REG-Edinburgh Inv. Trust: Final Results and Declaration of Special Dividend
02/06/2021 11:09
The Edinburgh Investment Trust plc
ANNUAL FINANCIAL REPORT
FOR THE YEAR ENDED 31 MARCH 2021
Financial Information and Performance Statistics
Year Ended Year Ended
Total Return ((1)(2)(3))(with dividends reinvested) 31 March 2021 31 March 2020
Net asset value (NAV) – debt at market value ((1)) +34.8% -26.7%
Share price +46.4% -29.4%
FTSE All-Share Index +26.7% -18.5%
The Company’s benchmark is the FTSE All-Share Index.
At 31 March At 31 March Change
Capital Return ((1)) 2021 2020 %
NAV – debt at market value 628.29p 490.40p +28.1
Share price ((2)) 600.00p 434.00p +38.2
FTSE All-Share Index ((2)) 3,831.05 3,107.42 +23.3
Discount ((1)(3))– debt at market value (4.5)% (11.5)%
Gearing (debt at market value) ((1)(3))– gross gearing 10.1% 13.4%
– net gearing 7.1% 8.3%
Year Ended Year Ended Change
Revenue and Dividends ((3)) 31 March 2021 31 March 2020 %
Revenue return per ordinary share 16.21p 27.83p -41.8
Dividends – first interim 6.00p 6.40p
– second interim 6.00p 6.40p
– third interim 6.00p 6.40p
– proposed final 6.00p 9.45p
– total dividends (excl special dividend) 24.00p 28.65p -16.2
– declared special dividend 4.65p nil
– total dividends 28.65p 28.65p nil
Retail Price Index ((2))– annual change 1.5% 2.6%
Consumer Price Index ((2))– annual change 0.7% 1.5%
Dividend Yield ((1)) 4.8% 6.6%
Ongoing Charges Ratio ((1)(3)(4)) 0.43% 0.55%
Notes:
((1)) These terms are defined in the Glossary of Terms and Alternative
Performance Measures, including reconciliations, on pages 79 to 81 of the
Annual Report. NAV with debt at market value is widely used by the investment
company sector for the reporting of performance, premium or discount, gearing
and ongoing charges. Dividend yield is inclusive of the 4.65 pence per share
special dividend declared. The Dividend Yield excluding this special dividend
is 4.0%.
((2)) Source: Refinitiv.
((3)) Key Performance Indicator.
((4)) The Manager waived its investment management fee for the first
three months of its appointment from 4 March 2020. The Ongoing Charges Ratio
disclosed above show the actual charges incurred during the period. The
pro-forma charges had the investment management fees not been waived over this
period would have been 0.51% (2020 0.58%).
Chairman’s Statement
Dear Shareholder
This time last year I began this statement describing the challenging times
that faced us both economically and socially. This year, those challenges are
still here but we are beginning to see some light at the end of the pandemic
tunnel. Still, I would again like to take this opportunity to say that I hope
you remain safe and well.
Since this marks the first full year of Majedie Asset Management’s tenure as
portfolio manager, I think it would be helpful to start with a reminder of the
context in which we should think about how to evaluate the performance of the
Company.
You will no doubt be aware that the Company has two objectives:
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.
In the five years before the start of the current period, the Company met its
objective in terms of dividends – in fact, dividends grew by 3.7% per annum
compared with 2.6% per annum for the UK Retail Price Index in that period.
However, over the same period the Company failed to meet the capital return
objective and, perhaps more importantly, the Company’s total return fell
behind the return on the benchmark. This was clearly unsatisfactory and,
combined with fact that the UK equity market has been out of favour with
investors for most of that period, contributed to a significant widening of
the discount of the share price to NAV during 2019.
As I explained in last year’s annual report, in December 2019 the Board
decided that this unsatisfactory performance was best addressed through a
change of manager. Accordingly, following the consideration of a number of
potential managers, including a “beauty parade”, the Board appointed
Majedie Asset Management, and in particular James de Uphaugh, one of the
co-founders of Majedie, as its portfolio manager.
We were impressed in particular by James’ emphasis on taking a ‘total
return’ approach to stock selection and portfolio composition: to simplify
considerably, this is an analytical approach that emphasises the long term
returns from capital investment by companies as well as their immediate
dividend paying capacity.
This was (and is) an important issue in current market circumstances. Many
companies, such as banks, have been asked to reduce dividend payments because
of pressures from regulators; competition (where, for example, the emergence
of companies such as Amazon has seriously affected the profitability of high
street retailers); environmental changes (such as those facing energy
companies); and lastly the pandemic itself. It is worth noting that - while
this is a worldwide issue - its impact on equity valuations is greater in the
UK given the much larger weight of banks, retailers, and energy companies in
indices than elsewhere. It is unlikely that total return expectations in the
market have changed much but the market is increasingly giving value to
companies which can show long-term returns from capital investment as well as
to those that can produce sustainable dividends.
On top of this, shareholders will be aware that in the past year, the prospect
of a gradual long-term rise in interest rates has begun to be priced in the
markets. This has come through a rise in long term interest rates as well as
through market talk – but as yet no tangible sign – of a sustained rise in
inflation. A sustained rise in long term interest rates – and its
consequence, a steepening of the yield curve – would represent a significant
change in market conditions.
This is a difficult environment for all portfolio managers. The Board believes
that James de Uphaugh’s style has the necessary flexibility to adapt as the
market environment changes.
RETURNS
Against this background, I am pleased to report that the Company’s Net Asset
Value (NAV) on a total return basis, i.e. including reinvested dividends,
returned 34.8% over the financial year ended 31 March 2021 and the share price
returned 46.4%. These compare with a total return of 26.7% for the FTSE
All-Share Index. The equivalent returns on a capital only basis are 28.1% for
the NAV, 38.2% for the share price, and 23.3% for the index. The difference
between the NAV total return and capital return is explained not only by the
dividends received by the Company, but also because the Company has been using
some of its reserves to pay dividends to shareholders (discussed in more
detail below). Over the past three years, the Company’s NAV return has been
1.8% cumulatively, with the Company’s benchmark index returning 9.9% over
the same period. Over the past five years, the Company’s NAV return has been
10.3% cumulatively, with the Company’s benchmark index returning 35.7% over
the same period. In all these cases, the NAV is stated after deducting debt at
market values.
Further information on the portfolio, and contributors to returns, is set out
in the Manager’s Report.
I would like to note that performance has come from a diversified range of
stocks, with an additional boost from the effect of the Company’s
borrowings. The portfolio is relatively concentrated, containing approximately
50 stocks. This means shareholders should expect performance to come in a
lumpy fashion, as the last year illustrates: the bulk of the outperformance
has come in the last six months, since the announcement of vaccines.
Nonetheless, while still early days for Majedie in their role as the
Company’s manager, I am delighted that they have made such a strong start
– particularly given the challenging market backdrop.
DIVIDENDS
In November 2020, the Board announced a change in the underlying level of
dividends to be paid to the Company’s shareholders: we explained at the time
that this year’s first interim dividend – and the expectation for each
subsequent interim and the final dividend – would be 6.00 pence per share,
for a total of 24.00 pence per share. Last year, the equivalent figure was
28.65 pence per share. While this means we have not met the Company’s
objective to grow the dividend per share in excess of inflation for the last
two financial years, the Board believes this rebased level is a sustainable
one from which the Company’s dividend objective can be met in the years
ahead.
This rebasing reflects as discussed above the fact that the overall yield on
the UK market had become increasingly dependent on a small number of companies
and sectors and that many of these were facing pressures even before the
impact of the COVID-19 related lockdowns. The effect of the crisis caused by
the pandemic, added to the ongoing structural changes to the economy, was to
erode the income available from much of the UK equity market. The Board
concluded that the previous level of Company dividends was unlikely to be
sustainable. While there remains uncertainty over the speed of the current
recovery in market earnings and dividends, dividends from across the
UK market are now more balanced.
The Board recognises the importance of dividends to shareholders, especially
in an uncertain environment and at a time when other sources of income are
under pressure. An attractive feature of investment trusts is the ability to
use revenue reserves, built up in years when revenues exceed dividends paid to
shareholders, to smooth dividend distributions in years when revenues are
weaker. On this front, your Company is in a strong position. Reflecting this,
the Board will use revenue reserves to maintain the total dividend per share
this year at the 2019/20 level through the payment of a special dividend.
Therefore, in addition to recommending a final dividend of 6.00p per share,
which shareholders will be asked to approve at the Annual General Meeting, the
Board has decided to pay a special dividend of 4.65p. This will supplement the
underlying distribution of 24.00p and result in a total distribution of
28.65p, unchanged from the previous financial year.
SHARE PRICE DISCOUNT TO NET ASSET VALUE
It is encouraging that the discount has narrowed by 7% percentage points in
the last 12 months. This reflects not only improved sentiment towards the UK
market as Brexit-related uncertainty has receded and recovery prospects after
the COVID-19 related shutdowns, but also an understanding and an appreciation
of James’ investment style and approach.
The Board’s policy continues to be to manage the discount actively through
share buy backs as appropriate. During the year we instructed the Company’s
broker to repurchase 2,500,000 shares in the market. The amount and cumulative
effect of these repurchases is noted in the table on page 15 of the Annual
Report. The last buy back took place on 20 October 2020. At 25 May 2021, the
last practical date before signing this report, the discount was 5.4%.
BORROWINGS
At 31st March 2021 the net debt of the Company, with the debenture at market
value, stood at £76.5 million, resulting in gearing of the Company of 7.1% of
net assets. All debt is currently achieved through the Company’s debenture,
which is due for redemption in September 2022. The Board is considering how
best to take advantage of the Company’s ability to borrow to enhance
returns. This takes account of the Manager’s perception of gearing risk, the
lower level of prevailing interest rates compared with the debenture’s
coupon, the cashflows of the company and possible share-buy backs in the
future.
REAPPOINTMENT OF MANAGER
The Board considers that the reappointment of Majedie is in the best interest
of shareholders.
OTHER MATTERS
At an operational level, the change this time last year to the new manager and
a new company secretary, PraxisIFM, proceeded smoothly. I would like to thank
the many colleagues both at Majedie and at PraxisIFM who have worked so hard
to deliver this result, especially given the difficult circumstances due to
the pandemic.
ANNUAL GENERAL MEETING (‘AGM’)
Details of the AGM are given in the Notice of Annual General Meeting on pages
73 to 76 of the Annual Report. We are planning for this event to take place in
person. We had our first in person Board meeting last week and we look forward
to meeting as many of you as possible in person in Edinburgh on 22 July. We
will revert to the pre-pandemic AGM format of an update from me and from the
Manager, and allow plenty of time for questions and informal discussions
between the Directors and shareholders. I very much hope as many of you as
possible will be able to attend as it will be the first opportunity for
shareholders to meet the new Manager. However, we recognise that some
shareholders may not be able to join in person and in the Notice of Annual
General Meeting we set out how shareholders can also submit questions in
advance of the AGM and participate virtually. Should changes to the timetable
for the lifting of gathering restrictions mean we are forced to amend
arrangements for the AGM, we will notify shareholders via a regulatory
announcement and give details of the new arrangements on our website
www.edinburghinvestmenttrust.com. We also propose to have an Investor Day in
London in September 2021, following on from the format we adopted in 2019.
BOARD
Max Ward will stand down at this year’s AGM after ten years of service on
the Board. We were fortunate that this time last year Max agreed to remain in
place for an additional year - on top of the nine years that he had originally
intended to serve - in order to help the Company with the transition to the
new Manager. As an experienced fund manager himself, Max has brought
invaluable insight and judgment as well as market knowledge that has been
critical on the Board.
Also standing down at this year’s AGM after ten years of service on the
Board is Gordon McQueen. For the last 10 years Gordon has served as Chair of
the Audit Committee. Once again, we were fortunate that this time last year
Gordon agreed to remain in place for an additional year – on top of the nine
years that he had originally intended to serve – in order to help with the
transition to the new Manager as well as the transition to PwC, appointed as
auditor in 2019 after a tender.
I am immensely grateful to both Max and Gordon for the huge contributions that
both have made to the Board’s work and effectiveness over the years.
Steve Baldwin will take over as Chair of the Audit Committee at a time when
the responsibility of the Audit Committee for risk management and controls is
increasing. Boards like ours face a bigger challenge in managing the broader
social impact of our decisions within the traditional constraints of the need
to pursue shareholder value.
I was pleased to welcome Patrick Edwardson to the Board as a new Director.
Patrick has 27 years of investment experience as a fund manager with Baillie
Gifford, where he was a Partner and Head of the Multi-Asset Team before his
recent retirement. Along with his knowledge of the UK equity market and deep
knowledge of investment companies, Patrick brings extensive experience of
income investing from his role as the Fund Manager of the Scottish American
Investment Company from 2004 to 2014. I have no doubt that he will rapidly
become an extremely valuable member of the Board.
We will be asking for shareholders’ approval at the AGM for some changes to
the Directors’ remuneration. Further details are set out on page 41 of the
Annual Report.
Finally, as shareholders will be aware, my own term as a Director will come to
an end at next year’s AGM in July 2022. In order to ensure a seamless and
orderly success, the Board, overseen by Vicky Hastings, the Senior Independent
Director, has recommended that Elisabeth Stheeman be nominated as Chair Elect
to succeed me. Elisabeth has made significant contributions to the Board’s
work since her appointment in 2019 and brings a wealth of experience from her
work across financial markets to the Board.
I would like to take this opportunity to thank all the Directors on behalf of
shareholders for the contributions that they have made in ensuring that the
Company is better able to meet its objectives and satisfy the expectations of
shareholders.
OUTLOOK
The successful development of vaccines against COVID-19 has been a major
turning point, at least for those developed economies fortunate enough to be
experiencing their roll out. Yet, the pandemic is far from over, as current
events in parts of the world such as India sadly highlight. In Western
economies, there remain significant restrictions on travel and gatherings: it
remains to be seen how the major sections of the economy that are exposed to
this will recover. Despite cautions of this kind, the arrival of vaccines,
combined with concerted financial actions by governments and interventions by
Central Banks around the world, means that this year’s annual report
contains a notably more positive tone than last year’s.
In closing, I would like to thank shareholders for their patience in recent
years. Your Company has undergone a material change with the appointment of
the new manager, and the improvements that have been made to the portfolio.
GLEN SUAREZ / CHAIRMAN / 27 May 2021
Portfolio Manager’s Report
For the year ended 31 March 2021
INTRODUCTION
It has been our great privilege to complete our first full year as manager of
your historic and prestigious Company. This has also been a year quite unlike
any other that we have experienced, with an ongoing pandemic and stock market
volatility. Nevertheless, we have maintained our focus on the two core
objectives of the Company:
1. An increase of the Net Asset Value per share in excess of the growth in the
FTSE All-Share Index;
2. Growth in dividends per share in excess of the rate of UK inflation.
To do this, we invest across global markets, with at least 80% of the
Company's portfolio by value listed in the UK. We take a team-based approach,
with final investment decisions taken by the manager. Our research is
stock-driven: we believe we will add most value for shareholders over the
medium term by identifying strong and attractively priced businesses. Our
investment approach is a flexible total return one - there are no built-in
biases to particular 'types' of investment. We therefore attempt to identify
companies that will deliver attractive total returns comprising income and
capital growth. Both are important elements and receive equal attention. As we
will illustrate with examples later in this report, we are acutely aware of
the growing ESG responsibilities of companies, particularly those potentially
contributing to rapid and worrying climate change.
The end result for shareholders is a differentiated portfolio that should
enable the Company to meet its two investment objectives set out above. Our
aspiration is for the Company to be a core part of investors' portfolios.
We have set out our core investment beliefs in more detail on page 13 of the
Annual Report: we hope that these provide shareholders with a clear
explanation of our process. We also keep the Company's website up to date with
a range of materials including factsheets, videos, and other pieces of
intellectual capital that explain our views and approach. Shareholders can
subscribe to notifications for updates at www.edinburghinvestmenttrust.com.
INVESTMENT RESULTS OVER THE COMPANY'S FINANCIAL YEAR
Stock markets have staged a major recovery over this period. The Company's
previously disappointing returns, prior to our appointment, were measured up
to a point at which the stock market was not far from its pandemic-driven
lows. The last year therefore represents a welcome recovery, more so as since
2016 the Company's shares had lagged the index. It is therefore pleasing to be
able to report a rise in the Company's net asset value per share ('NAV') of
34.8%, and a share price rise of 46.4%, both on a total return basis. Over the
same period, the FTSE All-Share Index returned 26.7%. The share price
outperformed the NAV, reflecting a closing of the 'discount' – the term for
the percentage by which the share price is below NAV. The discount moved in
from 11.5% on 31 March 2020, to 4.5% by the same date this year.
In our view, a twelve-month period is too short to assess an investment
manager's performance. A three-year period is likely to be more realistic,
particularly as we take multi-year views when assessing and making investment
decisions. At this stage, we would simply note that things that are firmly in
our control, such as the work ethic of our investment team, have been
effective and productive – despite most of us working from home for much of
the last year. Investment idea generation has been strong, with many of the
Company's new holdings since our appointment contributing to the positive
results of the last year. As we now begin to return to our open-plan London
office, we look forward to the return of even closer collaboration across the
team. Teams working together in person should be more effective than teams
working over 'Teams'.
Given our stock-driven approach and bearing in mind our caution that one year
is too short a period to assess manager skill, a factual appraisal of the
positive and negative stock contributors should give shareholders an early
sense of our investment approach. We will begin with those stocks that
hindered returns. The key point here is that the portfolio avoided stocks with
any major problems or issues and performance detractors were typically those
companies whose shares modestly underperformed the market. Indeed, somewhat
counterintuitively, one of the biggest negatives was the holding in Tesco,
which had a strong year operationally. Its share price was subdued, even
though it – along with the other UK supermarkets – did an excellent job of
prioritising food availability over profits. For this reason, Tesco is a great
example of a business with a strong ESG signature. A new chief executive and
finance director give us confidence that they can build on the solid
operational progress of the last year, and we have been buying more shares.
Another holding with a share price that gave up ground was Smith & Nephew.
This is a global leader in the design and manufacture of orthopaedic and other
medical devices. Their products are used by hospitals around the world to
replace joints and to help treat wounds and traumas. The company has an
enviable long-term record. However, in the last year the market took the view
that it was less competitive in areas such as replacement joints, for example
for knees. We view this as the inevitable ebb and flow of market shares. We
place much greater emphasis on Smith & Nephew's high margins and opportunities
to grow across multiple product lines. We are happy to retain the holding.
In terms of stock positive contributor, we are encouraged to see holdings in
mid-sized businesses making prominent contributions. Top of the list is
Ashtead, a business which rents out industrial equipment to a wide variety of
commercial customers. As this description suggests, it is a cyclical business,
with a positive structural undercurrent, and thus it has benefitted from
economies emerging from lockdowns. For us, the more important feature is that
management have maintained a clear focus on the long-term success of the
business, despite the many challenges of the last fifteen months. This is a
great example of what we describe as a Darwinian winner: one that is gently
crunching the competition. It is emerging from the economic crisis even
stronger.
Another positive contributor is a stock with an improving ESG profile: Weir.
This business, with a rich Scottish heritage, has become a key supplier of
engineering solutions that help improve their customers' safety, efficiency
and sustainability. These customers are often major mining companies. In a
similar vein, a third notable positive contributor is itself a miner: Anglo
American. It has benefitted from rising commodity prices over the last year.
More importantly, it has made changes to the profile of its business,
including the welcome sale of its thermal coal assets – something we have
been engaging with management on for some time.
As the above examples should illustrate, throughout our stock deliberations we
are focused on the ESG profile of the businesses in which we invest the
Company's assets. For us, ESG is not an add-on, but thoroughly integrated into
our research and debate about stocks and their prospects. The portfolio's
carbon footprint, in terms of carbon intensity, is also below the average of
the index. This is in part due to the sale of BP, reflecting our lack of
conviction in its management's energy transition plan.
Another significant contributor to the Company's NAV returns ahead of the
index was that of borrowings. We discuss our thinking on this topic at greater
length further below. But for now, it is important to note that our decision
to invest most of the Company's long-term borrowings accounted for 3.5% of the
8.1% excess return.
Overall, we view the last year as an encouraging start in our role as the
Company's manager. Clearly the market return was flattered by the depressed
level of markets this time last year, but we are encouraged that in general
the diversified range of stocks that we hold performed well at an operational
level. For the Company's shareholders, it has also been encouraging to see the
discount narrow.
ACTIVITY OVER THE YEAR
At the beginning of our tenure, last March, we moved the Company to a
relatively defensive stance. The news then at a human level was, frankly,
gut-wrenching. It was the same at an investment level. It is easy to forget
how challenging things were then. The rapidly changing environment since then,
and exceptionally high level of volatility, has presented us with an unusually
high number of investment opportunities. Major net purchases over the year
include Standard Chartered Bank, which should capitalise on recovering Asian
economies, and Ascential, a global information services leader offering a
unique collection of fast-growing ecommerce data analytics assets. Significant
sales have included GlaxoSmithKline, Legal & General and Barrick Gold, all of
which were sold or reduced, the latter two after strong share price
recoveries. In aggregate, portfolio turnover (calculated by taking the lower
of the value of purchases and sales, divided by the average portfolio value)
during the year was 39%. This is higher than we would typically expect:
longer-term turnover might more realistically be in the range of 25% to 33%,
which is equivalent to holding periods of three to four years.
Despite this level of turnover, a key advantage of a relatively small boutique
manager such as MAM is that we have been able to re-orientate the Company
quickly and efficiently. This was particularly the case after the announcement
of the approval of COVID-19 vaccines late in 2020. We have moved the portfolio
to build gently on the pro-cyclical stance that has come from holdings such as
Weir and Ashtead. These changes have made a difference to shareholder results.
CURRENT PORTFOLIO
There are many data points that indicate the potential for a strong recovery
in the UK economy. Perhaps the most important one is that, at the time of
writing a total of over fifty million COVID-19 vaccines have been
administered, with over fifteen million UK citizens having received both jabs.
The US is reporting a similarly strong roll out of vaccines, and the European
Union, after a slow start – is also now in full flow. We are under no
illusion that the virus and its consequences will be with us for many years to
come. Nonetheless, the gentle pro-cyclical tilt that we described above
remains, in our view, appropriate. Should the recovery come through,
especially given the degree of government largesse involved, there is a risk
of higher inflation and higher interest rates. These factors have led us to
have more modest positions in stocks that are sensitive to potentially tighter
credit conditions – such as the insurer Legal & General.
The UK market has been in the doldrums for an extended period. Indeed, some
say of UK equities, 'why bother'? To that, our retort is that the UK is rich
in stocks that are exceptionally well-placed both operationally and in
valuation terms. While we do not expect a repeat of the exceptionally strong
returns of last year, we do think there is scope for further attractive
returns. It has undoubtedly been a Cinderella to global equities, particularly
since 2016. There are a number of reasons for this. The sword of Damocles that
was Brexit has gone. There is also the issue that the UK market plainly has
had fewer technology stocks than other markets, particularly the US equity
market. But with the UK's vaccine rollout programme among the leading ones
around the world, and Brexit 'done', the outlook is much more positive. The UK
is home to a wide range of world class business. Take Electrocomponents, the
global distributor of industrial components. It has made a successful move to
an online proposition. Through the pandemic it has been able to entrench
further its lead over its competition, enabling it to grow at two to three
times the rate of its peers. As well as identifying strong businesses for the
long term, an important part of our investment process is thinking about
valuation. On this score, we are particularly excited about the opportunities
available in the UK: we are firmly of the view that the UK market contains an
exciting range of globally leading businesses with the double benefit of being
undervalued versus their international peers.
Where there are attractive stocks or sectors that, for whatever reason, are
listed outside the UK, the Company has the flexibility to buy them. We have
used this feature only sparingly in the last year. This partly reflects the
very attractive range of strong, compellingly valued UK-listed businesses. It
also reflects the fact that a year ago sterling was weaker, raising the bar
for overseas stocks given the risks of a recovery in our domestic currency.
Since then, sterling has recovered to a degree, in turn lowering the bar a
little. But as with any UK stock, prospective overseas investments must pass
the muster of our investment process. Recent non-UK purchases include A.P.
Moller-Maersk, the global container shipping group, also a great example of
the sort of business that has no equivalents listed in London, and NXP, the US
listed semiconductor group.
We therefore think Edinburgh Investment Trust offers shareholders a compelling
combination of a differentiated portfolio, containing companies that are
performing strongly on a global stage, often priced at a discount. Despite the
strong last year, on a medium-term view there is still much to go for.
DIVIDENDS
Many companies cut dividends in the aftermath of the pandemic. The Company's
holdings were not exempt from this, as the Revenue columns in the Income
Statement illustrate. Revenue for the year was £32.84m, versus £58.96m in
the prior twelve months. During the year we also received a significant
special dividend from Tesco, following the sale of the Thai operation. For the
Company this amounted to £10.98m and has been booked as a capital return. It
does not form part of the Company's revenue for the year. As the Chairman has
set out in his statement, the overall fall in revenue was a contributory
factor to the decision by the Board last autumn to rebase the underlying
dividend per share to 24.00 pence.
Today, we are in a position where the level of dividends paid across the
market is generally more sustainable. As economic visibility steadily
improves, more companies have begun to reinstate, or rebuild, dividends. A
good example of this phenomenon, in an early phase, is in the banking sector
where, for example, NatWest Group has set out a minimum monetary level of
dividend that it expects to pay out annually in dividends over the period 2021
to 2023. Drawing all this together, we expect the Company's revenue from
dividends to recover during this financial year and in the following year. As
the Chairman has also noted, we aim for the dividends paid to the Company's
shareholders to be covered by revenues in the medium term.
BORROWINGS
As managers of the Company, our core task is to construct a portfolio that
generates an attractive positive return over the medium to long term. Assuming
this positive result, borrowings should enhance shareholder returns over these
time horizons. This is a key differentiator for investment trusts versus their
open-ended 'fund' brethren. We support the concept of borrowings as an
important investment trust tool that can enhance underlying equity returns. As
we noted earlier, exactly this dynamic played out this year, with 3.5% of the
Company's 8.1% NAV excess return being attributable to the effect of
borrowings. However, as any homeowner with a mortgage in the early 1990's may
recall, borrowings exaggerate financial losses too, particularly if assets are
sold when prices are low. Here, again though, investment trusts have an
advantage: because of their relatively stable equity capital base, closed-end
investment trusts do not typically have to sell assets at market lows to
satisfy redemptions. Taking all this together, we are supportive of the
long-term role of borrowings for investment trusts, viewing their periodically
unhelpful role in market falls as a price to be paid for the undoubted
benefits of boosting long term returns.
At a practical level, the Company today has a long-term debt structure through
a £100m debenture. There is also a bank facility of up to £50m, which has
not been used during the year or since the year end. The market value of the
debenture, and adjusting for the Company's modest cash balance, equates to net
gearing (defined as net borrowing divided by net assets) of 7.1% at the year
end. The debenture will redeem in September 2022. As the Chairman has said in
his statement, ahead of that redemption we are collectively reviewing gearing
options and will keep the market apprised.
OUTLOOK
The stocks held by the Company are performing well operationally. At the same
time, many of the UK-listed stocks held are priced at a discount to their
peers in other markets internationally. With some UK-specific issues such as
Brexit receding, and a robust vaccine rollout across the country, there are
sound reasons to believe the valuation gap should narrow from here. How
quickly this might happen is clearly unknown. In the meantime, we will
patiently back the stocks that our in-depth fundamental research indicates
have the greatest upside. In this respect, the UK market is supplying us with
an attractive and diversified selection of businesses. Through a combination
of capital gains and dividend distributions, reflecting strong fundamentals,
we believe these companies will underpin above average returns for the
Company's shareholders over time.
JAMES DE UPHAUGH / PORTFOLIO MANAGER
CHRIS FIELD / DEPUTY PORTFOLIO MANAGER
27 MAY 2021
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 PraxisIFM 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 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 600.00p per ordinary share (2020:
434.00p). The net asset value (debt at market value) per ordinary share was
628.29p (2020 490.40p).
It is intended that a further payment of 10.65p should be made in respect of
the year to 31 March 2021 (2020: 9.45p). This comprises a special dividend of
4.65p (2020: nil), already declared and a proposed final dividend of 6.00p
(2020: 9.45p), which is subject to approval at the AGM. This will be payable
on 29 July 2021 to shareholders on the register on 25 June 2021. The shares
will be quoted ex-dividend on 24 June 2021. This will give total dividends for
the year of 28.65p per share (2020: 28.65p). The revenue return per share for
the year was 16.21p, a 41.8% decrease on the 2020 return of 27.83p.
PERFORMANCE
The Board reviews the Company’s performance by reference to a number of key
performance indicators (KPIs) which are shown on
Financial Information and Performance Statistics section. 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 Chairman’s Statement above 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 Investment 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 21 investment trusts in the UK Equity Income sector (including the
Company). As at 31 March 2021 the Company was ranked 11th by NAV performance
in this sector over one year, 19th over three years and 20th 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 the relevant section further above.
FINANCIAL POSITION AND BORROWINGS
The Company’s balance sheet shows the assets and liabilities at the year
end. Borrowings at the year end comprised the £100 million 7 ¾% debenture
which matures in 2022 and £nil (2020: £nil) drawn down on the Company’s
£50 million bank revolving credit facility (2020: £150 million). Details of
this bank facility are contained in note 11.
PERFORMANCE ATTRIBUTION
for year ended
31 March 2021
%
Total Return Basis ((1))
NAV (debt at market value) 34.8
Less: Benchmark 26.7
Relative outperformance 8.1
Analysis of Relative Performance
Portfolio total return 31.8
Less: Benchmark total return ((1)) 26.7
Portfolio outperformance 5.1
Borrowings:
Net gearing effect 3.5
Interest -0.8
Market value movement 0.6
Management fee -0.3
Other expenses -0.1
Tax -0.1
Share buybacks 0.2
Total 8.1
((1)) Source: Refinitiv.
Performance Attribution – analyses the performance of the Company relative
to its benchmark index. The Analysis of Relative Performance seeks to 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 debenture stock, bank
facility 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 and bank facility interest paid has a
negative impact on performance.
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 2021
UK LISTED ORDINARY SHARES UNLESS OTHERWISE STATED
Value % of
Investment Sector £’000 Portfolio
Royal Dutch Shell - B shares Oil, Gas and Coal 37,833
Royal Dutch Shell - A shares 28,516
66,349 5.8
Anglo American Precious Metals and Mining 50,187 4.4
Ashtead Industrial Support Services 49,367 4.3
AstraZeneca Pharmaceuticals and Biotechnology 46,119 4.0
Unilever Food Producers 45,255 3.9
Tesco Personal Care, Drug and Grocery Stores 38,714 3.4
Weir Industrial Engineering 36,962 3.2
Mondi Industrial Materials 36,107 3.1
NatWest Banks 35,967 3.1
Smith & Nephew Medical Equipment and Services 35,916 3.1
TEN TOP HOLDINGS 440,943 38.3
Electrocomponents Industrial Support Services 35,399 3.1
Hays Industrial Support Services 33,195 2.9
BAE Systems Aerospace and Defence 30,932 2.7
Direct Line Insurance Non-Life Insurance 30,804 2.7
Dunelm Retailers 30,427 2.6
Associated British Foods Food Producers 29,938 2.6
Diageo Beverages 29,823 2.6
HSBC Banks 25,383 2.2
Barclays Banks 25,379 2.2
Rio Tinto Precious Metals and Mining 24,859 2.2
TWENTY TOP HOLDINGS 737,082 64.1
Standard Chartered Banks 24,322 2.1
Newmont – US Listed Precious Metals and Mining 22,771 2.0
Wm Morrison Supermarkets Personal Care, Drug and Grocery Stores 21,397 1.8
Bellway Household Goods and Home Construction 21,032 1.8
Total – French Listed Oil, Gas and Coal 19,816 1.7
Koninklijke KPN – Dutch Listed Telecommunications Service Providers 19,777 1.7
Greggs Personal Care, Drug and Grocery Stores 19,101 1.7
WPP Media 17,777 1.5
Legal & General Life Insurance 17,719 1.5
NXP Semiconductors – US Listed Technology Hardware and Equipment 17,110 1.5
THIRTY TOP HOLDINGS 937,904 81.4
Ascential Media 16,813 1.5
Reckitt Benckiser Household Goods and Home Construction 15,859 1.4
RELX Media 15,548 1.4
Marshalls Construction and Materials 15,042 1.3
Daily Mail & General Trust Media 14,319 1.2
Polypipe Construction and Materials 14,306 1.2
Vodafone Telecommunications Service Providers 13,949 1.2
easyJet Travel and Leisure 13,640 1.2
Serco Industrial Support Services 12,790 1.1
Roche – Swiss Listed Pharmaceuticals and Biotechnology 12,393 1.1
FORTY TOP HOLDINGS 1,082,563 94.0
Compass Travel and Leisure 12,364 1.1
Convatec Medical Equipment and Services 12,152 1.1
QinetiQ Aerospace and Defence 11,834 1.0
Hargreaves Lansdown Investment Banking and Brokerage Services 6,946 0.6
A.P. Moller-Maersk – Danish Listed Industrial Transportation 6,916 0.6
Redrow Household Goods and Home Construction 6,875 0.6
Centrica Gas, Water and Multi-Utilities 5,594 0.5
Marks & Spencer Retailers 3,028 0.3
Raven Property – Preference shares Real Estate Investment and Services 2,631 0.2
Eurovestech (UQ) Investment Banking and Brokerage Services 105 0.0
TOTAL HOLDINGS (50) 1,151,008 100.0
(UQ) Unquoted investment.
Principal Risks and Uncertainties
RISK MANAGEMENT AND MITIGATION
The Board, through the Audit Committee and with the assistance of the Manager,
maintains and 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
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 is delegated to the Manager. The
Board has carried out a robust assessment of the principal risks facing the
Company, including those that would threaten its business model, future
performance, solvency or liquidity with consideration being given to the
effect of the COVID-19 pandemic and possible regulatory uncertainty arising
from Brexit. The following sets out a description of the principal 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, the severe
impact of the COVID-19 pandemic, political events including Brexit 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.
Market risk is included in the risk control summary report that is reviewed by
the Board at each meeting. Additionally, the Board receives reports on the
performance of the portfolio at each meeting.
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 Manager. The Manager’s approach is
to construct a portfolio which should benefit from expected future trends in
the UK and global economies. The 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 Manager’s high conviction,
stock-driven investment process and total return approach. Strategy, asset
allocation and stock selection decisions by the Manager can lead to
underperformance of the portfolio relative to the benchmark and/or income
targets.
The 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 Manager manages other portfolios holding many of the same
stocks as the Company which reflects the Manager’s high conviction style of
investment management. This could significantly increase the liquidity and
price risk of certain stocks under certain scenarios and market conditions.
However, the Board and Manager believe that the investment process and policy
outlined above should, over the long term, meet the Company’s objectives of
capital growth in excess of the benchmark and real dividend growth. Investment
selection is delegated to the 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 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 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.
BORROWING RISK
The Company may borrow to provide gearing to the equity portfolio of up to 25%
of net assets. Borrowing is a mix of the Company’s £100 million debenture
stock and the Company’s £50 million bank facility. Details of all
borrowings are given in Notes 11 and 12. The principal gearing risk is that
the level of gearing may have an adverse impact on performance. Secondary
risks include whether the cost of borrowing is too high and whether the bank
facility can be renewed and on terms acceptable to the Company.
Within an overall limit set by the Board, the Manager has full discretion over
the amount of the borrowing it uses to gear its portfolio, whilst the
issuance, repurchase, or restructuring of borrowing are for the Board to
decide.
Borrowing and gearing risk is included in the risk control summary report that
is reviewed by the Board at each meeting. Additionally, compliance with the
Company’s investment policy guidelines is continuously monitored by the
Manager and reported to the Board at each meeting.
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 forecasts
and comparison against budget. These are contained within the Board papers and
the Board considers the level of income at each meeting.
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.
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 2,500,000 shares for holding in treasury
(2020: 20,798,805) and the effect of these repurchases was to add 0.2% to the
Net Asset Value of the Company.
Share Price risk is included in the risk control summary report that is
reviewed by the Board at each 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 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.
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
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.
– 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, Chairman and Chief Investment
Officer of Majedie Asset Management. He is a Fund Manager and Analyst with 33
years’ investment experience in UK and international equity markets. James
is responsible for co-managing the UK Equity Fund of Majedie and managing the
Edinburgh Investment Trust.
– 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 Majedie team. Moreover, Chris Field, as deputy
portfolio manager, would be able to manage the portfolio if James de Uphaugh
were 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.
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 or legal or regulatory changes that affect the Company.
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 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.
The Company invests in a broad portfolio of businesses with operations spread
geographically, which should limit the impact of location-specific weather
events.
Pandemic (COVID-19)
The rapid spread of COVID-19 has caused governments to implement policies to
restrict the gathering, interaction or movement of people. These policies have
inevitably changed the nature of the operations of some aspects of the
Company, its key service providers and the companies in which it invests. As
cited in Market Risk, share prices respond to assessments of future economic
activity as well as their own forecast performance and the COVID-19 pandemic
has had a materially negative impact on the economy and will continue do so
for a period of time. The Board and its manager have regular discussions to
assess this impact on both the investment portfolio and on its ability to
generate income for shareholders.
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 considers 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 Chairman and the Audit Committee Chairman
if needed during the year.
Brexit
The Board considered the market uncertainty arising from the effect of the
negotiated trade deal with the EU at the end of the transition period. As the
Company’s shares are not currently marketed in Europe, investee companies
are predominantly listed in the UK and key counterparties of and service
providers to the Company are UK domiciled with suitable contingency
arrangements available as necessary, the Board does not expect the Company’s
operations or performance over the longer term, to be materially affected by
Brexit.
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 and accordingly they have assessed the Company’s viability over that
period. 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 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 and climate change),
as set out above 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 below; 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 32,
the Directors have concluded that the viability of the Company may start to be
challenged if the value of investments reduced by over 80% from the aggregate
level at the year end and the board considers this 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.
GOING CONCERN
The financial statements have been prepared on a going concern basis. The
Directors consider this is the appropriate basis as they have a reasonable
expectation that the Company has adequate resources to continue in operational
existence for the foreseeable future, being taken as twelve months after the
signing of the balance sheet, for the same reasons as set out in the Viability
Statement above. In considering this, the Directors took into account both
ongoing expenses and any obligations under the Company’s borrowing (both the
debenture and the bank facility). In reaching this conclusion, the Directors
have considered the liquidity of the Company’s portfolio of investments as
well as its cash position, income and expense flows. As at 31 March 2021, the
Company held £32.6 million (2020: £44.0 million) in cash and cash
equivalents and £1,151.0 million (2020: £922.4 million) in quoted
investments. The Company’s audited net assets at 31 March 2021 were
£1,091.2 million (2020: £872.5 million).
Given the level of market volatility experienced due to the impact of the
COVID-19 pandemic, the Manager has performed stress tests on the Company’s
portfolio of investments under current conditions and the Board remain
comfortable with the liquidity of the portfolio.
It is estimated that over 99% by value of the quoted investments held at the
year end could be realised in one month under normal market conditions.
The Board also considered the Company’s obligations under the Company’s
borrowing. The £100 million debenture matures in September 2022. The Board
does not anticipate difficulties in meeting this repayment obligation, either
through replacement borrowings or the realisation of Company assets. The Board
routinely monitors adherence to the borrowing restriction set out in Note 12,
noting the substantial headroom at the balance sheet date. The bank facility
which is not currently drawn, remains available whilst the Company’s Net
Asset Value is above £500 million (see notes 11 and 12 to the financial
statements). The bank facility was renewed on 17 June 2020 at £50 million and
matures on 16 June 2021.
The total ongoing charges (excluding taxation, non-recurring legal and
professional fees and finance costs) for the year ended 31 March 2021 were
£4.2 million (2020: £6.8 million).
Section 172 Statement, Company Sustainability and Stakeholders
BOARD RESPONSIBILITIES
As set out in the Directors’ Report on pages 33 to 39 of the Annual Report
the Directors have a statutory duty to promote the success of the Company,
whilst also having regard to certain broader matters, including the need to
engage with employees, suppliers, customers and others, and to have regard to
their interests (s172 Companies Act 2006). 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
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.
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.edinburghinvestmenttrust.com 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.
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. In addition to the AGM and
presentation, the Board and Manager also host an annual Shareholder event in
London. The Chairman uses these events to lead the Company’s engagement with
its shareholders.
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 has
no express authority to respond to enquiries addressed to the Board and all
communications, other than junk mail, are redirected to the Chairman.
During the year the Board considered the dividend strategy and following the
perceived impact of the COVID-19 pandemic and in-depth discussions at the
Board’s strategy meeting, the decision was taken to reduce the dividend to a
more sustainable level. Feedback from the Manager and the Broker was taken
into account in the decision making process and a full assessment on the
impact of the decision on shareholders was considered against the long term
success of the Company.
ENGAGEMENT WITH THE MANAGER, SERVICE PROVIDERS AND INVESTEE COMPANIES
At least annually the Board reviews the performance and services of all its
service providers including the Manager, and receives and considers the
internal control reports from them covering their operations, their policies
and control environments. The Board has regular dialogue with and reporting
from the Manager on the portfolio of investments and a representative of the
Manager attends each Board meeting to provide updates and answer questions
from the Board. Following the emergence of the COVID-19 pandemic, the Board
has continued engagement with its service providers to ensure that their
responses to the pandemic are adequate and also to provide them with
additional support where required.
The Manager maintains regular dialogue with both investee and potential
investee companies and reports back on these conversations to the Board. As
described below the Board and Manager believe engagement with investee
companies is positive, beneficial and welcomed and that consistent exercise of
voting rights is a key activity in the dialogue with these companies.
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 Boards belief that the long
term sustainable success of the Company is linked direct to its key
stakeholders.
ENVIRONMENTAL SOCIAL AND GOVERNANCE (“ESG”) MATTERS
As an investment company with no employees, property or activities outside
investment, environmental policy has limited application. The Manager
considers various factors when evaluating potential investments. While a
company’s policy towards the environment and social responsibility,
including with regard to human rights, is considered as part of the overall
assessment of risk and suitability for the portfolio, the Manager does not
necessarily decide to, or not to, make an investment on environmental and
social grounds alone. The Manager is a signatory to the Principles for
Responsible Investment ('PRI') and has pledged its commitment to the Net Zero
Asset Managers initiative. Further information is available at www.majedie.com
and through the investment company ESG disclosures at www.theaic.co.uk.
EXERCISE OF VOTING POWERS AND STEWARDSHIP CODE
Stewardship
The Board considers that the Company has a responsibility as a shareholder
towards ensuring that high Environmental, Social and Governance standards are
maintained in the companies in which it invests. To achieve this, the Board
does not seek to intervene in daily management decisions, but aims to support
high standards of governance and, where necessary, will take the initiative to
ensure those standards are met. The principal means of putting shareholder
responsibility into practice is through the exercise of voting rights. 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 the companies in which it invests look after
shareholders’ 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.majedie.com together with a copy of the Manager’s
Stewardship Policy and the Manager’s global proxy voting policy.
Two 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 ballots. 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.
When voting against or abstaining in a vote the Manager may communicate with
management beforehand, either setting out its position in its regular meetings
with the management of investee companies or in a communication to management.
The Manager discloses its voting record to the Board at each meeting with
notes explaining the reasons for any votes against resolutions.
In addition, the Manager discloses to all clients an annual Responsible
Capitalism report, providing cumulative voting statistics, full disclosure on
voting policy and extracts of engagement for the year. The Manager publishes
an annual voting record for the previous year on its website www.majedie.com
MODERN SLAVERY DISCLOSURE
The Company aims to adopt the highest standards 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. 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 all of 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.
This Strategic Report was approved by the Board on 27 May 2021
PRAXISIFM FUND SERVICES (UK) LIMITED / COMPANY SECRETARY
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.
The revised SORP issued in April 2021 is applicable for accounting periods
beginning on or after 1 January 2021. The SORP has no substantive changes but
has been updated to reflect changes IFRS standards and regulatory
requirements. No accounting policies or disclosures have changed as a result
of the revised SORP.
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 control as they determine is necessary
to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error, and have general responsibility
for taking such steps as are reasonably open to them to safeguard the assets
of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, Directors’ Report, Directors’ Remuneration
Report and 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
GLEN SUAREZ / CHAIRMAN / 27 MAY 2021
Income Statement
For the year ended 31 March
2021 2020
Revenue Capital Total Revenue Capital Total
Notes £’000 £’000 £’000 £’000 £’000 £’000
Gains/(losses) on investments held at fair value 9(b) – 247,596 247,596 – (377,639) (377,639)
Gains on derivative instruments – – – – 40 40
Losses on foreign exchange – (91) (91) – (625) (625)
Income 2 32,842 11,041 43,883 58,964 1,467 60,431
Investment management fees 3 (1,016) (2,371) (3,387) (1,778) (4,148) (5,926)
Other expenses 4 (814) (13) (827) (1,635) (6) (1,641)
Return/(loss) before finance costs and taxation 31,012 256,162 287,174 55,551 (380,911) (325,360)
Finance costs 5 (2,438) (5,690) (8,128) (2,490) (5,810) (8,300)
Return/(loss) before taxation 28,574 250,472 279,046 53,061 (386,721) (333,660)
Taxation 6 (495) – (495) (1,440) – (1,440)
Return/(loss) on ordinary activities after taxation for the financial year 28,079 250,472 278,551 51,621 (386,721) (335,100)
Return/(loss) per ordinary share:
Basic 7 16.21p 144.58p 160.79p 27.83p (208.52)p (180.69)p
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.
Statement of Changes in Equity
Capital
Share Share Redemption Capital Revenue
Capital Premium Reserve Reserve Reserve Total
Notes £’000 £’000 £’000 £’000 ((1)) £’000 ((1)) £’000
Balance at 1 April 2019 48,917 10,394 24,676 1,215,237 83,213 1,382,437
(Loss)/Return on ordinary activities – – – (386,721) 51,621 (335,100)
Dividends paid 8 – – – – (53,063) (53,063)
Shares bought back and held in treasury – – – (121,790) – (121,790)
Balance at 31 March 2020 48,917 10,394 24,676 706,726 81,771 872,484
Return on ordinary activities – – – 250,472 28,079 278,551
Dividends paid 8 – – – – (48,334) (48,334)
Shares bought back and held in treasury – – – (11,470) – (11,470)
Balance at 31 March 2021 48,917 10,394 24,676 945,728 61,516 1,091,231
((1) ) The revenue reserve and certain amounts of the capital
reserve are distributable by way of dividend.
The accompanying notes are an integral part of these financial statements.
Balance Sheet
As at 31 March
2021 2020
Notes £’000 £’000
Fixed assets
Investments held at fair value through profit or loss 9(a) 1,151,008 922,433
Current assets
Debtors 10 7,974 7,399
Cash and cash equivalents 32,570 43,958
40,544 51,357
Creditors: amounts falling due within one year
Other payables 11 (698) (1,934)
(698) (1,934)
Net current assets 39,846 49,423
Total assets less current liabilities 1,190,854 971,856
Creditors: amounts falling due after more than one year 12 (99,623) (99,372)
Net assets 1,091,231 872,484
Capital and reserves
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 14 945,728 706,726
Revenue reserve 14 61,516 81,771
Total Shareholders’ funds 1,091,231 872,484
Net asset value per ordinary share:
Basic – debt at par value 15 633.54p 499.11p
– debt at market value 15 628.29p 490.40p
These financial statements were approved and authorised for issue by the Board
of Directors on 27 May 2021.
GLEN SUAREZ / CHAIRMAN
Signed on behalf of the Board of Directors
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 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 in October 2019 (SORP).
The revised SORP issued in April 2021 is applicable for accounting periods
beginning on or after 1 January 2021. The SORP has no substantive changes but
has been updated to reflect changes to IFRS standards and regulatory
requirements. The Company has not early adopted the revised SORP in these
financial statements. No accounting policies or disclosures have changed as a
result of the revised SORP.
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 above.
As an investment fund the Company has the option, which it has taken, not to
present a cash flow statement. A cash flow statement is not required when an
investment fund meets all the following conditions: substantially all
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.
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 do not believe that any accounting
estimates, assumptions or judgements have been applied to these accounting
statements that have a significant risk of causing material adjustment to the
carrying amount of assets and liabilities within the next financial year. The
Directors do apply judgement as to the allocation of expenses between capital
and revenue in the income statement. The allocation and rationale is set out
in Note 1G.
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 fair
value, net of transaction costs and 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 held in the
Company’s base currency 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 accounts 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
The Directors made one material accounting judgement during the year as set
out in the paragraph below.
Tesco PLC Capital Special Dividend - £10,981,000
Further to the announcement on 18 December 2020 Tesco PLC had completed the
disposal of the entirety of its shareholding in Tesco Stores (Thailand)
Limited and Tesco Stores (Malaysia) Sdn Bhd. From the net proceeds of £7.8
billion an additional pension contribution of £2.5 billion was made and
nearly £5 billion was distributed to Shareholders’ via a Special Dividend
of 50.93 pence per Ordinary Share in the capital of the Company.
This Special Dividend was treated as Capital in nature due to the source being
covered by the proceeds of disposal. The Special Dividend was approved by
Shareholders’ at the Annual General Meeting on 25 January 2021 and went
ex-dividend on 15 February 2021.This amount is disclosed as part of the amount
in the footnote of Note 2 Income.
Apart from the above, the Directors do not believe that any other accounting
judgements have been made. There are no estimates that have a significant risk
of causing a material adjustment to the carrying amount of assets and
liabilities within the next financial 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 reserve retained after payment of
any dividends. The revenue reserve and certain amounts of the capital reserve
are distributable by way of dividend.
2. INCOME
This note shows the income generated from the portfolio (investment assets) of
the Company and income received from any other source.
2021 2020
£’000 £’000
Income from investments:
UK dividends 26,028 44,556
UK special dividends 2,432 534
UK unfranked income – 1,509
Overseas dividends 4,368 11,650
Overseas special dividends – 475
Income from money market funds 11 237
32,839 58,961
Other income:
Deposit interest 3 3
3 3
Total income 32,842 58,964
Special dividends of £11,041,000 were recognised in capital during the year
(2020: £1,467,000).
3. INVESTMENT MANAGEMENT FEE
This note shows the fee due to the Manager. This is calculated and paid
monthly.
2021 2020
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Investment management fee 1,016 2,371 3,387 1,778 4,148 5,926
Details of the investment management agreement is disclosed on page 37 in the
Directors’ Report of the Annual Report. At 31 March 2021 investment
management fees of £407,000 (2020: £385,000) were accrued.
4. OTHER EXPENSES
The other expenses of the Company are presented below; those paid to the
Directors and the auditor are separately identified.
2021 2020
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Other expenses 814 13 827 1,635 6 1,641
Other expenses include the following:
Directors’ remuneration ((i)) 187 – 187 193 – 193
Auditors’ fees ((ii)):
– for audit of the Company’s annual financial statements 33 – 33 30 – 30
– additional fees in respect of COVID-19 audit procedures in prior year 8 – 8 – – –
– audit related assurance services in respect of the Debenture Stock 3 – 3 3 – 3
The maximum Directors’ fees authorised by the Articles of Association are
£250,000 per annum.
1. There were seven directors for a period during the year and the
Director’s Remuneration Report on page 41 of the Annual Report provides
further information on Directors’ fees.
2. Auditor’s fees include expenses but excludes VAT.
3. Other expenses include:
– £18,000 (2020: £16,000) of employer’s National Insurance payable
on Directors’ remuneration. As at 31 March 2021, the amounts outstanding on
Directors’ remuneration and employer’s National Insurance was £42,000
(2020: £7,000); and
– custodian transaction charges of £14,000 (2020: £6,000). These are
charged to capital.
– other expenses also include fees of £nil (2020: £704,000). These
costs relate to fees and expenses incurred in relation to the review of the
previous manager and subsequent change of manager.
5. FINANCE COSTS
Finance costs arise on any borrowing facilities the Company has used.
Borrowing facilities are the £100 million debenture stock and a £50 million
bank revolving credit facility.
2021 2020
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Interest payable on borrowings repayable not by
instalment:
– commitment fees due on bank facility 38 89 127 67 156 223
– interest on bank facility – – – 23 53 76
– debenture stock repayable within 2 years 2,325 5,425 7,750 2,325 5,425 7,750
Amortised debenture stock discount and issue costs 75 176 251 75 176 251
2,438 5,690 8,128 2,490 5,810 8,300
6. TAX 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
2021 2020
£’000 £’000
Overseas taxation 495 1,440
(b) Reconciliation of tax charge
2021 2020
£’000 £’000
Total return/(loss) before taxation 279,046 (333,660)
Theoretical tax at the current UK Corporation Tax rate of 19% (2020: 19%) 53,019 (63,395)
Effects of:
– Non-taxable UK dividends (4,945) (7,514)
– Non-taxable UK special dividends (2,560) (471)
– Non-taxable overseas dividends (830) (2,134)
– Non-taxable (gains)/loss on investments (47,037) 71,745
– Non-taxable losses on foreign exchange 11 118
– Excess of allowable expenses over taxable income 2,340 1,650
– Disallowable expenses 2 1
– Overseas taxation 495 1,440
Tax charge for the year 495 1,440
(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 £477,190,000 (2020:
£464,617,000) that are available to offset future taxable revenue.
The deferred tax asset of £90,666,112 (2020: £88,277,000) at 19% (2020: 19%)
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 the
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 returns/(loss) per ordinary share is
based on each of the returns on ordinary activities after taxation and on
173,236,905 (2020: 185,459,576) 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.
2021 2020
pence £’000 pence £’000
Dividends paid and recognised in the year:
– third interim paid in respect of previous year 6.40 11,180 6.25 12,218
– final paid in respect of previous year 9.45 16,492 9.25 18,027
– first interim paid 6.00 10,331 6.40 11,535
– second interim paid 6.00 10,331 6.40 11,283
27.85 48,334 28.30 53,063
2021 2020
pence £’000 pence £’000
Dividends payable in respect of the year:
– first interim 6.00 10,331 6.40 11,535
– second interim 6.00 10,331 6.40 11,283
– third interim 6.00 10,331 6.40 11,180
– proposed final 6.00 10,331 9.45 16,492
Total dividends (excl. special dividends) 24.00 41,324 28.65 50,490
– declared special dividend 4.65 8,007 – –
Total dividends 28.65 49,331 28.65 50,490
The proposed final dividend is subject to approval by ordinary shareholders at
the AGM.
9. INVESTMENTS
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
2021 2020
£’000 £’000
Investments listed on a regulated stock exchange 1,150,903 922,279
Unquoted investments at Directors’ valuation 105 154
1,151,008 922,433
(b) Analysis of investment gains/(losses)
2021 2020
£’000 £’000
Opening book cost 1,068,853 1,390,495
Opening investment holding (losses)/gains (146,420) 110,656
Opening valuation 922,433 1,501,151
Movements in year:
– purchases at cost 416,676 1,106,098
– sales proceeds (435,697) (1,307,177)
Gains/(losses) on investments in the year 247,596 (377,639)
Closing valuation 1,151,008 922,433
Closing book cost 1,026,675 1,068,853
Closing investment holding gains/(losses) 124,333 (146,420)
Closing valuation 1,151,008 922,433
The Company received £435,697,000 (2020: £1,307,177,000) from investments
sold in the year. The book cost of these investments when they were purchased
was £458,854,000 (2020: £1,427,740,000) realising a loss of £23,157,000
(2020: £120,563,000). 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 £1,917,000
(2020: £4,856,000) on purchases and £167,000 (2020: £444,000) 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.
2021 2020
£’000 £’000
Amounts due from brokers 1,489 3,217
Overseas withholding tax recoverable 1,592 2,621
Prepayments and accrued income 4,893 1,561
7,974 7,399
11. CREDITORS: 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 are the debenture and bank borrowings. The
other creditors include any amounts due to brokers for the purchase of
investments or amounts owed to suppliers (accruals) such as the Manager and
auditor.
2021 2020
£’000 £’000
Amounts due to brokers – 996
Share buybacks awaiting settlement – 68
Accruals 698 870
698 1,934
The Company has a 364 day committed revolving credit facility (the 'bank
facility') of £50 million (2020: £150 million) with the lender, The Bank of
New York Mellon. The bank facility was renewed on 17 June 2020 and matures on
16 June 2021. Interest is payable at 1.00% over LIBOR for drawn amounts, with
a commitment fee of 0.20% per annum for undrawn amounts. Under the bank
facility's covenants, the Company’s total indebtedness must not exceed 25%
of net assets and net assets must not be less than £500 million (2020: £700
million).
12. CREDITORS: 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.
2021 2020
£’000 £’000
Debenture Stock 7¾% redeemable 30 September 2022 100,000 100,000
Unamortised discount and issue expenses on debenture stock (377) (628)
99,623 99,372
The debenture is secured by a floating charge on the Company, under which
borrowing must not exceed a sum equal to the Adjusted Total of Capital and
Reserves. The interest on the 7¾% debenture is payable in half-yearly
instalments, in March and September, each year.
The effect on the net asset value of deducting the debenture stock at market
value, rather than at par, is disclosed in note 15.
13. SHARE CAPITAL
Share capital represents the total number of shares in issue.
2021 2020
£’000 £’000
Share capital:
Ordinary shares of 25p each 43,046 43,671
Treasury shares of 25p each 5,871 5,246
48,917 48,917
2021 2020
Number of ordinary shares in issue:
Brought forward 174,682,929 195,481,734
Shares bought back and held in treasury (2,500,000) (20,798,805)
Carried forward 172,182,929 174,682,929
Number of treasury shares held:
Brought forward 20,983,805 185,000
Shares bought back into treasury 2,500,000 20,798,805
Carried forward 23,483,805 20,983,805
Total ordinary shares 195,666,734 195,666,734
During the year the Company bought back, into treasury, 2,500,000 ordinary
shares at an average price of 458.79p (including costs). Since the year end,
no shares have been bought back into treasury.
The Directors’ Report on pages 37 and 38 of the Annual Report 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 shows the net revenue retained after payment of any
dividends.. The capital and revenue reserves 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.
The NAV – debt at par is the NAV with the value of the £100 million
debenture (the debt) at its nominal (equivalent to the par) value of £100
million. The NAV – debt at market value reflects the debenture stock at the
value that a third party would be prepared to pay for the debt, and this
amount fluctuates owing to various factors including changes in interest rates
and the remaining life of the debt. The number of ordinary shares in issue at
the year end was 172,182,929 (2020: 174,682,929).
(a) NAV – debt at par value
The shareholders’ funds in the balance sheet are accounted for in accordance
with accounting standards; however, this does not reflect the rights of
shareholders on a return of assets under the Articles of Association. These
rights are reflected in the net assets with debt at par value and the
corresponding NAV per share. A reconciliation between the two sets of figures
follows:
2021 2020
NAV Shareholders’ NAV Shareholders’
per share funds per share funds
pence £’000 pence £’000
Shareholders’ funds 633.76 1,091,231 499.47 872,484
Less:
Unamortised discount and expenses arising from debenture issue (0.22) (377) (0.36) (628)
NAV – debt at par 633.54 1,090,854 499.11 871,856
(b) NAV – debt at market value
The market value of the debenture stock is determined by reference to the
daily closing price, and is subject to review against various data providers
to ensure consistency between data providers and against the reference gilt.
The net asset value per share adjusted to include the debenture stock at
market value rather than at par is as follows:
2021 2020
NAV Shareholders’ NAV Shareholders’
per share funds per share funds
pence £’000 pence £’000
NAV – debt at par 633.54 1,090,854 499.11 871,856
Debenture stock – debt at par 58.08 100,000 57.25 100,000
– debt at market value (63.33) (109,041) (65.96) (115,209)
NAV – debt at market value 628.29 1,081,813 490.40 856,647
16. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
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 above), a debenture, 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 33 and 34 of the Annual
Report. 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 by using its £100 million
debenture stock 2022 and its bank facility of £50 million (2020: £150
million). Debenture stock 2022 market value £109,041,000 (2020:
£115,209,000).
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.
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 (2020:
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
£98.8 million (2020: £67.2 million) representing 8.6% (2020: 7.2%) 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.
2021 2020
USD CHF EUR USD CHF EUR
£’000 £’000 £’000 £’000 £’000 £’000
Foreign currency exposure on net monetary items 1,915 859 979 1,037 2,041 580
Investments at fair value through profit or loss that are equities 39,881 12,393 39,593 33,652 – 33,593
Total net foreign currency exposure 41,796 13,252 40,572 34,689 2,041 34,173
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 4.1% (2020:
2.8%) for the US dollar, 2.6% (2020: 3.3%) for the Swiss franc and 1.9% (2020:
2.7%) for the Euro during the year, capital return and net assets of the
Company would have increased by £3.0 million (2020: £2.0 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.
16.1.2 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.
The Company has in place a revolving credit facility (the 'bank facility'),
details of which are shown in note 11. The Company uses the bank facility when
required at levels monitored by the Board. At the maximum possible bank
facility gearing of £50 million (2020: £150 million), the effect of a 1%
increase/decrease in the interest rate would result in a decrease/increase to
the Company’s income of £500,000 (£2020: £1,500,000) per annum.
The Company also has an uncommitted bank overdraft facility which it uses for
settlement purposes and the interest rate is dependent on the base rate as
determined by the custodian. At the year end, no amounts were overdrawn (2020:
none).
The Company’s debt of £100 million (2020: £100 million) of debenture stock
is fixed which exposes the Company to changes in market value in the event
that the debt is repaid before maturity. Details of the debenture stock
interest is shown in note 12, with details of its market value and the affect
on net asset value in note 15(b).
The Company held one fixed income security during the year (2020: one), being
a short-term zero coupon government bond which matured on the 22 June 2020. As
at 31 March 2020 this government bond was 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.
2021 2020
Within Between Within Between
one one and one one and
year five years Total year five years Total
£’000 £’000 £’000 £’000 £’000 £’000
Exposure to floating interest rates:
Cash and cash equivalents 32,570 – 32,570 43,958 – 43,958
Exposure to fixed interest rates:
Debenture stock - debt at par value – (100,000) (100,000) – (100,000) (100,000)
Total exposure to interest rates 32,570 (100,000) (67,430) 43,958 (100,000) (56,042)
16.1.3 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 portfolio 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 £115.1 million (2020: £92.2 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. In addition, the Company has
a bank facility which it can use to provide short-term funding flexibility.
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
Three but
months less than More than
or less one year one year Total
2021 £’000 £’000 £’000 £’000
Debenture stock - debt at par value – – 100,000 100,000
Interest on debenture stock – 7,750 3,875 11,625
Accruals 698 – – 698
698 7,750 103,875 112,323
More
than three
months
Three but
months less than More than
or less one year one year Total
2020 £’000 £’000 £’000 £’000
Debenture stock - debt at par value – – 100,000 100,000
Interest on debenture stock – 7,750 11,625 19,375
Amounts due to brokers 996 – – 996
Accruals 938 – – 938
1,934 7,750 111,625 121,309
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.
17. FAIR VALUE
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 one 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.
2021
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 1,150,903 – – 1,150,903
Unquoted investments – – 105 105
Total for financial assets 1,150,903 – 105 1,151,008
2020
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 922,279 – – 922,279
Unquoted investments – – 154 154
Total for financial assets 922,279 – 154 922,433
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. The investment in Level 3 is in the unquoted company Eurovestech.
The holding in Eurovestech did not change during the year, but the fair value
was reduced to £105,000 (2020: £154,000).
The book cost and fair value of the debenture stock, based on the offer value
at the balance sheet date, are as follows:
2021 2020
Book Fair Book Fair
Value Value Value Value
£’000 £’000 £’000 £’000
Debenture stock repayable between one and five years:
7 ¾% Debenture Stock 2022 100,000 109,041 100,000 115,209
Discount on issue of debenture stock (377) – (628) –
99,623 109,041 99,372 115,209
Incorporating the fair value of the debenture, results in the reduction of the
net asset value per ordinary share to 628.29p (2020: 490.40p).
18. CAPITAL MANAGEMENT
The Company’s total capital employed at 31 March 2021 was £1,190,854,000
(2020: £971,856,000) comprising borrowings of £99,623,000 (2020:
£99,372,000) and equity share capital and other reserves of £1,091,231,000
(2020: £872,484,000).
The Company’s total capital employed is managed to achieve the Company’s
objective and investment policy as set out on above, 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 7.1%
(2020: 8.3%) 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 above. 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. Borrowings
comprise the debenture stock, details of which are contained in note 12, a
bank facility and an uncommitted overdraft facility which may be used for
short-term funding requirements.
19. CONTINGENCIES, GUARANTEES AND FINANCIAL COMMITMENTS
This note would show any liabilities the Company is committed to honour, and
which are dependent on future circumstances or events occurring.
There are no contingencies, guarantees or financial commitments of the Company
at the year end (2020: £nil).
20. RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH THE 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 42
and 43 of the Annual Report 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 37 of the Annual Report, and in note 3.
21. POST BALANCE SHEET EVENTS
There are no significant events or adjustment to the financial statements
after the end of the reporting year requiring disclosure.
There are no significant events after the end of the reporting year requiring
disclosure.
This announcement contains regulated information under the Disclosure Guidance
and Transparency Rules of the FCA.
This announcement does not constitute the Company's statutory accounts. The
financial information for 2021 is derived from the statutory accounts for
2021, which will be delivered to the registrar of companies. The statutory
accounts for 2019 have been delivered to the registrar of companies. The
auditors have reported on the 2021 and 2020 accounts; their reports were
unqualified and did not include a statement under Section 498(2) or (3) of the
Companies Act 2006.
The Annual Financial Report will be available from the Company’s website:
www.edinburghinvestmenttrust.com
The Annual Financial Report will be submitted to the National Storage
Mechanism and will shortly be available for inspection at:
http://www.morningstar.co.uk/uk/NSM .
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, Quartermile One, 15 Lauriston Place, Edinburgh EH3 9EP.
A copy of the Annual Financial Report will be available from the Company’s
website: www.edinburghinvestmenttrust.com
The Annual General Meeting of the Company will be held at 11 am on 22 July
2021 at The Hawthornden Lecture Theatre, The National Galleries of Scotland,
Weston Link, The Mound, Edinburgh, EH2 2EL.
By order of the Board
PraxisIFM Fund Services (UK) Limited
Company Secretary
27 May 2021
Enquiries
Edinburgh Investment Trust plc
Glen Suarez (Chairman) via Montfort below
Majedie Asset Management Limited
James Mowat + 44 20 7618 3900
Harry Steel
Investec Bank plc
Tom Skinner + 44 20 7597 4000
Montfort Communications
Nick Bastin +44 7931 500066
Shireen Farhana+44 7757 299250
Miles McKechnie+44 7788 546279
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 0.9 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. Majedie Asset Management became the Company’s AIFM with effect
from 4 March 2020.
About Majedie Asset Management
Established in 2002, Majedie is an independent boutique. It actively manages
equities for institutional investors, wealth managers and endowments across
a range of UK, US and Global strategies. Its assets under management were
£8bn at the 31 March 2021. It has a team of 19 fund managers and analysts,
out of a total of 58 employees.
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