of the Manager. The Board receives reports on the
operation and efficacy of the Manager's IT and control systems, including
those relating to cyber-crime, and its internal audit and compliance
functions.
Safekeeping of assets. The Depositary is ultimately responsible for the
safekeeping of the Company's assets and its records are reconciled to those of
the Manager on a regular basis. Through a delegation by the Depositary, the
Company's investments and cash balances are held in segregated accounts by the
Depositary.
Monitoring of other third party service providers. The Manager monitors
closely the control environments and quality of services provided by third
parties, including those of the Depositary. This includes controls relating to
cyber-crime and is conducted through service level agreements, regular
meetings and key performance indicators. The Directors review reports on the
Manager's monitoring of third party service providers on a periodic basis.
Geo-political (including a pandemic, climate change and the conflict in Board and Manager awareness. Geo-political events over which the Company has
Ukraine) - the impact of geo-political events could result in losses to the no control are always a risk. The Board and Manager do what they can to
Company. address these risks where possible.
Promotional Activities
The Board recognises the importance of promoting the Company to prospective
investors both for improving liquidity and enhancing the 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 the Manager.
The Company also supports the Manager's investor relations programme which
involves regional roadshows, promotional and public relations campaigns. The
Manager'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. The promotional programme includes commissioning independent
paid for research on the Company, most recently from Kepler Trust
Intelligence. A copy of the latest research note is available from the Key
Literature section of the Company's website.
Board Diversity Policy
The Board recognises the importance of having a range of skilled, 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, 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 and the Board does not
therefore consider it appropriate to set measurable objectives in relation to
its diversity.
At 31 January 2023, there were three male and two female Directors on the
Board.
Environmental, Social and Human Rights Issues
The Company has no employees as 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.
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. 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.
The UK Stewardship Code and Proxy Voting
The Company supports the UK 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, 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 on a quarterly basis on stewardship
(including voting) issues.
Global Greenhouse Gas Emissions
The Company has no greenhouse gas emissions to report from its operations, nor
does it have responsibility for any other emissions producing sources under
the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations
2013.
Under Listing Rule 15.4.29(R), the Company, as a closed ended investment
company, is exempt from complying with the Task Force on Climate-related
Financial Disclosures.
Viability Statement
The Board considers that the Company, which does not have a fixed life, is a
long term investment vehicle and, for the purposes of this statement, has
decided that five years is an appropriate period over which to consider its
viability. The Board considers that this period reflects a balance between
looking out over a long term horizon and the inherent uncertainties of looking
out further than five years.
Taking into account the Company's current 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 five 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 detailed above and the
steps taken to mitigate these risks.
- The relevance of the Company's investment objective.
- The Company is invested in readily-realisable listed securities.
- Share buy backs carried out in the past have not resulted in
significant reductions to the capital of the Company.
- Although the Company's stated investment policy contains a
maximum gearing limit of 30% of the NAV at the time of draw down, the Board's
policy is to have a relatively modest level of equity gearing and the
financial covenants attached to the Company's borrowings provide for
significant headroom.
- The ability of the Company to refinance its £30 million
multi-currency credit facility when it matures in July 2023 (see Going Concern
below).
- The level of ongoing charges.
- The robustness of the operations of the Company's third party
service suppliers.
In making its assessment, the Board is also aware that there are other matters
that could have an impact on the Company's prospects or viability in the
future, including the conflict in Ukraine, economic shocks or significant
stock market volatility caused by other factors, and changes in regulation or
investor sentiment.
Outlook
The Board's view on the general outlook for the Company can be found in the
Chairman's Statement whilst the Investment Manager's views on the outlook for
the portfolio are included in its statement.
On behalf of the Board
David Barron
Chairman
5 April 2023
Promoting the Success of the Company
Introduction
Section 172 (1) of the Companies Act 2006 (the "Act") requires each Director
to act in the way he/she considers, in good faith, would be most likely to
promote the success of the Company for the benefit of its members as a whole.
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 that provision of the Act (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, among other things, 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 Purpose of the Company and
Role of the Board
The purpose of the Company is to act as a vehicle to provide, over time,
financial returns (both income and capital) to its shareholders. Investment
trusts, such as the Company, are long-term investment vehicles and are
typically externally managed, have no employees, and are overseen by an
independent non-executive board of directors.
The Board, which at the end of the year comprised five independent
non-executive Directors with a broad range of skills and experience across all
major functions that affect the Company, retains responsibility 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's philosophy is that the Company should operate in a transparent
culture where all parties are provided with the opportunity to offer practical
challenge and participate in positive debate which is focused on the aim of
achieving the expectations of shareholders and other stakeholders alike. The
Board reviews the culture and manner in which the Manager and Investment
Manager operate at its regular meetings and receives regular reporting and
feedback from the other key service providers. The Board works very closely
with the Manager and Investment Manager in reviewing how stakeholder 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.
The Company's main stakeholders have been identified as its Shareholders, the
Manager (and Investment Manager), Service Providers, Investee Companies, Debt
Providers and, more broadly, the environment and community at large.
How the Board Engages with Stakeholders
The Board considers its stakeholders at Board meetings and receives feedback
on the Manager's interactions with them.
Further details are included in the table 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 between all of them. The Manager and Company's Stockbroker meet
regularly with current and prospective shareholders to discuss performance and
shareholder feedback is discussed by the Directors at Board meetings. In
addition, the Manager meets with analysts who cover the investment trust
sector and the Directors attend meetings with the Company's largest
shareholders and meet other shareholders at the Annual General Meeting.
The Company subscribes to the Manager's investor relations programme in order
to maintain communication channels, in particular, with the Company's
institutional shareholder base.
Regular updates are provided to shareholders through the Annual Report, Half
Yearly Report, monthly factsheets, Company announcements, including daily NAV
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 and to provide feedback on the Company. In addition
to the Annual General Meeting, this year the Board will again hold an
interactive online shareholder presentation at which shareholders will receive
updates from the Chairman and Investment Manager and there will be the
opportunity for an interactive question and answer session.
Manager The Investment Manager's Review details the key investment decisions taken
(and Investment Manager) during the year. The Investment Manager has continued to manage the Company's
assets in accordance with the mandate provided by the Company, with the
oversight of 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 Investment Manager at every Board
meeting to help it to exercise effective oversight of the Investment Manager
and the Company's strategy.
The Board, through the 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 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 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.
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 Investment Manager
actively works with companies to improve corporate standards, transparency and
accountability.
The Manager reports regularly to the Board on investment and engagement
activity.
Debt Providers On behalf of the Board, the Manager maintains a positive working relationship
with The Bank of Nova Scotia, London Branch, the provider of the Company's
multi-currency loan facility, and provides regular updates on business
activity and compliance with its loan covenants.
The Manager also provides regular covenant compliance certificates to the
holders of the Company's £30 million Loan Notes.
Environment and Community The Board and Manager are committed to investing in a responsible manner and
the Investment Manager embeds Environmental, Social and Governance ("ESG")
considerations into the research and analysis as part of the investment
decision-making process.
Specific Examples of Stakeholder Consideration During the Year
While the importance of giving due consideration to the Company's stakeholders
is not a new requirement, and is considered during every Board decision, the
Directors were particularly mindful of stakeholder considerations during the
following decisions undertaken during the year ended 31 January 2023. Each of
these decisions was made after taking into account the short and long term
benefits for stakeholders.
Investment Objective and Portfolio
The Investment 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, including compliance with the
Company's sustainable and responsible investing criteria.
During the year, the Management Engagement Committee decided that the
continuing appointment of the Manager is in the best interests of
shareholders.
Dividend
Following the payment of the final dividend for the year, of 4.1p per Ordinary
share, total dividends for the year will amount to 13.1p per Ordinary share.
This represents an increase of 1.6% compared to the previous year. This will
be the 39th year out of the past 43 that the Company has grown its dividend,
with the distribution maintained in the other four years, and is in accordance
with its policy to grow total annual dividends in real terms over the medium
term.
Through meetings with shareholders and feedback from the Manager and the
Company's Stockbroker, the Board is conscious of the importance that
shareholders place on the level of dividends paid by the Company.
Promotional Activities
During the year, the Board and Manager agreed a set of key marketing messages
designed to assist with the promotion of the Company. The Board also agreed a
series of key performance indicators with the Manager relating to promotional
activities, to help it monitor progress with the activities undertaken.
Online Shareholder Presentation
To encourage and promote stronger interaction and engagement with the
Company's shareholders, the Board will hold an interactive online shareholder
presentation which will be held at 11.00am on Wednesday 3 May 2023. At the
presentation, shareholders will receive updates from the Chairman and
Investment Manager and there will be the opportunity for an interactive
question and answer session. The online presentation is being held ahead of
the Annual General Meeting to allow shareholders to submit their proxy votes
prior to the meeting. Details of how to register for the event can be found in
the Chairman's Statement.
On behalf of the Board
David Barron
Chairman
5 April 2023
Performance
Performance (total return)
1 year 3 year 5 year
% return % return % return
Total return (Capital return plus net dividends reinvested)
Net asset value(AB) +2.4% +10.4% +29.7%
Share price(B) (0.9%) +11.6% +42.5%
FTSE All-Share Index +5.2% +15.6% +23.1%
Capital return
Net asset value(A) (2.0%) (3.0%) +4.2%
Share price (5.2%) (2.3%) +13.1%
FTSE All-Share Index +1.5% +4.9% +2.9%
(A) Cum-income NAV with debt at fair value.
(B) Considered to be an Alternative Performance Measure
Source: abrdn, Factset & Morningstar
Ten Year Financial Record
Year ended 31 January 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Total revenue (£'000) 20,750 20,994 20,359 21,963 22,317 22,263 20,518 18,346 21,518 21,950
Per share (p)
Revenue return 11.89 11.90 12.11 12.55 12.64 12.68 12.08 10.90 12.87 13.02
Dividends paid/proposed 11.10 11.25 11.40 11.70 12.10 12.45 12.70 12.80 12.90 13.10
Revenue reserve(A) 8.22 8.89 9.63 10.51 11.16 11.54 10.94 9.07 9.05 8.97
Net asset value(B) 262.34 279.66 237.48 270.34 290.57 266.83 312.22 297.64 309.03 302.80
Total return(C) 22.24 27.76 (28.94) 43.83 30.83 (11.95) 58.57 (1.81) 23.78 1.92
Shareholders' funds (£'000) 403,526 428,702 368,041 415,810 442,384 401,731 469,806 448,293 464,579 448,605
(A) After payment of third interim and final dividends (see note 16 for
further details).
(B) With debt at fair value.
(C) Per Statement of Comprehensive Income.
Investment Manager's Review
Introduction
For the year ended 31 January 2023, the Company's net asset value ("NAV")
total return for the year of 2.4% compared to a total return of 5.2% from the
benchmark FTSE All-Share Index. Many of the trends that we highlighted last
year continued in 2022/23 and again it was a period when our style and
strategy were out of favour with investors. The benchmark returns were highly
concentrated in the oil and gas, mining and defence sectors, where the
portfolio is typically underweight due to the sustainability objectives of the
Company. Net income generated per share hit a new record level of just over
13p a share.
The economic outlook brings with it a degree of uncertainty and potential for
macro-economic slowdown. Given this, we consider the portfolio to be in good
shape with our focus on higher quality companies, an emphasis on investments
that can deliver both income and capital growth whilst also meeting the
Company's sustainable and responsible investing criteria, positioning the
Company to be able to cope with what may be difficult market conditions ahead.
The portfolio remains highly differentiated compared to both peers and its
benchmark. It is the only equity income investment trust with a formal
sustainability objective, the active share of the portfolio increased in the
year to 86% while the number of holdings consolidated to a focussed group of
36 at the year end. We see attractive opportunities emerging in
domestic-facing and mid-sized companies - just under half of the portfolio is
invested outside the FTSE 100 Index and almost 20% is held in companies listed
outside the UK as we seek to gain exposure to innovative and high quality
companies listed in European markets.
The portfolio offers an attractive 4.3% dividend yield, 15% ahead of the FTSE
All -Share Index at the end of 2022. The free cash flow performance of
companies held in the portfolio has been strong, with many growing their
dividends significantly during the year. As result, income generation came in
well ahead of our initial expectations. The discount at which the Company's
shares trade ended the year at 2.9%, narrower than the average of the sector.
Performance
We are pleased with the portfolio's income progression in the year. Having
started the year expecting net revenue of around 12p per share, the net income
generation of 13.0p per share exceeded our expectation. This is despite
missing the very substantial contribution from Rio Tinto's special dividends
and the expected dividend cut at GlaxoSmithKline given corporate changes. A
number of holdings in the portfolio delivered strong dividend growth,
including Morgan Sindall, ASML, London Stock Exchange, Pets at Home,
Novo-Nordisk and TotalEnergies. We continued writing options based on our
fundamental analysis of holdings in the portfolio and this has been a benefit
to the Company by diversifying and increasing the level of income generated.
The year under review saw markets digest a number of extraordinary exogenous
shocks. From the tragic war in Ukraine leading to soaring power prices, the
highest level of inflation since the 1980's, aggressive central banks
tightening, UK Government leadership change and swings in consumer confidence.
These factors have caused sharp rotations and shifts in market sentiment
towards many companies that performed well in the preceding decade. Against
this difficult backdrop, the Company delivered a flat absolute return in the
first six months to July but lagged in the second half when the UK political
environment deteriorated.
There are a number of themes driving markets. The portfolio's underperformance
relative to the benchmark was primarily driven by market style rotation and
factor risk, offset by positive stock selection. The Company's sustainable and
responsible investing approach includes negative exclusions, alongside the
positive allocation to sustainable leaders and improvers and corporate
engagement. Risk analysis concludes that, this year, the Company's negative
exclusions, which restrict the investable universe by approximately 22%,
caused a headwind to performance but that the portfolio outperformed its
investable universe.
Reassuringly, fundamental analysis and stock selection contributed positively
in the year. The UK market has been a hunting ground for international buyers
looking to take advantage of discounted valuations and the underappreciated
quality of many companies. Global investors are looking on the UK market more
favourably than in recent years and we see M&A as a feature of the market
which we expect to continue going forward. A number of holdings in the
portfolio were bid for in the year as global investors capitalised on the
opportunity to acquire companies with strong business models and market
leadership at attractive valuations, further boosted by Sterling weakness. The
Company's long-standing holding in the industrial software company Aveva came
to an end when it was bought by majority shareholder Schneider Electric,
valuing the company at £9.9 billion. In addition, the events and database
business Euromoney Institutional Investor received a take-over offer from the
private equity sector.
The portfolio benefited from its overseas exposure. TotalEnergies' portfolio
of assets delivered strong profit progression and cash return including a 6%
dividend yield in addition to share buybacks. While near term weakness in
natural gas prices will hold back earnings momentum, we see the company as
well positioned to benefit from structural under-investment in upstream energy
markets and judge its energy transition strategy as credible. Danish
pharmaceutical company Novo-Nordisk raised guidance through the year, driven
by growth in diabetes therapies and the positive launch of anti-obesity
treatment Wegovy. The prepaid vouchers and employee benefits solutions company
Edenred out-performed expectations with growth in its SME business, supporting
margins. It remains at an attractive valuation for the growth we expect the
company to deliver.
After building a position in Games Workshop in the year, the company issued a
surprise announcement that it had reached an agreement with Amazon to develop
Games Workshop's intellectual property into exciting film and TV content.
Recent addition to the portfolio Taylor Wimpey contributed positively with its
shares recovering from lows at the time of the mini budget as the market
recognised its highly discounted valuation.
The FTSE All-Share Index return for the year was highly concentrated in a
narrow set of companies, namely in the Energy and Basic Materials sectors.
Supply constraints due to the war in Ukraine, coupled with post Covid recovery
in activity led to strong oil price appreciation. As a consequence, BP and
Shell delivered healthy profit growth, cash generation and shareholder returns
over the period. The Metals and Mining sector also had a strong year, with the
diversified miner Glencore returning over 50% on the back of strong commodity
price inflation including in thermal coal. The Company's investment policy
leads us to be underweight these sectors due to our preference for investments
with a higher degree of earnings visibility and stability and more dependable
dividend distribution track records. Not owning large index constituents such
as BP, Shell, Glencore, Rio Tinto and Anglo American proved a significant
relative headwind over the year.
In addition to the quality focus of the portfolio, the sustainable and
responsible investment approach draws attention to the long-term risk facing
the Energy sector as global economies transition to low carbon fuels to
mitigate climate change. The policy focuses our efforts on companies at the
forefront of energy transition, with a material proportion of revenues from
transition energies such as national gas, in addition to renewables. Here we
see Total Energies as a leader in the sector. The decision to hold back
investing in BP and Shell for environmental reasons has been corroborated this
year, with both companies pulling back on plans to roll out low carbon energy
capex. However, we recognised this was taken well by the market given the
uncertainty of returns in alternative energy assets.
Political turmoil in UK politics in the second half of the year, triggered by
the government's 'mini-budget', led to a sharp rise in interest rate
expectations, a fall in Sterling and a sell-off in companies heavily exposed
to the UK. 2022 saw the UK domestic focused FTSE 250 Index lag the large cap
FTSE 100 Index, with the quantum of underperformance greater than during the
2008/09 financial crisis. With 27% of the portfolio invested in UK mid and
small caps, this allocation detracted from performance with companies such as
the housebuilder Persimmon, online greetings cards company Moonpig, and
leading high street pet retailer Pets at Home underperforming in the period.
Whilst there are pockets of weakness, particularly in housing transactions and
big ticket discretionary spend, recent trading has indicated the UK consumer
is holding up. Meanwhile, valuations have been rebased and we believe the long
run track record of alpha generation from UK mid-caps will return.
There are two stock specific detractors in the year to highlight. Direct
Line Insurance issued a disappointing profits warning in January 2023 on the
back of major weather losses, claims inflation, delays to motor rate rises and
commercial property investment losses. Pressure on the company's balance sheet
has meant its dividend has been suspended as the company looks to rebuild its
capital position. The building materials company Marshalls lowered forecasts
in October following softening consumer demand in its landscaping business.
The company embarked on a restructuring programme to manage its cost base and
protect profitability and has subsequently issued a reassuring update to the
market.
Portfolio Activity
We continue to concentrate the portfolio in companies with highly attractive
prospects for total returns. We have recycled the capital from companies held
in the portfolio that have been bid for, including Aveva and Euromoney
Institutional Investor.
We significantly increased the position in Unilever in the first half of the
year. It has been pleasing to see its investment in brand and product lead to
sector leading pricing power and demand elasticity in what has been a period
of high input cost inflation.
The market volatility around the mini budget led to sharp share price
corrections. This presented an opportunity for us to buy domestic oriented
quality companies facing near-term uncertainty but where future long-term
prospective returns look attractive. We initiated a position in the large
housebuilder Taylor Wimpey in October 2022, at a point when mortgage rates
spiked and availability sharply reduced. Whilst the company faces near term
headwinds, the valuation includes a lot of negativity and does not reflect the
strength of the balance sheet and commitment to its attractive cash returns.
We also topped up the holdings in business materials manufacturer Marshalls,
construction group Morgan Sindall, and gaming company Games Workshop during
the year.
We introduced several new positions to the portfolio in the second half of the
year. We initiated a holding in Sage, a developer of accounting software for
small and medium sized businesses. The company has been through a significant
investment phase over the past few years, and we believe it is nearing an
inflection point for its revenue growth and margin expansion potential.
Together, these should drive strong increases in cash generation and dividend
payments.
We started a position in Hiscox, a specialist insurance company with units
operating in both the retail and reinsurance markets. Pricing for insurance
premiums looks extremely positive, while new management is rebuilding
credibility after a series of missteps giving the potential for a rerating of
the valuation. We also expect that distributions to shareholders should
accelerate as profitability comes through. A holding was also started in
Oxford Instruments, a manufacturer of specialist tools for industrial and
academic users. The business has high levels of intellectual property,
attractive long-term growth prospects, and a strong balance sheet which
underpins the investment case. The holding has been added to since the year
end.
We have implemented a number of strategic actions through options, most
notably writing calls over the holding in GlaxoSmithKline ahead of its
spin-out of Haleon, generating significant revenue from a position which we
wanted to exit over the medium term.
Outlook
We retain the relatively cautious outlook that we have had for some time. We
remain positive on the potential long-term returns available from the
portfolio and fundamental company analysis points to attractive opportunities
amongst innovative and resilient mid-sized companies. The market recovery
since the mini budget has been strong as the political environment stabilised
in the UK. The economic backdrop remains one of high and potentially
persistent inflation plus tightening monetary policy. We maintain a cautious
view of economic activity and corporate profitability as we go into the next
financial year. In an uncertain environment, we believe our focus on quality
companies provides protection through a downturn; those companies with strong
pricing power, high margins and resilient balance sheets are better placed to
navigate through a range of economic scenarios.
Against this backdrop, we see reasons to be positive. 2022 was a challenging
year for the UK domestic focused FTSE 250 Index and, in turn, the portfolio's
overweight exposure to this index. The mid-cap underperformance relative to
the large cap FTSE 100 Index was worse than during the 2008/09 global
financial crisis. Valuations have been rebased and we believe the long run
track record of alpha generation from UK mid-caps will return. There are signs
that the UK consumer is in a healthier position than feared, with household
wallets benefiting from wage inflation and lower energy costs. Finally, the UK
equity market remains at a highly attractive valuation on an absolute basis
and relative to global markets. This view is reflected in the bids for
holdings in the portfolio, including Aveva and Euromoney Institutional
Investor, and presents an opportunity for positive prospective returns.
Overall, we will continue to seek to keep a balance to the positioning of the
portfolio, giving ourselves the potential to perform in a range of market
environments. Our primary attention remains on seeking long term capital
growth, but we will continue to look to participate in opportunities where
share prices in good companies with attractive long-term prospects have been
oversold and at the same time focus on those that meet the Company's
sustainable and responsible investing criteria.
Ben Ritchie and Rebecca Maclean,
abrdn Investments Limited
5 April 2023
Portfolio
As at 31 January 2023
Valuation Total Valuation
2023 assets 2022
Company Sector £'000 % £'000
AstraZeneca Pharmaceuticals and Biotechnology 38,221 7.8 27,116
Unilever Personal Care, Drug and Grocery Stores 35,175 7.2 8,486
TotalEnergies Oil, Gas and Coal 28,736 5.8 21,177
Diageo Beverages 25,344 5.2 26,809
Relx Media 24,794 5.0 25,378
SSE Electricity 20,814 4.2 25,499
Nordea Bank Banks 20,309 4.1 21,375
Prudential Life Insurance 17,980 3.7 18,542
Chesnara Life Insurance 16,934 3.4 16,756
Coca-Cola Hellenic Bottling Company Beverages 15,617 3.2 15,772
Ten largest investments 243,924 49.6
Volvo Industrial Transportation 14,667 3.0 7,472
London Stock Exchange Finance and Credit Services 13,697 2.8 9,816
Assura Real Estate Investment Trusts 13,327 2.7 13,083
Games Workshop Leisure Goods 12,772 2.6 5,150
Intermediate Capital Investment Banking and Brokerage Services 12,451 2.5 14,438
Taylor Wimpey Household Goods and Home Construction 11,926 2.4 -
Weir Group Industrial Engineering 11,653 2.4 14,717
Pets At Home Retailers 11,329 2.3 13,729
Close Brothers Banks 11,001 2.2 13,127
Hiscox Non-life Insurance 10,869 2.2 -
Twenty largest investments 367,616 74.7
ASML Technology Hardware and Equipment 10,202 2.1 11,990
Sage Software and Computer Services 10,059 2.0 -
Novo-Nordisk Pharmaceuticals and Biotechnology 9,909 2.0 14,234
Edenred Industrial Support Services 9,319 1.9 8,875
Croda Chemicals 9,297 1.9 10,764
Direct Line Insurance Non-life Insurance 9,180 1.9 15,773
Marshalls Construction and Materials 9,109 1.9 11,612
M&G Investment Banking and Brokerage Services 9,072 1.8 9,683
Morgan Sindall Construction and Materials 8,085 1.6 9,766
Genus Pharmaceuticals and Biotechnology 6,020 1.2 5,082
Thirty largest investments 457,868 93.0
Dechra Pharmaceuticals Pharmaceuticals and Biotechnology 5,803 1.2 5,518
Ashmore Investment Banking and Brokerage Services 5,391 1.1 11,262
Sirius Real Estate Real Estate Investment and Services 4,112 0.9 12,733
Moonpig Retailers 3,551 0.7 4,713
Ubisoft Leisure Goods 2,090 0.4 5,306
Oxford Instruments Electronic and Electrical Equipment 80 - -
Total investments 478,895 97.3
Net current assets(A) 13,210 2.7
Total assets less current liabilities(A) 492,105 100.0
(A) Excluding bank loan of £13,762,000
Sector Analysis
As at 31 January 2023
FTSE All-Share Portfolio Portfolio
Index weighting weighting weighting
2023 2023 2022
% % %
Energy Oil, Gas and Coal 11.0 5.8 4.2
11.0 5.8 4.2
Basic Materials Chemicals 0.7 1.9 2.1
Industrial Metals & Mining 7.9 - -
Precious Metals & Mining 0.3 - -
8.9 1.9 2.1
Industrials Aerospace & Defence 1.7 - -
Construction and Materials 1.5 3.5 4.2
Electronic & Electrical Equipment 1.0 - -
General Industrials 1.8 - -
Industrial Engineering 0.6 2.4 2.9
Industrial Support Services 3.3 1.9 3.5
Industrial Transportation 1.2 3.0 1.5
11.1 10.7 12.1
Consumer Discretionary Consumer Services 1.4 - -
Household Goods and Home Construction 1.1 2.5 2.4
Leisure Goods 0.2 3.0 2.0
Media 3.3 5.0 5.0
Personal Goods 0.5 - -
Retailers 1.6 3.0 3.6
Travel & Leisure 3.0 - -
11.1 13.6 13.0
Health Care Healthcare Providers 0.1 - -
Medical Equipment and Services 0.6 - -
Pharmaceuticals and Biotechnology 10.0 12.2 13.2
10.7 12.2 13.2
Consumer Staples Beverages 3.6 8.3 8.4
Food Producers 0.6 - -
Personal Care, Drug and Grocery Stores 7.3 7.1 1.7
Tobacco 3.7 - -
15.2 15.5 10.1
Real Estate Real Estate Investment and Services 0.4 0.8 2.5
Real Estate Investment Trusts 2.2 2.7 2.7
2.6 3.5 5.1
Utilities Electricity 0.9 4.2 5.0
Gas, Water & Multi-utilities 2.5 - -
3.4 4.2 5.0
Financials Banks 9.4 6.3 6.8
Finance and Credit Services 1.3 2.8 1.9
Investment Banking and Brokerage Services 2.6 5.5 7.0
Life Insurance 3.0 7.1 7.0
Non-life Insurance 0.8 4.1 5.3
17.1 25.7 28.0
Investment Companies Equity Investment Instruments 6.2 - -
Technology Software and Computer Services 1.1 2.0 3.8
Technology Hardware and Equipment - 2.1 2.4
1.1 4.1 6.2
Telecommunications Telecommunications Equipment 0.1 - -
Telecommunications Service Providers 1.5 - -
1.6 - -
Total investments 100.0 97.3 99.0
Net current assets before borrowings(A) 2.7 1.0
Total assets less current liabilities(A) 100.0 100.0
(A) Excluding bank loan of £13,762,000
Directors' Report (extract)
The Directors present their report and the audited financial statements for
the year ended 31 January 2023.
Results and Dividends
The financial statements for the year ended 31 January 2023 are contained
below. First, second and third interim dividends, each of 3.00p per Ordinary
share, were paid on 26 August 2022, 25 November 2022 and 24 February 2023
respectively. The Directors recommend a final dividend of 4.10p per Ordinary
share, payable on 30 May 2023 to shareholders on the register on 5 May 2023.
The ex-dividend date is 4 May 2023. A resolution to approve the final dividend
will be proposed at the Annual General Meeting.
Principal Activity and Status
The Company is registered as a public limited company (registered in Scotland
No. SC000881) and is an investment company within the meaning of Section 833
of the Companies Act 2006. The Company has been approved by HM Revenue &
Customs as an investment trust subject to it continuing to meet the relevant
eligibility conditions of Section 1158 of the Corporation Tax Act 2010 and the
ongoing requirements of Part 2 Chapter 3 Statutory Instrument 2011/2999 for
all financial years commencing on or after 1 February 2012. The Directors
are of the opinion that the Company has conducted its affairs for the year
ended 31 January 2023 so as to enable it to comply with the ongoing
requirements for investment trust status.
Individual Savings Accounts
The Company has conducted its affairs in such a way as to satisfy the
requirements as a qualifying security for Individual Savings Accounts. The
Directors intend that the Company will continue to conduct its affairs in this
manner.
Donations to Charity
During the year, the Board decided that amounts of unclaimed dividends greater
than 12 years old, which are returned annually to the Company by the Registrar
in accordance with the Company Articles of Association, would be donated to
charity. Accordingly, the Company made a donation of £16,000 (2022: £nil) to
the abrdn Charitable Foundation, which directs funding to charities around the
world.
The abrdn Charitable Foundation is a registered charity. Its board of
directors includes independent representation from the abrdn Group and
provides oversight and guidance for its charitable giving activities.
Capital Structure and Voting Rights
The issued Ordinary share capital at 31 January 2023 consisted of 148,264,670
Ordinary shares of 25p and 5,413,265 Ordinary shares held in treasury.
Each Ordinary share holds one voting right and shareholders are entitled to
vote on all resolutions which are proposed at general meetings of the Company.
The Ordinary shares, excluding treasury shares, carry a right to receive
dividends. On a winding up or other return of capital, after meeting the
liabilities of the Company, the surplus assets will be paid to Ordinary
shareholders in proportion to their shareholdings.
There are no restrictions on the transfer of, or voting rights attaching to,
the Ordinary shares in the Company other than certain restrictions which may
from time to time be imposed by law.
Management Agreement
The Company has appointed abrdn Fund Managers Limited ("aFML") (formerly
Aberdeen Standard Fund Managers Limited), a wholly owned subsidiary of abrdn
plc, as its alternative investment fund 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 Investments Limited ("aIL) (formerly Aberdeen
Asset Managers Limited) by way of a group delegation agreement in place
between aFML and aIL. In addition, aFML has sub-delegated administrative and
secretarial services to abrdn Holdings Limited (formerly Aberdeen Asset
Management PLC) and promotional activities to aIL. Details of the management
fees and fees payable for promotional activities are shown in notes 4 and 5 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.
Substantial Interests
As at 31 January 2023, the following interests in the issued Ordinary share
capital of the Company had been disclosed in accordance with the requirements
of the FCA's Disclosure Guidance and Transparency Rules:
Shareholder Number of shares held % held
Abrdn Retail Plans(A) 34,562,852 23.3
(A) Non-beneficial interest
There have been no changes notified to the Company between the year end and
the date of approval of
this Report.
Directors
Throughout the year, the Board comprised five non-executive Directors, each of
which is considered by the Board to be independent of the Company and the
Manager. David Barron is the Chairman and Howard Williams is the Senior
Independent Director.
The Directors attended scheduled Board and Committee meetings during the year
ended 31 January 2023 as follows (with their eligibility to attend the
relevant meetings in brackets):
Board Meetings Audit Committee Meetings Management Engagement Committee Meetings Nomination and Remuneration Committee Meetings
David Barron 6 (6) - (-) 1 (1) 1 (1)
Gay Collins 6 (6) 2 (2) 1 (1) 1 (1)
Jasper Judd 6 (6) 2 (2) 1 (1) 1 (1)
Christine Montgomery 6 (6) 2 (2) 1 (1) 1 (1)
Howard Williams 6 (6) 2 (2) 1 (1) 1 (1)
The Board meets more frequently when business needs require.
Under the terms of the Company's Articles of Association, Directors are
subject to election at the first Annual General Meeting after their
appointment and are required to retire and be subject to re-election at least
every three years thereafter. However, the Board has decided that all
Directors will retire annually. Accordingly, Gay Collins, Jasper Judd, Howard
Williams, Christine Montgomery and David Barron will retire at the Annual
General Meeting and, being eligible, offer themselves for re-election.
The Board believes that all the Directors seeking re-election 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 each Director has the requisite high level and range of business,
investment and financial experience which enables the Board 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 managed succession and diversity.
It is the Board's policy that the Chairman of the Board will not serve as a
Director beyond the Annual General Meeting following the ninth anniversary of
his or her appointment to the Board. However, this may be extended in
exceptional circumstances or to facilitate effective succession planning and
the development of a diverse Board. In such a situation the reasons for the
extension will be fully explained to shareholders and a timetable for the
departure of the Chairman clearly set out.
The Role of the Chairman and Senior Independent Director
The Chairman is responsible for providing effective leadership of the Board,
demonstrating objective judgement and promoting a culture of openness and
debate. The Chairman facilitates the effective contribution and encourages
active engagement by each Director. In conjunction with the Company Secretary,
the Chairman ensures that Directors receive accurate, timely and clear
information to assist them with effective decision-making. The Chairman 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 Chairman and
acts as an intermediary for other Directors, when necessary. Working closely
with the Nomination and Remuneration Committee, the Senior Independent
Director takes responsibility for an orderly succession process for the
Chairman, and leads the annual appraisal of the Chairman's performance. The
Senior Independent Director is also available to shareholders to discuss any
concerns they may have.
Directors' and Officers' Liability Insurance
The Company maintains insurance in respect of Directors' and Officers'
liabilities in relation to their acts on behalf of the Company. Each Director
is entitled to be indemnified out of the assets of the Company to the extent
permitted by law against any loss or liability incurred by him or her in the
execution of his or her duties in relation to the affairs of the Company.
These rights are included in the Articles of Association 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.
No Director has a service contract with the Company although all Directors are
issued with letters of appointment. There were no contracts during, or at the
end of the year, in which any Director was interested.
The Company has a policy of conducting its business in an honest and ethical
manner. The Company takes a zero-tolerance approach to bribery and corruption
and has procedures in place that are proportionate to the Company's
circumstances to prevent them. The Manager also adopts a group-wide
zero-tolerance approach and has its own detailed policy and procedures in
place to prevent bribery and corruption. Copies of the Manager's anti-bribery
and corruption policies are available on its website.
In relation to the corporate offence of failing to prevent tax evasion, it is
the Company's policy to conduct all business in an honest and ethical manner.
The Company takes a zero-tolerance approach to facilitation of tax evasion
whether under UK law or under the law of any foreign country and is committed
to acting professionally, fairly and with integrity in all its business
dealings and relationships.
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.
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);
- 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 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 Company has therefore not
reported further in respect of these provisions.
Full details of the Company's compliance with AIC Code can be found on its
website.
Going Concern
The Company's assets consist mainly of equity shares in companies listed on
the London Stock Exchange and in most circumstances are considered to be
realisable within a short timescale. The Board has set limits for borrowing
and derivative contract positions and regularly reviews actual exposures, cash
flow projections and compliance with loan covenants. The Directors have
considered the fact that Company's investments comprise readily realisable
securities which can be sold to meet funding requirements if necessary. The
Directors have also performed stress testing on the portfolio and the loan
financial covenants.
The Company has borrowings in the form of £30 million 3.99% Loan Notes that
mature in December 2045, and a £30 million multi-currency revolving credit
facility with The Bank of Nova Scotia, London Branch, which matures in July
2023. The Board has reviewed indicative quotes for the renewal of the
multi-currency revolving credit facility and expects to be able to renew it
upon its maturity with a similar facility.
Following this assessment, the Directors believe that the Company has adequate
financial resources to continue in operational existence for the foreseeable
future and for at least twelve months from the date of this Report.
Accordingly, they continue to adopt the going concern basis of accounting in
preparing the financial statements.
Accountability and Audit
Each Director confirms that, so far as he or she is aware, there is no
relevant audit information of which the Company's Auditor is unaware, and they
have taken all the steps that they could reasonably be expected to have taken
as Directors in order to make themselves aware of any relevant audit
information and to establish that the Company's Auditor is aware of that
information.
Independent Auditor
The Company's Auditor, Deloitte LLP, has indicated its willingness to remain
in office. The Board will propose resolutions at the Annual General Meeting to
re-appoint Deloitte LLP as 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 the Manager's Customer Services Department
(see Contact Addresses).
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 Board and Manager meet
with major shareholders on at least an annual basis in order to gauge their
views.
abrdn Holdings Limited has been appointed Company Secretary to the Company.
Whilst abrdn Holdings Limited is a wholly owned subsidiary of the abrdn Group,
there is a clear separation of roles between the Manager and Company Secretary
with different board compositions and different reporting lines in place. 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 Chairman responds personally as appropriate.
Directors attend meetings with the Company's largest shareholders and meet
other shareholders at the Annual General Meeting and, as explained in the
Chairman's Statement, the Company will hold an online shareholder presentation
in advance of the Annual General Meeting this year, which will include an
interactive question and answer session.
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.
Disclosures in Strategic Report
In accordance with Section 414 C (11) of the Companies Act 2006, the following
information otherwise required to be set out in the Directors' Report has been
included in the Strategic Report: risk management objectives and policies and
likely future developments in the business.
Annual General Meeting
The Annual General Meeting will be held at V&A Dundee, 1 Riverside
Esplanade, Dundee DD1 4EZ on Tuesday 16 May 2023 at 12 noon.
By order of the Board
abrdn Holdings Limited
Company Secretary
1 George Street
Edinburgh EH2 2LL
5 April 2023
Statement of Directors' Responsibilities
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 have elected 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 judgments 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; 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 proper accounting records that
disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that the financial statements comply with
the Companies Act 2006. They have general responsibility for taking such steps
as are reasonably open to them to safeguard the assets of the Company and to
prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, 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 Annual Report taken as a whole, is fair, balanced and
understandable and it provides the information necessary to assess the
Company's position and performance, business model and strategy; 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.
On behalf of the Board
David Barron
Chairman
5 April 2023
Statement of Comprehensive Income
Year ended 31 January 2023 Year ended 31 January 2022
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains on investments 10 - (13,996) (13,996) - 17,551 17,551
Currency (loss)/profit - (558) (558) - 525 525
Income 3 21,950 - 21,950 21,518 - 21,518
Investment management fee 4 (682) (1,022) (1,704) (727) (1,091) (1,818)
Administrative expenses 5 (951) - (951) (882) - (882)
Net return before finance costs and taxation 20,317 (15,576) 4,741 19,909 16,985 36,894
Finance costs 6 (597) (888) (1,485) (569) (824) (1,393)
Return before taxation 19,720 (16,464) 3,256 19,340 16,161 35,501
Taxation 7 (412) - (412) (267) - (267)
Return after taxation 19,308 (16,464) 2,844 19,073 16,161 35,234
Return per Ordinary share (pence) 9 13.02 (11.10) 1.92 12.87 10.91 23.78
The column of this statement headed "Total" 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
As at As at
31 January 2023 31 January 2022
Notes £'000 £'000
Non-current assets
Investments at fair value through profit or loss 10 478,895 502,423
Current assets
Debtors 11 2,452 2,672
Cash and cash equivalents 12,267 2,855
14,719 5,527
Creditors: amounts falling due within one year
Bank loan 12 (13,762) (13,034)
Other creditors 12 (1,509) (606)
(15,271) (13,640)
Net current liabilities (552) (8,113)
Total assets less current liabilities 478,343 494,310
Creditors: amounts falling due after more than one year 13 (29,738) (29,731)
Net assets 448,605 464,579
Capital and reserves
Called-up share capital 14 38,419 38,419
Share premium account 4,908 4,619
Capital redemption reserve 1,606 1,606
Capital reserve 379,839 396,303
Revenue reserve 16 23,833 23,632
Equity shareholders' funds 448,605 464,579
Net asset value per Ordinary share (pence) 17 302.57 313.56
The financial statements were approved and authorised for issue by the Board
of Directors on 5 April 2023 and were signed on its behalf by:
David Barron
Director
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Equity
For the year ended 31 January 2023
Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 January 2022 38,419 4,619 1,606 396,303 23,632 464,579
Return after taxation - - - (16,464) 19,308 2,844
Issue of shares from Treasury - 289 - - - 289
Dividends paid 8 - - - - (19,107) (19,107)
Balance at 31 January 2023 38,419 4,908 1,606 379,839 23,833 448,605
For the year ended 31 January 2022
Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 January 2021 38,419 4,619 1,606 380,142 23,507 448,293
Return after taxation - - - 16,161 19,073 35,234
Dividends paid 8 - - - - (18,948) (18,948)
Balance at 31 January 2022 38,419 4,619 1,606 396,303 23,632 464,579
The Revenue reserve and the part of the Capital reserve represented by
realised capital gains represent the amount of the Company's reserves
distributable by way of dividend.
The accompanying notes are an integral part of the financial statements.
Statement of Cash Flows
Year ended Year ended
31 January 2023 31 January 2022
Notes £'000 £'000
Operating activities
Net return before finance costs and taxation 4,741 36,894
Adjustment for:
Losses/(gains) on investments 13,996 (17,551)
Currency losses/(gains) 558 (525)
Decrease/(increase) in accrued dividend income 18 (223)
Stock dividends included in dividend income - (1,333)
(Increase)/decrease in other debtors excluding tax (16) 5
Increase/(decrease) in other creditors 186 (66)
Overseas withholding tax (1,052) (811)
Net cash flow from operating activities 18,431 16,390
Investing activities
Purchases of investments (109,784) (142,812)
Sales of investments 120,822 145,846
Net cash from investing activities 11,038 3,034
Financing activities
Interest paid (1,409) (1,380)
Dividends paid 8 (19,107) (18,948)
Issue of shares from treasury 289 -
Loan repayment - (13,323)
Loan drawdowns - 13,323
Net cash used in financing activities (20,227) (20,328)
Increase/(decrease) in cash and cash equivalents 9,242 (904)
Analysis of changes in cash and cash equivalents during the year
Opening balance 2,855 4,002
Effect of exchange rate fluctuations on cash held 170 (243)
Increase/(decrease) in cash as above 9,242 (904)
Closing balance 12,267 2,855
The accompanying notes are an integral part of the financial statements. A
reconciliation of the changes in net debt can be found in note 18 .
Notes to the Financial Statements
For the year ended 31 January 2023
1. Principal activity
The Company is a closed-end investment company, registered in Scotland No.
SC000881, with its Ordinary shares being listed on the London Stock Exchange.
2. Accounting policies
(a) Basis of preparation and going concern. The financial statements have been
prepared in accordance with Financial Reporting Standard 102, the requirements
of the Companies Act 2006 and with the AIC ("Association of Investment
Companies") Statement of Recommended Practice 'Financial Statements of
Investment Trust Companies and Venture Capital Trusts' issued in July 2022.
The financial statements are prepared in sterling which is the functional
currency of the Company and rounded to the nearest £'000. They have also been
prepared on the assumption that approval as an investment trust will continue
to be granted.
The Company's assets consist mainly of equity shares in companies listed on
the London Stock Exchange and in most circumstances are considered to be
realisable within a short timescale. The Board has set limits for borrowing
and derivative contract positions and regularly reviews actual exposures, cash
flow projections and compliance with loan covenants. The Directors have
considered the fact that Company's investments comprise readily realisable
securities which can be sold to meet funding requirements if necessary. The
Directors have also performed stress testing on the portfolio and the loan
financial covenants.
The Company has borrowings in the form of £30 million 3.99% Loan Notes that
mature in December 2045, and a £30 million multi-currency revolving credit
facility with The Bank of Nova Scotia, London Branch, which matures in July
2023. The Board has reviewed indicative quotes for the renewal of the
multi-currency revolving credit facility and expects to be able to renew it
upon its maturity with a similar facility.
Following this assessment, the Directors believe that the Company has adequate
financial resources to continue in operational existence for the foreseeable
future and for at least twelve months from the date of this Report.
Accordingly, they continue to adopt the going concern basis of accounting in
preparing the financial statements.
Critical accounting judgements and key sources of estimation uncertainty. The
preparation of financial statements requires the use of certain significant
accounting judgements, estimates and assumptions which requires management to
exercise its judgement in the process of applying the accounting policies
which are continually evaluated. The Board considers that there are no
accounting judgements, estimates and assumptions which would significantly
impact the financial statements.
(b) Revenue, expenses and interest payable. Income from equity investments (other
than special dividends), 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. Foreign income is converted at the exchange rate applicable
at the time of receipt. Interest receivable on short term deposits and
expenses are accounted for on an accruals basis. Income from underwriting
commission is recognised as earned. Interest payable is calculated on an
effective yield basis. Stock lending income is recognised on an accruals
basis.
Underwriting commission is taken to revenue, unless any shares underwritten
are required to be taken up, in which case the proportionate commission
received is deducted from the cost of the investment.
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, including the
amortisation of expenses, are allocated between revenue and capital in line
with the Board's expectation of returns from the Company's investments over
the long-term of 40% to revenue and 60% to capital.
(c) Investments. Investments have been designated upon initial recognition as fair
value through profit or loss. Investments are recognised and de-recognised at
trade date where a purchase or sale is under a contract whose terms require
delivery within the timeframe established by the market concerned, and are
measured initially at fair value. Subsequent to initial recognition,
investments are recognised at fair value through profit or loss. 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
FTSE All-Share and the most liquid AIM constituents. Gains or 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.
(d) Dividends payable. Final dividends payable to equity shareholders are
recognised in the financial statements when they have been approved by
Shareholders and become a liability of the Company. Interim dividends are
recognised in the financial statements in the period in which they are paid.
(e) Nature and purpose of reserves
Called-up share capital. The Ordinary share capital on the Statement of
Financial Position relates to the number of shares in issue and in treasury.
Only when the shares are cancelled, either from treasury or directly, is a
transfer made to the capital redemption reserve.
Share premium account. The balance classified as share premium includes the
premium above the nominal value from the proceeds on issue of any equity share
capital comprising Ordinary shares of 25p.
Capital redemption reserve. The capital redemption reserve is used to record
the amount equivalent to the nominal value of any of the Company's own shares
purchased and cancelled in order to maintain the Company's capital.
Capital reserve. Gains or losses on the disposal of investments and changes in
the fair values of investments are transferred to 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.
Certain other items including gains or losses on foreign currency and special
dividends are also allocated to this reserve as appropriate. The part of this
reserve represented by realised capital gains is available for distribution by
way of dividend.
The costs of share buybacks to be held in treasury are also deducted from this
reserve.
Revenue reserve. Income and expenses which are recognised in the revenue
column of the Statement of Comprehensive Income are transferred to the revenue
reserve. The revenue reserve is available for distribution by way of dividend.
(f) Taxation. The charge for taxation is based on the profit for the year and
takes into account taxation deferred because of timing differences between the
treatment of certain items for taxation and accounting purposes.
Owing to the Company's status as an investment trust, 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.
(g) Foreign currency. Monetary assets and liabilities and non-monetary assets held
at fair value denominated in foreign currencies are converted into sterling at
the rate of exchange ruling at the reporting date. Transactions during the
year involving foreign currencies are converted at the rate of exchange ruling
at the transaction date. Gains or losses arising from a change in exchange
rates subsequent to the date of a transaction are included as a currency gain
or loss in revenue or capital in the Statement of Comprehensive Income,
depending on whether the gain or loss is of a revenue or capital nature. The
Company receives a proportion of its investment income in foreign currency.
These amounts are translated at the rate ruling on the date of receipt.
(h) Traded options. The Company may enter into certain derivative contracts (e.g.
options). Option contracts are accounted for as separate derivative contracts
and are therefore shown in other assets or other liabilities at their fair
value. The initial fair value is based on the initial premium, which is
recognised upfront. The premium received and fair value changes in the open
position which occur due to the movement in underlying securities are
recognised in the revenue column, losses realised on the exercise of the
contracts are recorded in the capital column of the Statement of Comprehensive
Income.
In addition, the Company may enter into derivative contracts to manage market
risk and gains or losses arising on such contracts are recorded in the capital
column of the Statement of Comprehensive Income.
(i) Borrowings. Borrowings are measured initially at the fair value of the
consideration received, net of any issue expenses, and subsequently at
amortised cost using the effective interest method. The finance costs of such
borrowings are accounted for on an accruals basis using the effective interest
rate method and are charged 40% to revenue and 60% to capital in the Statement
of Comprehensive Income to reflect the Company's investment policy and
prospective income and capital growth.
(j) Treasury shares. When the Company purchases the Company's equity share capital
to be held as treasury shares, the amount of the consideration paid, which
includes directly attributable costs, is net of any tax effects, 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.
3. Income
2023 2022
£'000 £'000
Income from investments
UK dividend income 13,643 14,463
Overseas dividends 6,262 3,895
Stock dividends - 1,333
19,905 19,691
Other income
Income on derivatives 2,007 1,826
Deposit interest -
Interest received on withholding tax refunds 38 1
2,045 1,827
Total income 21,950 21,518
During the year, the Company earned premiums totalling £2,007,000 (2022 -
£1,826,000) in exchange for entering into derivative transactions. The
Company had no open positions in derivative contracts at 31 January 2023 (2022
- no open positions). Losses realised on the exercise of derivative
transactions are disclosed in note 10.
4. Management fee
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Management fee 682 1,022 1,704 727 1,091 1,818
The Company has an agreement with abrdn Fund Managers Limited ("aFML") for the
provision of investment management, risk management, accounting,
administrative and secretarial services. The management fee is calculated and
charged, on a monthly basis, at 0.45% per annum on the first £225 million,
0.35% per annum on the next £200 million and 0.25% per annum on amounts over
£425 million of the net assets of the Company, with debt at par and excluding
commonly managed funds. The balance due at the year end was £286,000 (2022 -
£154,000). The management fee is allocated 40% to revenue and 60% to capital.
There were no commonly managed funds held in the portfolio during the year to
31 January 2023 (2022 - none).
The management agreement may be terminated by either party on six months'
written notice.
5. Administrative expenses
2023 2022
£'000 £'000
Directors' fees 153 142
Auditor's remuneration (excluding VAT):
- fees payable to the Company's Auditor for the audit of the Company's annual 30 23
accounts
- fees payable to the Company's Auditor for other services:
- interim review 7 7
Irrecoverable VAT 61 98
Promotional activities 243 189
Registrar's fees 43 43
Share plan fees 120 85
Printing and postage 65 48
Other expenses 229 247
951 882
Expenses of £243,000 (2022 - £189,000) were paid to aFML in respect of the
promotional activities of the Company. The balance outstanding at the year end
was £81,000 (2022 - £24,000).
The Company was granted VAT registered status during the year, backdated to 1
January 2021. As a result the above current year expenses, where applicable,
are disclosed net of VAT.
6. Finance costs
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Bank loan 110 166 276 68 102 170
Loan Notes - repayable after more than five years 479 718 1,197 479 718 1,197
Amortised Loan Notes issue expenses 3 4 7 3 4 7
Bank overdraft 5 - 5 19 - 19
597 888 1,485 569 824 1,393
Finance costs (excluding bank overdraft interest) are allocated 40% to revenue
and 60% to capital.
7. Taxation
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
(a) Analysis of charge for the year
Overseas tax suffered 1,154 - 1,154 961 - 961
Overseas tax reclaimable (742) - (742) (694) - (694)
Total tax charge for the year 412 - 412 267 - 267
(b) Factors affecting the tax charge for the year. The UK corporation tax rate is
19% (2022 - 19%). The tax assessed for the year is lower than the rate of
corporation tax. The differences are explained below:
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Return before taxation 19,720 (16,464) 3,256 19,340 16,161 35,501
Corporation tax at 19% (2022 - 19%) 3,747 (3,128) 619 3,675 3,071 6,746
Effects of: -
Non-taxable UK dividend income (2,628) - (2,628) (2,748) - (2,748)
Non-taxable stock dividends - - (254) - (254)
Capital losses/(gains) on investments not taxable - 2,659 2,659 - (3,335) (3,335)
Expenses not deductible for tax purposes 1 - 1 1 - 1
Currency (gains)/losses not taxable - 106 106 - (99) (99)
Overseas taxes 412 - 412 267 - 267
Non-taxable overseas dividends (1,050) - (1,050) (687) - (687)
Excess management expenses (70) 363 293 13 363 376
Total tax charge 412 - 412 267 - 267
(c) Factors that may affect future tax charges. At the year end, the Company has,
for taxation purposes only, accumulated unrelieved management expenses and
loan relationship deficits of £133,906,000 (2022 - £132,362,000). A deferred
tax asset in respect of this has not been recognised and these unrelieved
expenses will only be utilised if the Company has profits chargeable to
corporation tax in the future.
The UK corporation tax rate will increase to 25% with effect from 1 April
2023. This will impact, where appropriate, the value of UK deferred tax
balances and the tax charged on future UK profits.
8. Ordinary dividends on equity shares
2023 2022
£'000 £'000
Amounts recognised as distributions paid during the year:
Third interim dividend for 2022 - 3.00p (2021 - 3.00p) 4,445 4,445
Final dividend for 2022 - 3.90p (2021 - fourth interim - 3.80p) 5,782 5,630
First interim dividend for 2023 - 3.00p (2022 - 3.00p) 4,448 4,445
Second interim dividend for 2023 - 3.00p (2022 - 3.00p) 4,448 4,445
Return of unclaimed dividends(A) (16) (17)
19,107 18,948
(A) Unclaimed dividends returned to the Company during the year ended 31
January 2023 have been donated to charity (see note 22).
A third interim dividend of 3.00p per Ordinary share was declared on 6
December 2022, payable on 24 February 2023 to shareholders on the register on
3 February 2023 and has not been included as a liability in these financial
statements. The final dividend of 4.10p per Ordinary share was approved by the
Board on 5 April 2023, payable on 30 May 2023 to shareholders on the register
on 5 May 2023 and has not been included as a liability in the financial
statements.
The table below sets out the total dividends paid and proposed in respect of
the financial year, which is the basis upon which the requirements of Sections
1158-1159 of the Corporation Tax Act 2010 are considered. The net revenue
available for distribution by way of dividend for the year is £19,308,000
(2022 - £19,073,000).
2023 2022
£'000 £'000
First interim dividend for 2023 - 3.00p (2022 - 3.00p) 4,448 4,445
Second interim dividend for 2023 - 3.00p (2022 - 3.00p) 4,448 4,445
Third interim dividend for 2023 - 3.00p (2022 - 3.00p) 4,448 4,445
Final dividend for 2023 - 4.10p (2022 - 3.90p) 6,079 5,782
19,423 19,117
The final dividend is based on the latest share capital of 148,264,670
Ordinary shares excluding those held in treasury.
9. Return per Ordinary share
2023 2022
£'000 p £'000 p
Revenue return 19,308 13.02 19,073 12.87
Capital return (16,464) (11.10) 16,161 10.91
Total return 2,844 1.92 35,234 23.78
Weighted average number of Ordinary shares in issue 148,256,451 148,164,670
10. Investments at fair value through profit or loss
2023 2022
£'000 £'000
Opening book cost 428,488 410,222
Investment holdings gains 73,935 77,208
Opening fair value 502,423 487,430
Analysis of transactions made during the year
Purchases 110,433 144,145
Sales - proceeds (119,965) (146,703)
(Losses)/gains on investments (13,996) 17,551
Closing fair value 478,895 502,423
Closing book cost 424,815 428,488
Closing investment holdings gains 54,080 73,935
Closing fair value 478,895 502,423
The Company received £119,965,000 (2022 - £146,703,000) from investments
sold in the year. The book cost of these investments when they were purchased
was £114,106,000 (2022 - £125,879,000). 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.
The realised gains figure above includes losses realised on the exercise of
traded options of £625,000 (2022 - £971,000). Premiums received of
£2,007,000 (2022 - £1,826,000) are included within income per note 3.
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
gains/(losses) on investments in the Statement of Comprehensive Income. The
total costs were as follows:
2023 2022
£'000 £'000
Purchases 506 592
Sales 76 79
582 671
The above transaction costs are calculated in line with the AIC SORP. The
transaction costs in the Company's Key Information Document are calculated on
a different basis and in line with the PRIIPs regulations.
11. Debtors: amounts falling due within one year
2023 2022
£'000 £'000
Net dividends and interest receivable 763 781
Tax recoverable 1,657 1,017
Amounts due from brokers - 857
Other loans and receivables 32 17
2,452 2,672
12. Creditors: amounts falling due within one year
2023 2022
(a) Bank loan £'000 £'000
EUR 15,600,000 - 11 February 2022 - 13,034
EUR 15,600,000 - 11 February 2023 13,762 -
13,762 13,034
The Company has a £30,000,000 multi-currency revolving credit facility with
The Bank of Nova Scotia, London Branch committed until 13 July 2023. Under the
terms of the facility, subject to the lender's credit approval, the Company
has the option to increase the level of the facility from £30,000,000 to
£40,000,000 at any time, should further investment opportunities be
identified. As at 31 January 2023 €15,600,000 had been drawn down at a rate
of 3.618% (2022 - €15,600,000 at a rate of 1.0%), which matured on 7
February 2023. At the date this Report was approved €15,600,000 had been
drawn down at a rate of 3.551%, maturing on 6 April 2023. The terms of the
loan facility contain covenants that the adjusted asset coverage is not be
less than 4.00 to 1.00 and that the minimum net assets of the Company are
£200 million.
2023 2022
(b) Other creditors £'000 £'000
Loan Notes and bank loan interest 257 189
Amount due to brokers 649 -
Sundry creditors 603 417
1,509 606
13. Creditors: amounts falling due after more than one year
2023 2022
£'000 £'000
3.99% Loan Notes 2045 30,000 30,000
Unamortised Loan Note issue expenses (262) (269)
29,738 29,731
The 3.99% Loan Notes were issued in December 2015 and are due to be redeemed
at par on 8 December 2045. Interest is payable in half-yearly instalments in
June and December. The Loan Notes are secured by a floating charge over the
whole of the assets of the Company. The Company has complied with the Loan
Note Trust Deed covenant that total net borrowings (ie. after the deduction of
cash balances) should not exceed 33% of the Company's net asset value and that
the Company's net asset value should not be less than £200 million.
The fair value of the Loan Notes as at 31 January 2023 was £29,393,000 (2022
- £36,441,000), the value being calculated per the disclosure in note 19. The
effect on the net asset value of deducting the Loan Notes at fair value rather
than at par is disclosed in note 17.
14. Called-up share capital
2023 2022
£'000 £'000
Allotted, called up and fully paid:
148,264,670 (2022 - 148,164,670) Ordinary shares of 25p each - equity 37,066 37,041
Treasury shares:
5,413,265 (2022 - 5,513,265) Ordinary shares of 25p each - equity 1,353 1,378
38,419 38,419
The Ordinary share capital on the Statement of Financial Position relates to
the number of shares in issue and in treasury. Only when the shares are
cancelled, either from treasury or directly, is a transfer made to the capital
redemption reserve.
During the year the Company issued 100,000 Ordinary shares at a price of 290p
per share (2022 - no shares issued or repurchased). All of these shares were
released from treasury.
15. Analysis of changes in financing during the year
2023 2022
Equity Equity
share capital share capital
(including Loan (including Loan
premium) Notes premium) Notes
£'000 £'000 £'000 £'000
Opening balance at 31 January 2022 43,038 29,731 43,038 29,724
Issue of shares from Treasury 289 - - -
Movement in unamortised Loan Notes issue expenses - 7 - 7
Closing balance at 31 January 2023 43,327 29,738 43,038 29,731
16. Revenue reserve per share
The following information is presented supplemental to the financial
statements to show the Companies Act position at the year end.
2023 2022
Revenue reserve (£'000) 23,833 23,632
Number of Ordinary shares in issue at year end 148,264,670 148,164,670
Revenue reserve per Ordinary share (p) 16.07 15.95
Less: - third interim dividend (p) (3.00) (3.00)
- final dividend (p) (4.10) (3.90)
Revenue reserve per Ordinary share (p) 8.97 9.05
17. Net asset value per share
Equity shareholders' funds have been calculated in accordance with the
provisions of FRS 102. The analysis of equity shareholders' funds on the face
of the Statement of Financial Position does not reflect the rights under the
Articles of Association of the Ordinary shareholders on a return of assets.
These rights are reflected in the net asset value and the net asset value per
share attributable to Ordinary shareholders at the year end, adjusted to
reflect the deduction of the Loan Notes at par. A reconciliation between the
two sets of figures is as follows:
2023 2022
Net assets attributable (£'000) 448,605 464,579
Number of Ordinary shares in issue at year end(A) 148,264,670 148,164,670
Net asset value per Ordinary share 302.57p 313.56p
(A) Excluding shares held in treasury.
Adjusted net assets 2023 2022
Net assets attributable (£'000) as above 448,605 464,579
Unamortised Loan Note issue expenses (note 13) (262) (269)
Adjusted net assets attributable (£'000) 448,343 464,310
Number of Ordinary shares in issue at year end(A) 148,264,670 148,164,670
Adjusted net asset value per Ordinary share 302.39p 313.37p
(A) Excluding shares held in treasury.
Net assets - debt at fair value £'000 £'000
Net assets attributable 448,605 464,579
Amortised cost Loan Notes 29,738 29,731
Market value Loan Notes (29,393) (36,441)
Net assets attributable 448,950 457,869
Number of Ordinary shares in issue at the period end(A) 148,264,670 148,164,670
Net asset value per Ordinary share (debt at fair value) 302.80p 309.03p
(A) Excluding shares held in treasury. a) b)
18. Analysis of changes in net debt
At Currency Non-cash At
31 January 2022 differences Cash flows movements 31 January 2023
£'000 £'000 £'000 £'000 £'000
Cash and cash equivalents 2,855 170 9,242 - 12,267
Debt due within one year (13,034) (728) - - (13,762)
Debt due after more than one year (29,731) - - (7) (29,738)
(39,910) (558) 9,242 (7) (31,233)
At Currency Non-cash At
31 January 2021 differences Cash flows movements 31 January 2022
£'000 £'000 £'000 £'000 £'000
Cash and cash equivalents 4,002 (243) (904) - 2,855
Debt due within one year (13,802) 768 - - (13,034)
Debt due after more than one year (29,724) - - (7) (29,731)
(39,524) 525 (904) (7) (39,910)
A statement reconciling the movement in net funds to the net cash flow has not
been presented as there are no differences from the above analysis.
19. Financial instruments and risk management
The Company's investment activities expose it to various types of financial
risk associated with the financial instruments and markets in which it
invests. 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 in the form of option contracts
for the purpose of generating income and futures/options for hedging market
exposures.
During the year, the Company entered into certain options contracts for the
purpose of generating income. Positions closed during the year realised a loss
of £625,000 (2022 - £971,000). As disclosed in note 3, the premium received
and fair value changes in respect of options written in the year was
£2,007,000 (2022 - £1,826,000). The largest position in derivative contracts
held during the year at any given time was £889,000 (2022 - £558,000). The
Company had no open positions in derivative contracts at 31 January 2023 (2022
- none).
The Board relies on abrdn Fund Managers Limited ("aFML" or the "Manager") for
the provision of risk management activities under the terms of its management
agreement with aFML (further details of which are included under note 4). The
Board regularly reviews and agrees policies for managing each of the key
financial risks identified with the Manager. The types of risk and the
Manager's approach to the management of each type of risk, are summarised
below. Such approach has been applied throughout the year and has not changed
since the previous accounting period. The numerical disclosures exclude
short-term debtors and creditors on the grounds that they are not considered
to be material.
The Company's Manager has an independent Investment Risk department for
reviewing the investment risk parameters of all core equity, fixed income and
alternative asset classes on a regular basis. The department reports to the
Manager's Performance Review Committee which is chaired by the Manager's Chief
Investment Officer. The department's responsibility is to review and monitor
ex-ante (predicted) portfolio risk and style characteristics using best
practice, industry standard multi-factor models.
Risk management framework. The directors of aFML collectively assume
responsibility for aFML's obligations under the AIFMD including reviewing
investment performance and monitoring the Company's risk profile during the
year.
aFML is a fully integrated member of the abrdn Group (the "Group") which
provides a variety of services and support to aFML in the conduct of its
business activities, including in the oversight of the risk management
framework for the Company. aFML has delegated the day to day administration of
the investment policy to abrdn Limited, which is responsible for ensuring that
the Company is managed within the terms of its investment guidelines and the
limits set out in its pre-investment disclosures to investors (details of
which can be found on the Company's website). aFML has retained responsibility
for monitoring and oversight of investment performance, product risk and
regulatory and operational risk for the Company.
The Manager conducts its risk oversight function through the operation of the
Group's risk management processes and systems which are embedded within the
Group's operations. The Group's Risk Division supports management in the
identification and mitigation of risks and provides independent monitoring of
the business. The Division includes Compliance, Business Risk, Market Risk,
Risk Management and Legal. The team is headed up by the Group's Chief Risk
Officer, who reports to the Chief Executive Officers of the Group. The Risk
Division achieves its objective through embedding the Risk Management
Framework throughout the organisation using the Group's operational risk
management system ("SHIELD").
The Group's Internal Audit Department is independent of the Risk Division and
reports directly to the Group's Chief Executive Officers and to the Audit
Committee of the Group's Board of Directors. The Internal Audit Department is
responsible for providing an independent assessment of the Group's control
environment.
The Group's corporate governance structure is supported by several committees
to assist the board of directors of abrdn, its subsidiaries and the Company to
fulfil their roles and responsibilities. The Group's Risk Division is
represented on all committees, with the exception of those committees that
deal with investment recommendations. The specific goals and guidelines on the
functioning of those committees are described on the committees' terms of
reference.
Risk Management. The main risks the Company faces from its financial
instruments are (i) market 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 Group's policies for managing these risks are summarised below and
have been applied throughout the year. The numerical disclosures exclude
short-term debtors and creditors, other than for currency disclosures.
(i) Market risk. Market risk comprises three elements - interest rate risk,
currency risk and price risk.
(a) Interest rate risk. Interest rate movements may affect:
- the fair value of the investments in fixed interest rate securities;
- the level of income receivable on cash deposits; and
- interest payable on the Company's variable rate borrowings.
Management of the risk. The possible effects on fair value and cash flows that
could arise as a result of changes in interest rates are taken into account
when making investment and borrowing decisions.
The Board imposes borrowing limits to ensure gearing levels are appropriate to
market conditions and reviews these on a regular basis. Borrowings comprise
fixed rate, revolving, and uncommitted facilities. Details of borrowings at 31
January 2023 are shown in notes 12 and 13.
Interest risk 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
At 31 January 2023 Years % £'000 £'000
Assets
Sterling - - - 12,267
Total assets - - - 12,267
Liabilities
Bank loans 0.17 3.62 (13,762) -
Loan Notes 22.87 3.99 (29,738) -
Total liabilities - - (43,500) -
Weighted
average Weighted
period for average
which interest Fixed Floating
rate is fixed rate rate rate
At 31 January 2022 Years % £'000 £'000
Assets
Sterling - - - 2,855
Total assets - - - 2,855
Liabilities
Bank loans 0.08 1.00 (13,034) -
Loan Notes 23.87 3.99 (29,731) -
Total liabilities - - (42,765) -
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 maturity dates of the Company's borrowings are shown in
notes 12 and 13 to the financial statements.
The floating rate assets consist of cash deposits all earning interest at
prevailing market rates.
The Company's equity portfolio and short-term debtors and creditors (excluding
bank loans) have been excluded from the above tables. All financial
liabilities are measured at amortised cost.
Interest rate sensitivity. Movements in interest rates would not significantly
affect net assets attributable to the Company's shareholders and total profit.
(b) Foreign currency risk. A proportion of the Company's investment portfolio
is invested in overseas securities whose values are subject to fluctuation due
to changes in exchange rates. In addition, the impact of changes in foreign
exchange rates upon the profits of investee companies can result, indirectly,
in changes in their valuations. Consequently the Statement of Financial
Position can be affected by movements in exchange rates.
Management of the risk. It is not the Company's policy to hedge this risk on a
continuing basis but the Company may, from time to time, match specific
overseas investment with foreign currency borrowings. A proportion of the
Company's borrowings, as detailed in note 12, is in foreign currency as at 31
January 2023. The revenue account is subject to currency fluctuations arising
on dividends received in foreign currencies and, indirectly, due to the impact
of foreign exchange rates upon the profits of investee companies. The Company
does not hedge this currency risk.
Foreign currency risk exposure by currency of denomination:
31 January 2023 31 January 2022
Net Total Net Total
monetary currency monetary currency
Investments assets exposure Investments assets exposure
£'000 £'000 £'000 £'000 £'000 £'000
Euro 44,258 (12,391) 31,867 63,632 (12,098) 51,534
Swiss Francs 15,617 90 15,707 - 216 216
Danish Krone 9,909 114 10,023 14,234 94 14,328
Norwegian Krone 10,202 12 10,214 - 13 13
Swedish Krona 34,976 1 34,977 28,847 - 28,847
Sterling 363,933 (18,116) 345,817 395,710 (26,069) 369,641
Total 478,895 (30,290) 448,605 502,423 (37,844) 464,579
The asset allocation between specific markets can vary from time to time based
on the Manager's opinion of the attractiveness of the individual stocks in
these markets.
Foreign currency sensitivity. There is no sensitivity analysis included as the
Board believes the amount exposed to foreign currency denominated monetary
assets to be immaterial. Where the Company's equity investments (which are
non-monetary items) are priced in a foreign currency, they have been included
within the other price risk sensitivity analysis so as to show the overall
level of exposure.
(c) Price risk. 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 and traded options.
Management of the risk. 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 company or sector. The Manager actively
monitors market prices throughout the year and reports to the Board, which
meets regularly in order to review investment strategy. The investments held
by the Company are listed on various stock exchanges in the UK and Europe.
Price risk sensitivity. If market prices at the Statement of Financial
Position date had been 10% higher while all other variables remained constant,
the return attributable to Ordinary shareholders for the year ended 31 January
2023 would have increased by £47,890,000 (2022 - increase of £50,242,000)
and equity reserves would have increased by the same amount. Had market prices
been 10% lower the converse would apply.
(ii) Liquidity risk. This is the risk that the Company will encounter difficulty in
meeting obligations associated with financial liabilities as they fall due in
line with the maturity profile analysed below.
More
Within Within Within Within Within than
1 year 1-2 years 2-3 years 3-4 years 4-5 years 5 years Total
At 31 January 2023 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Bank loans 13,762 - - - - - 13,762
Loan Notes - - - - - 30,000 30,000
Interest cash flows on bank loans and loan notes 1,281 1,197 1,197 1,197 1,197 21,546 27,615
Cash flows on other creditors 1,252 - - - - - 1,252
16,295 1,197 1,197 1,197 1,197 51,546 72,629
More
Within Within Within Within Within than
1 year 1-2 years 2-3 years 3-4 years 4-5 years 5 years Total
At 31 January 2022 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Bank loans 13,034 - - - - - 13,034
Loan Notes - - - - - 30,000 30,000
Interest cash flows on bank loans and loan notes 1,207 1,197 1,197 1,197 1,197 22,743 28,738
Cash flows on other creditors 417 - - - - - 417
14,658 1,197 1,197 1,197 1,197 52,743 72,189
Management of the risk. The Board imposes borrowing limits to ensure gearing
levels are appropriate to market conditions and reviews these on a regular
basis. Borrowings comprise Loan Notes and a revolving facility. The Loan Notes
provide secure long-term funding while short term flexibility is achieved
through the borrowing facility. It is the Board's policy to maintain a gearing
level, measured on the most stringent basis of calculation after netting off
cash equivalents, of less than 30% at all times. Details of borrowings at 31
January 2023 are shown in notes 12 and 13.
Liquidity risk is not considered to be significant as the Company's assets
comprise mainly cash and listed securities, which can be sold to meet funding
commitments if necessary. Short-term flexibility is achieved through the use
of loan and overdraft facilities, details of which can be found in note 12.
Under the terms of the loan facility, the Manager provides the lender with
loan covenant reports on a monthly basis, to provide the lender with assurance
that the terms of the facility are not being breached. The Manager will also
review the credit rating of a lender on a regular basis. Details of the
Board's policy on gearing are shown in the interest rate risk section of this
note.
Liquidity risk exposure. At 31 January 2023 and 31 January 2022 the amortised
cost of the Company's Loan Notes was £29,738,000 and £29,731,000
respectively. At 31 January 2023 and 31 January 2022 the Company's bank loans
amounted to £13,762,000 and £13,034,000 respectively. The facility is
committed until 13 July 2023.
(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.
Management of the risk. Investment transactions are carried out with a large
number of brokers, whose credit standing is reviewed periodically by the
Manager, and limits are set on the amount that may be due from any one broker;
- the risk of counterparty exposure due to failed trades causing a loss to the
Company is mitigated by the review of failed trade reports on a daily basis.
In addition, both stock and cash reconciliations to the Custodians' records
are performed on a daily basis to ensure discrepancies are investigated on a
timely basis. The Group's Compliance department carries out periodic reviews
of the custodian's operations and reports its finding to the abrdn Group's
Risk Management Committee. This review will also include checks on the
maintenance and security of investments held;
- cash is held only with reputable banks whose credit ratings are monitored on
a regular basis.
There are internal exposure limits to cash balances placed with
counterparties. The credit worthiness of counterparties is also reviewed on a
regular basis.
None of the Company's financial assets are secured by collateral or other
credit enhancements.
Credit risk exposure. In summary, compared to the amounts in the Statement of
Financial Position, the maximum exposure to credit risk at 31 January was as
follows:
2023 2022
Balance Maximum Balance Maximum
Sheet exposure Sheet exposure
£'000 £'000 £'000 £'000
Non-current assets
Investments at fair value through profit or loss 478,895 - 502,423 -
Current assets
Cash and short term deposits 12,267 12,267 2,855 2,855
491,162 12,267 505,278 2,855
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 has been calculated at £43,155,000 as at 31 January 2023 (2022 -
£49,475,000) compared to an accounts value in the financial statements of
£43,500,000 (2022 - £42,765,000) (notes 12 and 13). The fair value of each
loan is determined by aggregating the expected future cash flows for that loan
discounted at a rate comprising the borrower's margin plus an average of
market rates applicable to loans of a similar period of time and currency. All
other assets and liabilities of the Company are included in the Statement of
Financial Position at fair value.
20. 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 has 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 (ie developed using market data) for the asset or liability, either
directly or indirectly.
Level 3: inputs are unobservable (ie for which market data is unavailable) for
the asset or liability.
The financial assets and liabilities measured at fair value in the Statement
of Financial Position are grouped into the fair value hierarchy at the
reporting date as follows:
Level 1 Level 2 Level 3 Total
As at 31 January 2023 Note £'000 £'000 £'000 £'000
Financial assets at fair value through profit or loss
Quoted equities a) 478,895 - - 478,895
Total 478,895 - - 478,895
Level 1 Level 2 Level 3 Total
As at 31 January 2022 £'000 £'000 £'000 £'000
Financial assets at fair value through profit or loss
Quoted equities a) 502,423 - - 502,423
Total 502,423 - - 502,423
a) Quoted equities. The fair value of the Company's investments in quoted
equities has been determined by reference to their quoted bid prices at the
reporting date. Quoted equities included in Fair Value Level 1 are actively
traded on recognised stock exchanges.
21. 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 return to its equity shareholders through an appropriate
balance of equity capital and debt.
The capital of the Company consists of equity, comprising issued capital,
reserves and retained earnings.
The Board monitors and reviews the broad structure of the Company's capital.
This review includes the nature and planned level of gearing, which takes
account of the Manager's views on future expected returns and the extent to
which revenue in excess of that which is required to be distributed should be
retained. The Company is not subject to any externally imposed capital
requirements.
22. Related party transactions and transactions with the Manager
Directors' fees and interests. Fees payable during the year to the Directors
and their interests in the shares of the Company are disclosed within the
Directors' Remuneration Report.
Transactions with the Manager. The Company has an agreement with the abrdn
Group for the provision of management, secretarial, accounting and
administration services and also for the provision of promotional activities.
Details of transactions during the year and balances outstanding at the year
end are disclosed in notes 4 and 5.
During the year, the Company received £16,000 in respect of returned,
unclaimed dividends accumulated over a number of years. The Board took the
decision to donate these monies to the abrdn Charitable Foundation. The abrdn
Charitable Foundation is a registered charity. Its board of directors includes
independent representation from the abrdn Group and provides oversight and
guidance for its charitable giving activities.
Alternative Performance Measures
Alternative performance measures 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-end
investment companies.
Dividend cover
Dividend cover measures the revenue return per share divided by total
dividends per share, expressed as a ratio.
2023 2022
Revenue return per share a 13.02p 12.87p
Dividends per share b 13.10p 12.90p
Dividend cover a/b 0.99 1.00
Net gearing
Net gearing measures total borrowings less cash and cash equivalents divided
by shareholders' funds, expressed as a percentage. Under AIC reporting
guidance cash and cash equivalents includes net amounts due to and from
brokers at the period end as well as cash and short term deposits.
2023 2022
Borrowings (£'000) a 43,500 42,765
Cash (£'000) b 12,267 2,855
Amounts due to brokers (£'000) c 649 -
Amounts due from brokers (£'000) d - 857
Shareholders' funds (£'000) e 448,605 464,579
Net gearing (a-b+c-d)/e 7.11% 8.41%
Premium/(discount) to net asset value per share with debt at fair value
The premium/(discount) is the amount by which the share price is
higher/(lower) than the net asset value per share with debt at fair value,
expressed as a percentage of the net asset value with debt at fair value.
2023 2022
Share price (p) a 294.00p 310.00p
NAV per Ordinary share (p) (see note 17) b 302.80p 309.03p
Discount (a-b)/b (2.91%) 0.31%
Ongoing charges
The ongoing charges ratio has been calculated in accordance with guidance
issued by the AIC as the total of investment management fees and
administrative expenses less non-recurring charges, expressed as a percentage
of the average net asset values with debt at fair value throughout the year.
2023 2022
Investment management fees (£'000) 1,704 1,818
Administrative expenses (£'000) 951 882
Less: non-recurring charges (£'000) - (57)
Ongoing charges (£'000) 2,655 2,643
Average net assets (£'000) 430,038 472,893
Ongoing charges ratio (excluding look-through costs) 0.62% 0.56%
Look-through costs(AB) 0.02% 0.03%
Ongoing charges ratio (including look-through costs) 0.64% 0.59%
(A) Professional services comprising new Director recruitment costs and legal
fees considered unlikely 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 amongst other things,
includes the cost of borrowings 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 31 January 2023 NAV Price
Opening at 1 February 2022 a 309.0p 310.0p
Closing at 31 January 2023 b 302.8p 294.0p
Price movements c=(b/a)-1 -2.0% -5.2%
Dividend reinvestment(A) d 4.4% 4.3%
Total return c+d +2.4% (0.9%)
Share
Year ended 31 January 2022 NAV Price
Opening at 1 February 2021 a 297.6p 287.0p
Closing at 31 January 2022 b 309.0p 310.0p
Price movements c=(b/a)-1 +3.8% +8.0%
Dividend reinvestment(A) d 4.3% 4.5%
Total return c+d +8.1% +12.5%
(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 Annual Financial Report
The Annual General Meeting will be held at V&A Dundee, 1 Riverside
Esplanade, Dundee DD1 4EZ on Tuesday 16 May 2023 at 12 noon.
The Annual Financial Report Announcement is not the Company's statutory
accounts. The above results for the year ended 31 January 2023 are an
abridged version of the Company's full accounts, which have been approved and
audited with an unqualified report. The 2022 and 2023 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
S498 of the Companies Act 2006. The financial information for 2022 is derived
from the statutory accounts for the year ended 31 January 2022 which have been
delivered to the Registrar of Companies. The accounts for the year ended 31
January 2023 will be filed with the Registrar of Companies in due course.
The Annual Report and Accounts will be posted to shareholders in April 2023
and copies will be available from the registered office of the Company and on
the Company's website, www.dunedinincomegrowth.co.uk.*
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.
By order of the Board
abrdn Holdings Limited
Company Secretary
5 April 2023
* Neither the Company's website nor the content of any website accessible from
hyperlinks on the Company's website (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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