Annual Financial Report
30/05/2023 07:00
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RNS Number : 8922A Edinburgh Investment Trust PLC 30 May 2023
LEI:
549300HV0VXCRONER808
30 May 2023
The Edinburgh Investment Trust plc
ANNUAL FINANCIAL REPORT
FOR THE YEAR ENDED 31 MARCH 2023
30 May 2023 - The Directors of the Edinburgh Investment Trust plc ("the
Company") have today announced the annual results for the period ending 31
March 2023.
Highlights
· Net Asset Value (NAV) per share (with debt at fair value) on a
total return basis increased by 7.9%, comfortably exceeding the 2.9% return on
the FTSE All-Share Index. The share price total return was 8.4%.
· Final dividend proposed of 6.7p per share. Dividends for the
financial year +5.6% compared with the previous year, equivalent to a yield of
4.0%
· Net gearing at 31 March 2023 of 4.7%
· Share price discount to NAV narrowed marginally from 7.7% to 7.5%
· Since James de Uphaugh became Manager of the Company in March
2020, the cumulative NAV return of +65.9% and the share price return of +75.5%
have outperformed the FTSE All-Share return of +47.4% (all in total return
terms)
Elisabeth Stheeman, Chair, said: "It has been a great pleasure to lead the
Company in my first year as the Chair of the Board. Together with my fellow
Directors, and the Company's Manager, we have continued to build on the
strengthening investment track record to position the Company as a core
holding for long-term savers.
"It has been another encouraging twelve months for the Company's investment
returns. Growth in both the NAV and the share price comfortably exceeded the
FTSE All-Share Index. The NAV return in total return terms was 7.9% against
the index return of 2.9%. We are therefore building a track record under the
new Manager that meets the Company's first investment objective - a long-term
increase of the NAV per share in excess of the index.
"Despite the ever-uncertain economic outlook, there is enthusiasm about the
underlying prospects for the stocks in the Company's portfolio. The Manager's
approach of maintaining a diversified portfolio is therefore an important
feature that should help protect shareholders' capital over time. We believe
the Company is well positioned to deliver to shareholders attractive total
returns."
James de Uphaugh, Manager, said: "It is now just over three years since we
became the Manager of the Company. We took over in the midst of the market
sell-off in March 2020, as the full implications of the COVID pandemic began
to dawn. Since then, our investment approach has helped us deal with an at
times rapidly changing economic and market backdrop. As it turns out, we
became stewards of your portfolio towards the lowest levels of the market.
Absolute returns have been strong since then.
"In terms of the main stock contributors over the last year, the top three
were BAE Systems, NatWest and Centrica. These stocks encapsulate the
diversified nature of the portfolio. Other contributions came from Greggs,
Standard Chartered and Weir.
"The better recent returns from the UK equity market strike us as the early
stages of a recovery in the market. This recovery is rooted in the
undervaluation of UK equities that has built up over time and we remain
optimistic about the specific prospects for the Company's holdings.
"Overall, 2023 could see lower inflation, peaking interest rates and perhaps a
slightly better tenor from the consumer. A balanced, diversified portfolio is
as important as ever."
The Edinburgh Investment Trust plc
ANNUAL FINANCIAL REPORT
FOR THE YEAR ENDED 31 MARCH 2023
Financial Information and Performance Statistics
Year Ended Year Ended
Total Return((1)(3)(4)) (all with dividends reinvested) 31 March 2023 31 March 2022
Net asset value((1)) (NAV) - debt at fair value +7.9% +14.1%
Share price((2)) +8.4% +10.6%
FTSE All-Share Index((2)) +2.9% +13.0%
The Company's benchmark is the FTSE All-Share Index.
Capital Return((1)(4)) At 31 March 2023 At 31 March 2022 Change %
Net asset value - debt at fair value 713.75p 686.69p +3.9
Share price((2)) 660.00p 634.00p +4.1
FTSE All-Share Index((2)) 4,157.88 4,187.78 -0.7
Discount((1)(3)(4)) - debt at fair value (7.5)% (7.7)%
Gearing (debt at fair value)((1)(3)(4)) - gross gearing 6.6% 10.3%
- net gearing 4.7% 4.4%
Year Ended Year Ended
Revenue and Dividends((3)) 31 March 2023 31 March 2022 Change %
Revenue return per ordinary share 25.99p 22.41p +15.6
Dividends - first interim 6.40p 6.00p
- second interim 6.40p 6.00p
- third interim 6.70p 6.40p
- proposed final 6.70p 6.40p
- total dividends 26.20p 24.80p +5.6
Consumer Price Index((2)(4)) - annual change 10.2% 7.0%
Dividend Yield((1)(3)(4)) 4.0% 3.9%
Ongoing Charges Ratio((1)(3)(4)) 0.53% 0.52%
Notes:
((1) ) These terms are defined in the Glossary of Terms and
Alternative Performance Measures, including reconciliations, on pages 83 to
86. NAV with debt at fair value is widely used by the investment company
sector for the reporting of performance, premium or discount, gearing and
ongoing charges.
((2) ) Source: Refinitiv.
((3) ) Key Performance Indicator.
((4) ) Alternative Performance Measures.
References to page numbers in the Annual Financial Report, which will be
available from the Company's website: www.
(http://www.edinburgh-investment-trust.co.uk) edinburgh-investment-trust.co.uk
(http://www.edinburgh-investment-trust.co.uk)
Chair's Statement
DEAR SHAREHOLDER
It has been a great pleasure to lead your Company in my first year as the
Chair of the Board. Together with my fellow Directors, and the Company's
Manager, we have continued to build on the strengthening investment track
record to position the Company as a core holding for long-term savers.
I would particularly like to thank my predecessor, Glen Suarez, who stood down
as planned at last year's Annual General Meeting after nine years on the
Board. In recent years he oversaw a transition of the Company with a new
Manager and supporting team, a sustainable and rising dividend, very
attractively priced long-term debt financing and the initiation of a new
marketing strategy, which has been further refined in the past year. This is
an excellent position from which the rest of the Board and I look forward to
building further.
PERFORMANCE
It has been another encouraging twelve months for the Company's investment
returns. Growth in both the Net Asset Value (NAV) and the share price
comfortably exceeded the benchmark index, the FTSE All-Share Index. The NAV
return was 7.9% against the index return of 2.9%. These are in total return
terms (i.e. the combination of capital appreciation plus income received). We
are therefore building a track record under the new Manager that meets the
Company's first investment objective - a long-term increase of the NAV per
share in excess of the index.
The Company's share price total return was 8.4% over the year: the share price
itself moved from 634p to 660p, a rise of 4.1%, with the balance coming from
the dividends paid to shareholders. The share price return differs from the
NAV return because of the changing share price discount to NAV. For this year
the discount narrowed marginally from 7.7% to 7.5%.
There are a number of investment factors that have influenced the Company's
returns over the year. Most important are the performance of the businesses
held in the Company's portfolio. Your Manager takes mainly a 'bottom-up'
approach, seeking to construct a diversified portfolio. Echoing this, some of
the major drivers of returns over the year included the holdings in BAE
Systems, NatWest, Centrica and Greggs. To a lesser extent there were
offsetting negative returns from some of the mining stocks held, including
Anglo American and Newmont. Other factors that contributed to the overall
return were:
● UK equities continue to rebound, outperforming global equities.
After an extended period of dull returns for UK equities, extending to before
the Brexit referendum of 2016, a combination of strong fundamentals and
attractive starting valuations have come to the fore;
● The positive returns have been despite the challenging geopolitical
situation, including the war between Russia and Ukraine;
● Another headwind for elements of the equity market has been
inflation. Here in the UK there is hope that this might start to recede and
that the cost of living crisis might in turn abate;
● The UK equity market appears to have taken the recent concerns about
some banks in the US and Switzerland in its stride. The Manager is alert to
how this may affect bank lending appetites, including in the UK, which could
in turn impact the economic outlook;
● The effect of marking the Company's new loan notes to fair value,
reflecting the fall in value of the debt that the Company issued in 2021/2 due
to the rise in government bonds yields. As I wrote in the interim report, this
boosted the NAV by c.4% during the year and is explained in more detail below.
It is also important to consider longer term returns: it has now been three
years since the change of Manager to James de Uphaugh and his team. It is
gratifying to see that the Company's growth in NAV has exceeded that of the
FTSE All-Share Index in each of the three successive 12-month periods. Taken
as a whole, over the three years to 31 March 2023, the Company's cumulative
NAV total return has been 65.9%, with the Company's benchmark index returning
47.4% over the same period. Over the past five years, the Company's NAV return
has been 25.2% cumulatively, compared with the Company's benchmark index
returning 27.9% over the same period. In all these cases, the NAV is stated
after deducting debt at fair values.
In our view, three years is the minimum period over which investment success
can be properly assessed. It is clearly positive that the Company has had such
encouraging returns over this period. Growth in the share price has been more
volatile, outperforming the index in two of these three years. Further, the
discount has narrowed from 11.5% in March 2020 to 7.5% at the end of March
2023. This results in an overall share price return (which is ultimately what
shareholders experience - as distinct from the NAV) of 75.5%, which exceeds
the NAV return. I will come back to the approach we have taken towards the
discount below.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE INVESTMENT FACTORS
We believe an important component of profitable investment decisions is the
consideration of Environmental, Social and Governance (ESG) factors. Well
managed and governed companies tend to make successful long-term investments.
The Manager therefore considers such issues as an integral part of their
research and investment process. The Manager's report describes this in more
detail, as does the summary of the Manager's voting activities in respect of
each investee company. This is the first time that we have included the detail
of how we have exercised the Company's voting rights as a shareholder. You
will also see that we have included some examples of the engagement the
Manager had with investee companies on some of the more contentious issues. I
encourage you to read these interesting examples.
DIVIDENDS
We have announced three interim dividends so far this year, totalling 19.5
pence per share. For the final dividend, the Board is proposing a payment of
6.7p per share, taking the total to 26.2p per share. This final figure is a
5.6% increase on last year. When divided by the year end share price of 660p,
it results in a dividend yield of 4.0%. This compares with the dividend yield
on the FTSE All-Share Index of 3.5% on average.
The dividend increase of 5.6% is behind the level of UK inflation over the
same period. As is evident from the bar chart of longer-term dividend growth
rates on page 4, we are not currently meeting the second of the Company's two
objectives: to grow dividends per share in excess of UK inflation. We used
these reserves to maintain the dividend initially, but it became apparent that
the natural level of income generated by the portfolio was not going to be
sufficient, in the long run, to maintain the dividend and, after much
deliberation, decided to reduce it in the financial year to March 2021.
Looking forward, with expectations for inflation coming down and noting our
confidence in the ability of our portfolio companies to grow their
distributions, we anticipate a return to the dividend rising above normalised
inflation.
For this last financial year, I am pleased to report that dividends received
by the portfolio have continued to rise and in conjunction with our lower
costs of debt the P&L is in better shape. This means that the dividends in
respect of this financial year are almost entirely covered by earnings: as the
table on page 2 shows, dividends for the year of 26.2p compare with revenues
of 26.0p.
Another important feature to note is that many of the stocks held in the
Company's portfolio are buying back their own shares for cancellation. The
Manager explores this in more detail in his report later in this document but
suffice to say, share buybacks are another form of redistribution to
shareholders, but in the form of capital rather than income. Sometimes these
buybacks complement dividends paid to shareholders, other times they replace
them. Either way, the returns to shareholders of capital or income support the
broader concept of total returns which I used when reporting performance at
the beginning of this statement.
BORROWINGS
An element of borrowings, sensibly managed, should enhance long-term returns
to shareholders. For investment companies this requires the returns from the
equity portfolio to exceed the cost of the debt.
This year has marked a major change in the borrowing costs of the Company. The
last of the Company's debentures, a £100m issue dating back to 1997 and
costing 7.75% per annum, matured last September. The debt that has replaced it
costs an average of 2.44%: an immediate interest saving of over £5m a year.
You may ask how such an attractive rate of interest has been achieved, given
the much higher interest rates that have become prevalent of late. The answer
is that the Company contracted this interest rate with its lenders in
September 2021, a year in advance of the debenture maturing. With hindsight,
this proved extremely fortuitous timing.
To reiterate an earlier point, the fall in government bond prices (and rise in
their yields) has contributed to a reduction in the fair value of the
outstanding loans. This does not affect the balance sheet presented later in
this report, where loans are stated at par. But this does effect the level of
reported gearing (and investment returns) for which our long-standing practice
- and that of the Investment Trust sector generally - is to deduct loans at
fair value. Gearing calculations on this basis are set out in full in the
Glossary on page 84. Net gearing was 4.7% at the year end.
The Board monitors the level of gearing against various conservative
thresholds. The stated policy is that it should not exceed 25%. The current
level of gearing is therefore significantly below this threshold. But, in the
event of unhelpful market moves that drive up the level of gearing, the
portfolio is highly liquid. None of the NAV is attributed to unlisted,
unquoted, or private investments, and we have no plans to go down that route.
Overall, the borrowings have positively enhanced shareholder returns in the
last financial year - this is quantified in the table on page 15 - and we are
optimistic that this should also apply over the next three years and beyond.
SHARE PRICE DISCOUNT TO NET ASSET VALUE
The discount varied from a low of 12.0% to a high of 4.8%. It finished the
year at 7.5%. We consider this an acceptable performance as discounts across
the investment trust universe as a whole have generally widened. But we are
not complacent. We would like to see the discount narrow further as more
investors are attracted to the Company as a reliable long-term savings
vehicle. The marketing initiatives I describe below are designed to help
narrow the discount.
While the discount is at current levels, we will continue with our policy of
periodic share buy backs. Over the year we have bought back 3% of the
Company's shares which we have retained in Treasury. These buybacks modestly
enhance net asset value for shareholders (see table on page 15) and we are
continuing with our policy of actively buying back shares while the discount
persists. A further 655,000 (0.33% of the issued share capital) of the
Company's shares have been repurchased since the end of the financial year.
MARKETING
As mentioned earlier we have embarked on a range of new or enhanced
promotional activities. You may have seen our new website, press
advertisements, or noticed our greater digital promotion through avenues such
as Twitter and LinkedIn. The clear intention here is to raise the profile of
the Company and generate increased buying of shares, whether from new or
existing shareholders. The Board is monitoring a series of Key Performance
Indicators to assess the effectiveness of this promotional spend and would
encourage you to sign up on our website to receive monthly updates.
BOARD AND GOVERNANCE
At this year's Annual General Meeting, Vicky Hastings will not be standing for
re-election. The board has been very fortunate to have had Vicky's wise
counsel and exceptional attention to detail for ten years. The last twelve
months were an extension to the normal nine years, in order to avoid having
the Chair and the Senior Independent Director standing down at the same time
last year.
We will all miss Vicky's hugely valuable insights and her infectious
enthusiasm, and we wish her all the very best with her other corporate and
charitable board responsibilities. Aidan Lisser has kindly agreed to take on
Vicky's role as Senior Independent Director after the conclusion of the Annual
General Meeting in July.
In February we welcomed Annabel Tagoe-Bannerman as a non-executive Director to
the Board. She brings particular operational legal and governance experience
to the Board. With Annabel's appointment, it means that we are in the
fortunate position of having five directors going forward each bringing
different skills and expertise to the boardroom discussions. These are in a
range of relevant fields for your Company, including equity portfolio
management, marketing, accounting, risk management and regulation. We also
have a board that meets or exceeds all the recommended diversity guidelines. I
thank all my fellow directors for their hard work on behalf of shareholders
over the last year.
ANNUAL GENERAL MEETING
This year's Annual General Meeting will take place on Wednesday 19 July 2023
at 11.00am at the Balmoral Hotel in Edinburgh. Please note the change of venue
from last year. The whole Board and I look forward to meeting as many of you
as possible. For those unable to attend in person, the AGM will also be
streamed online, with the ability to post questions live into the meeting. The
link for electronic access will be displayed prominently on the Company's
website and it will not require a passcode. Please see page 77 for the Notice
of AGM for more information.
There will also be a shareholder presentation and update in central London on
27 September. All members of the Board, the Manager and members of his team
will attend. Further details will be posted on the Company's website from next
month.
OUTLOOK
As you will see from the Portfolio Manager's report, there is enthusiasm about
the underlying prospects for the stocks in the Company's portfolio. Set
against this is the ever-uncertain economic outlook. The Manager's approach of
maintaining a diversified portfolio is therefore an important feature that
should help protect shareholders' capital over time. Meanwhile, many UK equity
market constituents in the portfolio stand at a valuation discount to their
international peers. Over time, if these companies deliver the operational
results that we believe they can, it seems reasonable to expect this valuation
differential to close. Combined with a dividend yield of 4.0%, we believe this
leaves the Company well positioned to deliver to shareholders attractive total
returns.
ELISABETH STHEEMAN / Chair / 26 May 2023
Portfolio Manager's Report
For the year ended 31 March 2023
As we review the twelve months to the end of March 2023 and consider what may
be ahead for stock markets and economies, it is worth beginning with a
reminder of how we manage your Company:
• We manage the Company's investments by constructing a portfolio of
40-50 stocks. While this is a relatively concentrated portfolio by many
standards, we also manage it with the aim of ensuring an adequate level of
diversification across industries and economic themes.
• In order to meet the Company's two investment objectives, we
manage the portfolio with a 'total return' approach, with ESG factors
considered throughout the investment process.
• Most holdings are UK-listed, and we have the flexibility to hold
up to 20% in overseas stocks.
• Our aim is to construct a portfolio that has the potential to
outperform the UK equity index return over rolling three‑year periods.
• We take the view that returns in excess of the UK equity index
should, over the long term, provide a satisfactory return for savers when
compared with other equity strategies and asset classes.
• An adequate degree of leverage, appropriately managed, should
further enhance long-term shareholder returns.
TOTAL RETURNS OVER THE LAST TWELVE MONTHS
Net Asset Value (NAV) per share rose 7.9%, while the share price rose 8.4%.
Both figures exceed the UK equity index return of 2.9%. As the Chair's
statement has described, the NAV's outperformance of the index came primarily
through superior stock selection as well as through the revaluation of the
Company's long-term debt.
In terms of the main stock contributors, the top three were BAE Systems,
NatWest and Centrica. These stocks encapsulate the diversified nature of the
portfolio, a defence contractor, a UK bank and a domestic energy distribution
company. Other contributions came from food-on-the-go retailer Greggs, the
international bank Standard Chartered and the mining technology group Weir.
The portfolio had exposure to mining stocks and two of the three biggest
negatives were Anglo American and Newmont. The third notable negative was from
not holding BP for most of the period, as its share price recovered (we bought
shares in BP towards the end of the period, as we describe below).
The discount of the shares to NAV narrowed slightly, hence the modestly higher
return in the shares than in the NAV.
TRANSACTIONS OVER THE LAST TWELVE MONTHS
We have made fewer than average transactions over the year, with portfolio
turnover of 21%. This means the holding period is equivalent to just under
five years on average.
The biggest change to the portfolio was the purchase of a holding in BP. The
shares were acquired following its latest results, in which the group
increased its investment plans in high return energy transition growth engines
such as Bioenergy and EV Charging. In addition, it also announced new
investment plans in high-return upstream assets, which will help to meet the
global requirement for greater energy security post the war in Ukraine.
Consequently, the projected medium-term return on investment should improve
through to 2030. Capex on energy transition related projects will still
represent 45% of mid-term capex. We funded the purchase of BP with a sale of
the French energy group Total Energies, which is more exposed to fluctuations
in the LNG and gas price.
Other significant purchases included GlaxoSmithKline and its de-merged
consumer goods unit, Haleon. Both stand at attractive valuations and should
have the additional benefit of refocused management teams. Elsewhere, among
the more stable growth stocks in the portfolio, we sold Diageo and Reckitt
Benckiser: where we view their share prices as fully capturing their future
prospects.
More recently, we have added selectively to our holdings in UK cyclicals with
strong market positions such as easyJet, Dunelm, Travis Perkins and Marks
& Spencer. The UK economic pulse has been stronger than the consensus
expected, with energy bills coming down from the highs of last summer. This
takes some pressure off the consumer. These additions to the portfolio were
funded by reductions of a number of the more internationally focussed
companies such as KPN and Smith & Nephew.
These changes leave the portfolio sensibly diversified, in our view. In
addition to diversification by industry and sector, which is evident from the
portfolio listing on pages 16 to 17, we also think about the broader drivers
of future investment returns. Again, we believe there is suitable
diversification that should provide sources of portfolio outperformance,
whatever the economic development or condition. These drivers of returns, and
the holdings that should benefit, include:
• Supply chain resilience - Tesco, Compass and Intel;
• Capitalising on data analytics technology - WPP, Dunelm &
Weir;
• The revenge of the incumbent - NatWest, Marks & Spencer and
Centrica;
• Businesses becoming stronger through corporate Darwinism -
Whitbread, Serco, RS Group;
• Profitability edge through cost curve positioning - Howdens, Mondi
and Anglo American.
ESG CONSIDERATIONS
We take careful account of the ESG considerations of any investment case.
Taking account of such things are essential for good investment performance
and we do not place any major restrictions on what we can invest in. For this
reason, as we note above, stocks like BP and BAE Systems, which might not make
it into other investors' portfolios, are acceptable to us. The acceptability
comes with the important caveat that we have to be able to assure ourselves,
to the best extent possible, that they are behaving responsibly and making
positive change for the future.
To illustrate the kind of interactions we undertake when assessing
investments, the team engaged with Dunelm, the British home furnishings
retailer, in April and February 2023 and in September 2022:
• During the meeting in April 2023, the team engaged on the group's
proposed remuneration policy ahead of Dunelm's 2023 AGM. The proposal included
a new maximum opportunity for the CEO of 375% of salary (up from 325%) which
the team felt was reasonable.
• In a subsequent meeting, the group asked for our input on what we
consider to be Dunelm's most material issues, such as the sourcing of their
goods and relationship with suppliers. We also fed back that we appreciate the
company's clear efforts to demonstrate connectivity between the group's
strategy, material issues, and executive pay in its reporting.
• At the meeting in February 2023, the team discussed the group's
near-term earnings and strategy. Dunelm aims to develop product excellence
across all price points and effective marketing. It has increased efforts to
develop product mastery across more nascent categories where market shares are
lower, with the ultimate goal of becoming the one-stop for home spend. The
group is also introducing credit to facilitate more spend in bigger‑ticket
group sections, like Furniture, which is an area in the market that is growing
substantially.
• In September 2022, the team met with Dunelm to discuss how it is
controlling costs. The group reported that it was seeing a high percentage of
incremental UK homeware spend which could fuel EPS growth through 2023. This
engagement work reinforces our view of Dunelm's business model resiliency. In
turn this should support its ability to deliver dividend growth in excess of
inflation over the long-term. This is the rationale for it being one of the
larger positions in the portfolio.
There are further examples of our ESG engagement with companies on pages 25 to
26.
BORROWINGS
We were pleased to see the successful completion of the Company's long-term
refinancing of its debt last September. The new debt, with an average interest
coupon of 2.44% per annum, means a significantly reduced cost of borrowings,
leading in practice to a future saving of over £5m per annum compared with
the previous arrangements.
We utilise this favourable financing by maintaining a fully invested
portfolio. The nature of the borrowings, with an average maturity of 25 years,
means that they are essentially permanent in nature. We therefore tend to
manage the portfolio with the borrowings fully invested. When the portfolio's
value rises, the gearing should enhance returns, and the converse also
applies: when underlying returns are negative, the borrowings make the losses
greater. With this in mind, we take a tactical view of the economic and market
backdrop and can introduce a cash position to reduce this impact by lowering
'net' gearing. For example, we may allow the cash position to build up if we
are struggling to find attractively priced investment opportunities and fear
the market might be ripe for correction. However, shareholders should think of
us as investing the vast majority of the borrowings under normal
circumstances. Our gross gearing (borrowings) total would amount to 6.6% as at
year end with an offsetting cash balance reducing the net gearing to 4.7%.
DIVIDENDS RECEIVED
Actual revenue per share for the 12 months to 31 March 2023 was 26.0p. This
compares with 22.4p in the previous year - a rise of 15.9%. Clearly this is a
very satisfactory outcome. For context, top line portfolio income was £49.0m
(+10.8% on 2022), which was split between ordinary dividends of £41.6m
(+11.0%) and special dividends of £7.4m (+10.0%). The reason for the revenue
per share rise of 15.9% exceeding underlying income growth of 10.8% is that
revenues are calculated after deducting costs including debt interest. The new
borrowing arrangements, as noted above, have resulted in a significant fall in
interest expense.
Looking ahead, we forecast more modest revenue per share growth. Some of this
is in part due to a mix effect in the portfolio, with the sale of some higher
yielding stocks including Total Energies and Direct Line. Dividend generation
nonetheless is robust across the portfolio. Furthermore, the ordinary and
special dividends being received understate the shareholder distributions made
by investee companies which also include share buybacks. These remain
significant: there are ongoing share buybacks by BP, Shell, Unilever and
NatWest, plus from many other portfolio holdings. Overall, c40% of portfolio
holdings have declared some form of ongoing share buyback. This is supportive
of the 'total return' ethos that should underpin returns to the Company's
shareholders - whether income or capital growth - in the years ahead.
The Directors' decision to recommend total dividends for the year of 26.2p
mean that dividends are almost entirely covered by revenues for the year: a
welcome position to be in.
THREE-YEAR REFLECTIONS
It is now just over three years since we became the Manager of your Company.
We took over in the midst of the market sell-off in March 2020, as the full
implications of the COVID‑19 pandemic began to dawn.
Since then, our investment approach has helped us deal with an at times
rapidly changing economic and market backdrop. The roll-out of COVID‑19
vaccines, the "mini-budget" crisis, rising interest rates, a falling sterling
currency and the tech sector sell-off have all had to be navigated. A key
advantage throughout this period has been the diversified portfolio.
As it turns out, we became stewards of your portfolio towards the lowest
levels of the market. Absolute returns have been strong since then. The end
result is, as the Chair has already noted, a cumulative total return of the
Company's Net Asset Value (NAV) per share of 65.9%. The share price, thanks to
a narrowing of its discount to NAV, has risen 75.5%. These returns compare
with a FTSE All-Share Index return of 47.4%.
In keeping with the stock-driven investment approach, when we analyse the key
drivers of returns over the period, we look at the key stock contributors. For
the last three years, the big winners also reflect the flexible investment
style we take. To illustrate, the top five stock contributors to the
outperformance were Ashtead (industrial equipment hire), NatWest (banking),
BAE Systems (defence), Centrica (gas utility) and Anglo American (mining).
Hence clearly a bias towards a mix of cyclical companies - benefitting from
the recovery in the economy over the period compared with expectations at the
depths of the pandemic.
Inevitably there have been some less successful decisions along the way.
Interestingly, the biggest factor was having little or no exposure to two
large commodity groups - BP and Glencore. An important part of the portfolio
construction (and risk oversight) process is managing these larger risks. A
(very) small number of holdings disappointed in their results, but in each
case the holding size had been calibrated to take account of the greater
downside risk.
In terms of the income generated over the last three years, revenue per share
has been disappointing for shareholders, moving from 27.8p in 2020 to 26.0p in
the last financial year. The portfolio was overly dependent on unsustainable
dividend income prior to March 2020. We believe it is on a more sustainable
and progressive footing now.
Our view is that underlying fundamentals of the portfolio's holdings
ultimately drive the Company's total returns. We therefore prefer to hold
stocks for sufficient time to allow those fundamentals to come through. We
have long held the view that this means a three-year period, and this does in
fact coincide with the average holding period since we were appointed in 2020.
Overall, we believe the last three years demonstrate the merits of a flexible,
long-term total return investment approach.
OUTLOOK
While we are cautious about the outlook for equity markets in general, the
better recent returns from UK equities strike us as being the early stages of
a recovery in the market. This recovery is rooted in the undervaluation of UK
equities that has built up over time for a variety of well-rehearsed reasons
such as Brexit and final-salary pension funds reducing equity exposures. Just
as these headwinds appear to be waning, we remain optimistic about the
specific prospects for the Company's holdings.
We are cautious about markets because inflation remains a challenge. It will
naturally come down to a degree, helped by some inputs such as gas prices
being markedly lower than a year ago. But consumer expectations have ratcheted
up. Economic history tells us that it is much harder to squeeze inflation back
into the bottle, once the inflation genie is out.
At the market level, this economic slowdown is likely to be different from
those we have experienced since the turn of the millennium. They may be more
reminiscent of those of the 1980s and 1990s: more typical slowdowns when
inflation has been too high and interest rates have been raised to choke it
off. At the same time, bank lending criteria are likely to tighten in the US
because of the recent set of banking failures and near failures in the US and
Switzerland, which could present downside risk to economic growth.
On a more positive note, at the corporate level, the current elevated rate of
inflation means nominal revenue growth should be tolerable even if real GDP
falters. Another help is that China has 'reopened'. Overall, 2023 could see
lower inflation, peaking interest rates and perhaps a slightly better tenor
from the consumer.
Therefore, a balanced, diversified portfolio is as important as ever. In
market terms, we may have entered a new and different investing environment
from that which has prevailed since the financial crisis of 2008. For much of
the period since then, it often seemed that an investment style that focused
on buying and holding growth stocks - sometimes with little regard to
valuation or how durable the growth would be - was all that was required. Now,
we have a return to an investment environment in which an understanding of
company fundamentals matters, as does an appreciation of how the valuation
paid for a stock ultimately determines investment returns.
JAMES DE UPHAUGH / PORTFOLIO MANAGER CHRIS FIELD / DEPUTY PORTFOLIO MANAGER
26 MAY 2023
Portfolio Manager's Core Investment Beliefs
Our competitive edge rests on the combination of our Global Fundamental team's
structure within Liontrust and our flexible investment style. Liontrust
provides a stable environment in which our Portfolio Manager operates, and our
investment approach produces portfolios that aim to deliver long-term
outperformance on a repeatable basis.
ACTIVE MANAGEMENT
Stock-driven. Share prices follow fundamentals over the long term. Through our
proven investment approach, we expect to outperform over the long term, net of
fees.
High conviction portfolio. We expect the portfolio to contain around 40 to 50
stocks. Holdings sizes reflect the conviction we have in each company and our
assessment of the upside and downside potential of its share price.
Risk. We think of risk as permanent capital loss. To mitigate this, our
analysis of a company's valuation is the first line of defence. Our risk
management process combines our depth of knowledge of the stocks in the
portfolio, plus separate oversight by Liontrust's Portfolio Risk Committee.
FLEXIBLE INVESTMENT STYLE
Open-minded approach. We do not have dogmatic style biases, such as 'growth'
or 'value'. We are also prepared to invest in companies that we identify as
having scope for recovery through management change, business transformation
or an improving business environment. We expect the profile of the portfolio
to evolve depending on our assessment of individual companies and our reading
of the economic and market background.
Disciplined, rigorous, fundamental research. In keeping with the stock-driven
nature of the portfolio, approximately three quarters of our effort takes the
form of in-depth stock research. The remainder is spent on macroeconomic and
geopolitical analysis.
Full Environmental, Social and Governance ('ESG') integration. ESG-related
considerations have financial implications for the portfolio's holdings. We
prioritise and engage our holdings on their key, material issues, many of
which are ESG-related. The outcomes from our in-depth analysis and engagements
help form our conviction level and investment decisions. In this way, ESG lies
at the heart of our investment process.
TOTAL RETURN STRATEGY
A focus on both capital growth and income. We take a total return approach:
investor returns should derive over the long term from both capital
appreciation and dividend income. We often prefer companies with organic
investment opportunities: as such, we normally expect companies with growing
profits - and share prices - to contribute to returns. We view income as an
important component rather than the primary driver of investment return. This
aligns with the Company's twin objectives.
LONG TERM
Typical holding period of 3-5 years. This is an appropriate period to ensure
that underlying corporate fundamentals drive investment returns. It is
therefore also a sensible period over which to measure an active manager.
Gearing should enhance shareholder returns. One of the advantages of an
investment trust is the ability to borrow to enhance equity returns. We
therefore expect gearing to boost investment returns over time.
CAPACITY MANAGEMENT
Scale diseconomies. In our view, investment performance can rapidly suffer if
assets under management become too large. We carefully manage capacity to
ensure that the interests of existing clients take precedence over new
clients. The approach ensures we retain a size advantage. It enables us to
reposition the portfolio - and those of all our other clients - quickly and
efficiently when required.
DEEP INVESTMENT RESOURCE WITH GLOBAL PERSPECTIVE
A close-knit investment team. Average experience for each member of the team
is 15 years. The team has been stress‑tested across various market cycles.
Challenge and debate. This is encouraged within a structured risk control
environment, with robust oversight processes. Team members own Liontrust
equity and co-invest in the team's investment strategies, which in turn
underpins teamwork and collaboration.
Business Review
STRATEGY AND BUSINESS MODEL
The Edinburgh Investment Trust plc is an investment company and its investment
objective is set out below. The strategy the Board follows to achieve that
objective is to set investment policy and risk guidelines, together with
investment limits, and to monitor how they are applied. These are also set out
below and have been approved by shareholders.
The business model the Company has adopted to achieve its investment objective
has been to contract the services of the Manager to manage and administer the
portfolio in accordance with the Board's strategy and under its oversight. The
portfolio manager with individual responsibility for the day-to-day management
of the portfolio is James de Uphaugh and the deputy portfolio manager is Chris
Field.
In addition, the Company has contractual arrangements with Link Group to act
as registrar, The Bank of New York Mellon (International) Limited as
depositary and custodian, and Apex Listed Companies Services (UK) Limited,
(formerly Sanne Fund Services (UK) Limited) to act as Company Secretary.
INVESTMENT OBJECTIVE AND POLICY
Investment Objective
The Company invests primarily in UK securities with the long-term objective of
achieving:
1. an increase of the Net Asset Value per share in excess of the growth in
the FTSE All-Share Index; and
2. growth in dividends per share in excess of the rate of UK inflation.
Investment Policy
The Company will generally invest in companies quoted on a recognised stock
exchange in the UK. The Company may also invest up to 20% of the market value
of the Company's investment portfolio, measured at the time of any
acquisition, in securities listed on stock exchanges outside the UK. The
portfolio is selected by the Portfolio Manager on the basis of its assessment
of the fundamental value available in individual securities. Whilst the
Company's overall exposure to individual securities is monitored carefully by
the Board, the portfolio is not primarily structured on the basis of industry
weightings. No acquisition may be made which would result in a holding being
greater than 10% of the market value of the Company's investment portfolio.
Similarly, the Company may not hold more than 5% of the issued share capital
(or voting shares) in any one company. Investment in convertibles is subject
to normal security limits. Should these or any other limit be exceeded by
subsequent market movement, each resulting position is specifically reviewed
by the Board.
The Company may borrow money to provide gearing to the equity portfolio of up
to 25% of net assets.
Use of derivative instruments is monitored carefully by the Board and
permitted within the following constraints: the writing of covered calls
against securities which in aggregate amount to no more than 10% of the value
of the portfolio and the investment in FTSE 100 futures which when exercised
would equate to no more than 15% of the value of the portfolio. Other
derivative instruments may be employed, subject to prior Board approval,
provided that the cost (and potential liability) of exercise of all
outstanding derivative positions at any time should not exceed 25% of the
value of the portfolio at that time. The Company may hedge exposure to changes
in foreign currency rates in respect of its overseas investments.
RESULTS AND DIVIDENDS
At the year end the share price was 660.0p per ordinary share (2022: 634.00p).
The net asset value (debt at fair value) per ordinary share was 713.73p (2022:
686.69p).
The Directors declared a third interim dividend for the year ended 31 March
2023 of 6.70 pence per ordinary share (2022: 6.40 pence), an increase of 4.7%
compared with each of the first two interim dividends. This dividend is
payable on 26 May 2023 to ordinary shareholders on the register on 5 May 2023.
The shares were quoted ex-divided on 4 May 2023.
The Board is recommending a final dividend of 6.70p per share which is the
same as the third interim dividend declared last month, implying a full year
payout of 26.20 pence per share. This represents an increase of 5.6% compared
with the total underlying ordinary dividends paid for the financial year to 31
March 2022.
PERFORMANCE
The Board reviews the Company's performance by reference to a number of key
performance indicators (KPIs) which are shown on page 2. Notwithstanding that
some KPIs are beyond its control, they are measures of the Company's absolute
and relative performance. The KPIs assist in managing performance and
compliance and are reviewed by the Board at each meeting.
The Chair's Statement on pages 5 to 7 gives a commentary on the performance of
the Company during the year, the gearing and the dividend.
The Board reviews an analysis of expenditure at each Board meeting, and the
Audit and Management Engagement Committees formally review the fees payable to
the main service providers, including the Manager, on an annual basis. The
ongoing charges figure is calculated in accordance with the AIC methodology
and is reviewed by the Board annually in comparison to peers.
The Board also regularly reviews the performance of the Company in relation to
the 23 investment trusts in the UK Equity Income sector (including the
Company). As at 31 March 2023 the Company was ranked 2nd by NAV performance in
this sector over one year, 5th over three years and 10th over five years
(source: Morningstar).
OUTLOOK, INCLUDING THE FUTURE OF THE COMPANY
The main trends and factors likely to affect the future development,
performance and position of the Company's business can be found in the
Portfolio Manager's Report. Details of the principal risks affecting the
Company can be found on pages 18 to 21.
FINANCIAL POSITION AND BORROWINGS
The Company's balance sheet on page 58 shows the assets and liabilities at the
year end. Borrowings at the year end comprised of £120 million of Unsecured
Senior Loan Notes (2022: £20 million and £100m Debenture).
PERFORMANCE ATTRIBUTION
for year
ended
31 March 2023
%
Total Return Basis((1))
NAV (debt at fair value) 7.9
Benchmark 2.9
Relative performance 5.0
Analysis of Relative Performance
Portfolio total return 4.5
Benchmark total return((1)) 2.9
Portfolio outperformance A 1.6
Borrowings:
Net gearing effect 0.4
Interest (0.5)
Market value movement 3.8
Management fee (0.4)
Other expenses (0.1)
Tax (0.1)
Share buybacks 0.3
Subtotal B
Relative performance A+B 5.0
((1)) Source: Refinitiv.
Performance Attribution - analyses the performance of the Company relative to
its benchmark index. The Analysis of Relative Performance estimate the quantum
of relative performance that is attributable to each of the factors set out in
this table. The table is intended to be indicative rather than precise; the
accuracy of each estimate is determined by a variety of factors such as the
volatility of investment returns over the year and intra-month, and the timing
of income receipts and expenditure payments.
Relative performance - represents the arithmetic difference between the NAV
and benchmark returns.
Portfolio total return - represents the return of the holdings in the
portfolio including transaction costs, cash and income received, but excluding
expenses incurred by the Company.
Net gearing effect - measures the impact of the unsecured senior loan notes
and cash on the Company's relative performance. This will be positive if the
portfolio has positive capital performance, total return is positive and
negative if capital performance total return is negative.
Interest - the debenture stock, unsecured senior loan notes and bank facility
interest paid has a negative impact on performance.
Market value movement - represents the change in market value of the Company's
borrowings, measured to the end of the financial year or maturity from the
start of the financial year or issuance, each as appropriate.
Management fee - the base fee reduces the Company's net assets and decreases
returns.
Other expenses and tax - reduce the level of assets and therefore result in a
negative effect on relative performance.
Share buybacks - measures the effect of ordinary shares bought back at a
discount to net asset value on the Company's relative performance.
Investments in Order of Valuation
At 31 March 2023
UK LISTED ORDINARY SHARES UNLESS OTHERWISE STATED
Value % of
Company Sector £'000 Portfolio
Shell Oil, Gas and Coal 89,645 7.3
BAE Systems Aerospace and Defence 69,124 5.6
Unilever Personal Care, Drug and Grocery Stores 62,430 5.1
Tesco Personal Care, Drug and Grocery Stores 61,692 5.0
NatWest Banks 56,746 4.6
AstraZeneca Pharmaceuticals and Biotechnology 54,874 4.5
Centrica Gas, Water and Multi-Utilities 47,470 3.9
Ashtead Industrial Transportation 43,275 3.5
Anglo American Industrial Metals and Mining 41,372 3.4
HSBC Banks 39,037 3.2
TEN TOP HOLDINGS 565,665 46.1
Weir Industrial Engineering 37,609 3.1
RS Group Industrial Support Services 33,579 2.7
Dunelm Retailers 32,802 2.7
WPP Media 32,583 2.7
Standard Chartered Banks 31,345 2.5
Hays Industrial Support Services 28,750 2.3
Compass Consumer Services 27,658 2.3
GlaxoSmithKline Pharmaceuticals and Biotechnology 26,696 2.2
Novartis - Swiss Listed Pharmaceuticals and Biotechnology 24,125 2.0
Greggs Personal Care, Drug and Grocery Stores 23,961 1.9
TWENTY TOP HOLDINGS 864,773 70.5
Serco Industrial Support Services 22,259 1.8
Haleon Pharmaceuticals and Biotechnology 22,175 1.8
Marks & Spencer Retailers 22,107 1.8
Convatec Medical Equipment and Services 20,939 1.7
Mondi General Industrials 20,069 1.6
Admiral Non-Life Insurance 19,666 1.6
BP Oil, Gas and Coal 19,309 1.6
Whitbread Travel and Leisure 17,881 1.5
Smith & Nephew Medical Equipment and Services 17,222 1.4
easyJet Travel and Leisure 16,689 1.4
THIRTY TOP HOLDINGS 1,063,089 86.7
Newmont - US Listed Precious Metals and Mining 15,951 1.3
KPN - Dutch Listed Telecommunications Service Providers 15,653 1.3
Thales - French Listed Aerospace and Defence 15,644 1.3
CNH Industrial Industrial Engineering 13,780 1.1
Bellway Household Goods and Home Construction 12,638 1.0
Ascential Software and Computer Services 12,627 1.0
Travis Perkins Industrial Support Services 11,863 1.0
Redrow Household Goods and Home Construction 11,712 0.9
Howden Joinery Retailers 9,828 0.8
QinetiQ Aerospace and Defence 8,618 0.7
FORTY TOP HOLDINGS 1,191,403 97.1
Roche - Swiss Listed Pharmaceuticals and Biotechnology 8,424 0.7
Genuit Construction and Materials 6,812 0.6
Intel - US Listed Technology Hardware and Equipment 6,405 0.5
Marshalls Construction and Materials 6,014 0.5
Siemens - German Listed General Industrials 3,884 0.3
Publicis - French Listed Media 3,707 0.3
Raven Property(S) - Preference Real Estate Investment Services - -
shares
Eurovestech(UQ) Investment Banking and Brokerage Services - -
TOTAL HOLDINGS 46 (2022: 50) 1,226,649 100.0
S - Delisted
UQ - Unquoted investment
Principal Risks and Uncertainties
RISK MANAGEMENT AND MITIGATION
The Manager (AIFM) is responsible for the portfolio management of the Company
and for exercising the risk management function in respect of the Company. As
part of this risk management function, the AIFM maintains a register of
identified risks including emerging risks likely to impact the Company. This
is updated regularly, following discussions with the Manager and highlighted
to the Board.
The Board, through the Audit Committee and with the assistance of the Manager,
regularly reviews a report of potential risks to the Company in the form of a
risk control summary. The document includes a description of each identified
risk, the mitigating action taken, reporting and disclosure to the Board and
an impact and probability risk rating. The rating is given both prior to and
after the Board's mitigation of each risk. The information is then displayed
in matrix form which allows the Board to identify the Company's key risks. As
the changing risk environment in which the Company operates has evolved, the
total number of risks has fluctuated, with certain risks having been removed
and new risks added with emerging risks actively discussed as part of this
process and, so far as practicable, mitigated.
The composition of the Board is regularly reviewed to ensure its members offer
sufficient knowledge and experience to assess, anticipate and mitigate these
risks, as far as possible.
The Company's key long-term investment objectives are an increase in the net
asset value per share in excess of the growth in the FTSE All-Share Index (the
'benchmark') and an increase in dividends in excess of the annual rate of UK
inflation. The principal risks and uncertainties facing the Company are an
integral consideration when assessing the operations in place to meet these
objectives, including the performance of the portfolio, share price and
dividends. The Board is ultimately responsible for the risk control systems
but the day-to-day operation and monitoring are delegated to the Manager. The
Board has carried out a robust assessment of the principal and emerging risks
facing the Company, including those that would threaten its business model,
future performance, solvency or liquidity. The following sets out a
description of the principal and emerging risks and how they are being managed
or mitigated.
MARKET RISK
A great majority of the Company's investments are traded on recognised stock
exchanges. The principal risk for investors in the Company is a significant
fall and/or a prolonged period of decline in those markets. The Company's
investments and the income derived from them are influenced by many factors
such as general economic conditions, interest rates, inflation, a recurrence
of a pandemic, geopolitical events, the war in Ukraine and government policies
as well as by supply and demand reflecting investor sentiment. Such factors
are outside the control of the Board and Manager and may give rise to high
levels of volatility in the prices of investments held by the Company. The
asset value and price of the Company's shares and its earnings and dividends
may consequently also experience volatility and may decline.
Fluctuations in interest rates and exchange rates could reduce returns and
lead to depreciation of the Company's net asset value.
Market risk is included in the risk control summary report that is prepared by
the Manager and reviewed by the Board at each meeting. Additionally, the Board
receives reports on the performance of the portfolio at each meeting. The
portfolio is positioned by the Manager for medium to long-term returns.
INVESTMENT PERFORMANCE RISK
The Board sets investment policy and risk guidelines, together with investment
limits, and monitors adherence to these at each Board meeting. All individual
investment decisions are delegated to the Portfolio Manager. The Portfolio
Manager's approach is to construct a portfolio which should benefit from
expected future trends in the UK and global economies. The Portfolio Manager
is a long-term investor, prepared to take substantial positions in securities
and sectors across a range of different types of stock. This reflects the
Portfolio Manager's high conviction, stock-driven investment process and total
return approach. Strategy, asset allocation and stock selection decisions by
the Portfolio Manager can lead to underperformance of the portfolio relative
to the benchmark and/or income targets.
The Portfolio Manager's style may result in a concentrated portfolio with
significant overweight or underweight positions in individual stocks or
sectors compared to the index and consequently, the Company's performance may
deviate significantly, possibly for extended periods, from that of the
benchmark. In a similar way, the Portfolio Manager manages other portfolios
holding many of the same stocks as the Company which reflects the Portfolio
Manager's high conviction style of investment management. This could increase
the liquidity and price risk of certain stocks under certain scenarios and
market conditions. However, the Board and Portfolio Manager believe that the
investment process and policy outlined above should, over the long term, meet
the Company's objectives of Net Asset Value per share growth in excess of the
benchmark and real dividend per share growth. Investment selection is
delegated to the Portfolio Manager. The Board does not specify asset
allocations. Information on the Company's performance against the benchmark
and peer group is provided to the Board at each Board meeting. The Board uses
this to review the performance of the Company, taking into account how
performance relates to the Company's objectives. The Portfolio Manager is
responsible for monitoring the portfolio selected and seeks to ensure that
individual stocks meet an acceptable risk-reward profile.
As described in the investment policy, derivatives may be used provided that
the market exposure arising is less than 25% of the value of the portfolio.
Investment Performance risk is included in the risk control summary report
that is prepared by the Manager and reviewed by the Board at each meeting. The
Board also receives reports on the performance of the portfolio and on
compliance with the Company's investment policy guidelines from the Manager at
each meeting. As part of the annual assessment, the Board reviews the
performance of the Manager and the management contract at the Management
Engagement Committee meeting.
The Board also reviews the annual depository report and report from the
compliance department of the Manager and any breaches of the investment
policy, limits or guidelines are reported immediately to the Board and Audit
Committee Chairs.
Investment risk is increased through the Company's borrowing, namely the
£120m Unsecured Senior Loan Notes. This facilitates additional investment
exposure than would be the case for an unleveraged portfolio; if the
investments fall in value, this will increase the adverse impact on
performance. On a routine basis the Board monitors the appropriateness of
gross and net gearing levels, and the amount of headroom above minimum NAV
levels as agreed with the lenders.
INCOME/DIVIDEND RISK
The Company is subject to the risk that income generation from its investments
fails to reach the level of income required to meet its objectives.
The Board monitors this risk through the review of detailed income and
dividend forecasts and comparison against budget. These are contained within
the Board papers and the Board considers the level of income at each meeting.
Revenue estimates are presented at each Board meeting and Board committee
meeting which determine the three interim dividends and propose the final
dividend.
The Board also takes into account the size of the Company's accumulated income
and capital reserves which can be used to supplement dividends for a period
where income levels alone do not cover the proposed dividend payments.
SHARE PRICE RISK
There is a risk that the Company's prospects and NAV may not be fully
reflected in the share price from time-to-time and that the Company's
objectives are no longer meeting investors' expectations.
The share price is monitored on a daily basis and, at the request of the
Board, the Company is empowered to repurchase shares within agreed parameters
which are regularly reviewed with the Company's broker. The discount at which
the shares trade to NAV can be influenced by share repurchases. During the
year, the Company repurchased 5,601,604 shares for holding in treasury (2022:
1,104,800).
Risk management activity includes systematic reviews of the investment
objective and investment strategy and regular dialogue with major shareholders
and marketing activities.
Share price risk is included in the risk control summary report that is
prepared by the Manager and reviewed by the Board at each meeting. In
addition, the Board monitors the Company's investment performance against its
stated objectives and peer group and reviews the marketing report at every
Board meeting.
CORPORATE GOVERNANCE AND INTERNAL CONTROLS RISK
The Board has delegated to third-party service providers the management of the
investment portfolio, depositary and custody services (which include the
safeguarding of the assets), registration services, accounting and company
secretarial services.
The principal risks arising from the above contracts relate to the performance
of the Manager, the performance of administrative, registration, depositary,
custodial and banking services, and the failure of information technology
systems used by third-party service providers. These risk areas could lead to
the loss or impairment of the Company's assets, inadequate returns to
shareholders and loss of investment trust status. Consequently, in respect of
these activities the Company is dependent on the Manager's control systems and
those of its administrator, depositary, custodian and registrar.
An annual review of the control environments of all service providers is
carried out by the Company Secretary who provides an assessment of these risks
and the operation of the controls for consideration by the Audit Committee and
is formally reported to and considered by the Board.
Investment trust status is assessed by the Manager, reviewed at every Board
meeting and confirmed by the Audit Committee and HMRC annually. Taxation
matters are dealt with by independent accountants.
RELIANCE ON THE MANAGER AND OTHER THIRD-PARTY PROVIDERS RISK
The Company is reliant upon the performance of third-party service providers
for its executive function and other service provisions. The Company's most
significant contract is with the Manager, to whom responsibility for the
management of the Company's portfolio is delegated. The Company has other
contractual arrangements with third parties to act as administrator, company
secretary, registrar, depositary and broker. The Company's operational
structure means that all cyber risk (information and physical security) arises
at its third-party service providers, including fraud, sabotage or crime
against the Company. Failure by any service provider to carry out its
obligations to the Company in accordance with the terms of its appointment
could have a materially detrimental impact on the operation of the Company and
could affect the ability of the Company to pursue successfully its investment
policy and expose the Company to risk of loss or to reputational risk.
In particular, the Manager performs services which are integral to the
operation of the Company. The Manager may be exposed to the risk that
litigation, misconduct, operational failures, negative publicity and press
speculation, whether or not it is valid, will harm its reputation. Any damage
to the reputation of the Manager could result in counterparties and third
parties being unwilling to deal with the Manager and by extension the Company.
This could have an adverse impact on the ability of the Company to pursue its
investment policy.
The Board seeks to manage these risks in a number of ways:
- The Company Secretary reviews the performance and the service
organisation control reports of third-party service providers and reports to
the Board on an annual basis at the Audit Committee meeting.
- The Board reviews the performance of the Manager at every Board
meeting and otherwise as appropriate. The Board has the power to replace the
Manager and reviews the management contract formally once a year.
- The day-to-day management of the portfolio is the responsibility of
the named Portfolio Manager, James de Uphaugh, Head of the Liontrust Global
Fundamental team. James joined Liontrust in April 2022 as part of the
acquisition of Majedie Asset Management Limited where he was Chief Investment
Officer. He is a Fund Manager and Analyst with 34 years' investment experience
in UK and international equity markets. James is responsible for co-managing
the UK Equity Fund of Liontrust and managing The Edinburgh Investment Trust
plc.
- The risk that the Portfolio Manager might be incapacitated or
otherwise unavailable is mitigated by the fact that he works within, and is
supported by, the wider Liontrust team. Moreover, Chris Field, as Deputy
Portfolio Manager, would be able to manage the portfolio if James de Uphaugh
was unable to do so for any reason.
- The Board has set guidelines within which the Portfolio Manager is
permitted wide discretion. Any proposed variation outside these guidelines is
referred to the Board and compliance with the guidelines and the guidelines
themselves are reviewed at every Board meeting.
PHYSICAL AND TRANSITIONAL CLIMATE CHANGE
Globally, climate change effects are already emerging in the form of changing
weather patterns. Extreme weather events could potentially impair the
operations of individual investee companies, potential investee companies,
their supply chains and their customers. Legislative changes are driving an
economic adjustment towards a low-carbon economy. There are considerable risks
to the value, business model and operations of investee and potential investee
companies due to stranded assets and how investors, financial regulators and
policymakers respond to climate concerns. The Portfolio Manager takes such
risks into account, along with the downside risk to any company - whether in
the form of its business prospects, market valuation or sustainability of
dividends - that is perceived to be making a detrimental contribution to
climate change. Further details on the Portfolio Manager's process for
considering climate risk relating to each portfolio holding are supplied in
the s.172 statement on page 23. The Company invests in a broad portfolio of
businesses with operations spread geographically, which should limit the
impact of location-specific weather events.
Climate change related risks are regularly monitored by the Manager and
reviewed by the Board at every meeting as required, together with any new
guidance.
OTHER RISKS
The Company is subject to laws and regulations by virtue of its status as an
investment trust and is required to comply with certain regulatory
requirements that are applicable to listed closed-ended investment companies.
The Company is subject to the continuing obligations imposed by the UK Listing
Authority on all companies whose shares are listed on the Official List.
The Manager reviews compliance with investment trust tax conditions and other
financial and regulatory requirements on a daily basis with any issues being
immediately brought to the attention of the Board.
The Company may be exposed to other business, strategic and political risks in
the future, as well as regulatory risks (such as an adverse change in the tax
treatment of investment companies), credit, liquidity and concentration risks.
The risk control summary report allows the Board to consider all these risks,
the measures in place to control them and the possibility of any other risks
that could arise.
The Board ensures that satisfactory assurances are received from the service
providers. The Manager's compliance officers produce regular reports for
review by the Company's Audit Committee.
Additionally, the depositary monitors stock, cash, borrowings and investment
restrictions throughout the year. The depositary reports formally once a year
and also has access to the Company Chair and the Audit Committee Chair if
needed during the year.
Please see note 16 on page 70 to read more about risk management and financial
instruments.
EMERGING RISKS
The Board has put in place robust procedures to assist with identifying
emerging risks that arise from existing risks or from new situations. The
Board is kept informed through its advisors and Manager regarding any
political, economic, legal or regulatory changes that it is anticipated may
significantly affect the Company.
For example, there are currently a growing number of risks as a result of
emerging geopolitical factors that may translate into greater stock market
risk, as well as heightened macro-economic changes in inflation, interest
rates and energy costs, the ever-evolving global regulatory and trade
environments and a risk of re-emergence of a global pandemic. Geopolitical
factors include the war in Ukraine, Scottish independence and global supply
chain issues . Whilst these risks currently exist, their extent and long-term
impact are yet to emerge but they are regularly assessed by the Manager and
the Board.
Viability Statement
The Directors' view of the Company's viability has not changed since last
year. The Company, as an investment trust, is a collective investment vehicle
rather than a commercial business venture and is designed and managed for
long‑term investment. The Company's investment objective clearly sets this
out. 'Long-term' for this purpose is considered by the Directors to be at
least five years, a timeframe in which the accuracy of estimates and
assumptions is deemed to be reasonable. The Company's viability has thus been
assessed over that period. Five years is considered a reasonable time frame
for a forecast, however, the life of the Company is not intended to be limited
to that or any other period.
There are no current plans to amend the investment strategy, which has
delivered long-term good investment performance above or in line with
benchmark for shareholders and, the Directors believe, should continue to do
so. The investment strategy and its associated risks are kept under constant
review by the board.
In assessing the viability of the Company under various scenarios, the
Directors undertook a robust assessment of the risks to which it is exposed
(including the issues arising from the COVID-19 pandemic, Russia's invasion of
Ukraine and climate change), as set out on page 18 together with mitigating
factors. The risks of failure to meet the Company's investment objective, and
contributory market and investment risks, were considered to be of particular
importance. The Directors also took into account: the investment capabilities
of the portfolio manager; the liquidity of the portfolio, with nearly all
investments being listed and readily realisable; the Company's borrowings as
considered in further detail in the Going Concern Statement on page 41; the
ability of the Company to meet its liabilities as they fall due; the Company's
annual operating costs and that, as a closed ended investment trust, the
Company is not affected by the liquidity issues of open- ended companies
caused by large or unexpected redemptions.
In taking account of these factors and on reviews conducted as part of the
detailed internal controls and risk management processes set out on page 40,
the Directors have undertaken a reverse stress test seeking to identify the
financial circumstances that might result in the Company becoming unviable.
This concluded that the viability of the Company may start to be challenged if
the value of Total Shareholders Funds were to fall permanently by
approximately 80% from the level at the year end, a fall that the Board
considers to be near implausible having noted that since the inception of the
Company's All-Share Index Total Return benchmark in December 1985, the largest
fall over any calendar year has been 29.9%, the largest fall over any rolling
five year period was 28.8% and the largest fall over any period was 42.9% (all
based on benchmark calendar month end values).
Based on the above, and assuming there is no adverse change to the regulatory
environment and tax treatment of UK investment trusts to the extent that would
challenge the viability of the UK investment trust industry as a whole, the
Directors have a reasonable expectation that the Company will be able to
continue in operation and meet its liabilities as they fall due over the five
year period of assessment.
Section 172 Statement, Company Sustainability and Stakeholders
BOARD RESPONSIBILITIES
The responsibilities of the Board include setting the Company's strategic
aims, providing the leadership to put them into effect, supervising the
Manager and reporting to shareholders on their stewardship. The Board is
ultimately responsible for the direction, management, performance and
long-term sustainable success of the Company.
The Board sets the Company's strategy and objectives, taking into account the
interests of all its stakeholders. However, the Company has no employees and
no customers in the traditional sense. Consistent with the Company's nature as
an investment trust, the Board's principal concern has been, and continues to
be, the interests of the Company's shareholders taken as a whole.
COMPANY SUSTAINABILITY AND STAKEHOLDERS
A good understanding of the Company's stakeholders enables the Board to
consider the potential impact of strategic decisions on each stakeholder group
during the decision‑making process. By considering the Company's purpose,
vision and values, together with its strategic priorities, the Board aims for
its decisions to be fair and take account of the interests of the key
stakeholder groups. As an externally managed investment company, the Company
does not have any employees. The Board considers its main stakeholders to be
its shareholders, service providers, investee companies and the Manager.
SECTION 172 STATEMENT
During the year under review, the Board believes that it has acted in good
faith and discharged its duties under Section 172 of the Companies Act 2006 to
promote the success of the Company for the benefit of its members as a whole
and having regard to the interest of stakeholders and the factors set out in
s172. The Board performed its role as outlined in the schedule of matters
reserved for the Board and taking into account the interest of the key
stakeholders during the decision-making process.
The following sections include examples of how the Company's stakeholders were
considered during the key Board decisions. Key Board decisions include payment
of dividends, liquidity management via share issuance and buy‑backs,
marketing, performance evaluation, negotiation on debt and re-appointment of
the Investment Manager and other key service providers, ESG integration into
investment decisions and Board succession planning. Please see the table below
for a reference to where this information can be found:
Section 172 statement area Reference
The likely consequences of any decision in the long-term See Chair's Statement on page 5, The Portfolio Manager's Report, Core
Investment Beliefs and Business Review on pages 9 to 15, Going Concern and
Viability Statements on pages 41 and 22 and Stakeholder Engagement section
below.
The interests of the Company's employees As a closed-ended investment company, the Company has no employees.
Stewardship section on page 25 refers to how the Company assesses its impact
on the social issues.
The need to foster the Company's business relationships with suppliers, As a closed-ended investment company, the Company has no customers in the
customers and others traditional sense. See Stakeholder Engagement section below Principal Risks
and Uncertainties on page 18 and Stewardship section on page 25 on how the
Company assesses its impact on and engages with its key stakeholders.
The impact of the Company's operations on the community and environment See Principal Risks and Uncertainties on page 18, Stewardship section on
page 25 and ESG matters disclosure below on how the Company assesses its
impact on the community and environment of its investee companies.
The desirability of the Company maintaining a reputation for high standards of See Stakeholder Engagement section on page 24, Anti-Bribery and Corruption and
business conduct Modern Slavery disclosures on pages 26-27.
The need to act fairly as between members of the Company See Stakeholder Engagement section on page 24 and Corporate Governance Report
on pages 29 to 44.
ENGAGEMENT WITH SHAREHOLDERS
Shareholder relations are given high priority by both the Board and the
Manager and the Board welcomes feedback from shareholders throughout the year.
The prime medium by which the Company communicates with shareholders is
through the half-yearly and annual financial reports, which aim to provide
shareholders with a full understanding of the Company's activities and
results. This information is supplemented by the daily publication of the net
asset value, monthly factsheets as well as dividend and other announcements.
Feedback from shareholders forms part of the discussion at all Board meetings
and at the Board's annual strategy meeting which involves consideration of how
the Company is meeting shareholder expectations.
Shareholders can also visit the Company's website
www.edinburgh-investment-trust.co.uk in order to access copies of the annual
and half-yearly financial reports, pre-investment information, Key Information
Documents (KIDs), proxy voting results, factsheets and stock exchange
announcements. The Company's website also hosts videos and other applicable
written materials by the Manager to enhance the information available.
Shareholders can send their questions using a dedicated section of the
Company's website.
Typically, at each AGM, a presentation is made by the Manager following the
formal business of the meeting and shareholders have the opportunity to
attend, vote and most importantly to communicate directly with the Manager and
Board. Presentations to both institutional shareholders and analysts also
follow the publication of the annual results. The Company held a physical AGM
with virtual attendance on 21 July 2022 which allowed shareholders to join via
a live weblink and to submit questions during the meeting. In addition to the
AGM and presentations, the Board and Manager hosted a shareholder event in
London on 22 September 2022. The Chair uses these events to lead the Company's
engagement with its shareholders. Please see page 77 for the notice of 2023
Annual General Meeting and page 7 for details of the 2023 shareholder event.
Regular dialogue is maintained between the Manager and major institutional
shareholders throughout the year to discuss aspects of investment performance,
governance and strategy and to listen to shareholder views in order to help
develop an understanding of their issues and concerns. All meetings between
the Manager and shareholders are reported to the Board.
There is a clear channel of communication between the Board and the Company's
Shareholders via the Company Secretary. The Company Secretary passes to the
Chair all correspondence addressed to the Board of the Company.
The strategy of the Company is reviewed by the Board on an annual basis. At
the strategy day in September 2022 the Board discussed discount management,
marketing and board recruitment. Whilst feedback from shareholders is sought
regularly, shareholders' feedback provided by the Company's Broker and Manager
is a major consideration at this meeting.
ENGAGEMENT WITH THE MANAGER
The Board has regular dialogue with and reports from the Manager on the
portfolio of investments, including performance against set objectives and
risk management and the Manager attends each Board meeting to provide updates
and answer questions from the Board. The Board has also discussed the AIFM's
responsibility under the Consumer Duty Act with the Manager and received
comfort as to how those responsibilities will be met.
ENGAGEMENT WITH SERVICE PROVIDERS
As an externally managed investment trust, the Company conducts all its
business through its key service providers. The Board believes that
maintaining a collaborative relationship with each of the Company's service
providers Is essential to the Board's decision-making and the ongoing success
of the Company. At least annually the Board reviews the performance and
services of its key service providers including the Manager and receives and
considers the internal control reports on a quarterly basis covering their
operations, policies and control environments.
The Board reviews the quarterly reports of the service providers and whether
the services meet the requirements of the Company, represent value for money
and are therefore in the best interests of shareholders. We expect to conduct
ourselves fairly with all service providers, to maintain a reputation as a
trusted, fair and reliable partner. The Board and/or delegates of the Board
engage with key providers on a periodic basis through service review meetings
or, by invitation, attendance at Board or committee meetings. Such engagement
gives opportunity to both parties to discuss any challenges being experienced
and potential solutions thereon, and to identify planned developments at the
Company or the service provider. We aim to pay promptly and if in dispute, to
engage openly to resolve matters in a timely manner.
Following the COVID-19 pandemic, the Board continues to ensure that service
providers are as prepared as possible for all such eventualities which could
disrupt the performance of their respective functions.
ENGAGEMENT WITH INVESTEE COMPANIES
The Manager is a long-term investor and develops strong relationships with
both investee and potential investee companies and reports their conversations
back to the Board. Both the Board and the Manager believe that engagement with
investee companies is positive, beneficial and welcomed.
Voting is a key activity in the dialogue with investee companies and these
decisions are reported to the Board on a quarterly basis. Voting is undertaken
by the same team that manages the portfolio assets rather than it being
delegated to an independent third party.
The Board supports the Manager's approach to ESG in the context of its
management of the portfolio, please see below on ESG matters and stewardship
of investee companies.
ENVIRONMENTAL SOCIAL AND GOVERNANCE ("ESG") MATTERS
As an investment company with no employees, property or activities outside
investment, environmental policy has limited application, yet the Board is
committed to taking a responsible approach to ESG matters. The Company's
compliance with the AIC Code of Corporate Governance is detailed in the
Corporate Governance Statement on page 32, which demonstrates the Company's
own responsibilities on matters such as governance.
In respect of the Company's investments, the Manager and the other members of
the investment team integrate ESG risks and opportunities (including climate
change related risks) as part of a material assessment undertaken for all
holdings. Consistent with the Manager's investment approach, this analysis is
undertaken on a bottom-up, stock basis. The risks and opportunities that each
holding faces over a three-to-five-year period are then identified and
prioritised. Many of these issues can be sub-categorised as "E", "S" and "G"
issues. The issues that are identified as the key ones are at the forefront of
engagement discussions on holdings with the investee companies. These
frequently include issues related to global warming, including those focused
on transitional risks, legislation risks, and/or physical risks. The Manager
is a signatory to the Principles of Responsible Investment ('PRI'). Further
information is available at www.liontrust.co.uk and through the investment
company ESG disclosures at www.theaic.co.uk.
The Board recognises that the most material way in which the Company can have
an impact is through responsible ownership of its investments. See below how
the Manager engages with the management of investee companies to encourage
that high standards of ESG practice are adopted.
The Company made no political donations during the year in review.
STEWARDSHIP CODE AND EXERCISE OF VOTING POWERS
The Board considers that the Company has a responsibility as a shareholder to
ensure that high ESG standards are maintained in the companies in which it
invests. One of the principal means of putting shareholder responsibility into
practice is through the exercise of voting rights. The Company aims to provide
investment specific active stewardship and the Company's voting rights are
exercised on an informed and independent basis. The Manager has adopted a
clear and considered policy towards its stewardship responsibility on behalf
of the Company. The Manager takes steps to satisfy itself about the extent to
which investee companies protect shareholder value and comply with local
recommendations and practices, such as the UK Corporate Governance Code. The
Manager's approach to corporate governance and the UK Stewardship Code can be
found on the Manager's website at www.liontrust.co.uk together with a copy of
the Manager's Stewardship Policy and the Manager's global proxy voting policy.
Members of the Manager's investment team are responsible for overseeing all
aspects of the Stewardship process, including voting on all resolutions at all
Annual General Meetings and Extraordinary General Meetings in the UK and
overseas. The Manager assesses corporate governance, remuneration policies
and, if deemed necessary, will challenge management where it is felt that the
best interests of shareholders are not being met.
The Board reviews the Manager's voting record at each meeting. The table below
demonstrates how the Manager voted during the year in review. The Manager
voted at all meetings, except for an unlisted legacy holding in Raven
Property.
Total %
For Against Items Against
Audit Related 84 0 84 0.0%
Capitalisation 186 5 191 2.6%
Company Articles 9 1 10 10.0%
Compensation 73 11 84 13.1%
Corporate Governance 1 0 1 0.0%
Director Election 436 13 449 2.9%
Director Related 7 0 7 0.0%
Environmental 6 2 8 25.0%
Miscellaneous 2 0 2 0.0%
Non-Routine Business 4 0 4 0.0%
Routine Business 87 1 88 1.1%
Social(1) 4 21 25 84.0%
Strategic Transactions 4 0 4 0.0%
Takeover Related 37 0 37 0.0%
Total 940 54 994 5.4%
(1 ) The large number of against votes relates to a policy of
voting against UK Political Donations and Expenditure.
(2 ) The term return on capital employed (ROCE) refers to a
financial ratio that can be used to assess a company's profitability and
capital efficiency.
The Managers' policy is to invest in well managed companies with robust ESG
policies. The examples below demonstrate how the Manager voted on certain ESG
issues and its rationale behind it.
- NatWest Group. Resolution summary: to re-elect Frank Dangeard as
Director. The Manager voted against this proposal because, in addition to his
role as NED of the Company, Frank Dangeard serves on the boards of three other
publicly listed companies. Furthermore, he is the Chair of the Board in two of
those companies. This could potentially compromise his ability to commit
sufficient time to his role at NatWest Group. The outcome of the vote was that
the resolution was passed, albeit with 20% of votes against. We will continue
to engage with the management on this issue.
- RS Group. Resolution summary: to approve the company's remuneration
policy. Although it was a contentious policy, with some third-party advisors
recommending their clients to vote against it, the Manager supported the
resolution. The Manager believe the CEO and Financial Director have done an
outstanding job in reversing the fortunes of the company and positioning the
business for long term success. It is important for the remuneration to be
competitive. Moreover, the award targets are extremely stretching and have the
strong underpinning of the 20% ROCE(2) condition. The resolution was passed,
albeit with over 39% of votes against.
- Shell Group. Resolution summary: this was a shareholder‑filed
resolution, which requested Shell to set and publish targets for greenhouse
gas (GHG) emissions. The Manager voted against this proposal as it was
considered unnecessary, because a separate management-filed proposal at the
same meeting, to approve the Shell energy transition progress update, showed
good progress with the plan. The shareholder-filed resolution was therefore
redundant as Shell had already disclosed those targets. The resolution was not
passed, with 80% of votes against.
- Ashtead Group. Resolution summary: to approve the company's
remuneration report. The Manager voted against this management proposal. This
was because the actions taken by the Remuneration Committee in response to the
significant levels of dissent recorded against the remuneration-related
resolutions at the 2021 AGM were not considered sufficient to address the
underlying concerns raised. The resolution was passed, with 33% of votes
against the report. We will continue to engage with the management on this
issue.
In addition, the Manager publishes an annual Responsible Capitalism report,
providing cumulative voting statistics, full disclosure on voting policy and
extracts of engagement for the year. The Manager publishes a quarterly voting
record on its website www.liontrust.co.uk.
MODERN SLAVERY DISCLOSURE
The Company aims to adopt the highest standards of conduct and is committed to
integrating responsible business practices throughout its operations. The
prevention of modern slavery is an important part of corporate good
governance.
The Company is an investment vehicle and does not provide goods or services in
the normal course of its business or have customers or employees. Accordingly,
the Directors consider that the Company is not required to make any slavery or
human trafficking statement under the Modern Slavery Act 2015.
ANTI-BRIBERY AND CORRUPTION
It is the Company's policy to conduct its business in an honest and ethical
manner. The Company takes a zero‑tolerance approach to bribery and
corruption and is committed to acting professionally, fairly and with
integrity in all its business dealings and relationships wherever it
operates. The Company's policy and the procedures that implement it are
designed to support that commitment.
PREVENTION OF THE FACILITATION OF TAX EVASION
The Board has adopted a zero-tolerance approach to the criminal facilitation
of tax evasion.
GREENHOUSE GAS EMISSIONS AND STREAMLINED ENERGY AND CARBON REPORTING ('SECR')
The Company has no employees, physical assets, property or operations of its
own, does not provide goods or services and does not have its own customers.
It follows that the Company has little or no direct environmental impact. In
consequence, the Company has limited greenhouse gas emissions to report from
its operations aside from travel to board meetings, nor does it have
responsibility for any other sources of emissions under the Companies
Act 2006 (Strategic Report and Directors' Reports) Regulations 2013. As the
Company has no material operations and therefore has low energy usage, it has
not included an energy and carbon report.
CONCLUSION
The Directors believe that they have fulfilled their duties under s172 of the
Companies Act 2006 in their deliberations on all matters. The Board takes into
account the interests of all the Company's key stakeholders, as outlined
above, in its decision-making which reflects the Board's belief that the
long-term sustainable success of the Company is linked directly to its key
stakeholders. Work of the Board and its Committees is described in the
Governance Report on pages 29 to 44.
This Strategic Report was approved by the Board on 26 May 2023
Signed by order of the Board of Directors
APEX LISTED COMPANIES SERVICES (UK) LIMITED / COMPANY SECRETARY / 26 MAY 2023.
Statement of Directors' Responsibilities
IN RESPECT OF THE PREPARATION OF THE ANNUAL FINANCIAL REPORT
The Directors are responsible for preparing the annual financial report and
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 they are required to prepare the financial
statements in accordance with UK accounting standards, including FRS 102
The Financial Reporting Standard applicable in the UK and Republic of
Ireland.
Under company law the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Company and of its profit or loss for that period.
In preparing these financial statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgements and estimates that are reasonable and prudent;
- state whether applicable UK accounting standards have been followed,
subject to any material departures disclosed and explained in the financial
statements;
- assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern; and
- use the going concern basis of accounting unless they either intend to
liquidate the Company or to cease operations, or have no realistic alternative
but to do so.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that its financial statements comply with the Companies
Act 2006.
They are responsible for such internal controls as they determine are
necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error, and have general
responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Company and to prevent and detect fraud and other
irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, Directors' Report, Directors' Remuneration
Report and Corporate Governance Statement that complies 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, which
is maintained by the Company's Manager. Legislation in the UK governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL FINANCIAL
REPORT
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with the applicable
set of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company; and
- the Strategic Report includes a fair review of the development and
performance of the business and the position of the Company, together with a
description of the principal risks and uncertainties that it faces.
We consider the annual financial report, taken as a whole, is fair, balanced
and understandable and provides the information necessary for shareholders to
assess the Company's position and performance, business model and strategy.
Signed on behalf of the Board of Directors
ELISABETH STHEEMAN
CHAIR
26 MAY 2023
Income Statement
For the year ended 31 March
2023 2022
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Gains on investments held at fair value 9(b) - 6,023 6,023 - 101,815 101,815
Losses on foreign exchange - (191) (191) - (148) (148)
Income 2 48,998 - 48,998 44,211 10,036 54,247
Investment management fee 3 (1,492) (3,482) (4,974) (1,512) (3,528) (5,040)
Other expenses 4 (1,092) (7) (1,099) (977) (9) (986)
Net return before finance costs and taxation 46,414 2,343 48,757 41,722 108,166 149,888
Finance costs 5 (1,718) (4,015) (5,733) (2,492) (5,815) (8,307)
Return/(loss) on ordinary activities before taxation 44,696 (1,672) 43,024 39,230 102,351 141,581
Tax on ordinary activities 6 (781) - (781) (663) - (663)
Return/(loss) on ordinary activities after taxation for the financial year 43,915 (1,672) 42,243 38,567 102,351 140,918
Return/(loss) per ordinary share:
Basic and diluted 7 25.99p (0.99)p 25.00p 22.41p 59.47p 81.88p
The total column of this statement represents the Company's income statement,
prepared in accordance with UK Accounting Standards. The return/(loss) after
taxation is the total comprehensive income/(expense) and therefore no
additional statement of comprehensive income is presented. The supplementary
revenue and capital columns are presented for information purposes in
accordance with the Statement of Recommended Practice issued by the
Association of Investment Companies. All items in the above statement derive
from continuing operations of the Company. No operations were acquired or
discontinued in the year.
The accompanying notes are an integral part of these financial statements.
Balance Sheet
At 31 March 2023
2023 2022
Notes £'000 £'000
Non current assets
Investments held at fair value 9(a) 1,226,649 1,218,725
Current assets
Debtors 10 12,392 10,824
Cash and cash equivalents 22,362 68,728
Total assets 1,261,403 1,298,277
Non current liabilities
Unsecured Senior Loan Notes 12 (120,000) (20,000)
Current liabilities
Other payables 11 (2,059) (2,566)
7.75% Debenture Stock 30 Sep 2022 11 - (99,874)
Total liabilities (122,059) (122,440)
Net assets 1,139,344 1,175,837
Equity
Called up share capital 13 48,917 48,917
Share premium account 14 10,394 10,394
Capital redemption reserve 14 24,676 24,676
Capital reserve 14 1,003,989 1,041,086
Revenue reserve 14 51,368 50,764
Total equity 1,139,344 1,175,837
Net asset value per ordinary share:
Basic and diluted - debt at par value 688.52p 687.24p
Basic and diluted - debt at fair value 713.75p 686.69p
The financial statements on pages 57 to 75 were approved and authorised for
issue by the Board of Directors on 26 May 2023.
ELISABETH STHEEMAN / CHAIR
Signed on behalf of the Board of Directors
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Equity
For the year ended 31 March
Capital
Share Share Redemption Capital Revenue
Capital Premium Reserve Reserve(1) Reserve(1) Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
At 31 March 2021 48,917 10,394 24,676 945,728 61,516 1,091,231
Return on ordinary activities - - - 102,351 38,567 140,918
Dividends paid 8 - - - - (49,319) (49,319)
Shares bought back and held in treasury(2) 13 - - - (6,993) - (6,993)
At 1 April 2022 48,917 10,394 24,676 1,041,086 50,764 1,175,837
(Loss)/return on ordinary activities - - - (1,672) 43,915 42,243
Dividends paid 8 - - - - (43,311) (43,311)
Shares bought back and held in treasury(2) 13 - - - (35,425) - (35,425)
At 31 March 2023 48,917 10,394 24,676 1,003,989 51,368 1,139,344
(1) The revenue reserve and certain amounts of the capital reserve
are distributable by way of dividend.
(2) Shares bought back and held in treasury includes transaction
costs.
The accompanying notes are an integral part of these financial statements.
Cash Flow Statement
For the year ended 31 March
2023 2022
Notes £'000 £'000
Cash flow from operating activities
Net return before finance costs and taxation 48,757 149,888
Tax on overseas income 6 (781) (663)
Adjustments for:
Purchase of investments (254,040) (426,367)
Sale of investments 251,961 462,132
Gains on investments held at fair value (6,023) (101,815)
Increase in debtors (2,706) (3,201)
Increase in creditors 37 128
Net cash inflow from operating activities 37,205 80,102
Cash flow from financing activities
Interest paid on overdraft (3) (1)
Interest and commitment fees paid on bank facility (12) (85)
Interest paid on unsecured senior loan notes/debenture stocks (4,372) (7,994)
Issue of unsecured senior loan notes 100,000 20,000
Redemption of debenture loan stock (100,000) -
Shares bought back and held in treasury (35,873) (6,545)
Dividends paid 8 (43,311) (49,319)
Net cash outflow from financing activities (83,571) (43,944)
Net (decrease)/increase in cash and cash equivalents (46,366) 36,158
Cash and cash equivalents at start of the year 68,728 32,570
Cash and cash equivalents at the end of the year 22,362 68,728
Cash and cash equivalent comprises:
Cash held at custodian 1,093 1,021
Goldman Sachs Liquidity Reserve International Fund - Money Market Fund 21,269 47,727
UK Government Treasury Bill - 19,980
Cash and cash equivalents 22,362 68,728
Cash flow from operating activities includes:
Dividends received 45,820 50,447
Interest received 6 -
At 1 April Non-cash At 31 March
2022 Cash flow movement 2023
£'000 £'000 £'000 £'000
Reconciliation of net debt:
Cash and cash equivalents 68,728 (46,366) - 22,362
Debenture Stock 7¾% 30 September 2022 (99,874) 100,000 (126) -
Unsecured Senior Loan Notes (20,000) (100,000) - (120,000)
Total (51,146) (46,366) (126) (97,638)
The accompanying notes are an integral part of these financial statements.
Notes to the Financial Statements
1. PRINCIPAL ACCOUNTING POLICIES
Accounting policies describe the Company's approach to recognising and
measuring transactions during the year and the position of the Company at the
year end.
The principal accounting policies adopted in the preparation of these
financial statements are set out below. These policies have been consistently
applied during the year and the preceding year.
A. Basis of Preparation
Accounting Standards Applied
The financial statements have been prepared in accordance with the Companies
Act 2006, applicable United Kingdom Accounting Standards and applicable law
(UK Generally Accepted Accounting Practice (UK GAAP)) including FRS 102 'The
Financial Reporting Standard applicable in the UK and Republic of Ireland' and
with the Statement of Recommended Practice Financial Statements of Investment
Trust Companies and Venture Capital Trusts, issued by the Association of
Investment Companies (SORP) in April 2021 (as amended in July 2022).
The financial statements are issued on a going concern basis. Details of the
Directors' assessment of the going concern status of the Company, which
considered the adequacy of the Company's resources and the impacts of the
COVID-19 pandemic, are given on page 41.
As an investment fund the Company has the option not to present a cash flow
statement. A cash flow statement is not required when an investment fund meets
all the following conditions: substantially all investments are highly liquid
and are carried at market value, and where a Statement of Changes in Equity is
provided: all of which are satisfied.
However the Directors' have elected to present a cash flow statement in the
annual financial report to present additional relevant information to readers
of the financial statements.
Significant Accounting Estimates, Assumptions and Judgements
The preparation of the financial statements may require the use of estimates,
assumptions and judgements which may affect the reported amounts of assets and
liabilities at the reporting date. While estimates are based on best judgement
using information and financial data available the actual outcome may differ
from these estimates. The Directors have applied their judgement for the
allocation of the investment management fee and finance costs between capital
and revenue in the income statement as set out in Note 1G and the treatment of
special dividend income between capital and income, as set out in Note 1J. The
Directors do not believe that these judgements nor any accounting estimates,
assumptions or judgements that have been applied to the financial statements
have a significant risk of causing material adjustment to the carrying amount
of assets and liabilities within the next financial year.
B. Foreign Currency and Segmental Reporting
(i) Functional and presentational currency
The financial statements are presented in sterling, which is the Company's
functional and presentational currency and the currency in which the Company's
share capital and expenses, as well as its assets and liabilities, are
denominated.
(ii) Transactions and balances
Transactions in foreign currency, whether of a revenue or capital nature, are
translated to sterling at the rates of exchange ruling on the dates of such
transactions. Foreign currency assets and liabilities are translated to
sterling at the rates of exchange ruling at the balance sheet date. Any gains
or losses, whether realised or unrealised, are taken to the capital reserve or
to the revenue account, depending on whether the gain or loss is of a capital
or revenue nature. All gains and losses are recognised in the income
statement.
(iii) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single
segment of business of investing in equity and debt securities, issued by
companies quoted mainly on the UK or other recognised stock exchanges.
C. Financial Instruments
The Company has chosen to apply Section 11 and 12 of FRS102 in full in respect
of the financial instruments.
(i) Recognition of financial assets and financial liabilities
The Company recognises financial assets and financial liabilities when the
Company becomes a party to the contractual provisions of the instrument. The
Company will offset financial assets and financial liabilities if the Company
has a legally enforceable right to set off the recognised amounts and intends
to settle on a net basis.
(ii) Derecognition of financial assets
The Company derecognises a financial asset when the contractual rights to the
cash flows from the asset expire or it transfers the right to receive the
contractual cash flows on the financial asset in a transaction in which
substantially all the risks and rewards of ownership of the financial asset
are transferred. Any interest in the transferred financial asset that is
created or retained by the Company is recognised as an asset.
(iii) Derecognition of financial liabilities
The Company derecognises financial liabilities when its obligations are
discharged, cancelled or have expired.
(iv) Trade date accounting
Purchases and sales of financial assets are recognised on trade date, being
the date on which the Company commits to purchase or sell the assets.
(v) Classification and measurement of financial assets and financial
liabilities
- Financial assets
The Company's investments are classified as held at fair value through profit
or loss.
Financial assets held at fair value through profit or loss are initially
recognized as fair value, which is taken to be their acquisition price, with
transaction costs expensed in the income statement. These are subsequently
valued at fair value.
Fair value for investments that are actively traded in organised financial
markets is determined by reference to stock exchange quoted bid prices at the
balance sheet date. Fair value for investments that are actively traded but
where active stock exchange quoted bid prices are not available is determined
by reference to a variety of valuation techniques including broker quotes and
price modelling. Unquoted, unlisted or illiquid investments are valued by the
Directors at fair value using a variety of valuation techniques including
earnings multiples, recent transactions and other market indicators, cash
flows and net assets.
- Financial liabilities
Financial liabilities, including borrowings, are initially measured at
transaction price, being the fair value. For liabilities issued at a discount
or with significant associated transaction costs, such discount and costs are
subsequently measured at amortised cost using the effective interest method.
D. Cash and Cash Equivalents
Cash and cash equivalents may comprise cash (including short term deposits
which are readily convertible to a known amount of cash and are subject to an
insignificant risk of change in value) as well as cash equivalents, including
money market funds. Investments are regarded as cash equivalents if they meet
all of the following criteria: short term in duration (typically three months
or less from the date of acquisition), highly liquid investments that are
readily convertible to a known amount of cash, are subject to an insignificant
risk of change in value and provide a return no greater than the rate of a
three-month high quality government bond.
E. Hedging
Forward currency contracts entered into for hedging purposes are valued at the
appropriate forward exchange rate ruling at the balance sheet date. Profits or
losses on the closure or revaluation of positions are recognised in the income
statement and taken to capital reserves.
F. Income
Interest income arising from fixed income securities and cash is recognised in
the income statement using the effective interest method. Dividend income
arises from equity investments held and is recognised on the date investments
are marked 'ex-dividend'. Special dividends are looked at individually to
ascertain the reason behind the payment. This will determine whether they are
treated as income or capital in the income statement.
Deposit interest and underwriting commission receivable are taken into account
on an accruals basis.
G. Expenses and Finance Costs
Expenses are recognised on an accruals basis and finance costs are recognised
using the effective interest method in the income statement.
The investment management fee and finance costs are allocated 70% to capital
and 30% to revenue. This is in accordance with the Board's expected long-term
split of returns, in the form of capital gains and income respectively, from
the portfolio. Transaction costs are recognised as capital in the income
statement. All other expenses are allocated to revenue in the income
statement.
H. Taxation
The liability to corporation tax is based on net revenue for the year,
excluding non-taxable dividends. The tax charge is allocated between the
revenue and capital account on the marginal basis whereby revenue expenses are
matched first against taxable income in the revenue account.
Deferred taxation is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more tax or a right to pay less tax
in the future have occurred. Timing differences are differences between the
Company's taxable profits and its results as stated in the financial
statements. Deferred taxation assets are recognised where, in the opinion of
the Directors, it is more likely than not that these amounts will be realised
in future periods.
A deferred tax asset is only recognised in respect of surplus management
expenses, losses on loan relationships and eligible unrelieved foreign tax to
the extent that it is probable that the Company will be able to recover them
from future taxable revenue.
I. Dividends Payable
Dividends are not recognised in the financial statements unless there is an
obligation to pay at the balance sheet date. Proposed dividends are recognised
in the year in which they are paid to shareholders.
J. Critical accounting estimates and judgements
No critical accounting judgements or estimates were made during the year.
K. Accounting for reserves
The share premium comprises the net proceeds received by the Company following
the issue of shares, after deduction of the nominal amount of 25 pence and any
applicable issue costs. The capital redemption reserve maintains the equity
share capital of the Company and arose from the nominal value of any shares
bought back and cancelled; both are non-distributable.
The capital reserve includes the investment holding gains/(losses), being the
difference between cost and market value at the balance sheet date. It also
includes cumulative realised gains/(losses) and costs related to share
buybacks. Capital investment gains and losses are shown in note 9(b) and form
part of the capital reserve.
The revenue reserve shows the net revenue retained after payment of any
dividends. The revenue reserve and certain amounts of the capital reserve are
distributable by way of dividend.
L. Shares repurchased and held in treasury
The cost of repurchasing ordinary shares (for cancellation or to hold in
treasury) including the related stamp duty and transaction cost is charged to
the capital reserve and dealt with in the Statement of Changes in Equity.
Share repurchase transactions are accounted for on a trade date basis. Where
shares are cancelled (or are subsequently cancelled having previously been
held in treasury), the nominal value of those shares is transferred out of
Called up share capital and into the Capital redemption reserve. Should shares
held in treasury be reissued, the sales proceeds will be treated as a realised
capital profit up to the amount of the purchase price of those shares and will
be transferred to capital reserves. The excess of the sales proceeds over the
purchase price will be transferred to Share premium.
2. INCOME
This note shows the income generated from the portfolio (investment assets) of
the Company and income received from any other source.
2023 2022
£'000 £'000
Income from investments:
UK zero coupon bond income 148 11
UK dividends 35,807 32,253
UK special dividends 6,999 6,689
Overseas dividends 5,287 5,193
Overseas special dividends 358 -
Interest from money market funds 393 28
48,992 44,174
Other income:
Deposit interest 6 -
Underwriting commission - 37
6 37
Total income 48,998 44,211
No special dividends have been recognised in capital during the year (2022:
£10,036,000).
3. INVESTMENT MANAGEMENT FEE
This note shows the fee due to the Manager. This is calculated and paid
monthly.
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management fee 1,492 3,482 4,974 1,512 3,528 5,040
1,492 3,482 4,974 1,512 3,528 5,040
Details of the investment management agreement is disclosed on page 41 in the
Directors' Report. At 31 March 2023 investment management fees of £429,000
(2022: £427,000) were accrued.
4. OTHER EXPENSES
The other expenses((i)) of the Company are presented below, those paid to the
Directors and the auditors are separately identified.
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Other expenses 1,092 7 1,099 977 9 986
Other expenses include the following:
Directors' remuneration((ii)) 189 - 189 184 - 184
Auditors' fees:((iii))
- for audit of the Company's annual financial statements 48 - 48 41 - 41
The maximum Directors' fees authorised by the Articles of Association are
£250,000 per annum.
(i) Other expenses include:
- £18,000 (2022: £17,000) of employer's National Insurance payable on
Directors' remuneration. As at 31 March 2023, the amounts outstanding on
Directors' remuneration and employer's National Insurance was £64,000 (2022:
£nil); and
- custodian transaction charges of £7,000 (2022: £9,000). These are
charged to capital.
(ii) There were seven directors for a period during the year and the
Director's Remuneration Report on page 45 provides further information on
Directors' fees.
(iii) Auditor's fees include expenses but exclude VAT.
5. FINANCE COSTS
Finance costs arise on any borrowing facilities the Company has used.
Borrowing facilities are the £120m notes (2022 £100m debenture stock, £20m
notes and a £25m bank revolving credit facility). Please see note 12 for
additional details of the Unsecured Senior Loan Note terms.
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Interest payable on borrowings repayable not by instalment:
- Commitment fees due on loan facility 4 8 12 18 42 60
- Interest on overdraft facility 1 2 3 - 1 1
- Debenture stock repayable within 1 year 1,235 2,883 4,118 2,325 5,425 7,750
- Unsecured Senior Loan notes repayable after 5 years 442 1,032 1,474 73 171 244
Amortised debenture stock discount and issue costs 36 90 126 76 176 252
1,718 4,015 5,733 2,492 5,815 8,307
6. TAXATION AND TOTAL RETURN ON ORDINARY ACTIVITIES
As an investment trust the Company pays no tax on capital gains. As the
Company invests principally in UK equities, it has little overseas tax and the
overseas tax charge is the result of withholding tax deducted at source. This
note also clarifies the basis for the Company having no deferred tax asset or
liability.
(a) Tax charge
2023 2022
£'000 £'000
Overseas taxation 781 663
(b) Reconciliation of tax charge
2023 2022
£'000 £'000
Return on ordinary activities before taxation 43,024 141,581
Theoretical tax at the current UK Corporation Tax rate of 19% (2022: 19%) 8,175 26,900
Effects of:
- Non-taxable UK dividends (6,803) (6,128)
- Non-taxable UK special dividends (1,398) (972)
- Non-taxable overseas dividends (982) (3,178)
- Non-taxable gains on investments (1,145) (19,345)
- Non-taxable losses on foreign exchange 36 28
- Excess of allowable expenses over taxable income 2,116 2,693
- Disallowable expenses 1 2
- Overseas taxation 781 663
Tax charge for the year 781 663
(c) Deferred tax
Owing to the Company's status as an investment company, and the Directors'
intention that it continues to meet the conditions required to maintain that
approval in the foreseeable future, no deferred tax has been provided on any
capital gains and losses arising on the revaluation or disposal of
investments.
(d) Factors that may affect future tax changes
The Company has cumulative excess management expenses of £502,750,000 (2022:
£491,547,000) that are available to offset future taxable revenue.
A deferred tax asset of £125,687,483 (2022: £122,886,688) at 25% (2022: 25%)
has not been recognised in respect of these expenses since the Directors
believe that there will be no taxable profits in the future against which
deferred tax assets can be offset.
7. RETURN/(LOSS) PER ORDINARY SHARE
Return per share is the amount of gain generated for the financial year
divided by the weighted average number of ordinary shares in issue.
The basic revenue, capital and total return per ordinary share is based on
each of the returns on ordinary activities after taxation and on 168,985,796
(2022: 172,100,486) ordinary shares, being the weighted average number of
ordinary shares in issue throughout the year.
8. DIVIDENDS ON ORDINARY SHARES
Dividends represent the distribution of income to shareholders. The Company
pays four dividends a year - three interims and one final dividend.
2023 2022
pence £'000 pence £'000
Dividends paid and recognised in the year:
- third interim paid in respect of previous year 6.40 10,934 6.00 10,331
- final paid in respect of previous year 6.40 10,925 6.00 10,331
- special dividend paid in respect of previous year - - 4.65 8,006
- first interim paid 6.40 10,783 6.00 10,331
- second interim paid 6.40 10,669 6.00 10,320
25.60 43,311 28.65 49,319
2023 2022
pence £'000 pence £'000
Dividends payable in respect of the year:
- first interim 6.40 10,783 6.00 10,331
- second interim 6.40 10,669 6.00 10,320
- third interim 6.70 11,087 6.40 10,934
- proposed final 6.70 11,087 6.40 10,927
26.20 43,626 24.80 42,512
The proposed final dividend is subject to approval by ordinary shareholders at
the AGM.
9. INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT AND LOSS
The portfolio comprises investments which are principally listed on a
regulated stock exchange or traded on AIM. A very small proportion of
investments are valued by the Directors as they are unlisted.
Gains or losses are either:
- realised, usually arising when investments are sold; or
- unrealised, being the difference from cost on those investments still
held at the year end.
(a) Analysis of investments by listing status
2023 2022
£'000 £'000
Investments listed on a recognised investment exchange 1,226,649 1,218,419
Unlisted or not regularly traded investments at Directors' valuation - 306
1,226,649 1,218,725
(b) Analysis of investment gains:
2023 2022
£'000 £'000
Opening book cost 1,048,510 1,026,675
Opening investment holding gains 170,215 124,333
Opening fair value 1,218,725 1,151,008
Movements in year:
Purchases at cost 252,724 427,683
Sales - proceeds (250,823) (461,781)
Gains on investments in the year 6,023 101,815
Closing fair value 1,226,649 1,218,725
Closing book cost 1,040,163 1,048,510
Closing investment holding gains 186,486 170,215
Closing fair value 1,226,649 1,218,725
The Company received £250,823,000 (2022: £461,781,000) from investments sold
in the year. The book cost of these investments when they were purchased was
£261,072,000 (2022: £405,848,000) realising a loss of £10,249,000 (2022:
gain of £55,933,000). These investments have been revalued over time and
until they were sold any unrealised profits/losses were included in the fair
value of the investments.
The transaction costs included in gains on investments amount to £1,162,000
(2022: £1,698,000) on purchases and £99,000 (2022: £152,000) for sales.
10. DEBTORS
Debtors are amounts which are due to the Company, such as monies due from
brokers for investments sold and income which has been earned (accrued) but
not yet received.
2023 2022
£'000 £'000
Amounts due from brokers - 1,138
Overseas withholding tax recoverable 2,316 1,897
Prepayments and accrued income 10,076 7,789
12,392 10,824
11. OTHER PAYABLES: AMOUNTS FALLING DUE WITHIN ONE YEAR
Creditors are amounts which must be paid by the Company and are split between
those payable within 12 months of the balance sheet date and those payable
after that time. The main creditors have historically been the debenture and
bank borrowings. The other creditors include any amounts due to brokers for
the purchase of investments, amounts owing on share buy backs awaiting
settlement or amounts owed to suppliers (accruals) such as the Manager and
auditors.
2023 2022
£'000 £'000
Debenture Stock 7¾% redeemable 30 September 2022 - 99,874
Amounts due to brokers - 1,316
Share buybacks awaiting settlement - 448
Accruals 2,059 802
2,059 102,440
The debenture was redeemed at par on 30 September 2022.
The effect on the net asset value of deducting the debenture stock at fair
value, rather than at par, is disclosed in the Alternative Performance
Measures on page 85.
As at 31 March 2022 the Company had a 364 day committed revolving credit
facility (the 'bank facility') of £25 million with The Bank of New York
Mellon. The facility had not been utilised for a number of years, and a
decision was taken that it would not be renewed when it matured on 15 June
2022.
The Company has arranged refinancing for the debenture as previously noted.
12. UNSECURED SENIOR LOAN NOTES: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
These creditors are amounts that must be paid, as shown by note 11, but are
due more than one year after the balance sheet date.
2023 2022
Loan Notes £'000 £'000
Unsecured Senior Loan Notes - 2.26% interest rate, maturity 30 September 2037 35,000 -
Unsecured Senior Loan Notes - 2.49% interest rate, maturity 30 September 2047 35,000 -
Unsecured Senior Loan Notes - 2.53% interest rate, maturity 30 September 2051 20,000 20,000
Unsecured Senior Loan Notes - 2.53% interest rate, maturity 30 September 2057 30,000 -
120,000 20,000
The Unsecured Senior Loan Notes comprise four separate notes. As shown above,
each has a fixed interest rate and contracted maturity date when the par value
must be repaid. Interest is payable on a semi-annual basis, with equal amounts
payable on each of 31 March and 30 September each year. These notes require
the Net Assets of the Company to remain not less than £300m. This requirement
was met throughout the year.
13. CALLED UP SHARE CAPITAL
Share capital represents the total number of shares in issue, including
treasury shares.
2023 2022
£'000 £'000
Share capital:
Ordinary shares of 25p each 41,369 42,770
Treasury shares of 25p each 7,548 6,147
48,917 48,917
2023 2022
Number of ordinary shares in issue:
Brought forward 171,078,129 172,182,929
Shares bought back and held in treasury (5,601,604) (1,104,800)
Carried forward 165,476,525 171,078,129
Number of shares held in treasury:
Brought forward 24,588,605 23,483,805
Shares bought back into treasury 5,601,604 1,104,800
Carried forward 30,190,209 24,588,605
Total ordinary shares 195,666,734 195,666,734
During the year the Company bought back, into treasury, 5,601,604 (2022:
1,104,800) ordinary shares at an average price of 632.40p (2022: 632.95p)
(including costs). Since the year end until 22 May 2023, (being the last
practicable day prior to the publication of this report), 655,000 shares have
been bought back into treasury Note 1L on page 63 explains the policy on the
transaction costs related to the shares repurchased and held in treasury.
The Directors' Report on pages 36 and 43 sets out the Company's share capital
structure, restrictions and voting rights.
14. RESERVES
This note explains the different reserves attributable to shareholders. The
aggregate of the reserves and share capital (see previous note) make up total
shareholders' funds.
The share premium comprises the net proceeds received by the Company following
the issue of shares, after deduction of the nominal amount of 25 pence and any
applicable issue costs. The capital redemption reserve maintains the equity
share capital of the Company and arose from the nominal value of any shares
bought back and cancelled; both are non-distributable.
The capital reserve includes the investment holding gains/(losses), being the
difference between cost and market value at the balance sheet date. It also
includes cumulative realised gains/(losses) and costs related to share
buybacks. Capital investment gains and losses are shown in note 9(b) and form
part of the capital reserve.
The revenue reserve and certain amounts of the capital reserve are
distributable by way of dividend.
15. NET ASSET VALUE PER ORDINARY SHARE
The Company's total net assets (total assets less total liabilities) are often
termed shareholders' funds and are converted into NAV per ordinary share by
dividing by the number of shares in issue (excluding treasury shares).
NAV - debt at par value
The shareholders funds in the balance sheet are accounted for in accordance
with accounting standards. Prior to the redemption of the £100m debenture
stock on 30 September 2022 this did not reflect the rights of shareholders on
a return of assets under the Articles of Association. Those rights were
reflected in the net assets with debt at par and the corresponding NAV per
share. A reconciliation between the two sets of figures follows. As the £120m
Unsecured Senior Loan Notes were issued at and being recorded at par, a
reconciliation is not required.
2023 2022
NAV Shareholders' NAV Shareholders'
per share funds per share funds
pence £'000 pence £'000
Shareholders' funds 688.52 1,139,344 687.31 1,175,837
Less:
Unamortised discount and expenses arising from debenture issue - - (0.07) (126)
NAV - debt at par 688.52 1,139,344 687.24 1,175,711
A reconciliation showing the NAV per share and Shareholders funds using debt
at fair value is shown in the Alternative Performance Measures on page 85.
16. RISK MANAGEMENT, FINANCIAL ASSETS AND LIABILITIES
Financial instruments comprise the Company's investment portfolio, derivative
instruments (if any) as well as cash, and any borrowings, debtors and
creditors. This note sets out the Company's financial instruments and the
risks related to them.
Financial instruments
The Company's financial instruments mainly comprise its investment portfolio
(as shown on pages 16 and 17), loan notes, a bank facility as well as its
cash, debtors and creditors that arise directly from its operations such as
sales and purchases awaiting settlement and accrued income. For the purpose of
this note 'cash' should be taken to comprise cash and cash equivalents as
defined in note 1D. The accounting policies in note 1C include criteria for
the recognition and the basis of measurement applied for financial
instruments. Note 1 also includes the basis on which income and expenses
arising from financial assets and liabilities are recognised and measured.
The main financial risks that the Company faces from its financial instruments
are market risk, liquidity risk, and credit risk. These are set out below:
Market risk - arising from fluctuations in the fair value or future cash flows
of a financial instrument because of changes in market prices. Market risk
comprises three types of risk: currency risk, interest rate risk and other
price risk:
- Currency risk - arising from fluctuations in the fair value or future
cash flows of a financial instrument because of changes in foreign exchange
rates;
- Interest rate risk - arising from fluctuations in the fair value or
future cash flows of a financial instrument because of changes in market
interest rates; and
- Other price risk - arising from fluctuations in the fair value or
future cash flows of a financial instrument for reasons other than changes in
foreign exchange rates or market interest rates.
Liquidity risk - arising from any difficulty in meeting obligations associated
with financial liabilities.
Credit risk - arising from financial loss for a company where the other party
to a financial instrument fails to discharge an obligation.
Risk Management Policies and Procedures
The Directors have delegated to the Manager the responsibility for the
day-to-day investment activities and management of gearing of the Company as
more fully described in the Directors' Report.
As an investment trust the Company invests in equities and other investments
for the long-term so as to fulfil its investment policy (incorporating the
Company's investment objective). In pursuing its investment objective, the
Company is exposed to a variety of risks that could result in either a
reduction in the Company's net assets or a reduction of the profits available
for dividends. The associated risk management policies are summarised below
and have remained substantially unchanged for the two years under review
16.1 Market Risk
The Company's Manager assesses the Company's exposure when making each
investment decision, and monitors the overall level of market risk for the
whole of the investment portfolio on an ongoing basis. The Board has meetings
in each calendar quarter to assess risk and review investment performance, as
disclosed in the Board Responsibilities on pages 35 and 36. Any borrowing to
gear the investment portfolio is used to enhance returns but also increases
the Company's exposure to market risk and volatility. The Company has the
ability to gear using its £120 million Unsecured Senior Loan Notes.
16.1.1 Currency risk
The majority of the Company's assets and all of its liabilities are
denominated in sterling. There is some exposure to US dollar, Swiss franc and
the Euro.
16.1.2 Inflation risk
The Company has no assets or liabilities that have direct inflation link
properties.
Management of the currency risk
The Manager monitors the Company's direct exposure to foreign currencies on a
daily basis and reports to the board on a regular basis. Forward currency
contracts can be used to reduce the Company's exposure to foreign currencies
arising naturally from the Manager's choice of securities. All contracts are
limited to currencies and amounts commensurate with the assets denominated in
currencies. No Forward currency contracts were used during the year (2022:
none).
Income denominated in foreign currencies is converted to sterling on receipt.
The Company does not use financial instruments to mitigate the currency
exposure in the period between the time that income is included in the
financial statements and its receipt.
The Company may invest up to 20% of the portfolio in securities listed on
non-UK stock exchanges. At the year end holdings of non-UK securities total
£93.8 million (2022: £144.3 million) representing 7.7% (2022: 12.0%) of the
portfolio.
Currency exposure
The fair values of the Company's monetary items that had a material currency
exposure at 31 March are shown below. Where the Company's equity investments
(which are not monetary items) are priced in a foreign currency, they have
been included separately in the analysis so as to show the overall level of
exposure.
2023 2022
USD DKK CHF EUR USD CHF EUR
Currency exposure £'000 £'000 £'000 £'000 £'000 £'000 £'000
Foreign currency exposure on net
monetary items 3,137 40 1,420 1,495 3,793 1,106 2,389
Investments at fair value through profit or loss that are equities 22,356 - 32,549 52,668 46,641 27,635 70,032
Total net foreign currency exposure 25,493 40 33,969 54,163 50,434 28,741 72,421
The above may not be representative of the exposure to risk during the year,
because the levels of foreign currency exposure may change significantly
throughout the year.
Currency sensitivity
In respect of the Company's material direct foreign currency exposure to
investments denominated in currencies, if sterling had weakened by 3.9%
(2022: 2.0%) for the US dollar, 3.5% (2022: 1.5%) for the Swiss franc, 2.0%
(2022: 1.2%) for the Euro, and for the Danish Krone, 2.0% (2022: £nil)
during the year, the capital return and net assets of the Company would have
increased for all currency exposures by £3.2 million (2022: £2.3 million).
Conversely, if sterling had strengthened to the same extent for the currencies
mentioned above, the capital return and net assets of the Company would have
decreased by the same amount. The exchange rate variances noted above have
been based on market volatility in the year, using the standard deviation of
sterling's fluctuation to the applicable currency. This sensitivity takes no
account of any impact on the market values of the Company's investments
arising from the foreign currency mix of their respective revenues, expenses,
assets and liabilities.
16.1.3 Interest rate risk
Interest rate movements will affect the level of income receivable on cash
deposits and money market funds, and the interest payable on variable rate
borrowings. When the Company has cash balances, they are held on variable rate
bank accounts yielding rates of interest dependent on the base rate determined
by the custodian, The Bank of New York Mellon (International) Limited.
The Company has Unsecured Senior Loan Notes of £120 million (2022: £20
million). The Unsecured Senior Loan Notes have a fixed interest rate which
only exposes the Company to changes in market value in the event that the debt
is repaid before maturity. Specifics of the Unsecured Senior Loan Notes are
shown in note 12. The details of their fair value and the affect on net asset
value within the Net Asset Value (NAV) - Debt at Fair Value reconciliation
within the Alternative Performance Measures on page 85.
The Company held two fixed income securities during the year (2022: one), both
being short-term zero coupon government bonds which matured during the
financial year. As at 31 March 2023 no government bonds (2022: one) to the
value of £nil (2022: £19.98m) were recognised as a Cash and Cash Equivalent
on the Balance Sheet.
Interest rate exposure
At 31 March the exposure of financial assets and financial liabilities to
interest rate risk is shown by reference to:
- floating interest rates (giving cash flow interest rate risk) - when
the interest rate is due to be re-set; and
- fixed interest rates (giving fair value interest rate risk) - when the
financial instrument is due for repayment.
2023 2022
Between Between
one After one After
Within and five five Within and five five
one year years years Total one year years years Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Exposure to floating interest rates:
- Cash and cash equivalents 22,488 - 22,488 48,748 - 48,748
- Exposure to fixed interest rates:
- UK Government Treasury Bill - - - 19,980 - 19,980
- Debenture stock - debt at par value - - - (100,000) (100,000)
- Unsecured Senior Loan Notes - debt at par value - - (120,000) (120,000) - - (20,000) (20,000)
Total exposure to interest rates 22,488 - (120,000) (97,512) (31,272) - (20,000) (51,272)
16.1.4 Other price risk
Other price risks (i.e. changes in market prices other than those arising from
interest rate risk or currency risk) may affect the value of the equity
investments, but it is the business of the Manager to manage the portfolio to
achieve the best return that he can.
Management of the other price risk
The Directors manage the market price risks inherent in the investment
portfolio by meeting regularly to monitor on a formal basis the Manager's
compliance with the Company's stated objectives and policies, and to review
investment performance.
The Company's portfolio is the result of the Manager's investment process and
need not be highly correlated with the Company's benchmark or the market in
which the Company invests. The value of the portfolio will not move in line
with the market but will move as a result of the performance of the company
shares within the portfolio.
If the value of the portfolio fell by 10% at the balance sheet date, the
profit after tax for the year and the net assets of the Company would decrease
by £122.7 million (2022: £121.9 million). Conversely, if the value of the
portfolio rose by 10%, the profit after tax and the net assets of the Company
would increase by the same amounts.
16.2 Liquidity risk
Liquidity risk is minimised as the majority of the Company's investments
constitute a diversified portfolio of readily realisable securities which can
be sold to meet funding commitments as necessary.
Liquidity risk exposure
The contractual maturities of the financial liabilities at the year end, based
on the earliest date on which payment can be required, are as follows:
More than
three months More than
Three months but less one
or less than one year year Total
2023 £'000 £'000 £'000 £'000
Loan note - debt at par value - - 120,000 120,000
Interest on loan notes - 2,928 70,500 73,428
Accruals 2,059 - - 2,059
2,059 2,928 190,500 195,487
More than
three months
Three months but less More than
or less than one year one year Total
2022 £'000 £'000 £'000 £'000
Debenture stock - debt at par value - 100,000 - 100,000
Loan note - debt at par value - - 20,000 20,000
Interest on debenture stock - 3,875 - 3,875
Interest on loan note - 506 14,421 14,927
Amounts due to brokers 1,316 - - 1,316
Share buybacks awaiting settlement 448 - - 448
Accruals 802 - - 802
2,566 104,381 34,421 141,368
16.3 Credit risk
Credit risk encompasses the failure by counterparties to deliver securities
which the Company has paid for, or to pay for securities which the Company has
delivered, and cash balances. Counterparty risk is minimised by using only
approved counterparties. The Company's ability to operate in the short-term
may be adversely affected if the Company's custodian suffers insolvency or
other financial difficulties. However, with the support of the depositary's
restitution obligation the risk of outright credit loss on the investment
portfolio is remote. The Board reviews the custodian's annual controls report
and the Manager's management of the relationship with the custodian. Cash
balances are limited to a maximum of 1% of net assets with any one deposit
taker, with only approved deposit takers being used, and a maximum deposit of
6% of net assets in aggregate in liquidity funds with credit ratings of AAAm
(or equivalent). These limits are at the discretion of the Board and are
reviewed on a regular basis. The investment policy also allows for UK
Government Treasuries to be held. Such holdings are recorded as cash
equivalents if they meet the criteria set out in Note 1D on page 59.
16.4 Custody risk
All investment assets are held in custody by The Bank of New York Mellon
(International) Limited in accounts segregated from the bank's own assets.
17. CLASSIFICATION UNDER FAIR VALUE HIERARCHY
The values of the financial assets and financial liabilities are carried
either at their fair value (investments), or at a reasonable approximation of
fair value (amounts due from brokers, dividends receivable, accrued income,
amounts due to brokers, accruals, cash and any drawings on the bank facility)
or at amortised cost (debenture).
Fair Value Hierarchy Disclosures
All except two of the Company's portfolio of investments are in the Level 1
category as defined in FRS 102 as amended for fair value hierarchy disclosures
(March 16). The three levels set out in this follow.
Level 1 - the unadjusted quoted price in an active market for identical assets
or liabilities that the entity can access at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 that are
observable (i.e. developed using market data) for the asset or liability,
either directly or indirectly.
Level 3 - Inputs are unobservable (i.e. for which market data is unavailable)
for the asset or liability.
Categorisation within the hierarchy is determined on the basis of the lowest
level input that is significant to the fair value measurement of each relevant
asset/liability.
The valuation techniques used by the Company are explained in the accounting
policies note.
2023
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Financial assets designated at fair value through profit or loss:
Quoted investments:
Equities and preference shares 1,226,649 - - 1,226,649
Unquoted and suspended investments - - - -
Total for financial assets 1,226,649 - - 1,226,649
2022
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Financial assets designated at fair value through profit or loss:
Quoted investments:
Equities and preference shares 1,218,419 - - 1,218,419
Unquoted investments - - 306 306
Total for financial assets 1,218,419 - 306 1,218,725
The valuation techniques used by the Company are explained in the accounting
policies note. At the end of the financial year there were no Level 2
investments (2022: no Level 2 investments). There were two Level 3 investments
at the year end totalling £nil (2022: two investments totalling: £306,000).
The holding in Eurovestech did not change during the year, but the fair value
was reduced to £nil (2022: £69,000).
Raven Property is the other unquoted investment. Their issued preference
shares were suspended on 2 March 2022 due to sanctions on the company's
Russian businesses. At the balance sheet date the shares have been de-listed
and recorded a fair value of £nil (2022: £237,000).
The book cost and fair value of the debenture stock, based on the offer value
at the balance sheet date, are as follows:
2023 2022
Book Fair Book Fair
Value Value Value Value
£'000 £'000 £'000 £'000
Debenture stock repayable within one year:
7¾% Debenture Stock 30 September 2022 - - 100,000 102,734
Discount on issue of debenture stock - - (126) -
Loan notes repayable after five year:
Unsecured Senior Loan Notes 120,000 78,253 20,000 18,204
120,000 78,253 119,874 120,938
Please refer to page 85 which describes the fair valuation process of the
Company's loan notes.
18. CAPITAL MANAGEMENT
The Company's total capital employed at 31 March 2023 was £1,259,276,000
(2022: £1,259,314,000) comprising borrowings of £120,000,000 (2022:
£119,874,000) and equity share capital and other reserves of £1,139,344,000
(2022: £1,175,837,000).
The Company's total capital employed is managed to achieve the Company's
objective and investment policy as set out on page 14, including that
borrowings may be used to provide gearing of the equity portfolio up to the
maximum authorised by shareholders, currently 25% of net assets. Net gearing
was 4.7% (2022: 4.4%) at the balance sheet date. The Company's policies and
processes for managing capital were unchanged throughout the year and the
preceding year.
The main risks to the Company's investments are shown in the Strategic Report
under the 'Principal Risks and Uncertainties' section on pages 18 to 21. These
also explain that the Company is able to use borrowings to gear and that
gearing will amplify the effect on equity of changes in the value of the
portfolio.
The Board can also manage the capital structure directly since it has taken
the powers, which it is seeking to renew, to issue and buy-back shares and it
also determines dividend payments.
The Company is subject to externally imposed capital requirements with respect
to the obligation and ability to pay dividends by section 1158 Corporation Tax
Act 2010 and by the Companies Act 2006, respectively, and with respect to the
availability of the bank facility by the terms imposed by the lender. The
Board regularly monitors, and has complied with, the externally imposed
capital requirements. This is unchanged from the prior year. As detailed in
note 11 and note 12, current borrowings comprise the unsecured senior loan
notes.
19. CONTINGENCIES, GUARANTEES AND FINANCIAL COMMITMENTS
There were no contingencies, guarantees or other financial commitments of the
Company as at 31 March 2023 (2022: nil).
20. RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH MANAGER
A related party is a company or individual who has direct or indirect control
or who has significant influence over the Company. Under accounting standards,
the Manager is not a related party.
Under UK GAAP, the Company has identified the Directors as related parties.
The Directors' remuneration and interests have been disclosed in pages 45 and
48 with additional disclosure in note 4. No other related parties have been
identified.
Details of the Manager's services and fees are disclosed in the Directors'
Report on page 41, and in note 3.
21. POST BALANCE SHEET EVENTS
There are no significant events after the end of the reporting period
requiring disclosure.
BOARD CHANGES
At this year's Annual General Meeting, Vicky Hastings will not be standing for
re-election. The board has been very fortunate to have had Vicky's wise
counsel and exceptional attention to detail for ten years. The last twelve
months were an extension to the normal nine years, in order to avoid having
the Chair and the Senior Independent Director standing down at the same time
last year.
Aidan Lisser has kindly agreed to take over Vicky's role as Senior Independent
Director after the conclusion of the Annual General Meeting 19 July 2023.
Please see the Governance section in the Annual Financial Report for more
details (pages 29 - 48).
NOTICE OF ANNUAL GENERAL MEETING
Notice of the Annual General Meeting of the Company is included in the Annual
Financial Report (pages 77 - 80).
The Annual General Meeting of the Company will be held at The Balmoral Hotel,
Edinburgh, EH2 2EQ on 19 July 2023 at 11am.
The Annual Financial Report will be submitted to the National Storage
Mechanism and will shortly be available for inspection at: National Storage
Mechanism | FCA (https://data.fca.org.uk/#/nsm/nationalstoragemechanism)
The Audited Annual Financial Report will be posted to shareholders shortly.
Copies may be obtained during normal business hours from the Company's
registered office, First Floor, 9 Haymarket Square, Edinburgh, EH3 8RY.
A copy of the Annual Financial Report will be available from the Company's
website: www. (http://www.edinburgh-investment-trust.co.uk)
edinburgh-investment-trust.co.uk (http://www.edinburgh-investment-trust.co.uk)
By order of the Board
Apex Listed Companies Services (UK) Limited
Company Secretary
30 May 2023
Enquiries
Liontrust Fund Partners LLP
James Mowat +44 20 3908 8822
james.mowat@liontrust.co.uk (mailto:james.mowat@liontrust.co.uk)
Investec Bank plc
Tom Skinner +
44 20 7597 4000
Montfort Communications
Gay Collins +44 7798 626282
Shireen Farhana +44 7757 299250
Ella Henderson +44 7762 245122
EIT@montfort.london (mailto:EIT@montfort.london)
Apex Listed Companies Services (UK) Limited (Company Secretary)
Brian Smith
+44 20 3327 9720
Notes to editors
About The Edinburgh Investment Trust plc
Founded over 130 years ago, The Edinburgh Investment Trust plc is listed on
the London Stock Exchange and is included in the FTSE 250 index. It invests
primarily in a portfolio of UK listed shares and has net assets of
approximately £1.1 billion. The Company's twin investment objectives for the
long term are to outperform the FTSE All-Share Index on a Net Asset Value
(NAV) basis and to produce dividend growth in excess of the rate of UK
inflation. Liontrust Fund Partners LLP became the Company's AIFM with effect
from 1 April 2022.
ENDS
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