REG - Edinburgh Inv. Trust - Final Results
28/05/2024 07:00
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RNS Number : 9458P Edinburgh Investment Trust PLC 28 May 2024
The Edinburgh Investment Trust plc
ANNUAL FINANCIAL REPORT
FOR THE YEAR ENDED 31 MARCH 2024
28 May 2024 - The Directors of the Edinburgh Investment Trust plc ("the
Company") have today announced the annual results for the year ended 31 March
2024.
Highlights
· Net asset value ("NAV") per share (with debt at fair value) on a
total return basis increased by 13.4%, exceeding the 8.4% return on the FTSE
All-Share Index. The share price total return was 8.9%
· Final dividend proposed of 6.9p per share. Dividends for the
financial year +3.8% compared with the previous year, equivalent to a yield of
3.9%
· Net gearing at 31 March 2024 of 3.1%, compared with 4.7% in the
previous year
· New fee agreed with the Manager, resulting in a pro-forma 11%
reduction in the annual management fee
· Despite positive performance, share price discount to NAV widened
to 11.5% from 7.5% reflecting widening discounts in the sector
Elisabeth Stheeman, Chair, said: "When comparing the Company's performance
against its two key objectives - increasing the NAV per share in excess of the
FTSE All-Share Index and growth in dividends per share in excess of inflation
- the year to 31 March 2024 has been a positive one. The NAV total return rose
by 13.4% compared to 8.4% for the index. Despite the challenging backdrop for
UK equities, a double digit return for the Company is an excellent outcome.
Dividends are set to rise this year by 3.8%, compared with CPI inflation of
3.2%.
"This year has also seen an internal change of the Liontrust portfolio
management team - from James de Uphaugh and Chris Field to Imran Sattar and
Emily Barnard. The Board would like to express their sincere thanks to James
and Chris and wish them well in their retirement. The Board is equally excited
to have Imran and Emily in place as the new management team.
"Many UK equity market constituents in the Company's portfolio continue to
stand at a valuation discount to their international peers. These valuation
anomalies are being exploited by the companies themselves, through share buy
backs and also from time to time by takeovers by third parties. Whether
through these types of actions or through greater demand for UK equities over
time, the Company is well placed to continue to meet its key objectives and
generate attractive returns for shareholders."
Imran Sattar, Portfolio Manager, said: "It is a great honour to take over as
the management team of the Company. Emily and I were fortunate to work closely
with James and Chris, and we look forward to building on the strong
foundations and excellent track record that they put in place.
"UK equities are out of fashion, for a host of well-rehearsed reasons. Quite
what the catalyst for an improvement in fortunes will be is hard to say, but
strong businesses generating attractive returns don't go unnoticed for long.
We believe the UK equity market offers a compelling universe of businesses at
attractive valuations. Further, some of the very best investment opportunities
arise when sentiment is poor. It strikes us that we are in one of those times
now.
"Over the financial year, a diversified set of stocks has driven the
portfolio's excess returns. Key outperformers included Marks & Spencer,
BAE Systems and Centrica. These three stocks are all excellent examples of
businesses that were purchased when out of favour, and which have enjoyed
significant share price appreciation as their operating models have improved.
"We are mindful of changing expectations for the path of interest rate
normalisation, as inflation remains more entrenched than expected. This period
of heightened monetary policy uncertainty coincides with a period of elevated
geopolitical risks - making a flexible and pragmatic approach important. We
expect risks to remain high, with 2024 seeing a significant number of
elections globally - most notably the US, India, and the UK. China continues
to face growth headwinds as the economy seeks to transition from
investment-led to consumption-led growth.
"With the elevated uncertainty, our focus remains on owning businesses where
growth is helped by exposure to structural growth tailwinds, or where there is
a change in industry structure or company strategy which will enable future
profit growth. Our confidence in the portfolio comes from owning strong
businesses, managed by intelligent management teams executing on their
business plans to drive total shareholder growth."
Enquiries
Liontrust Fund Partners LLP +44 20 3908 8822
James Mowat
james.mowat@liontrust.co.uk (mailto:james.mowat@liontrust.co.uk)
Investec Bank plc +44 20 7597 4000
Tom Skinner
Montfort Communications
Gay Collins +44 7798 626282
Shireen Farhana +44 7757 299250
Ella Henderson +44 7762 245122
EIT@montfort.london (mailto:EIT@montfort.london)
NSM Funds (UK) Limited +44 20 3697 5772
(Company Secretary)
Brian Smith
Ciara McKillop
eit@nsm.group (mailto:eit@nsm.group)
Notes to editors
About the Edinburgh Investment Trust plc
Founded over 130 years ago, the Edinburgh Investment Trust plc is listed on
the London Stock Exchange and is a member of the FTSE 250 index. It invests
primarily in a portfolio of UK listed shares and has net assets of
approximately £1.2 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.
Financial Information and Performance Statistics
Year Ended Year Ended
Total Return((1)(3)(4)) (all with dividends reinvested) 31 March 2024 31 March 2023
Net asset value((1)) (NAV) - debt at fair value +13.4% +7.9%
Share price((2)) +8.9% +8.4%
FTSE All-Share Index((2)) +8.4% +2.9%
The Company's benchmark is the FTSE All-Share Index.
Capital Return((1)(4)) At 31 March 2024 At 31 March 2023 Change %
Net asset value - debt at fair value 779.97p 713.75p +9.3
Share price((2)) 690.00p 660.00p +4.5
FTSE All-Share Index((2)) 4,338.05 4,157.88 +4.3
Discount((1)(3)(4)) - debt at fair value (11.5)% (7.5)%
Gearing (debt at fair value)((1)(3)(4)) - gross gearing 6.2% 6.6%
- net gearing 3.1% 4.7%
Year Ended Year Ended
Revenue and Dividends((3)) 31 March 2024 31 March 2023 Change %
Revenue return per ordinary share 23.93p 25.99p -7.9
Dividends - first interim 6.70p 6.40p
- second interim 6.70p 6.40p
- third interim 6.90p 6.70p
- proposed final 6.90p 6.70p
- total dividends 27.20p 26.20p +3.8
Consumer Price Index((2)(4)) - annual change 3.2% 10.2%
Dividend Yield((1)(3)(4)) 3.9% 4.0%
Ongoing Charges Ratio((1)(3)(4)) 0.53% 0.53%
Notes:
((1) ) These terms are defined in the Glossary of
Terms and Alternative Performance Measures, including reconciliations. NAV
with debt at fair value is widely used by the investment company sector for
the reporting of performance, premium or discount, gearing and ongoing
charges.
((2) ) Source: LSEG Data & Analytics.
((3) ) Key Performance Indicator.
((4) ) Alternative Performance Measures.
Overview / Ten Year Historical Information
Per ordinary share
Year ended Ordinary Shares Revenue return Dividend Net asset Share Discount Gross Net gearing
31 March
shareholders' (bought p rate value price (debt at gearing (debt at (debt at
(debt at
fair value)
fair value)
funds back)/ p
fair value) p
fair value)
issued
% %
£m
p %
m
2015 1,376 - 24.83 23.85 686.07 662.00 (3.5) 13.9 13.8
2016 1,392 0.55 26.66 24.35 695.30 665.00 (4.4) 15.5 15.3
2017 1,535 - 27.94 25.35 768.81 713.50 (7.2) 15.9 15.7
2018 1,400 - 29.25 26.60 703.34 642.00 (8.7) 12.1 11.8
2019 1,382 (0.19) 28.66 28.00 696.91 644.00 (7.6) 11.0 10.8
2020 872 (20.80) 27.83 28.65 490.40 434.00 (11.5) 13.4 8.3
2021 1,091 (2.50) 16.21 28.65((1)) 628.29 600.00 (4.5) 10.1 7.1
2022 1,176 (1.10) 22.41 24.80 686.69 634.00 (7.7) 10.3 4.4
2023 1,139 (5.60) 25.99 26.20 713.75 660.00 (7.5) 6.6 4.7
2024 1,135 (13.99) 23.93 27.20 779.97 690.00 (11.5) 6.2 3.1
((1)) including special dividend of 4.65p
Capital Returns (excluding dividends paid) to 31 March 2024
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 3yr 5yr 10yr
NAV (debt at fair value) (%) 11.9 1.3 10.6 -8.5 -0.9 -29.6 28.1 9.3 3.9 9.3 24.2 11.9 27.2
Share Price (%) 11.4 0.5 7.3 -10.0 0.3 -32.6 38.2 5.7 4.1 4.5 15.0 7.1 16.2
FTSE All-Share Index (%) 3.0 -7.3 17.5 -2.4 2.2 -21.9 23.3 9.3 -0.7 4.3 13.2 9.0 22.0
Source: LSEG Data & Analytics.
Total Returns (with dividends reinvested) to 31 March 2024
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 3yr 5yr 10yr
NAV (debt at fair value) (%) 16.2 5.0 14.7 -5.9 2.9 -26.7 34.8 14.1 7.9 13.4 39.6 38.0 87.5
Share Price (%) 15.7 4.0 11.2 -6.7 4.6 -29.4 46.4 10.6 8.4 8.9 30.5 34.9 76.2
FTSE All-Share Index (%) 6.6 -3.9 22.0 1.2 6.4 -18.5 26.7 13.0 2.9 8.4 26.1 30.3 75.3
Source: LSEG Data & Analytics.
Chair's Statement
DEAR SHAREHOLDERS,
It is a pleasure to write to you again with a summary of the year for
Edinburgh Investment Trust plc (the "Company"). My fellow directors and I
never lose sight of the fact that the Company exists to generate attractive
financial returns for shareholders.
We principally measure the success of this endeavour by comparing the
Company's performance against its two key objectives:
1. an increase of the Net Asset Value ("NAV") 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.
Over the last year the Company has met both objectives. On the first, the NAV
per share has risen by 9.3% while the comparator index rose by 4.3%. This has
led to a rise in NAV total return of 13.4% compared to 8.4% for the index.
Despite the challenging backdrop for UK equities, especially when compared
with some overseas equities, a double digit return for the Company is an
excellent outcome. The Portfolio Manager sets out the key stock contributors
to returns, and the broader market context, in the report. For the Company's
second objective, the dividend is set to rise this year by 3.8%, compared with
CPI inflation of 3.2%. On both fronts, the year to 31 March 2024 has therefore
been a positive one.
One year is just a snapshot, particularly in the context of a Company which
passes its 135(th) anniversary this year. Longer periods than a year are much
more meaningful, especially when it comes to judging investment skill. In the
four years since the Company changed its management arrangements, the NAV per
share has risen at an annualised 17.1%, compared with the index at 12.4%. The
dividend was cut in 2020/21, in the aftermath of the COVID pandemic. Since
then, it has grown by 4.7% per annum. With the dividend now growing again, the
longer-term picture for both objectives is improving.
While NAV returns are an appropriate yardstick for measuring investment skill,
we are also alert to the share price performance. This does, after all,
reflect the realisable value of a holding in the Company. During the last year
the share price total return was 8.9% (i.e. ahead of the index) but behind the
NAV total return, as the discount widened. Over the last four years, the
cumulative share price and NAV total returns have been 91.1% and 88.2%
respectively, compared with 59.8% for the index. I comment further on the
discount below.
Overall, it is encouraging to record that the Company's NAV and share price
returns are ahead of the index over three, five and ten years. Over the three
years to 31 March 2024, the Company's NAV return has been 39.6% cumulatively,
with the Company's benchmark index returning 26.1% over the same period. Over
the past five years, the NAV return has been 38.0% cumulatively, compared with
the index returning 30.3%. Over the past ten years, the NAV return has been
87.5% cumulatively, compared with the index returning 75.3%. In all these
cases, the NAV is stated after deducting debt at fair value.
NEW PORTFOLIO MANAGER
This year has also seen an internal change of the Liontrust portfolio
management team - from James de Uphaugh and Chris Field, to Imran Sattar and
Emily Barnard. The Board would like to express their sincere thanks to James
and Chris for steering the Company through the Manager change in 2020 - just
as the COVID pandemic took hold - and for overseeing strong investment returns
since their appointment. We were fortunate to have them at the helm, and wish
them well in their retirement. The Board is equally excited to have Imran and
Emily in place as the new management team. As we have been keen to emphasise
in previous communications about this change, the investment process for the
Company - with its focus on total returns from capital and dividends - remains
unchanged. There have been modest changes to the portfolio since the formal
handover in February and this, along with more colour on the portfolio and
outlook, is set out in the Portfolio Manager's report.
DIVIDENDS
The Board recommends a final dividend of 6.9p per share: shareholders will be
able to vote on this at our Annual General Meeting in July. If approved, this
will result in total dividends for the year of 27.2p per share. This figure,
divided by the year end share price of 690p, means a dividend yield to
shareholders of 3.9% - in-line with the index yield.
Underpinning the Company's dividend payments are the revenues generated by the
portfolio. This year this figure is 23.9p per share, which is lower than 2023
primarily because of a reduction in some 'special' dividend payments -
particularly from the banking sector. With a dividend of 27.2p due to be paid,
it means the dividend is 'uncovered' by 3.3p per share. One of the advantages
of an investment trust is the flexibility to draw on 'revenue reserves' to
smooth dividend payments and support attractive distributions. We have used
these 'revenue reserves' to varying degrees over the last five years,
particularly in the immediate aftermath of the pandemic. Revenue reserves
remain in a healthy position at 30.7 pence per share. The Portfolio Manager
sets out thoughts about dividend generation from the portfolio in his report.
In particular, they explore the recent pressures on dividends being paid and
the extent to which this is explained by investee companies' preference for
buying back shares instead.
BORROWINGS
The Company has long-term borrowings via four tranches of debt which mature
between 2037 and 2057. This helped boost investment returns over the year. The
face value of the debt (debt at 'par') is £120m, and at the year end the
'fair value' was £73m. The difference between the two numbers is due to
changes in reference gilt yields, which are significantly higher than when the
debt was arranged in 2021. The fair value of the debt a year ago was £78m. As
we always quote investment returns after deducting debt at fair value (not at
par), the reduction in the value of the debt has been a small positive
performance tailwind. As the Portfolio Manager notes in their report, we are
content with the current level of debt and have no immediate plans to borrow
more.
SHARE PRICE DISCOUNT TO NET ASSET VALUE
In common with many other equity investment trusts, the Company's discount
widened over the year. As a Board we have sought to turn this to the Company's
advantage, and have authorised the Company's broker to repurchase shares in
the open market. The permission of shareholders for repurchases is sought
annually at our Annual General Meeting. The buyback process enhances the NAV
per share for remaining shareholders. Over the year, the Company returned
£92m to shareholders through buybacks - or 8.5% of shares in circulation at
the beginning of the period (2023: £35m and 3.5%). This boosted NAV by 0.8%.
This return of capital is significantly more than the £42m that is due to be
paid in dividends and is therefore the single largest allocation of capital
over the year.
FEES
Following discussions with the Manager, we have agreed a new lower fee scale
as follows:
· First £500m of market capitalisation at 0.45% per annum
· Next £500m of market capitalisation at 0.40% per annum
· Balance of market capitalisation at 0.35% per annum
This new fee scale applies from the start of the new financial year, i.e. 1
April 2024. Based on the Company's market capitalisation at the year end, it
will reduce the pro-forma management fee by 11%. This will position the
Company as one of the most competitively priced investment trusts in its
sector, and should further support the role of the Company as a natural home
for long-term equity investors.
MARKETING
We are continuing with a range of promotional activities. These include
regular market updates (video and written articles) on the Company's website,
events, press advertisements, and digital promotion through avenues such as
LinkedIn and X, formerly Twitter. We also take part in various media events on
investment platforms. The Board is monitoring the effectiveness of marketing
expenditure via a series of Key Performance Indicators and I am pleased to
report that the scorecard is in good shape.
BOARD AND GOVERNANCE
Since the retirement from the Board of Vicky Hastings at last year's AGM, the
membership of the Board has been stable at five Directors including myself.
The Board continues to meet the FCA Listing Rules targets on gender diversity,
female representation in senior roles and ethnic representation on the Board.
All Directors also conform with the UK Corporate Governance Code's guidance on
board tenure. I thank all my fellow directors for their hard work on behalf of
shareholders over the last year.
During the year we reviewed Directors' fees. After reviewing reports from two
remuneration consultants, and taking account of the fact that Directors'
remuneration has not been changed since 2021, the Board approved a 7% increase
in fees for the year to 31 March 2024.
ANNUAL GENERAL MEETING ('AGM')
This year's AGM will take place on Wednesday 17 July 2024 at 11.00 a.m. at the
Balmoral Hotel in Edinburgh. The Board looks forward to meeting as many
shareholders there as possible. As usual there will be votes on resolutions as
set out in this report. I encourage shareholders to vote in person at the AGM
or through the proxy facility on the voting card. The holders of shares on
investment 'platforms' should be able to vote through their service provider.
After the voting, there will be a presentation by the Portfolio Manager. There
will also be an informal lunch and a chance to meet a range of colleagues and
advisors that manage the Company on a day-to-day basis. For those unable to
attend in person, the AGM will be streamed online, with the ability to post
questions live into the meeting. The link for electronic access will be
displayed prominently on the Company's website.
ARTICLES OF ASSOCIATION ('ARTICLES')
The Board is recommending that the Company adopt new Articles of Association
(the 'New Articles'). A description of the proposed amendments being
introduced in the New Articles. The proposed changes seek to update the
Company's approach to share register dormancy in line with modern practice,
and, the Board believes, good corporate governance. The amendments seek to
achieve this by reducing the periods until unclaimed dividends and shares of
untraced shareholders are forfeited. Under the current articles, this period
is twelve years of dormancy and the Board proposes to reduce it to eight
years.
The New Articles would also permit the Company to engage a professional asset
reunification company or other tracing agent to locate untraced shareholders.
If the Company's attempts to trace shareholders are unsuccessful after the
proposed eight year period, forfeited shares would be sold and, according to
the proposed New Articles, the proceeds of sale may be used for investment
purposes or for charitable or good causes.
Finally, the New Articles facilitate the removal of cheques as a method to pay
dividends. The Board will keep this under consideration, and will only remove
this option having given shareholders notice of its intention to do so.
LONDON RETAIL SHAREHOLDER EVENT
We will host a presentation to shareholders at the Royal Society of Arts on 9
October 2024 at 11am. This will be another chance to meet the Board, Portfolio
Manager and other members of the team. Further details will be posted on the
Company's website in due course.
OUTLOOK
As you will see from the Portfolio Manager's report, enthusiasm for the
underlying holdings of the Company is supported by strong operational
performance and attractive valuations. Many UK equity market constituents in
the Company's portfolio continue to stand at a valuation discount to their
international peers. These valuation anomalies are being exploited by the
companies themselves, through share buybacks, and also from time to time by
takeovers by third parties. Whether through these two types of action, or
through simply greater demand for UK equities over time, your Company is well
placed to continue to meet its two key objectives and generate attractive
returns for shareholders.
ELISABETH STHEEMAN / Chair / 24 May 2024
Portfolio Manager's Report
Dear Shareholders,
It is a great honour for us to take over as the management team of your
Company. We were fortunate to work closely with the previous management team,
James de Uphaugh and Chris Field, during the four years they managed the
Company and we observed first-hand how they transformed the track record and
credibility of the Company. We look forward to building on the strong
foundations and excellent investment track record that they put in place. The
Company's key features and structure mean it is an ideal vehicle for long-term
savers to capitalise on the excellent potential returns to come from
publicly-listed businesses both in the UK and overseas.
As is clearly set out on the first page of the report, your Company focuses on
its home market, the UK equity market, with at least 80% of the portfolio to
be listed in London. We start as your Portfolio Managers at a time when UK
equities are out of fashion, for a host of well-rehearsed reasons, not least
as their returns have been lower than many other markets (especially the US
equity market) for a long period of time. Quite what the catalyst for an
improvement in fortunes will be is hard to say - there are no shortage of
ideas, whether from government or the private sector - but strong businesses
generating attractive returns don't go unnoticed for long, regardless of where
they are listed. We believe the UK equity market offers a compelling universe
of businesses standing at attractive valuations.
Further, some of the very best investment opportunities arise when sentiment
is poor. It strikes us that we are in one of those times now. We are very
excited about the potential of the portfolio we inherit, as well as the
changes that we have made to date, and look forward to reporting to you over
the years ahead how the returns develop. We recognise the importance of
generating returns from an equity portfolio that can measure up with the best.
We think this portfolio will be able to do just that.
As your Board emphasised when they announced our appointment last autumn,
there is absolutely no change to the investment process and team approach. We
continue to manage the Company's portfolio with a 'bottom-up' stock selection
process and an emphasis on generating attractive total returns - the same
approach that has underpinned the exceptional results of the last four years.
The key features of the portfolio remain:
· 40-50 holdings, typically drawn from the lower reaches of
the FTSE100, the higher reaches of the FTSE250 and selected overseas stocks;
· Diversification by both company and economic exposure;
and
· Enthusiasm for utilising the Company's attractively
priced long-term debt facilities.
We take a pragmatic approach to stock selection, with a focus on exploiting
market anomalies that present across the growth-value spectrum. Within this
pragmatic approach, we have a focus on identifying growing companies with
strong economic moats. Further detail on the investment approach can be found
in the section titled 'Portfolio Manager's Core Investment Beliefs'.
The majority of the portfolio has remained unchanged since we took over
management at the start of the calendar year. In the final three months of the
Company's financial year we made some modest changes to the portfolio
(detailed further below), reflecting the investment opportunities that have
arisen and our own views on which stocks will drive future returns. Some 16%
of the portfolio has been reorganised in the first three months of the
calendar year and we anticipate a similar level of degree of change over the
rest of 2024. The core of the portfolio, designed to drive returns through a
combination of capital and income growth, remains the same.
PORTFOLIO RETURNS AND ATTRIBUTION
The portfolio that James and Chris had in place this time last year has
delivered a fourth consecutive year of NAV outperformance. Over the financial
year, a diversified set of stocks - in keeping with the aim of the investment
process - has driven the portfolio's excess returns. Key outperformers
included Marks & Spencer (Retailers), BAE Systems (Aerospace and Defence)
and Centrica (Gas, Water and Multi-Utilities). These three stocks are all
excellent examples of businesses that were purchased when out of favour, and
which have enjoyed significant share price appreciation as their operating
models have been restructured and improved. All remained prominent holdings at
the year end. Other significant contributors to excess returns came from
avoiding large index constituents whose share prices fell, such as Diageo
(Alcoholic Beverages), Reckitt Benckiser (Consumer Goods), Prudential
(insurance) and British American Tobacco.
On the negative ledger, the holdings in Anglo American (Industrial Metals and
Mining) and RS (Industrial Support Services) were weaker, making them the two
largest stock-specific headwinds. We also missed out on two index constituents
that performed well, namely Rolls-Royce (Engineering/Aerospace) and RELX
(Media).
TRANSACTIONS
Over the year, the largest purchases have been Verisk Analytics (a US-listed
business focusing on data analysis), Haleon (Pharmaceuticals and
Biotechnology), Lloyds (Banks), Rotork (Electronic and Electrical Equipment -
see below), Diploma (Industrial Support Services), Rentokil (Industrial
Support Services) and Autotrader (Software and Computer Services). All bar
Haleon and Lloyds have been new additions to the portfolio since January. The
funding for these purchases over the year came from sales or reductions in a
wide range of stocks, with the leading sales by value being BAE Systems
(Aerospace and Defence), WPP (Advertising), Weir (Industrial Engineering) and
Standard Chartered (Banks).
Rotork, a recent purchase, is an excellent example of the features we find
appealing in a company. Rotork, is a market leading industrials company in
flow control and instrumentation products. It is exposed to attractive
long-term growth drivers such as oil and gas upstream electrification, and
industrial process automation. Rotork is the market leader in pneumatic
actuators and has a strong long term track record of product quality and
reliability. Where it has had more challenges historically has been with
organic growth, which the new chief executive is addressing through a strategy
to focus the business on higher growth business lines, reinforcing and
improving the customer value proposition, and improving innovation. If
successful, this shift in the business should lead to mid to high single digit
sales growth and gentle margin accretion over the medium term.
CURRENT SHAPE OF PORTFOLIO
The portfolio remains well diversified across stocks and sectors with a range
of different economic characteristics. The most significant positions in the
portfolio (which we define those holdings whose weightings are most different
from that of the index) were three different retailers: Dunelm, Marks &
Spencer and Tesco, the energy company Centrica, and the banking group NatWest.
The stocks where we have below average (versus the index weight) zero holdings
- which as noted in the attribution section above can also be important for
relative returns - are AstraZeneca (pharmaceuticals), Diageo, RELX, HSBC
(banking) and Rio Tinto (mining).
At the year end we held 5.6% in non-UK stocks. We use this element of the
portfolio to gain access to businesses with the kind of characteristics or
features that we seek but which are not available in the UK market. The
principal non-UK holding was Verisk Analytics, a world-leading data technology
business, as flagged above. Other holdings in this category included Novartis
(pharmaceuticals), Intel (semiconductors), and Newmont Mining.
DISTRIBUTIONS TO SHAREHOLDERS
As the Chair has written in her report, dividends paid to the Company by
investee holdings fell compared with the previous financial year. This was a
function primarily of lower special dividends from the banks. For your
Company, the revenue received from dividends was £42.1m, which is equivalent
to 3.6% of the NAV at fair value at the end of the period. Once certain costs
are deducted (such as a share of the running costs of the Company and debt
interest costs), the dividend paid to Edinburgh's shareholders is 'uncovered'
by £3.3m.
However, a growing number of companies choose to return cash to shareholders
through share buybacks. We estimate that the 'buyback yield' of the portfolio
at the year end was approximately 2.3%. This figure does not form part of your
Company's accounts, as the cash spent on buybacks has by definition been
returned to ex-shareholders. Nonetheless, the process of buying back shares,
as long as it is done at prices that enhance value, benefits the shareholders
that remain.
As Portfolio Managers of the Company, we think carefully about the portfolio's
balance of returns coming from dividends or share buybacks: we are not trying
to maximise short term income performance by investing in high yielding
shares, as this could challenge the ability of the Company to generate strong
longer-term NAV total returns.
Putting this all this together, we take the view that the dividend paid to
Edinburgh's shareholders is supported by the portfolio's underlying economic
characteristics, even if the trend continues for management teams to divert
more of their cashflows towards buybacks instead of dividends.
MATERIALITY ASSESSMENT AND ENGAGEMENT
Our investment process seeks to take account of the significant variables that
influence a company's prospects. Whether these variables be financial,
strategic, reputational or have any other feature, our process tracks the most
material ones.
When we consider making an investment for Edinburgh's portfolio, we take a
holistic bottom-up approach to assessing the company in question, and combine
this with a macroeconomic overlay. From a bottom-up perspective we will
examine company specific opportunities (such as new products, margin
enhancement activities, M&A opportunities), and company specific risks
such as the risk of technological obsolescence, the need to restructure an
underperforming division, or poor employee engagement leading to high levels
of churn and resultant loss of customers. This bottom-up rigorous assessment
is then combined with a macroeconomic overlay to inform position sizing, and
the structure of the portfolio. This overlay includes an assessment of the
economic and market cycles, and also longer-term risks and opportunities that
could impact companies. We focus on materiality - what matters for the
companies in the portfolio. These material risks and opportunities are both
bottom-up and top-down and may include more ESG oriented risks and
opportunities. Top-down risks and opportunities we consider for the portfolio
include:
· The evolution in the global geopolitical environment and
how this might impact companies with significant operations in China - these
are governance and capital allocation topics of consideration, alongside
growth and supply chain topics;
· The growing commitments to increased defence spending
globally - a social topic of consideration, alongside a new product
development and growth topic;
· The ability for companies to pass through cost inflation
- a pricing power topic, as well as mitigate cost inflation particularly in
labour intensive businesses (a social consideration).
We then combine our macro-economic overlay alongside our bottom-up holistic
assessment to pinpoint where we believe the best medium to long term risk
adjusted return opportunities are for the portfolio. These material
opportunities and risks may or may not include specific ESG factors for the
company in question. For example, on cost inflation, this may be a material
social issue for a company which is particularly labour intensive, and for
another company it may be a material pricing power opportunity, or margin
risk. The analysis differs for each company: it is nuanced and focuses on the
material specific exposures that company faces. To help us incorporate this
analysis, we assign a Resiliency score, using a descending 1-5 scale, based on
how well a holding is managing its key exposures. We also assign Conviction
scores, again on a 1-5 scale, which reflect the team's conviction in owning a
stock. Portfolio weightings are also determined to some extent by conviction
scores and changes in these over time.
The following three examples illustrate how we engage with companies and track
the material issues of each investment case.
QINETIQ
Investment Rationale
Qinetiq is strategically well placed as a defence contractor able to work
across platforms, systems, and lifecycles. Qinetiq forms strong partnerships
with defence buyers, is platform agnostic, and is therefore able to capture
growth from multiple areas, which leaves it well placed in a world of growing
multipolarity. Following the acquisition of Avantus, Qinetiq needed to
demonstrate adequate return on that investment. The key priorities, in our
view, are capital discipline and demonstrating future growth potential.
More broadly, the growing commitments to increased defence spending globally
are a key factor influencing the conviction score of the company. Further, a
key factor influencing the resiliency score is what we have learnt from our
engagement with the company about the evolution of the culture of the
organization. Whilst there is still work to do, the company has refreshed a
significant proportion of its top one hundred executives in the last five
years, evolved to have a greater focus on the customer, and is speeding up the
response time to customers by enhancing levels of empowerment in the
organization. These are both social factors which are material to Qinetiq and
realizing the future growth potential, alongside the need to demonstrate
capital allocation discipline.
Areas of engagement and feedback
We engaged with the management team of Qinetiq around capital allocation
priorities and the benefits of clear communication around capital requirements
for the long term growth plan as described in the company's communications
with shareholders. We also discussed the subsequent range of options for use
of excess capital over and above that requirement. Demonstration of a returns
focused mindset is important as Qinetiq is in the process of proving out the
returns from a recent sizeable US acquisition, Avantus, which has initially
not gone as well as expected at the time of the acquisition.
Escalated issues
This feedback was followed up and expanded upon through an engagement as part
of an externally facilitated Shareholder Perception study, with feedback being
passed to the Qinetiq Board of Directors.
Outcomes
Our conviction in the medium term outlook for Qinetiq has increased, and we
have improved confidence around capital allocation discipline following the
announcement of a share buyback.
Conviction and Resiliency scores - both 3.
MONDI
Investment rationale
Mondi is a competitively-advantaged, vertically-integrated producer of paper
and packaging. It has a structurally lower cost base than peers due to the
location of its mills. High barriers to entry exist in the industry as paper
mills are expensive to build/retrofit and leaves vertically integrated players
at a significant advantage. The company is well positioned to benefit from the
plastic to paper switch in packaging. Mondi has historically generated
attractive 'through the cycle' returns, provided consistent stewardship of its
asset base and overseen a strong balance sheet.
Areas of engagement and feedback
We most recently engaged with the management team of Mondi around the proposed
deal with DS Smith. We discussed whether a combination with DS Smith would
make sense for Mondi shareholders and gave feedback around the importance of
maintaining the high-quality nature of Mondi's asset base, strong track record
of capital allocation and clean financial model. Further, asset stewardship
and management's strong track record of capital allocation are an important
'governance' topic and this feeds into both the resiliency and conviction
scores.
Escalated issues
None
Outcomes
Conviction score and Resiliency score both remain at 3 following the
engagement, and the subsequent announcement from Mondi that the Board has
decided the transaction would not be in the best interests of its
shareholders.
WEIR
Investment rationale
Weir predominantly sells equipment to the mining and extraction industries and
to a lesser degree the construction industry. A significant proportion of its
profits come from the aftermarket sales, products that are consumed by their
customers and need replacing on a regular basis as they wear out. Weir's
market shares are strong and it is a global leader in many of its products.
The key drivers of Weir's growth are:
1. more rock processing at mines as ore grades are declining
globally;
2. mining equipment age and underinvestment; and
3. technological progress and need for mining companies to meet
sustainability targets will drive investment cycle.
Areas of engagement and feedback
We have engaged with the management team of Weir around the importance of
demonstrating continued strong free cash flow conversion, and free cash flow
growth. We discussed the link between a more typically used free cash flow
definition, and the definition used by Weir in both their published targets,
and remuneration targets; and the potential benefits in aligning these.
We have also engaged with Weir around the Environment and Social
considerations of extending the time for approval of new greenfield mining
sites globally and how this could impact Weir's future growth, the growth
opportunity in HGPR (high pressure grinding rolls) which result in energy
savings for their customers, and recent M&A which has enabled Weir to
build out a platform to collect data from machines to enable condition
monitoring and predictive maintenance - a key efficiency, and safety topic.
Escalated issues
Upon meeting the new Chief Financial Officer of Weir, we reiterated the
importance around continuing to demonstrate strong free cash flow conversion,
a continued reduction in exceptional and adjusting items, and discussed
shareholder perceptions around the use of off-balance sheet financing.
Outcomes
Our Resiliency score for Weir remains at a 3, and our conviction score remains
at a 2.
Thus, for each piece of investment research, whatever the issue an investment
faces, we take a holistic approach to ensure that we consider the most likely
and potentially meaningful exposures for a holding. It is not uncommon for
some companies' risks and opportunities to have a longer time horizon than for
our investment focus - for example, where physical or transitional risks arise
from global warming. We therefore also consider a company's emerging exposures
to macroeconomic and other evolving factors. This helps us develop a view of
how competitive a group will be in three years and beyond.
Finally, we are sometimes asked about the carbon profile of the portfolio. As
a general point, we think that the profile should naturally be below average,
as our investment process often leads us to companies that operate on a
comparatively light asset base. The recent purchases of Verisk, Autotrader and
Diploma are examples. We tend not to own more capital heavy businesses,
although there are some in the portfolio that fall into this category such as
Shell and Anglo American.
The data that we use to measure the portfolio's carbon profile supports its
below average nature, although the data in this field is changeable,
especially for an index like the UK with large companies in the extractive
industries which are themselves changing their business structures. The key
metric that we use to monitor the portfolio's carbon profile is its weighted
average carbon intensity ("WACI") and how it compares with the benchmark's
WACI.
The portfolio's WACI is derived from data published by each holding for the
amount of carbon emitted for every one million dollars of sales, and compiled
by MSCI. Thus for a portfolio composed of high emitting companies (e.g. oil
stocks or airlines) we would expect an above index reading, and for a
portfolio with companies with lower emissions (perhaps companies with lighter
capital intensity, such as media or digital businesses) the reading should be
lower. For Edinburgh's portfolio at end March, the WACI was 66.8 tonnes of
carbon dioxide equivalent ("tco2e") per million dollars of sales, versus the
index figure of 84.6 tco2e/$m. The portfolio has had a below index level of
carbon intensity throughout the year. Note that these data are based on what
is disclosed by each holding. Some 95% + of the portfolio and index have
published their carbon data, but the sample is incomplete because some
companies do not publish a full set of data.
During the year your Company's assets were added to Liontrust's commitment to
the Net Zero Asset Managers Initiative. A signatory commits to manage client
assets to support the goal of net zero greenhouse gas emissions by 2050 or
sooner, in line with global efforts to limit warming to 1.5 degree Celsius.
The WACI figure is important in this context as a signatory also commits to
achieving interim targets. These are (1) by 2025 a 25% reduction in portfolio
Weighted Average Carbon Intensity (WACI) versus the WACI of the relevant
benchmark at the end of 2019, and (2) by 2030 a 50% reduction of WACI compared
with the 2019 benchmark. The current portfolio comfortably meets the 2025
objective (the 2019 benchmark figure was 125.0) and is very close to complying
with the 2030 target. We will keep shareholders appraised of progress against
these targets and about the carbon profile of the portfolio more generally.
OUTLOOK
As always, the focus for us remains on the bottom-up and maintaining the
flexible investment style that served James de Uphaugh well over the preceding
four years. Our pragmatic approach leads, we believe, to the construction of a
portfolio of advantaged businesses across the range of growth, value, and
recovery opportunities. The end result is a high conviction portfolio that
should perform whatever the economic weather.
From a macroeconomic perspective we are mindful of changing expectations for
the path of interest rate normalisation, as inflation remains more entrenched
than expected. This period of heightened monetary policy uncertainty coincides
with a period of elevated geopolitical risks - making a flexible pragmatic
approach to managing your portfolio important, in our view. Looking forward we
expect risks to remain high, with 2024 seeing a significant number of
elections globally - in countries accounting for over 50% of global GDP and
over 50% of the global population - mostly notably the US, India, and the UK.
China continues to face growth headwinds as the economy seeks to transition
from an investment led to a more balanced model with consumption led growth.
With consumer confidence in China intimately tied to the property market, this
transition is unlikely to be smooth.
With the elevated uncertainty across a range of factors, our focus remains on
owning businesses where growth is helped by exposure to structural growth
tailwinds, or where there is a change in industry structure or company
strategy which will enable future profit growth. Our confidence in Edinburgh's
portfolio comes from owning strong businesses, managed by intelligent
management teams executing on their business plans to drive total shareholder
returns.
IMRAN SATTAR / PORTFOLIO MANAGER
EMILY BARNARD / DEPUTY PORTFOLIO MANAGER
24 MAY 2024
Portfolio Manager's Core Investment Beliefs
Our competitive edge rests on the combination of our Global Fundamental team's
structure within Liontrust and our flexible investment style. Liontrust
provides a stable environment in which our Portfolio Manager operates, and our
investment approach produces portfolios designed to deliver long-term
outperformance on a repeatable basis.
ACTIVE MANAGEMENT
Stock-driven. Share prices follow fundamentals over the long term. Through our
proven investment approach, we expect to outperform over the long term, net of
fees.
High conviction portfolio. We expect the portfolio to contain around 40 to 50
stocks. Holdings sizes reflect the conviction we have in each company and our
assessment of the upside and downside potential of its share price.
Risk. We think of risk as permanent capital loss. To mitigate this, our
analysis of a company's valuation is the first line of defence. Our risk
management process combines our depth of knowledge of the stocks in the
portfolio, plus separate oversight by Liontrust's Portfolio Risk Committee.
FLEXIBLE INVESTMENT STYLE
Open-minded approach. We do not have dogmatic style biases, such as 'growth'
or 'value'. We are also prepared to invest in companies that we identify as
having scope for recovery through management change, business transformation
or an improving business environment. We expect the profile of the portfolio
to evolve depending on our assessment of individual companies and our reading
of the economic and market background.
Disciplined, rigorous, fundamental research. In keeping with the stock-driven
nature of the portfolio, the vast majority of our effort takes the form of
in-depth stock research. The remainder is spent on macroeconomicl analysis.
Materiality assessment is a core part of the investment process. As part of
the investment process, we identify and prioritise the key risks and
opportunities that each holding (or potential holding) faces over our
investment time horizon. These risks and opportunities cover all categories,
including ESG related areas. Some of these have financial implications for the
portfolio's holdings and, as such, we engage each holding on its key issues or
exposures. The outcomes from our in-depth analysis and engagement help form
our conviction level and investment decisions.
TOTAL RETURN STRATEGY
A focus on both capital growth and income. We take a total return approach:
investor returns should derive over the long term from both capital
appreciation and dividend income. We generally prefer companies with organic
investment opportunities, but will sometimes hold companies with acquisitive
profiles. Either way, companies with growth tailwinds are preferred. We view
income as an important component rather than the primary driver of investment
return. This aligns with the Company's twin objectives.
LONG TERM
Typical holding period of 3-5 years. This is an appropriate period to ensure
that underlying corporate fundamentals drive investment returns. It is
therefore also a sensible period over which to measure an active manager.
Gearing should enhance shareholder returns. One of the advantages of an
investment trust is the ability to borrow to enhance equity returns. We
therefore expect gearing to boost investment returns over time.
CAPACITY MANAGEMENT
Scale diseconomies. In our view, investment performance can rapidly suffer if
assets under management become too large. We carefully manage capacity to
ensure that the interests of existing clients take precedence over new
clients. The approach ensures we retain a size advantage. It enables us to
reposition the portfolio - and those of all our other clients - quickly and
efficiently when required.
DEEP INVESTMENT RESOURCE WITH GLOBAL PERSPECTIVE
A close-knit investment team. Average experience of the investment team is 16
years. The team has been stress-tested across various market cycles.
Challenge and debate. This is encouraged within a structured risk control
environment, with robust oversight processes. Team members own Liontrust
equity and co-invest in the team's investment strategies, which in turn
underpins teamwork and collaboration.
Business Review
STRATEGY AND BUSINESS MODEL
The Edinburgh Investment Trust plc is an investment company and its investment
objective is set out below. The strategy the Board follows to achieve that
objective is to set investment policy and risk guidelines, together with
investment limits, and to monitor how they are applied. These are also set out
below and have been approved by shareholders.
The business model the Company has adopted to achieve its investment objective
has been to contract the services of the Manager to manage and administer the
portfolio in accordance with the Board's strategy and under its oversight. The
Portfolio Manager with individual responsibility for the day-to-day management
of the portfolio is Imran Sattar and the Deputy Portfolio Manager is Emily
Barnard. Imran Sattar and Emily Barnard took on these new roles on 6 February
2024, following the retirement of James de Uphaugh, after 36 years in the
industry.
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 NSM Funds (UK) Limited to act as Company
Secretary.
INVESTMENT OBJECTIVE AND POLICY
Investment Objective
The Company invests primarily in UK securities with the long-term objective of
achieving:
1. an increase of the Net Asset Value per share in excess of the growth in
the FTSE All-Share Index; and
2. growth in dividends per share in excess of the rate of UK inflation.
Investment Policy
The Company will generally invest in companies quoted on a recognised stock
exchange in the UK. The Company may also invest up to 20% of the market value
of the Company's investment portfolio, measured at the time of any
acquisition, in securities listed on stock exchanges outside the UK. The
portfolio is selected by the Portfolio Manager on the basis of its assessment
of the fundamental value available in individual securities. Whilst the
Company's overall exposure to individual securities is monitored carefully by
the Board, the portfolio is not primarily structured on the basis of industry
weightings. No acquisition may be made which would result in a holding being
greater than 10% of the market value of the Company's investment portfolio,
nor will the Company invest more than 15% of the market value of its
investment portfolio in any other UK-listed investment trusts or investment
companies. Further, the Company may not hold more than 5% of the issued share
capital (or voting shares) of 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.
Amendment to the Company's investment policy (November 2023)
The Company, after discussion with the Manager, determined that it would be
beneficial to amend the existing Investment Policy. The change provided that
it was clear that the Company would not hold more than 15% of its assets in
other investment trusts. Shareholder approval was not required for this
amendment as these were immaterial changes. HMRC were notified of the change.
RESULTS AND DIVIDENDS
At the year end the share price was 690.00p per ordinary share (2023:
660.00p). The net asset value (debt at fair value) per ordinary share was
779.97p (2023: 713.75p).
The Directors declared a third interim dividend for the year ended 31 March
2024 of 6.90 pence per ordinary share (2023: 6.70 pence), an increase of 3.0%
compared with each of the first two interim dividends. This dividend is
payable on 24 May 2024 to ordinary shareholders on the register on 3 May 2024.
The shares were quoted ex-divided on 2 May 2024.
The Board is recommending a final dividend of 6.90 pence per share which is
the same as the third interim dividend declared last month, implying a full
year payout of 27.20 pence per share. This represents an increase of 3.8%
compared with the total underlying ordinary dividends paid for the financial
year to 31 March 2023. Subject to approval at the Company's AGM, the dividend
will have an ex-dividend date of 6 June 2024 and will be paid on 26 July 2024,
to shareholders on the register at 7 June 2024.
PERFORMANCE
The Board reviews the Company's performance by reference to a number of key
performance indicators (KPIs). Notwithstanding that some KPIs are beyond its
control, they are measures of the Company's absolute and relative performance.
The KPIs assist in managing performance and compliance and are reviewed by the
Board at each meeting.
The Chair's Statement gives a commentary on the performance of the Company
during the year, the gearing and the dividend.
The Board reviews an analysis of expenditure at each Board meeting, and the
Audit and Management Engagement Committees formally review the fees payable to
the main service providers, including the Manager, on an annual basis.
The ongoing charges figure is calculated in accordance with the AIC
methodology and is reviewed by the Board annually in comparison to peers.
The Board also regularly reviews the performance of the Company in relation to
the 23 investment trusts in the UK Equity Income sector (including the
Company). As at 31 March 2024 the Company was ranked 3rd by NAV performance in
this sector over one year, 1st over three years and 4th over five years
(source: JP Morgan Cazenove).
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 in the report.
FINANCIAL POSITION AND BORROWINGS
The Company's balance sheet shows the assets and liabilities at the year end.
Borrowings at the year end comprised of £120 million of Unsecured Senior Loan
Notes (2023: £120 million).
PERFORMANCE ATTRIBUTION
The following table illustrates the differing contributions to NAV excess
returns, split between underlying stock selection and other factors such as
gearing, costs and share buybacks.
for the for the
year ended year ended
31 March 2024 31 March 2023
% %
Total Return Basis((1))
NAV (debt at fair value) 13.4 7.9
Benchmark 8.4 2.9
Relative performance 5.0 5.0
Analysis of Relative
Performance
Portfolio total return 11.8 4.5
Benchmark total return((1)) 8.4 2.9
Portfolio outperformance A 3.4 1.6
Borrowings:
Net gearing effect 1.2 0.4
Interest -0.3 -0.5
Market value movement 0.4 3.8
Management fee -0.4 -0.4
Other expenses -0.1 -0.1
Tax 0.0 -0.1
Share buybacks 0.8 0.3
Subtotal B 1.6 5.0
Relative performance A+B 5.0 6.6
((1) ) LSEG Data & Analytics.
Performance Attribution - analyses the performance of the Company relative to
its benchmark index. The Analysis of Relative Performance estimate the quantum
of relative performance that is attributable to each of the factors set out in
this table. The table is intended to be indicative rather than precise; the
accuracy of each estimate is determined by a variety of factors such as the
volatility of investment returns over the year and intra-month, and the timing
of income receipts and expenditure payments.
Relative performance - represents the arithmetic difference between the NAV
and benchmark returns.
Portfolio total return - represents the return of the holdings in the
portfolio including transaction costs, cash and income received, but excluding
expenses incurred by the Company.
Net gearing effect - measures the impact of the unsecured senior loan notes
and cash on the Company's relative performance. This will be positive if the
portfolio has positive capital performance and negative if capital performance
is negative.
Interest - the unsecured senior loan notes and bank facility interest paid has
a negative impact on performance.
Market value movement - represents the change in market value of the Company's
borrowings, measured to the end of the financial year or maturity from the
start of the financial year or issuance, each as appropriate.
Management fee - the 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 2024
UK LISTED ORDINARY SHARES UNLESS OTHERWISE STATED
At Market Value % of
Company Sector £'000 Portfolio
Shell Oil, Gas and Coal 101,519 8.4
Unilever Personal Care, Drug and Grocery Stores 54,563 4.5
Tesco Personal Care, Drug and Grocery Stores 49,582 4.1
Centrica Gas, Water and Multi-Utilities 46,425 3.8
Haleon Pharmaceuticals and Biotechnology 46,101 3.8
BAE Systems Aerospace and Defence 45,883 3.8
GSK Pharmaceuticals and Biotechnology 45,753 3.8
Dunelm Retailers 45,684 3.8
NatWest Banks 43,360 3.6
AstraZeneca Pharmaceuticals and Biotechnology 43,061 3.6
TOP TEN HOLDINGS 521,931 43.2
Marks & Spencer Retailers 42,287 3.5
Compass Consumer Services 34,096 2.8
Ashtead Industrial Transportation 33,330 2.8
HSBC Banks 33,154 2.7
Admiral Non-Life Insurance 31,449 2.6
Verisk - US Listed Industrial Support Services 27,147 2.2
ConvaTec Medical Equipment and Services 26,441 2.2
Whitbread Travel and Leisure 24,947 2.1
Lloyds Bank Banks 23,737 2.0
Greggs Personal Care, Drug and Grocery Stores 23,665 2.0
TOP TWENTY HOLDINGS 822,184 68.1
Anglo American Industrial Metals and Mining 23,575 2.0
BP Oil, Gas and Coal 22,385 1.9
Serco Industrial Support Services 21,235 1.8
Hays Industrial Support Services 19,900 1.6
Mondi General Industrials 17,697 1.5
Diploma Industrial Support Services 17,363 1.4
Rotork Electronic and Electrical Equipment 17,321 1.4
Rentokil Industrial Support Services 17,043 1.4
Weir Industrial Engineering 16,779 1.4
Howden Joinery Retailers 15,876 1.3
TOP THIRTY HOLDINGS 1,011,358 83.8
Auto Trader Software and Computer Services 14,409 1.2
Sainsbury's Personal Care, Drug and Grocery Stores 13,800 1.1
Spirax-Sarco Engineering Industrial Engineering 13,773 1.1
Novartis - Swiss Listed Pharmaceuticals and Biotechnology 13,685 1.1
easyJet Travel and Leisure 13,472 1.1
Standard Chartered Banks 13,442 1.1
RS Industrial Support Services 11,833 1.0
3i Investment Banking and Brokerage Services 11,589 1.0
London Stock Exchange Group Finance and Credit Services 10,995 0.9
Baltic Classifieds Software and Computer Services 10,373 0.9
TOP FORTY HOLDINGS 1,138,729 94.3
QinetiQ Aerospace and Defence 8,298 0.7
AJ Bell Investment Banking and Brokerage Services 7,754 0.6
Roche - Swiss Listed Pharmaceuticals and Biotechnology 7,688 0.6
Newmont - US Listed Precious Metals and Mining 7,041 0.6
KPN - Dutch Listed Telecommunications Service Providers 6,806 0.6
LondonMetric Property Real Estate Investment Trusts 6,664 0.6
Intel - US Listed Technology Hardware and Equipment 6,478 0.5
Morgan Sindall Construction and Materials 6,178 0.5
SSE Electricity 5,479 0.5
Thales - French Listed Aerospace and Defence 5,448 0.5
TOP FIFTY HOLDINGS 1,206,563 100.0
Eurovestech (UQ) Investment Banking and Brokerage Services - -
Raven Property (S) - Preference shares Real Estate Investment and Services - -
TOTAL HOLDINGS 52 (31 MARCH 2023: 48) 1,206,563 100.0
UQ - Unquoted investment
S - Delisted
Principal Risks and Uncertainties
RISK MANAGEMENT AND MITIGATION
The Manager (AIFM) is responsible for the portfolio management of the Company
and for exercising the risk management function in respect of the Company. As
part of this risk management function, the AIFM maintains a register of
identified risks including emerging risks likely to impact the Company. This
is updated regularly, following discussions with the Manager and highlighted
to the Board.
The Board, through the Audit Committee and with the assistance of the Manager,
regularly reviews a report of potential risks to the Company in the form of a
risk control summary. The document includes a description of each identified
risk, the mitigating action taken, reporting and disclosure to the Board and
an impact and probability risk rating. The rating is given both prior to and
after the Board's mitigation of each risk. The information is then displayed
in matrix form which allows the Board to identify the Company's key risks. As
the changing risk environment in which the Company operates has evolved, the
total number of risks has fluctuated, with certain risks having been removed
and new risks added with emerging risks actively discussed as part of this
process and, so far as practicable, mitigated.
The composition of the Board is regularly reviewed to ensure its members offer
sufficient knowledge and experience to assess, anticipate and mitigate these
risks, as far as possible.
The Company's key long-term investment objectives are an increase in the net
asset value per share in excess of the growth in the FTSE All-Share Index (the
'benchmark') and an increase in dividends in excess of the annual rate of UK
inflation. The principal risks and uncertainties facing the Company are an
integral consideration when assessing the operations in place to meet these
objectives, including the performance of the portfolio, share price and
dividends. The Board is ultimately responsible for the risk control systems
but the day-to-day operation and monitoring are delegated to the Manager. The
Board has carried out a robust assessment of the principal and emerging risks
facing the Company, including those that would threaten its business model,
future performance, solvency or liquidity. The following sets out a
description of the principal and emerging risks and how they are being managed
or mitigated.
MARKET RISK
All the Company's investments are traded on recognised stock exchanges, bar a
very small number that have delisted/been suspended since purchase. The
principal risk for investors in the Company is a significant fall and/or a
prolonged period of decline in those markets. The Company's investments and
the income derived from them are influenced by many factors such as general
economic conditions, interest rates, inflation, a recurrence of a pandemic,
geopolitical events, the war in Ukraine and government policies as well as by
supply and demand reflecting investor sentiment. Such factors are outside the
control of the Board and Manager and may give rise to high levels of
volatility in the prices of investments held by the Company. The asset value
and price of the Company's shares and its earnings and dividends may
consequently also experience volatility and may decline.
Fluctuations in interest rates and exchange rates could reduce returns and
lead to depreciation of the Company's net asset value.
Market risk is included in the risk control summary report that is prepared by
the Manager and reviewed by the Board at each meeting. Additionally, the Board
receives reports on the performance of the portfolio at each meeting. The
portfolio is positioned by the Portfolio Manager for medium to long-term
returns.
INVESTMENT PERFORMANCE RISK
The Board sets investment policy and risk guidelines, together with investment
limits, and monitors adherence to these at each Board meeting. All individual
investment decisions are delegated to the Portfolio Manager. The Portfolio
Manager's approach is to construct a portfolio which should benefit from
expected future trends in the UK and global economies. The Portfolio Manager
is a long-term investor, prepared to take substantial positions in securities
across a range of different types of stock. This reflects the Portfolio
Manager's high conviction, stock-driven investment process and total return
approach. Strategy, asset allocation and stock selection decisions by the
Portfolio Manager can lead to underperformance of the portfolio relative to
the benchmark and/or income targets.
The Portfolio Manager's style may result in a concentrated portfolio with
significant overweight or underweight positions in individual stocks or
sectors compared to the index and, consequently, the Company's performance may
deviate significantly, possibly for extended periods, from that of the
benchmark. In a similar way, the Portfolio Manager manages other portfolios
holding many of the same stocks as the Company which reflects the Portfolio
Manager's high conviction style of investment management. This could increase
the liquidity and price risk of certain stocks under certain scenarios and
market conditions. However, the Board and the Portfolio Manager believe that
the investment process and policy outlined above should, over the long term,
meet the Company's objectives of Net Asset Value per share growth in excess of
the benchmark and real growth in the dividend per share. Investment selection
is delegated to the Portfolio Manager. The Board does not specify asset
allocations. Information on the Company's performance against the benchmark
and peer group is provided to the Board at each Board meeting. The Board uses
this to review the performance of the Company, taking into account how
performance relates to the Company's objectives. The Portfolio Manager is
responsible for monitoring the portfolio selected and seeks to ensure that
individual stocks meet an acceptable risk-reward profile.
As described in the investment policy, derivatives may be used provided that
the market exposure arising is less than 25% of the value of the portfolio.
Investment performance risk is included in the risk control summary report
that is prepared by the Manager and reviewed by the Board at each meeting. The
Board also receives reports on the performance of the portfolio and on
compliance with the Company's investment policy guidelines from the Manager at
each meeting. As part of an annual assessment, the Board reviews the
performance of the Manager and the management contract at the Management
Engagement Committee meeting.
The Board also reviews the annual depository report and report from the
compliance department of the Manager and any breaches of the investment
policy, limits or guidelines are reported immediately to the Board and Audit
Committee Chairs.
Investment risk is increased through the Company's borrowing, namely the
£120m Unsecured Senior Loan Notes. This facilitates additional investment
exposure than would be the case for an unleveraged portfolio; if the
investments fall in value, this will increase the adverse impact on
performance. On a routine basis the Board monitors the appropriateness of
gross and net gearing levels, and the amount of headroom above minimum NAV
levels as agreed with the lenders.
INCOME/DIVIDEND RISK
The Company is subject to the risk that income generation from its investments
fails to reach the level of income required to meet its objectives.
The Board monitors this risk through the review of detailed income and
dividend forecasts and comparison against budget. These are contained within
the Board papers and the Board considers the level of income at each meeting.
Revenue estimates are presented at each Board meeting and Board committee
meeting which determine the three interim dividends and propose the final
dividend.
The Board also takes into account the size of the Company's accumulated income
and capital reserves which can be used to supplement dividends for a period
where income levels alone do not cover the proposed dividend payments.
DISCOUNT CONTROL RISK
There is a risk that the Company's prospects and NAV may not be fully
reflected in the share price from time-to-time and that the Company's
objectives are no longer meeting investors' expectations.
The share price is monitored on a daily basis and, at the request of the
Board, the Company is empowered to repurchase shares within agreed parameters
which are regularly reviewed with the Company's broker. The discount at which
the shares trade to NAV can be influenced by share repurchases. During the
year, the Company repurchased 13,985,000 shares for holding in treasury (2023:
5,601,604).
Risk management activity includes systematic reviews of the investment
objective and investment strategy and regular dialogue with major shareholders
and marketing activities.
Share price and discount control risk is included in the risk control summary
report that is prepared by the Manager and reviewed by the Board at each
meeting. In addition, the Board monitors the Company's investment performance
against its stated objectives and peer group and reviews the marketing report
at every Board meeting.
CORPORATE GOVERNANCE AND INTERNAL CONTROLS RISK
The Board has delegated to third-party service providers the management of the
investment portfolio, depositary and custody services (which include the
safeguarding of the assets), registration services, accounting and company
secretarial services.
The principal risks arising from the above mentioned contracts relate to the
performance of the Manager, the performance of administrative, registration,
depositary, custodial and banking services, and the failure of information
technology systems used by third-party service providers. These risk areas
could lead to the loss or impairment of the Company's assets, inadequate
returns to shareholders and loss of investment trust status. Consequently, in
respect of these activities the Company is dependent on the Manager's control
systems and those of its administrator, depositary, custodian and registrar.
An annual review of the control environments of all service providers is
carried out by the Company Secretary who provides an assessment of these risks
and the operation of the controls for consideration by the Audit Committee and
is formally reported to and considered by the Board.
Investment trust status is assessed by the Manager, reviewed at every Board
meeting and confirmed by the Audit Committee and HMRC annually. Taxation
matters are dealt with by independent accountants.
RELIANCE ON THE MANAGER AND OTHER THIRD-PARTY PROVIDERS RISK
The Company is reliant upon the performance of third-party service providers
for its executive function and other service provisions. The Company's most
significant contract is with Liontrust Fund Partners LLP who have been
appointed as the Company's AIFM. The Company has other contractual
arrangements with third parties to act as administrator, company secretary,
registrar, depositary and broker. The Company's operational structure means
that all cyber risk (information and physical security) arises at its
third-party service providers, including fraud, sabotage or crime against the
Company. Failure by any service provider to carry out its obligations to the
Company in accordance with the terms of its appointment could have a
materially detrimental impact on the operation of the Company and could affect
the ability of the Company to pursue successfully its investment policy and
expose the Company to risk of loss or to reputational risk.
In particular, the Manager performs services which are integral to the
operation of the Company. The Manager may be exposed to the risk that
litigation, misconduct, operational failures, negative publicity and press
speculation, whether or not it is valid, will harm its reputation. Any damage
to the reputation of the Manager could result in counterparties and third
parties being unwilling to deal with the Manager and by extension the Company.
This could have an adverse impact on the ability of the Company to pursue its
investment policy.
The Board seeks to manage these risks in a number of ways:
- The Company Secretary reviews the performance and the service
organisation control reports of third-party service providers and reports to
the Board on an annual basis at the Audit Committee meeting.
- The Board reviews the performance of the Manager at every Board meeting
and otherwise as appropriate. The Board has the power to replace the Manager
and reviews the management contract formally once a year.
- The day-to-day management of the portfolio is the responsibility of the
named Portfolio Manager, Imran Sattar, who was appointed in February 2024, in
line with the Manager's succession plan. Imran has been a member of the
Liontrust Global Fundamental Team since 2018, managing UK equity client
portfolios jointly alongside the Company's previous Portfolio Manager and
Deputy Portfolio Manager, James Uphaugh and Chris Field. Since Chris and James
retired Imran is responsible for managing The Edinburgh Investment Trust plc
and also continues to be lead manager for two other UK equity strategies.
- The risk that the Portfolio Manager might be incapacitated or otherwise
unavailable is mitigated by the fact that he works within, and is supported
by, the wider Liontrust team. Moreover, Emily Barnard, as Deputy Portfolio
Manager works closely with Imran on a daily basis and would be able to manage
the portfolio if Imran Sattar was unable to do so for any reason.
- The Board has set guidelines within which the Portfolio Manager is
permitted wide discretion. Any proposed variation outside these guidelines is
referred to the Board and compliance with the guidelines and the guidelines
themselves are reviewed at every Board meeting.
PHYSICAL AND TRANSITIONAL CLIMATE CHANGE
Globally, climate change effects are already emerging in the form of changing
weather patterns. Extreme weather events could potentially impair the
operations of individual investee companies, potential investee companies,
their supply chains and their customers. Legislative changes are driving an
economic adjustment towards a low-carbon economy. There are considerable risks
to the value, business model and operations of investee and potential investee
companies due to stranded assets and how investors, financial regulators and
policymakers respond to climate concerns. The Portfolio Manager takes such
risks into account, along with the downside risk to any company - whether in
the form of its business prospects, market valuation or sustainability of
dividends - that is perceived to be making a detrimental contribution to
climate change. Further details on the Portfolio Manager's process for
considering climate risk relating to each portfolio holding are supplied in
the s.172 statement. The Company invests in a broad portfolio of businesses
with operations spread geographically, which should limit the impact of
location-specific weather events.
Climate change related risks are regularly monitored by the Manager and
reviewed by the Board as required, together with any new guidance.
OTHER RISKS
The Company is subject to laws and regulations by virtue of its status as an
investment trust and is required to comply with certain regulatory
requirements that are applicable to listed closed-ended investment companies.
The Company is subject to the continuing obligations imposed by the UK Listing
Authority on all companies whose shares are listed on the Official List.
The Manager reviews compliance with investment trust tax conditions and other
financial and regulatory requirements on a daily basis with any issues being
immediately brought to the attention of the Board.
The Company may be exposed to other business, strategic and political risks in
the future, as well as regulatory risks (such as an adverse change in the tax
treatment of investment companies), credit, liquidity and concentration risks.
The risk control summary report allows the Board to consider all these risks,
the measures in place to control them and the possibility of any other risks
that could arise.
The Board ensures that satisfactory assurances are received from the service
providers. The Manager's compliance officers produce regular reports for
review by the Company's Audit Committee.
Additionally, the depositary monitors stock, cash, borrowings and investment
restrictions throughout the year. The depositary reports formally once a year
and also has access to the Company Chair and the Audit Committee Chair if
needed during the year.
Please see Note 16 to read more about risk management and financial
instruments.
EMERGING RISKS
The Board has put in place robust procedures to assist with identifying
emerging risks that arise from existing risks or from new situations. Failure
to identify emerging risks may cause reactive rather proactive actions. The
experience and knowledge of the Board is invaluable in consideration of
emerging risks, as are updates and advice received from the Board's key
service providers such as the Company's Manager, Broker, Company Secretary and
Auditor. The Association of Investment Companies ("AIC") also provides regular
updates and draws members' attention to forthcoming industry and/ or
regulatory issues.
There are currently a growing number of risks as a result of emerging
geopolitical factors that may translate into greater stock market risk, as
well as heightened macro-economic changes in inflation, interest rates and
energy costs, the ever-evolving global regulatory and trade environments and a
risk of re-emergence of a global pandemic. Geopolitical factors include the
continuing war in Ukraine, the conflict in Israel and Gaza, political
elections this year in many countries and global supply chain issues. Whilst
these risks currently exist, their extent and long-term impact are yet to
emerge but they are regularly assessed by the Manager and the Board.
Viability Statement
The Directors' view of the Company's viability has not changed since last
year. The Company, as an investment trust, is a collective investment vehicle
rather than a commercial business venture and is designed and managed for
long‑term investment. The Company's investment objective clearly sets this
out. 'Long-term' for this purpose is considered by the Directors to be at
least five years, a timeframe in which the accuracy of estimates and
assumptions is deemed to be reasonable. The Company's viability has thus been
assessed over that period. Five years is considered a reasonable time frame
for a forecast, however, the life of the Company is not intended to be limited
to that or any other period.
There are no current plans to amend the investment strategy, which has
delivered long-term good investment performance above or in line with
benchmark for shareholders and, the Directors believe, should continue to do
so. The investment strategy and its associated risks are kept under constant
review by the board.
In assessing the viability of the Company under various scenarios, the
Directors undertook a robust assessment of the risks to which it is exposed
(including the conflict in Israel and Gaza, the continuation of the war in
Ukraine and climate change), 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; 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, the Directors have
undertaken a reverse stress test seeking to identify the financial
circumstances that might result in the Company becoming unviable. This
concluded that the viability of the Company becomes challenged if the value of
Total Shareholders' Funds were to fall permanently by approximately 80% from
the level at the year end, a fall that the Board considers to be near
implausible having noted that since the inception of the Company's FTSE
All-Share Index Total Return benchmark in December 1985, the largest fall over
any calendar year has been 29.9%, the largest fall over any rolling five year
period was 28.8% and the largest fall over any period was 42.9% (all based on
benchmark calendar month end values).
Based on the above, and assuming there is no adverse change to the regulatory
environment and tax treatment of UK investment trusts to the extent that would
challenge the viability of the UK investment trust industry as a whole, the
Directors have a reasonable expectation that the Company will be able to
continue in operation and meet its liabilities as they fall due over the five
year period of assessment.
Section 172 Statement, Company Sustainability and Stakeholders
BOARD RESPONSIBILITIES
The responsibilities of the Board include setting the Company's strategic
aims, providing the leadership to put them into effect, supervising the
Manager and reporting to shareholders on their stewardship. The Board is
ultimately responsible for the direction, management, performance and
long-term sustainable success of the Company.
The Board sets the Company's strategy and objectives, taking into account the
interests of all its stakeholders. However, the Company has no employees and
no customers in the traditional sense. Consistent with the Company's nature as
an investment trust, the Board's principal concern has been, and continues to
be, the interests of the Company's shareholders taken as a whole.
COMPANY SUSTAINABILITY AND STAKEHOLDERS
A good understanding of the Company's stakeholders enables the Board to
consider the potential impact of strategic decisions on each stakeholder group
during the decision-making process. By considering the Company's purpose,
vision and values, together with its strategic priorities, the Board aims for
its decisions to be fair and take account of the interests of the key
stakeholder groups. As an externally managed investment company, the Company
does not have any employees. The Board considers its main stakeholders to be
its shareholders, service providers and investee companies.
SECTION 172 STATEMENT
Section 172 of the Companies Act 2006 requires the Board to act in the way
that it consider would most likely promote the success of the Company for the
benefit of all stakeholders, taking into consideration the interests of
stakeholders in their decision-making and to share how they have discharged
this duty. During the year under review, the Board believes that it has acted
in good faith and discharged its duties under Section 172 of the Companies Act
2006. The fulfilment of this duty not only helps the Company achieve its
investment objective but ensures decisions are made in a responsible and
sustainable way for shareholders.
The following sections include examples of how the Company's stakeholders were
considered during the key Board decisions. Key Board decisions include payment
of dividends, liquidity management via share issuance and share buy-backs,
marketing, performance evaluation, negotiation on debt and re-appointment of
the Manager and other key service providers, ESG integration into investment
decisions and Board succession planning. Please see the table below for a
reference to where this information can be found:
Section 172 statement area Reference
The likely consequences of any decision in the long-term See Chair's Statement, The Portfolio Manager's Report, Core Investment Beliefs
and Business Review, Going Concern and Viability Statements and Stakeholder
Engagement section below.
The interests of the Company's employees As a closed-ended investment company, the Company has no employees.
Stewardship section refers to how the Company assesses its impact on social
issues.
The need to foster the Company's business relationships with suppliers, As a closed-ended investment company, the Company has no customers in the
customers and others traditional sense. See Stakeholder Engagement section below Principal Risks
and Uncertainties and Stewardship section on how the Company assesses its
impact on and engages with its key stakeholders.
The impact of the Company's operations on the community and environment See Principal Risks and Uncertainties, Stewardship section and ESG matters
disclosure below on how the Company assesses its impact on the community and
environment of its investee companies.
The desirability of the Company maintaining a reputation for high standards of See Stakeholder Engagement section, Anti-Bribery and Corruption and Modern
business conduct Slavery disclosures.
The need to act fairly as between members of the Company See Stakeholder Engagement section and Corporate Governance Report.
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. In October 2023 James de
Uphaugh, Imran Sattar and Emily Barnard also spoke at the Company's annual
retail investor presentation event.
Shareholders can also visit the Company's website
www.edinburgh-investment-trust.co.uk in order to access copies of the annual
and half-yearly financial reports, pre-investment information, Key Information
Documents (KIDs), proxy voting results, factsheets and stock exchange
announcements. The Company's website also hosts videos and other applicable
written materials by the Manager to enhance the information available.
Shareholders can send their questions using a dedicated section of the
Company's website.
Typically, at each AGM, a presentation is made by the Portfolio Manager
following the formal business of the meeting and shareholders have the
opportunity to attend, vote and most importantly to communicate directly with
the Portfolio Manager and Board. Presentations to both institutional
shareholders and analysts also follow the publication of the annual results.
The Company held a physical AGM on 19 July 2023, with voting on a show of
hands. Shareholders also had the opportunity to join the meeting virtually via
a live weblink using their smartphone, tablet or computer, with the option to
submit questions to the meeting in real time. In addition to the AGM and
presentations, the Board and Portfolio Manager hosted a presentation to retail
investors in central London in October 2023. The Chair uses these events to
lead the Company's engagement with its retail shareholders. Please see the
report for the notice of 2024 Annual General Meeting and for details of the
2024 shareholder event.
Regular dialogue is maintained between the Portfolio Manager and a wide range
of 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 Portfolio Manager and shareholders are reported to the
Board and the directors receive regular updates on the shareholder register
and trading activity.
There is a clear channel of communication between the Board and the Company's
shareholders via the Company Secretary. The Company Secretary passes to the
Chair all correspondence addressed to the Board of the Company.
The strategy of the Company is reviewed regularly and formally by the Board on
an annual basis. At the strategy day on 27 September 2023 the Board discussed
ESG matters, discount management, share buybacks, marketing and Portfolio
Manager succession. Whilst feedback from shareholders is sought regularly,
shareholders' feedback provided by the Company's Broker and Manager is a major
consideration at this meeting.
ENGAGEMENT WITH THE MANAGER
The Board maintains a constructive and collaborative working relationship with
the Portfolio Manager, encouraging open discussion. The Board has regular
dialogue with and receives reports from the Portfolio Manager on the portfolio
of investments, including performance against set objectives and risk
management. The Portfolio Manager and Deputy Portfolio Manager normally attend
each Board meeting to provide updates and answer questions from the Board. The
Board has also discussed the AIFM's responsibility under the FCA Consumer Duty
with the Manager and received comfort as to how those responsibilities will be
met.
As outlined in the Chair's Report, from 1 April 2024 the Board has agreed a
new lower management fee scale, further supporting the role of the Company as
a natural home for long-term equity investors.
Following James de Uphaugh's retirement in February 2024 he was replaced as
Portfolio Manager by his colleague Imran Sattar and Deputy Portfolio Manager
Emily Barnard. As part of the succession plan, Imran had been appointed as the
Company's deputy Portfolio Manager in October 2023, replacing Chris Field who
retired from Liontrust in November 2023. The Board met frequently with the
Management team throughout the succession planning process to ensure a smooth
transition and are confident that Imran and his colleagues are well placed to
build on the strong foundations put in place since 2020.
ENGAGEMENT WITH SERVICE PROVIDERS
As an externally managed investment trust, the Company conducts all its
business through its key service providers. The Board believes that
maintaining a collaborative relationship with each of the Company's service
providers is essential to the Board's decision-making and the ongoing success
of the Company. At least annually the Board reviews the performance and
services of its key service providers including the Manager and receives and
considers their internal control reports on a quarterly basis covering their
operations, policies and control environments.
During the year the Board conducted a competitive tender process to review its
company secretarial arrangements. As a result, it was agreed to appoint NSM
Funds (UK) Limited as the Company Secretary of the Company, effective 1 March
2024. Following a period of handover, Apex Listed Companies Services (UK)
Limited (previously Sanne Fund Services (UK) Limited) resigned as Company
Secretary on 1 March 2024.
The Board reviews the quarterly reports of the service providers and whether
the services meet the requirements of the Company, represent value for money
and are therefore in the best interests of shareholders. The Board treats all
service providers fairly, to maintain a reputation as a trusted, fair and
reliable partner. The Board and/or delegates of the Board engage with key
providers on a periodic basis through service review meetings or, by
invitation, attendance at Board or committee meetings. Such engagement gives
opportunity to both parties to discuss any challenges being experienced and
potential solutions thereon, and to identify planned developments at the
Company or the service provider. We aim to pay promptly and if in dispute, to
engage openly to resolve matters in a timely manner.
The Board continues to ensure that service providers are as prepared as
possible for all such eventualities which could disrupt the performance of
their respective functions.
ENGAGEMENT WITH INVESTEE COMPANIES
The Portfolio Manager is a long-term investor and typically develops strong
relationships with both investee and potential investee companies. Both the
Board and the Portfolio Manager believe that engagement with investee
companies is positive, beneficial and welcomed.
Voting is a key activity in the dialogue with investee companies and these
decisions are reported to the Board on a quarterly basis.
The Board supports the Portfolio Manager's approach to ESG in the context of
its management of the portfolio, as discussed below.
ENVIRONMENTAL SOCIAL AND GOVERNANCE ("ESG") MATTERS
As an investment company with no employees, property or activities outside
investment, environmental policy has limited application. Nevertheless, the
Board is committed to taking a responsible approach to ESG matters. The
Company's compliance with the AIC Code of Corporate Governance is detailed in
the Corporate Governance Statement, which demonstrates the Company's own
responsibilities on matters such as governance.
In respect of the Company's investments, the Portfolio Manager and the other
members of the investment team integrate ESG risks and opportunities
(including climate change related risks) as part of a material assessment
undertaken for all holdings. Consistent with the Portfolio Manager's
investment approach, this analysis is undertaken on a bottom-up, stock basis.
The risks and opportunities that each holding faces over a three-to-five-year
period are then identified and prioritised. Many of these issues can be
sub-categorised as "E", "S" and "G" issues. The issues that are identified as
the key ones are at the forefront of engagement discussions on holdings with
the investee companies. These frequently include issues related to global
warming, including those focused on transitional risks, legislation risks,
and/or physical risks. The Manager is a signatory to the Principles of
Responsible Investment ('PRI') and the Company's assets form part of its
commitment to the Net Zero Asset Managers Initiative. Further information is
available at www.liontrust.co.uk and through the investment company ESG
disclosures at www.theaic.co.uk.
The Board recognises that the most material way in which the Company can have
an impact is through responsible ownership of its investments. The Manager
discusses below how it engages with the management of investee companies to
encourage that high standards of ESG practice are adopted.
The Company made no political donations during the year in review.
STEWARDSHIP CODE AND EXERCISE OF VOTING POWERS
The Board considers that the Company has a responsibility as a shareholder to
ensure that high ESG standards are maintained in the companies in which it
invests. One of the principal means of putting shareholder responsibility into
practice is through the exercise of voting rights. The Company aims to provide
investment specific active stewardship and the Company's voting rights are
exercised on an informed and independent basis. The Manager has adopted a
clear and considered policy towards its stewardship responsibility on behalf
of the Company. The Manager takes steps to satisfy itself about the extent to
which investee companies protect shareholder value and comply with local
recommendations and practices, such as the UK Corporate Governance Code. The
Manager's approach to corporate governance and the UK Stewardship Code can be
found on the Manager's website at www.liontrust.co.uk together with a copy of
the Manager's Stewardship Policy and the Manager's global proxy voting policy.
Members of the Portfolio Manager's investment team are responsible for
overseeing all aspects of the Stewardship process, including voting on all
resolutions at all Annual General Meetings and Extraordinary General Meetings
in the UK and overseas. The Portfolio Manager assesses corporate governance,
remuneration policies and, if deemed necessary, will challenge management
where it is felt that the best interests of shareholders are not being met.
The Board reviews the Portfolio Manager's voting record at each meeting. The
table below demonstrates how the Portfolio Manager voted during the year in
review. The Portfolio Manager voted at all meetings, except for an unlisted
legacy holding in Raven Property.
Total %
For Against Items Against
Audit related 89 0 89 0%
Capitalisation 187 3 190 2%
Company articles 6 0 6 0%
Compensation 101 4 105 4%
Director election 462 0 462 0%
Environmental 2 2 4 50%
Misc 41 1 42 2%
Routine business 92 3 95 3%
Social 16 10 26 38%
Strategic transactions 8 0 8 0%
Total 1,004 23 1,027 2%
The Portfolio Manager's policy is to invest in well-managed companies. We
therefore expect few contentious votes, but in any given twelve month period
there will be a handful. The examples below are drawn from this handful and
demonstrate how the Portfolio Manager voted on certain ESG issues and the
rationale behind each vote.
RS Group. Resolution summary: to approve the company's remuneration policy. As
was also the case in 2022, this was a contentious vote, with some third-party
advisors recommending their clients to vote against it. Nevertheless, the
Portfolio Manager supported the resolution. The Portfolio Manager believes the
CEO and Financial Director have done an outstanding job in reversing the
fortunes of the company and positioning the business for long term success. It
is important for their remuneration to be competitive and for the award
targets to be stretching. The resolution was passed, albeit with 38% of votes
cast against.
Shell Group. Resolution summary: this was a shareholder‑filed resolution,
which requested Shell to align its greenhouse gas (GHG) targets with those of
the Paris Climate Agreement.
The shareholder resolution stated that the Company's existing GHG reduction
plan does not comply with the Paris Climate Agreement. However, the Company
argues that its overall goals are Paris-aligned. The Portfolio Manager was
comfortable with Shell's overall GHG reduction strategy and its Paris
alignment. The shareholder resolution would have required a change in strategy
which may not be appropriate given that a new strategy is due to be unveiled
at the 2024 AGM. As such, the Portfolio Manager voted against the resolution.
At the AGM, the resolution attracted 20% of votes in favour and was not
therefore carried.
Unilever. The Portfolio Manager voted against the remuneration policy. The
incoming CEO's base salary was set at c.18.5% higher than his predecessor and
is significantly higher than his current salary at Royal Friesland Campina,
and UK market peers. The Company did not provide compelling justification for
this remuneration package, and as such the Remuneration Report was opposed. At
the vote, 58% of shareholders voted against, which meant the Remuneration vote
was not carried. Subsequently, the Company engaged with shareholders and
amended the CEO's pay structure, stating that his fixed pay structure would be
frozen for two years, meaning that he would next be eligible for an increase
in his fixed pay terms in 2026.
In addition, the Manager publishes an annual Responsible Capitalism report,
providing cumulative voting statistics, full disclosure on voting policy and
extracts of engagement for the year. The Manager publishes a quarterly voting
record on its website www.liontrust.co.uk.
MODERN SLAVERY DISCLOSURE
The Company aims to adopt the highest standards of conduct and is committed to
integrating responsible business practices throughout its operations. The
prevention of modern slavery is an important part of corporate good
governance.
The Company is an investment vehicle and does not provide goods or services in
the normal course of its business or have customers or employees. Accordingly,
the Directors consider that the Company is not required to make any slavery or
human trafficking statement under the Modern Slavery Act 2015.
ANTI-BRIBERY AND CORRUPTION
It is the Company's policy to conduct its business in an honest and ethical
manner. The Company takes a zero-tolerance approach to bribery and corruption
and is committed to acting professionally, fairly and with integrity in all
its business dealings and relationships wherever it operates. The Company's
policy and the procedures that implement it are designed to support that
commitment and the appropriate training has been undertaken by the Board and
key service providers.
PREVENTION OF THE FACILITATION OF TAX EVASION
The Board has adopted a zero-tolerance approach to the criminal facilitation
of tax evasion.
GREENHOUSE GAS EMISSIONS AND STREAMLINED ENERGY AND CARBON REPORTING ('SECR')
The Company has no employees, physical assets, property or operations of its
own, does not provide goods or services and does not have its own customers.
It follows that the Company has little or no direct environmental impact. In
consequence, the Company has limited greenhouse gas emissions to report from
its operations aside from travel to board meetings, nor does it have
responsibility for any other sources of emissions under the Companies Act 2006
(Strategic Report and Directors' Reports) Regulations 2013. As the Company has
no material operations and therefore has low energy usage, it has not included
an energy and carbon report.
CONCLUSION
The Directors believe that they have fulfilled their duties under s172 of the
Companies Act 2006 in their deliberations on all matters. The Board takes into
account the interests of all the Company's key stakeholders, as outlined
above, in its decision- making which reflects the Board's belief that the
long-term sustainable success of the Company is linked directly to its key
stakeholders. The work of the Board and its Committees is described in the
Governance Report.
This Strategic Report was approved by the Board on 24 May 2024.
Signed by order of the Board of Directors
NSM FUNDS (UK) LIMITED
COMPANY SECRETARY 24 MAY 2024
Statement of Directors' Responsibilities
IN RESPECT OF THE PREPARATION OF THE ANNUAL FINANCIAL REPORT
The Directors are responsible for preparing the annual financial report and
financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law they are required to prepare the financial
statements in accordance with UK accounting standards, including FRS 102 The
Financial Reporting Standard applicable in the UK and Republic of Ireland.
Under company law the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Company and of its profit or loss for that period.
In preparing these financial statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgements and estimates that are reasonable and prudent;
- state whether applicable UK accounting standards have been followed,
subject to any material departures disclosed and explained in the financial
statements;
- assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern; and
- use the going concern basis of accounting unless they either intend to
liquidate the Company or to cease operations, or have no realistic alternative
but to do so.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that its financial statements comply with the Companies
Act 2006.
They are responsible for such internal controls as they determine are
necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error, and have general
responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Company and to prevent and detect fraud and other
irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, Directors' Report, Directors' Remuneration
Report and Corporate Governance Statement that complies with that law and
those regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website, which
is maintained by the Company's Manager. Legislation in the UK governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL FINANCIAL
REPORT
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with the applicable
set of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company; and
- the Strategic Report includes a fair review of the development and
performance of the business and the position of the Company, together with a
description of the principal risks and uncertainties that it faces.
We consider the annual financial report, taken as a whole, is fair, balanced
and understandable and provides the information necessary for shareholders to
assess the Company's position and performance, business model and strategy.
Signed on behalf of the Board of Directors
ELISABETH STHEEMAN
CHAIR
24 MAY 2024
Income Statement
For the year ended 31 March
2024 2023
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Gains on investments held at fair value 9(b) - 99,095 99,095 - 6,023 6,023
Losses on foreign exchange - (41) (41) - (191) (191)
Income 2 42,095 - 42,095 48,998 - 48,998
Investment management fee 3 (1,493) (3,483) (4,976) (1,492) (3,482) (4,974)
Other expenses 4 (1,179) (14) (1,193) (1,092) (7) (1,099)
Net return before finance costs and taxation 39,423 95,557 134,980 46,414 2,343 48,757
Finance costs 5 (888) (2,071) (2,959) (1,718) (4,015) (5,733)
Return/(loss) on ordinary activities before taxation 38,535 93,486 132,021 44,696 (1,672) 43,024
Tax on ordinary activities 6 (316) - (316) (781) - (781)
Return/(loss) on ordinary activities after taxation for the financial year 38,219 93,486 131,705 43,915 (1,672) 42,243
Return/(loss) per ordinary share:
Basic and diluted 7 23.93p 58.55p 82.48p 25.99p (0.99)p 25.00p
The total column of this statement represents the Company's profit and loss
account, prepared in accordance with UK Accounting Standards. The return after
taxation is the total comprehensive income and therefore no additional
statement of comprehensive income is presented. The supplementary revenue and
capital columns are presented for information purposes in accordance with the
Statement of Recommended Practice issued by the Association of Investment
Companies. All items in the above statement derive from continuing operations
of the Company. No operations were acquired or discontinued in the year.
The accompanying notes are an integral part of these financial statements.
Balance Sheet
At 31 march
2024 2023
Notes £'000 £'000
Non current assets
Investments held at fair value 9(a) 1,206,563 1,226,649
Current assets
Debtors 10 19,878 12,392
Cash and cash equivalents 36,314 22,362
Total assets 1,262,755 1,261,403
Non current liabilities
Unsecured Senior Loan Notes 12 (120,000) (120,000)
Current liabilities
Other payables 11 (7,708) (2,059)
Total assets less current liabilities 1,255,047 1,259,344
Total liabilities (127,708) (122,059)
Net assets 1,135,047 1,139,344
Equity
Called up share capital 13 48,917 48,917
Share premium account 14 10,394 10,394
Capital redemption reserve 14 24,676 24,676
Capital reserve 14 1,004,498 1,003,989
Revenue reserve 14 46,562 51,368
Total equity 1,135,047 1,139,344
Net asset value per ordinary share:
Basic and diluted - debt at par value 15 749.25p 688.52p
Basic and diluted - debt at fair value 15 779.97p 713.75p
The financial statements were approved and authorised for issue by the Board
of Directors on 24 May 2024.
ELISABETH STHEEMAN / CHAIR
Signed on behalf of the Board of Directors
Company Number SC001836
The accompanying notes are an integral part of these financial statements.
Financial Review / Statement of Changes in Equity
For the year ended 31 March
Capital
Share Share Redemption Capital Revenue
Capital Premium Reserve Reserve(1) Reserve(1) Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
At 1 April 2022 48,917 10,394 24,676 1,041,086 50,764 1,175,837
(Loss)/return on ordinary activities - - - (1,672) 43,915 42,243
Dividends paid 8 - - - - (43,311) (43,311)
Shares bought back and held in treasury(2) 13 - - - (35,425) - (35,425)
At 31 March 2023 48,917 10,394 24,676 1,003,989 51,368 1,139,344
Return on ordinary activities - - - 93,486 38,219 131,705
Dividends paid 8 - - - - (43,025) (43,025)
Shares bought back and held in treasury(2) 13 - - - (92,977) - (92,977)
At 31 March 2024 48,917 10,394 24,676 1,004,498 46,562 1,135,047
1 The revenue reserve and certain amounts of the capital
reserve are distributable by way of dividend.
2 Shares bought back and held in treasury includes
transaction costs.
The accompanying notes are an integral part of these financial statements.
Cash Flow Statement
For the year ended 31 March
2024 2023
Notes £'000 £'000
Cash flow from operating activities
Net return before finance costs and taxation 134,980 48,757
Tax on overseas income 6 (316) (781)
Adjustments for:
Purchase of investments (329,331) (254,040)
Sale of investments 444,660 251,961
Gains on investments held at fair value (99,095) (6,023)
Decrease/(increase) in debtors 2,280 (2,706)
(Decrease)/increase in creditors (2,211) 37
Net cash inflow from operating activities 150,967 37,205
Cash flow from financing activities
Interest paid on overdraft (9) (3)
Interest and commitment fees paid on bank facility - (12)
Interest paid on Unsecured Senior Loan Notes/debenture stocks (2,093) (4,372)
Issue of Unsecured Senior Loan Notes - 100,000
Redemption of debenture loan stock - (100,000)
Shares bought back and held in treasury (91,888) (35,873)
Dividends paid 8 (43,025) (43,311)
Net cash outflow from financing activities (137,015) (83,571)
Net increase/(decrease) in cash and cash equivalents 13,952 (46,366)
Cash and cash equivalents at start of the year 22,362 68,728
Cash and cash equivalents at the end of the year 36,314 22,362
Reconciliation of cash and cash equivalents to the Balance Sheet is as
follows:
Cash held at custodian 2,768 1,093
Goldman Sachs Liquidity Reserve International Fund - Money Market Fund 33,546 21,269
Cash and cash equivalents 36,314 22,362
Cash flow from operating activities includes:
Dividends received 43,681 45,820
Interest received 11 6
At 1 April Non-cash At 31 March
2023 Cash flow movement 2024
£'000 £'000 £'000 £'000
Reconciliation of net debt
Cash and cash equivalents 22,362 13,952 - 36,314
Unsecured Senior Loan Notes (120,000) - - (120,000)
Total (97,638) 13,952 - (83,686)
The accompanying notes are an integral part of these financial statements.
Notes to the Financial Statements
1. PRINCIPAL ACCOUNTING POLICIES
Accounting policies describe the Company's approach to recognising and
measuring transactions during the year and the position of the Company at the
year end.
The principal accounting policies adopted in the preparation of these
financial statements are set out below. These policies have been consistently
applied during the year and the preceding year.
A. Basis of Preparation
Accounting Standards Applied
The financial statements have been prepared in accordance with the Companies
Act 2006, applicable United Kingdom Accounting Standards and applicable law
(UK Generally Accepted Accounting Practice (UK GAAP)) including FRS 102 'The
Financial Reporting Standard applicable in the UK and Republic of Ireland' and
with the Statement of Recommended Practice Financial Statements of Investment
Trust Companies and Venture Capital Trusts, issued by the Association of
Investment Companies (SORP) in April 2021 (as amended in July 2022).
The financial statements are issued on a going concern basis. Details of the
Directors' assessment of the going concern status of the Company, which
considered the adequacy of the Company's resources are given in the report
As an investment fund the Company has the option not to present a cash flow
statement. A cash flow statement is not required when an investment fund meets
all the following conditions: substantially all investments are highly liquid
and are carried at market value, and where a Statement of Changes in Equity is
provided: all of which are satisfied.
However the Directors' have elected to present a cash flow statement in the
annual financial report to present additional relevant information to readers
of the financial statements.
Significant Accounting Estimates, Assumptions and Judgements
The preparation of the financial statements may require the use of estimates,
assumptions and judgements which may affect the reported amounts of assets and
liabilities at the reporting date. While estimates are based on best judgement
using information and financial data available the actual outcome may differ
from these estimates. The Directors have applied their judgement for the
allocation of the investment management fee and finance costs between capital
and revenue in the income statement as set out in Note 1G and the treatment of
special dividend income between capital and income, as set out in Note 1J. The
Directors do not believe that these judgements nor any accounting estimates,
assumptions or judgements that have been applied to the financial statements
have a significant risk of causing material adjustment to the carrying amount
of assets and liabilities within the next financial year.
B. Foreign Currency and Segmental Reporting
(i) Functional and presentational currency
The financial statements are presented in sterling, which is the
Company's functional and presentational currency and the currency in which the
Company's share capital and expenses, as well as its assets and liabilities,
are denominated.
(ii) Transactions and balances
Transactions in foreign currency, whether of a revenue or capital
nature, are translated to sterling at the rates of exchange ruling on the
dates of such transactions. Foreign currency assets and liabilities are
translated to sterling at the rates of exchange ruling at the balance sheet
date. Any gains or losses, whether realised or unrealised, are taken to the
capital reserve or to the revenue account, depending on whether the gain or
loss is of a capital or revenue nature. All gains and losses are recognised in
the income statement.
(iii) Segmental reporting
The Directors are of the opinion that the Company is engaged in a
single segment of business of investing in equity and debt securities, issued
by companies quoted mainly on the UK or other recognised stock exchanges.
C. Financial Instruments
The Company has chosen to apply Section 11 and 12 of FRS102 in full in respect
of the financial instruments.
(i) Recognition of financial assets and financial liabilities
The Company recognises financial assets and financial liabilities
when the Company becomes a party to the contractual provisions of the
instrument. The Company will offset financial assets and financial liabilities
if the Company has a legally enforceable right to set off the recognised
amounts and intends to settle on a net basis.
(ii) Derecognition of financial assets
The Company derecognises a financial asset when the contractual
rights to the cash flows from the asset expire or it transfers the right to
receive the contractual cash flows on the financial asset in a transaction in
which substantially all the risks and rewards of ownership of the financial
asset are transferred. Any interest in the transferred financial asset that is
created or retained by the Company is recognised as an asset.
(iii) Derecognition of financial liabilities
The Company derecognises financial liabilities when its obligations
are discharged, cancelled or have expired.
(iv) Trade date accounting
Purchases and sales of financial assets are recognised on trade
date, being the date on which the Company commits to purchase or sell the
assets.
(v) Classification and measurement of financial assets and financial
liabilities
- Financial assets
The Company's investments are classified as held at fair value through profit
or loss.
Financial assets held at fair value through profit or loss are initially
recognized as fair value, which is taken to be their acquisition price, with
transaction costs expensed in the income statement. These are subsequently
valued at fair value.
Fair value for investments that are actively traded in organised financial
markets is determined by reference to stock exchange quoted bid prices at the
balance sheet date. Fair value for investments that are actively traded but
where active stock exchange quoted bid prices are not available is determined
by reference to a variety of valuation techniques including broker quotes and
price modelling. Unquoted, unlisted or illiquid investments are valued by the
Directors at fair value using a variety of valuation techniques including
earnings multiples, recent transactions and other market indicators, cash
flows and net assets.
- Financial liabilities
Financial liabilities, including borrowings, are initially measured at
transaction price, being the fair value. For liabilities issued at a discount
or with significant associated transaction costs, such discount and costs are
subsequently measured at amortised cost using the effective interest method.
D. Cash and Cash Equivalents
Cash and cash equivalents may comprise cash (including short term deposits
which are readily convertible to a known amount of cash and are subject to an
insignificant risk of change in value) as well as cash equivalents, including
money market funds. Investments are regarded as cash equivalents if they meet
all of the following criteria: short term in duration (typically three months
or less from the date of acquisition), highly liquid investments that are
readily convertible to a known amount of cash, are subject to an insignificant
risk of change in value and provide a return no greater than the rate of a
three-month high quality government bond.
E. Hedging
Forward currency contracts entered into for hedging purposes are valued at the
appropriate forward exchange rate ruling at the balance sheet date. Profits or
losses on the closure or revaluation of positions are recognised in the income
statement and taken to capital reserves.
F. Income
Interest income arising from fixed income securities and cash is recognised in
the income statement using the effective interest method. Dividend income
arises from equity investments held and is recognised on the date investments
are marked 'ex‑dividend'. Special dividends are looked at individually to
ascertain the reason behind the payment. This will determine whether they are
treated as income or capital in the income statement.
Deposit interest and underwriting commission receivable are taken into account
on an accruals basis.
G. Expenses and Finance Costs
Expenses are recognised on an accruals basis and finance costs are recognised
using the effective interest method in the income statement.
The investment management fee and finance costs are allocated 70% to capital
and 30% to revenue. This is in accordance with the Board's expected long-term
split of returns, in the form of capital gains and income respectively, from
the portfolio. Transaction costs are recognised as capital in the income
statement. All other expenses are allocated to revenue in the income
statement.
H. Taxation
The liability to corporation tax is based on net revenue for the year,
excluding non-taxable dividends. The tax charge is allocated between the
revenue and capital account on the marginal basis whereby revenue expenses are
matched first against taxable income in the revenue account.
Deferred taxation is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more tax or a right to pay less tax
in the future have occurred. Timing differences are differences between the
Company's taxable profits and its results as stated in the financial
statements. Deferred taxation assets are recognised where, in the opinion of
the Directors, it is more likely than not that these amounts will be realised
in future periods.
A deferred tax asset is only recognised in respect of surplus management
expenses, losses on loan relationships and eligible unrelieved foreign tax to
the extent that it is probable that the Company will be able to recover them
from future taxable revenue.
I. Dividends payable
Dividends are not recognised in the financial statements unless there is an
obligation to pay at the balance sheet date. Proposed dividends are recognised
in the year in which they are paid to shareholders.
J. Critical accounting estimates and judgements
No critical accounting judgements or estimates were made during the year.
K. Accounting for reserves
The share premium comprises the net proceeds received by the Company following
the issue of shares, after deduction of the nominal amount of 25 pence and any
applicable issue costs. The capital redemption reserve maintains the equity
share capital of the Company and arose from the nominal value of any shares
bought back and cancelled; both are non-distributable.
The capital reserve includes the investment holding gains/(losses), being the
difference between cost and market value at the balance sheet date. It also
includes cumulative realised gains/(losses) and costs related to share
buybacks. Capital investment gains and losses are shown in note 9(b) and form
part of the capital reserve.
The revenue reserve shows the net revenue retained after payment of any
dividends. The revenue reserve and certain amounts of the capital reserve are
distributable by way of dividend.
L. Shares repurchased and held in treasury
The cost of repurchasing ordinary shares (for cancellation or to hold in
treasury) including the related stamp duty and transaction cost is charged to
the capital reserve and dealt with in the Statement of Changes in Equity.
Share repurchase transactions are accounted for on a trade date basis. Where
shares are cancelled (or are subsequently cancelled having previously been
held in treasury), the nominal value of those shares is transferred out of
Called up share capital and into the Capital redemption reserve. Should shares
held in treasury be reissued, the sales proceeds will be treated as a realised
capital profit up to the amount of the purchase price of those shares and will
be transferred to capital reserves. The excess of the sales proceeds over the
purchase price will be transferred to Share premium.
2. INCOME
This note shows the income generated from the portfolio (investment assets) of
the Company and income received from any other source.
2024 2023
£'000 £'000
Income from investments:
UK zero coupon bond income - 148
UK dividends 35,857 35,807
UK special dividends 2,095 6,999
Overseas dividends 2,789 5,287
Overseas special dividends 318 358
Interest from money market funds 1,025 393
42,084 48,992
Other income:
Deposit interest 11 6
11 6
Total income 42,095 48,998
Special dividends of £2,251,000 were recognised in capital during the year
(2023: nil).
3. INVESTMENT MANAGEMENT FEE
This note shows the fee due to the Manager. This is calculated and paid
monthly.
2024 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management fee 1,493 3,483 4,976 1,492 3,482 4,974
Details of the investment management and secretarial agreement is disclosed in
the Directors' Report.
At 31 March 2024, investment management fees of £411,000 (2023: £429,000)
were accrued.
4. OTHER EXPENSES
The other expenses((i)) of the Company are presented below, those paid to the
Directors and the auditors are separately identified.
2024 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Other expenses 1,182 14 1,196 1,092 7 1,099
Other expenses include the following:
Directors' remuneration((ii)) 168 - 168 189 - 189
Auditors' fees((iii)):
- for audit of the Company's annual financial statements 51 - 51 48 - 48
The maximum Directors' fees authorised by the Articles of Association are
£250,000 per annum.
I. Other expenses include:
- £300 (2023: £18,000) of employer's National Insurance payable on
Directors' remuneration. This has been reduced from the previous year due to
the release of prior years' accruals in the current period. As at 31 March
2024, the amounts outstanding on Directors' remuneration and employer's
National Insurance was £nil (2023: £64,000); and
- custodian transaction charges of £14,000 (2023: £7,000). These are
charged to capital.
II. There were six directors for a period during the year and the
Directors' Remuneration Report provides further information on Directors' fees
III. Auditors' fees include expenses but exclude VAT.
5. FINANCE COSTS
Finance costs arise on any borrowing facilities the Company has used.
Borrowing facilities are the £120m (2023 £120m notes). Please see Note 12
for additional details of the terms.
2024 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Interest payable on borrowings repayable not by instalment:
- Commitment fees due on loan facility - - - 4 8 12
- Interest on overdraft facility 3 6 9 1 2 3
- Debenture stock repayable within 1 year - - - 1,235 2,883 4,118
- Unsecured Senior Loan Notes repayable after 5 years 885 2,065 2,950 442 1,032 1,474
Amortised debenture stock discount and
issue costs - - - 36 90 126
888 2,071 2,959 1,718 4,015 5,733
6. TAXATION
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
2024 2023
£'000 £'000
Overseas taxation 316 781
(b) Reconciliation of tax charge
2024 2023
£'000 £'000
Return before taxation 132,021 43,024
Theoretical tax at the current UK Corporation Tax rate of 25% (2023: 19%) 33,005 8,175
Effects of:
- Non-taxable UK dividends (8,929) (6,803)
- Non-taxable UK special dividends (603) (1,398)
- Non-taxable overseas dividends (706) (982)
- Non-taxable gains on investments (24,773) (1,145)
- Non-taxable losses on foreign exchange 10 36
- Excess of allowable expenses over taxable income 1,993 2,116
- Disallowable expenses 3 1
- Overseas taxation 316 781
Tax charge for the year 316 781
(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 £510,654,000 (2023:
£502,750,000 ) that are available to offset future taxable revenue. A
deferred tax asset of £127,663,574 (2023: £125,687,483) at 25% (2023: 25%)
has not been recognised in respect of these expenses since the Directors
believe that there will be no taxable profits in the future against which
deferred tax assets can be offset.
7. RETURN PER ORDINARY SHARE
Return per share is the amount of gain generated for the financial year
divided by the weighted average number of ordinary shares in issue.
The basic revenue, capital and total return per ordinary share is based on
each of the returns/loss after taxation and on 159,690,463 (2023: 168,985,796)
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 interim and one final dividend.
2024 2023
pence £'000 pence £'000
Dividends paid and recognised in the year:
- third interim paid in respect of previous year 6.70 11,050 6.40 10,934
- final paid in respect of previous year 6.70 11,036 6.40 10,925
- first interim paid 6.70 10,622 6.40 10,783
- second interim paid 6.70 10,317 6.40 10,669
26.80 43,025 25.60 43,311
2024 2023
pence £'000 pence £'000
Dividends payable in respect of the year:
- first interim 6.70 10,622 6.40 10,783
- second interim 6.70 10,317 6.40 10,669
- third interim 6.90 10,429 6.70 11,087
- proposed final 6.90 10,429 6.70 11,087
27.20 41,797 26.20 43,626
The proposed final dividend is subject to approval by ordinary shareholders at
the AGM.
9. INVESTMENTS HELD AT FAIR VALUE
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
2024 2023
£'000 £'000
Investments listed on a recognised investment exchange 1,206,563 1,226,649
(b) Analysis of investment gains:
2024 2023
£'000 £'000
Opening book cost 1,040,163 1,048,510
Opening investment holding gains 186,486 170,215
Opening fair value 1,226,649 1,218,725
Movements in year:
Purchases at cost 335,245 252,724
Sales - proceeds (454,426) (250,823)
Gains on investments in the year 99,095 6,023
Closing fair value 1,206,563 1,226,649
Closing book cost 976,923 1,040,163
Closing investment holding gains 229,640 186,486
Closing fair value 1,206,563 1,226,649
The Company received £454,426,000 (2023: £250,823,000) from investments sold
in the year. The book cost of these investments when they were purchased was
£398,434,000 (2023: £261,072,000) realising a gain of £55,992,000 (2023:
loss of £10,249,000). 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 £1,642,000
(2023: £1,162,000) on purchases and £222,000 (2023: £99,000) 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.
2024 2023
£'000 £'000
Amounts due from brokers 9,766 -
Overseas withholding tax recoverable 2,229 2,316
Income tax recoverable 28 -
Prepayments and accrued income 7,855 10,076
19,878 12,392
11. OTHER PAYABLES
Creditors are amounts which must be paid by the Company and are split between
those payable within 12 months of the balance sheet date and those payable
after that time. The main creditors have historically been the long term debt
and bank borrowings. The other creditors include any amounts due to brokers
for the purchase of investments, amounts owing on share buy backs awaiting
settlement or amounts owed to suppliers (accruals) such as the Manager and
auditors.
2024 2023
£'000 £'000
Amounts due to brokers 5,914 -
Share buybacks awaiting settlement 1,098 -
Accruals and deferred income 696 2,059
7,708 2,059
12. UNSECURED SENIOR LOAN NOTES
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.
2024 2023
£'000 £'000
Unsecured Senior Loan Notes - 2.26% interest rate, maturity 30 September 2037 35,000 35,000
Unsecured Senior Loan Notes - 2.49% interest rate, maturity 30 September 2047 35,000 35,000
Unsecured Senior Loan Notes - 2.53% interest rate, maturity 30 September 2051 20,000 20,000
Unsecured Senior Loan Notes - 2.53% interest rate, maturity 30 September 2057 30,000 30,000
120,000 120,000
The Unsecured Senior Loan Notes comprise four separate notes. As shown above,
each has a fixed interest rate and contracted maturity date when the par value
must be repaid. Interest is payable on a semi-annual basis, with equal amounts
payable on each of 31 March and 30 September each year. These notes require
the net assets of the Company to remain not less than £300m and net debt to
remain less than 35% of net assets. This requirement was met throughout the
year.
13. CALLED UP SHARE CAPITAL
Share capital represents the total number of shares in issue, including
treasury shares.
2024 2023
£'000 £'000
Share capital:
Ordinary shares of 25 pence each 37,873 41,369
Treasury shares of 25 pence each 11,044 7,548
48,917 48,917
2024 2023
Number of ordinary shares in issue:
Brought forward 165,476,525 171,078,129
Shares bought back and held in treasury (13,985,000) (5,601,604)
Carried forward 151,491,525 165,476,525
Number of shares held in treasury:
Brought forward 30,190,209 24,588,605
Shares bought back into treasury 13,985,000 5,601,604
Carried forward 44,175,209 30,190,209
Total ordinary shares 195,666,734 195,666,734
During the year the Company bought back, into treasury 13,985,000 (2023:
5,601,604) ordinary shares at an average price of 664.84p (2023: 632.40p)
(including costs).
Since the year end to 22 May 2024, (being the last practicable day prior to
the publication of this report), 640,000 shares have been bought back into
treasury. Note 1L explains the policy on the transaction costs related to the
shares repurchased and held in treasury.
The Directors' 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 and certain amounts of the capital reserve are
distributable by way of dividend.
15. NET ASSET VALUE PER ORDINARY SHARE
The Company's total net assets (total assets less total liabilities) are often
termed shareholders' funds and are converted into NAV per ordinary share by
dividing by the number of shares in issue (excluding treasury shares).
NAV - debt at par value
The shareholders' funds in the balance sheet are accounted for in accordance
with accounting standards.
2024 2023
NAV Shareholders' NAV Shareholders'
per share funds per share funds
pence £'000 pence £'000
Shareholders' funds 749.25 1,135,047 688.52 1,139,344
NAV - debt at par 749.25 1,135,047 688.52 1,139,344
A reconciliation showing the NAV per share and Shareholders' funds using debt
at fair value is shown in the Alternative Performance Measures.
16. RISK MANAGEMENT, FINANCIAL ASSETS AND LIABILITIES
Financial instruments comprise the Company's investment portfolio, derivative
instruments (if any) as well as cash, and any borrowings, debtors and
creditors. This note sets out the Company's financial instruments and the
risks related to them.
Financial instruments
The Company's financial instruments mainly comprise its investment portfolio,
Unsecured Senior Loan Notes, a bank facility as well as its cash, debtors and
creditors that arise directly from its operations such as sales and purchases
awaiting settlement and accrued income. For the purpose of this note 'cash'
should be taken to comprise cash and cash equivalents as defined in note 1D.
The accounting policies in note 1C include criteria for the recognition and
the basis of measurement applied for financial instruments. Note 1 also
includes the basis on which income and expenses arising from financial assets
and liabilities are recognised and measured.
The main financial risks that the Company faces from its financial instruments
are market risk, liquidity risk, and credit risk. These are set out below:
Market risk - arising from fluctuations in the fair value or future cash flows
of a financial instrument because of changes in market prices. Market risk
comprises three types of risk: currency risk, interest rate risk and other
price risk:
- Currency risk - arising from fluctuations in the fair value or future
cash flows of a financial instrument because of changes in foreign exchange
rates;
- Interest rate risk - arising from fluctuations in the fair value or
future cash flows of a financial instrument because of changes in market
interest rates; and
- Other price risk - arising from fluctuations in the fair value or
future cash flows of a financial instrument for reasons other than changes in
foreign exchange rates or market interest rates.
Liquidity risk - arising from any difficulty in meeting obligations associated
with financial liabilities.
Credit risk - arising from financial loss for a company where the other party
to a financial instrument fails to discharge an obligation.
Risk Management Policies and Procedures
The Directors have delegated to the Manager the responsibility for the
day-to-day investment activities and management of gearing of the Company as
more fully described in the Directors' Report.
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. Any borrowing to gear the investment
portfolio is used to enhance returns but also increases the Company's exposure
to market risk and volatility. The Company has the ability to gear using its
£120 million Unsecured Senior Loan Notes.
16.1.1 Currency risk
The majority of the Company's assets and liabilities are denominated in
sterling. There is some exposure to US dollar, Swiss franc and the Euro.
16.1.2 Inflation risk
The Company has no assets or liabilities that have direct inflation link
properties.
Management of the currency risk
The Manager monitors the Company's direct exposure to foreign currencies on a
daily basis and reports to the board on a regular basis. Forward currency
contracts can be used to reduce the Company's exposure to foreign currencies
arising naturally from the Manager's choice of securities. All contracts are
limited to currencies and amounts commensurate with the assets denominated in
currencies. No Forward currency contracts were used during the year (2023:
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
£74.3 million (2023: £93.8 million) representing 6.2% (2023: 7.7%) 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.
2024 2023
USD DKK CHF EUR USD DKK CHF EUR
Currency exposure £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Foreign currency exposure on net monetary items 2,730 38 2,183 584 3,137 40 1,420 1,495
Investments at fair value through profit or loss that are equities 40,666 - 21,373 12,254 22,356 - 32,549 52,668
Total net foreign currency exposure 43,396 38 23,556 12,838 25,493 40 33,969 54,163
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 1.7% (2023:
3.9%) against the US dollar, 1.4% (2023: 3.5%) for the Swiss franc, 1.0%
(2023: 2.0%) for the Euro, and for the Danish Krone, 1.0% (2023: 2.0%) during
the year, the capital return and net assets of the Company would have
increased for all currency exposures by £1.2 million (2023: £3.2 million).
Conversely, if sterling had strengthened to the same extent for the currencies
mentioned above, the capital return and net assets of the Company would have
decreased by the same amount. The exchange rate variances noted above have
been based on market volatility in the year, using the standard deviation of
sterling's fluctuation to the applicable currency. This sensitivity takes no
account of any impact on the market values of the Company's investments
arising from the foreign currency mix of their respective revenues, expenses,
assets and liabilities.
16.1.3 Interest rate risk
Interest rate movements will affect the level of income receivable on cash
deposits and money market funds, and the interest payable on variable rate
borrowings. When the Company has cash balances, they are held on variable rate
bank accounts yielding rates of interest dependent on the base rate determined
by the custodian, The Bank of New York Mellon (International) Limited.
The Company has Unsecured Senior Loan Notes of £120 million (2023: £120
million). The Unsecured Senior Loan Notes have a fixed interest rate which
only exposes the Company to changes in market value in the event that the debt
is repaid before maturity. Specifics of the Unsecured Senior Loan Notes are
shown in Note 12. The details of their fair value and the affect on net asset
value within the Net Asset Value (NAV) - Debt at Fair Value reconciliation
within the Alternative Performance Measures.
The Company held no fixed income securities during the year (2023: two
short-term zero coupon government bonds which matured during the financial
year). As at 31 March 2024 no government bonds (2023: none) were recognised as
a Cash and Cash Equivalent on the Balance Sheet.
Interest rate exposure
At 31 March the exposure of financial assets and financial liabilities to
interest rate risk is shown by reference to:
- floating interest rates (giving cash flow interest rate risk) - when
the interest rate is due to be re-set; and
- fixed interest rates (giving fair value interest rate risk) - when the
financial instrument is due for repayment.
2024 2023
Between Between
one After one After
Within and five five Within and five five
one year years years Total one year years years Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Exposure to floating interest rates:
Cash and cash equivalents 36,314 - 36,314 22,488 - 22,488
Unsecured Senior Loan Notes - debt at par value - - (120,000) (120,000) - - (120,000) (120,000)
Total exposure to interest rates 36,314 - (120,000) (83,686) 22,488 - (120,000) (97,512)
16.1.4 Other price risk
Other price risks (i.e. changes in market prices other than those arising from
interest rate risk or currency risk) may affect the value of the equity
investments, but it is the business of the Manager to manage the portfolio to
achieve the best return that he can.
Management of the other price risks
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 £120.7 million (2023: £122.7 million). Conversely, if the value of the
portfolio rose by 10%, the profit after tax and the net assets of the Company
would increase by the same amounts.
16.2 Liquidity risk
Liquidity risk is minimised as the majority of the Company's investments
constitute a diversified portfolio of readily realisable securities which can
be sold to meet funding commitments as necessary.
Liquidity risk exposure
The contractual maturities of the financial liabilities at the year end, based
on the earliest date on which payment can be required, are as follows:
More than
three
months
Three but less More than
months than one
or less one year year Total
2024 £'000 £'000 £'000 £'000
Unsecured Senior Loan Notes - debt at par value - - 120,000 120,000
Interest on Unsecured Senior Loan Notes - 2,928 67,573 70,501
Amounts due to brokers 5,914 - - 5,914
Share buybacks awaiting settlement 1,098 - - 1,098
Accruals 696 - - 696
7,708 2,928 187,573 198,209
More than
three
months
Three but less More than
months than one
or less one year year Total
2023 £'000 £'000 £'000 £'000
Unsecured Senior Loan Notes - debt at par value - - 120,000 120,000
Interest on Unsecured Senior Loan Notes - 2,928 70,500 73,428
Accruals 2,059 - - 2,059
2,059 2,928 190,500 195,487
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.
16.4 Custody risk
All investment assets are held in custody by The Bank of New York Mellon
(International) Limited in accounts segregated from the bank's own assets.
17. CLASSIFICATION UNDER FAIR VALUE HIERARCHY
The values of the financial assets and financial liabilities are carried
either at their fair value (investments), or at a reasonable approximation of
fair value (amounts due from brokers, dividends receivable, accrued income,
amounts due to brokers, accruals, cash and any drawings on the bank facility).
Fair Value Hierarchy Disclosures
All except two of the Company's portfolio of investments are in the Level 1
category as defined in FRS 102 as amended for fair value hierarchy disclosures
(March 16). The three levels set out in this follow.
Level 1 - the unadjusted quoted price in an active market for identical assets
or liabilities that the entity can access at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 that are
observable (i.e. developed using market data) for the asset or liability,
either directly or indirectly.
Level 3 - Inputs are unobservable (i.e. for which market data is unavailable)
for the asset or liability.
Categorisation within the hierarchy is determined on the basis of the lowest
level input that is significant to the fair value measurement of each relevant
asset/liability.
The valuation techniques used by the Company are explained in the accounting
policies note.
2024
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 1,206,563 - - 1,206,563
Total for financial assets 1,206,563 - - 1,206,563
2023
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Financial assets designated at fair value through profit or loss:
Quoted investments:
Equities and preference shares 1,226,649 - - 1,226,649
Total for financial assets 1,226,649 - - 1,226,649
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 (2023: no Level 2 investments). There were two Level 3 investments
at the year end totaling £nil (2023: two investments totalling: £nil).
The holding in Eurovestech did not change during the year and the fair value
was unchanged at £nil (2023: £nil).
Raven Property is the other unquoted investment. Their issued preference
shares were suspended in March 2022 due to sanctions on the company's Russian
businesses. At the balance sheet date the shares remain de-listed and recorded
a fair value of £nil (2023: £nil).
The book cost and fair value of the Unsecured Senior Loan Notes, are as
follows:
2024 2023
Book Fair Book Fair
Value Value Value Value
£'000 £'000 £'000 £'000
Unsecured Senior Loan Notes 120,000 73,461 120,000 78,253
120,000 73,461 120,000 78,253
Incorporating the fair value of the Unsecured Senior Loan Notes, results in
the increase of the net asset value per ordinary share to 779.97p (2023:
713.75p).
18. CAPITAL MANAGEMENT
The Company's total capital employed at 31 March 2024 was £1,255,047,000
(2023: £1,259,276,000) comprising borrowings of £120,000,000 (2023:
£120,000,000) and equity share capital and other reserves of £1,135,047,000
(2023: £1,139,344,000).
The Company's total capital employed is managed to achieve the Company's
objective and investment policy, 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 3.1% (2023: 4.7%)
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. These also explain that
the Company is able to use borrowings to gear and that gearing will amplify
the effect on equity of changes in the value of the portfolio.
The Board can also manage the capital structure directly since it has taken
the powers, which it is seeking to renew, to issue and buy-back shares and it
also determines dividend payments.
The Company is subject to externally imposed capital requirements with respect
to the obligation and ability to pay dividends by section 1158 Corporation Tax
Act 2010 and by the Companies Act 2006, respectively, and with respect to the
availability of the bank facility by the terms imposed by the lender. The
Board regularly monitors, and has complied with, the externally imposed
capital requirements. This is unchanged from the prior year. As detailed in
note 11 and note 12, current borrowings comprise the Unsecured Senior Loan
Notes.
19. CONTINGENCIES, GUARANTEES AND FINANCIAL COMMITMENTS
There were no contingencies, guarantees or other financial commitments of the
Company as at 31 March 2024 (2023: nil).
20. RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH MANAGER
A related party is a company or individual who has direct or indirect control
or who has significant influence over the Company. Under accounting standards,
the Manager is not a related party.
Under UK GAAP, the Company has identified the Directors as related parties.
The Directors' remuneration and interests have been disclosed, 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 and in note 3.
21. POST BALANCE SHEET EVENTS
There are no significant events after the end of the reporting period
requiring amendment to financial amounts.
NOTICE OF ANNUAL GENERAL MEETING
Notice of the Annual General Meeting of the Company is included in the Annual
Financial Report.
The Annual General Meeting of the Company will be held at The Balmoral Hotel,
Edinburgh, EH2 2EQ on 17 July 2024 at 11am.
The Annual Financial Report will be submitted to the National Storage
Mechanism and will shortly be available for inspection at: National Storage
Mechanism | FCA (https://data.fca.org.uk/#/nsm/nationalstoragemechanism)
The Audited Annual Financial Report will be posted to shareholders shortly.
Copies may be obtained during normal business hours from the Company's
registered office, First Floor, 9 Haymarket Square, Edinburgh, EH3 8RY.
A copy of the Annual Financial Report will be available from the Company's
website: www. (http://www.edinburgh-investment-trust.co.uk/)
edinburgh-investment-trust.co.uk
(http://www.edinburgh-investment-trust.co.uk/)
By order of the Board:
NSM Funds (UK) Limited
Company Secretary
28 May 2024
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