Fidelity China: Annual Financial Report
08/06/2023 07:00
FIDELITY CHINA SPECIAL SITUATIONS PLC
Final Results for the year ended 31 March 2023
Financial Highlights:
* The Board of Fidelity China Special Situations PLC (the “Company”)
recommends an annual dividend of 6.25 pence per share, an increase of 13.6%
from last year.
* The first tier of the management fee will reduce from 0.90% of net assets to
0.85% of net assets from 1 July 2023.
* The net asset value (“NAV”) total return of the Company increased by
+2.6% for the year ended 31 March 2023, outperforming the Benchmark Index
(MSCI China Index) which returned +1.4% (in UK
sterling terms).
* The ordinary share price total return was +0.3% over the reporting year.
* The Portfolio Manager continues to find opportunities fuelled by growing
domestic consumption in the region.
Contacts
For further information, please contact:
Smita Amin
Company Secretary
01737 836347
FIL Investments International
CHAIRMAN’S STATEMENT
After more than two years of volatile returns, it was pleasing to see positive
net asset value (“NAV”) and share price returns and a return to
outperformance for your Company against its Benchmark Index, the MSCI China
Index (in UK sterling terms). China’s economic growth rate in 2022 was just
3%, the lowest in decades, but the economy and stock market are now on a
recovery path following the removal of the zero-COVID policy.
In the reporting year to 31 March 2023, NAV per share total return of your
Company was 2.6% outperforming the Benchmark Index which returned 1.4%. The
share price total return was 0.3%. The discount of the share price to the NAV
widened to 9.7% at the end of the year compared to 7.5% last year. While we
expect the Company to generate its returns primarily from capital, corporate
earnings growth in China and the maturing of business models has meant healthy
growth in dividends. Our own dividend – which has grown every year since
inception – makes an important contribution to shareholder returns and this
year grows by 13.6% from 5.50 pence to 6.25 pence.
As our Portfolio Manager, Dale Nicholls, points out in his report, investor
pessimism towards China reached a peak in the early part of the second half of
our financial year. Encouragingly, the rebound in sentiment since then is
borne out by the six-months to 31 March 2023 total return performance figures,
with the NAV and share price rising by 12.1% and 11.2% respectively, compared
with a return of 7.3% on the Benchmark Index.
While the mood of investors in Chinese equities has swung between extreme
bearishness and euphoria over the past year, the current backdrop reflects a
more measured outlook. The Board continues to believe that a direct exposure
to China – the world’s second-largest economy – is an important
constituent of a diversified portfolio. Although economic growth was
lacklustre in 2022, the International Monetary Fund expects China’s GDP to
advance by 5.3% in 2023, ahead of the 3.9% average for emerging markets and
developing economies and well in excess of the 1.3% forecast for advanced
economies.
China is at a different point in the economic cycle to the rest of the world;
rising interest rates and inflation in the West have meant very constraining
central bank policies aimed at slowing economies down, whereas the opposite is
the case in China. Inflation is not and has not been a problem and the
authorities are taking a more stimulative approach to boost growth. This is
being done at a measured pace to reduce unemployment, particularly amongst the
young, but at a level which doesn’t fan speculation in the property sector
which remains an issue.
Your portfolio has limited exposure to property as Dale prefers to access the
housing theme through areas such as home décor and appliances. Consumer
spending, which is expected to be the primary engine of growth for the Chinese
economy, is an important driver of stock selection, with the consumer
discretionary sector containing many of the attractively valued, fast-growing
stocks that he favours. Having a large research team on the ground in China is
fundamental to seeking out the best opportunities, particularly among medium
and smaller-sized companies, where the relatively higher growth potential has
yet to be reflected in share prices, and investor awareness is low.
As a closed-ended fund and without the liquidity concerns that would hamper an
open-ended fund, the Company is able to invest up to 15% of its Net Assets
plus Borrowings in unquoted companies (those not listed on a stock exchange).
This allows the Manager to take advantage of the faster growth trajectory of
earlier stage companies before they potentially become listed on the public
markets. Other than the unlisted shares in Xiaoju Kuaizhi (Didi Chuxing)
converting to listed American Depositary Shares, there have been no new
unlisted additions or changes to the unlisted companies held in the portfolio
in the reporting year. However, the unlisted percentage increased from 13.2%
of Net Assets plus Borrowings on 31 March 2022 to 13.6% on 31 March 2023 given
changes in the valuations of these companies and changes to the size of the
rest of the portfolio. If the Company were to reach the 15% limit in unquoted
companies, it does not preclude us from further investment in existing
holdings if fresh capital was required by them.
Our unquoted investments are assessed regularly by Fidelity’s dedicated Fair
Value Committee (“FVC”), with advice from Kroll, a third-party valuation
specialist, as well as from the Fidelity analysts, who look after these
companies. An additional resource has been added in the past year in the form
of oversight by a newly recruited Chinese unlisted investment specialist. The
Board receives regular updates from the FVC, with Alastair Bruce, the Audit
and Risk Committee Chairman, also providing expertise in the area, having for
many years been involved professionally in private equity investing.
The Board is mindful of the risks of investing in a single emerging market,
however large and diverse it may be, and monitors both current risks and our
perception of emerging risks. The key risks are set out below. We believe,
however, that those risks are outweighed by the opportunities offered by
investing in China in general, and in particular in Fidelity China Special
Situations. Dale’s focus on consumption and the domestic economy mitigates
much of the geopolitical risk which has been heightened in the period under
review. We share Dale’s confidence that with the Chinese economy now having
fully reopened after the restrictions imposed by the government’s zero-COVID
policy, the opportunities for a continued rebound in consumer spending are
significant.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) INVESTMENT AND CLIMATE CHANGE
ESG factors remain central to the work of both the Board and the Portfolio
Manager. Chinese businesses are under increasing pressure to ensure that their
activities are environmentally sustainable and demonstrate social
responsibility and good corporate governance. Although there is progress in
the form of commitments and initiatives across a wide range of areas, much
more needs to be done. Fidelity has a sustainable investing approach, which
includes engagement and voting principles and its proprietary forward-looking
ESG ratings. This ratings system leverages Fidelity’s internal research and
interactions with investee companies, where analysts quantify the direction of
change of a company’s ESG performance (positive, neutral or negative
trajectory) and rate the companies using a scale of A to E. The Board pays
close attention to the ratings of underlying portfolio companies and
challenges the Portfolio Manager and his team on any stocks with lower
ratings. The ratings of the companies within the portfolio are well ahead of
the broader market and continue to improve.
The evaluation of ESG factors is a core part of our Portfolio Manager’s
investment process and he continues to see progress regarding the level of
engagement with and transparency of Chinese companies. Sustainability factors
are key topics of conversation with companies and many management teams are
looking at ways to generate a more sustainable outcome for their businesses.
Although China continues to lag most other major markets in this area, we are
encouraged by the rates of improvement the Manager is seeing. China’s
regulators are engaging with companies to improve the disclosure of ESG
metrics to better align themselves with the required standards. Not only is
this a good outcome globally, but we also believe that progress on better ESG
practices could be a key driver of performance for the portfolio over the
longer-term. Further details of the Manager’s ESG practices are in the
Annual Report.
GEARING
We continue to believe that the judicious use of gearing (another benefit of
the investment trust structure) can be accretive to long-term capital and
income returns, although being more than 100% invested does also mean that the
NAV and share price may be more volatile and can accentuate losses in a
falling market. Net gearing at the year-end was 21.1%, largely unchanged from
a year earlier when it was at 23.5%. The Company recently renewed its loan
facility for a period of one year at a fixed interest annual rate of 6.335%.
The Board would prefer to have a diversified source of finance in the future,
as well as CFDs, and depending on terms hopes to be able to put in place
longer-term borrowing when this facility ends.
DIVIDEND
Although the Company’s investment objective is to achieve long-term capital
growth, it has paid an increasing dividend each year since its inception,
growing from 0.25 pence per share in 2011 to 5.50 pence per share in 2022,
which is a compound annualised growth rate of 32.8%.
As indicated earlier, the Board is pleased to recommend once again an
increased final dividend of 6.25 pence per share for the year ended 31 March
2023 for approval by shareholders at the Annual General Meeting (“AGM”) to
be held on 20 July 2023. This represents an increase of 13.6% over the 5.50
pence paid in respect of the prior year and cements your Company’s status as
one of the Association of Investment Companies’ Next Generation of Dividend
Heroes. The dividend will be payable on 27 July 2023 to shareholders on the
register on 16 June 2023 (ex-dividend date 15 June 2023).
The revenue per share earned by the Company during the year was 7.05 pence,
which is an increase of 9.8% over the 6.42 pence earned in the prior year, and
this fully covers the recommended dividend.
DISCOUNT MANAGEMENT
The Board believes that investors are best served when the share price trades
close to its NAV per share. However, we recognise that the share price is
affected by the interaction of supply and demand in the market based on
investor sentiment towards China, as well as the performance of the
Company’s portfolio. A discount control mechanism is in place whereby we
seek to maintain the Company’s discount in single digits in normal market
conditions. Historically, shares bought back were held in Treasury and could
be issued at a later date should the share price move to a premium to NAV per
share. As the number of shares held in Treasury equated to 15% of the issued
share capital by 11 May 2023, shares bought since then have been cancelled.
There is an annual 14.99% cap in place that limits the Company’s ability to
repurchase its own shares in the market.
The Company’s discount widened from 7.5% at the start of the reporting year
to 9.7% on 31st March. To combat slightly tricky and volatile market
conditions during the year, the Board authorised the repurchase of 25,631,781
shares into Treasury at a cost of £57,249,000, representing 4.5% of the
issued share capital of the Company. These share repurchases have benefited
remaining shareholders as the NAV per share has been increased by purchasing
shares at a discount. Since the year end and as at the date of this report,
the Company has repurchased a further 2,900,696 shares into Treasury and
2,238,726 shares for cancellation. The graph below shows the movement of the
Company’s discount during the year.
FCSS – Discount to NAV
At the forthcoming AGM, the Board is seeking to renew the annual authority to
repurchase up to 14.99% of the Company’s shares, to be either cancelled or
held in Treasury, as it has done each year previously.
ONGOING CHARGE
The Ongoing Charge (the costs of running the Company) for the year was 0.98%
(2022: 0.94%). The variable element of the management fee (due to
outperformance of the Benchmark Index) was a charge of 0.20% (2022: 0.20%).
Therefore, the Ongoing Charge, including this variable element, for the year
was 1.18% (2022: 1.14%).
The largest element of those running costs of the Company is the management
fee paid to Fidelity.
MANAGEMENT FEE
The Board has agreed a revised fee with the Manager, FIL Investment Services
(UK) Limited, with effect from 1 July 2023. The revised fee will be 0.85%
(reduced from 0.90%) on the first £1.5 billion of net assets. It will remain
at 0.70% on net assets over £1.5 billion. The variable element of the fee of
+/-0.20% remains unchanged.
CHANGE OF BROKER
Following a review of broker services provided to the Company, we changed our
corporate broker in March this year from Peel Hunt to Jefferies International,
who now acts as sole corporate broker and financial adviser to the Company.
BOARD OF DIRECTORS
This is my first annual report as Chairman, having taken over from Nicholas
Bull at the conclusion of the last AGM. Nicholas had served on the Board since
Fidelity China Special Situations PLC was launched in April 2010, and as
Chairman since 2016, and we thank him for his wonderful stewardship of the
Company.
Given my new position, Alastair Bruce, who joined the Board in July 2021, has
taken on my former role as Chairman of the Audit and Risk Committee.
We have welcomed three new non-executive Directors in the past 12 months.
Georgina Field, whose appointment was announced in the last annual report, and
who joined the Board on 1 July 2022, is an investment marketing specialist and
founder and CEO of White Marble Consulting. She was subsequently elected by
shareholders at the AGM on 20 July 2022.
We were sad to say goodbye to Linda Yueh who resigned and stepped down from
the Board on 31 December 2022 in order to concentrate on a new role as a
non-executive director of Standard Chartered plc. Linda’s role as Senior
Independent Director is now undertaken by Vanessa Donegan. We are very pleased
to have added not one but two China experts to the Board as non-executive
Directors in recent months. Edward Tse, a pioneer of management consulting in
China, was appointed to the Board on 24 November 2022. As well as acting as a
consultant to hundreds of companies on all critical aspects of business in
China, he has also advised Chinese government organisations on strategy,
state-owned enterprise reform and Chinese companies going overseas, as well as
advising the World Bank and the Asian Development Bank.
Gordon Orr, who moved to mainland China from the UK in the early 1990s,
founded McKinsey’s management consulting practice in the country, and led
McKinsey in China and subsequently Asia until 2015. Gordon was appointed to
the Board on 1 January 2023. He currently serves on the boards of Hong
Kong-listed companies Lenovo, Meituan and Swire Pacific, and is the Vice
Chairman of the China Britain Business Council.
We are pleased that your Company’s Board includes a real diversity and
balance of relevant skills and experience, covering China itself, accountancy,
investment management, including private equity and private equity valuations,
and marketing expertise. Owing to the changes in its composition during the
year, the Board no longer meets the target of 40% of FTSE 350 board members to
be women as set by the FTSE Women Leaders Review. Our Board composition
currently has a 33% women representation, however, it should be noted that
from 1 July to 31 December 2022 the Board exceeded the 40% target. In the
period from 24 July 2019 to 31 December 2022, at least 40% of the Board
consisted of women. As all the current Directors have served for less than
five years, the Board wishes to take due care in making the next appointment
in order to meet the 40% target and to space out succession planning. The
present plan is to recruit a female director before the AGM next year.
In accordance with the UK Corporate Governance Code for Directors of FTSE 350
companies, all Directors are subject to annual re-election at the AGM on 20
July 2023. I, together with Alastair, Vanessa and Georgina will stand for
re-election and both Edward and Gordon, being newly appointed, will stand for
election at the AGM. The Directors’ biographies can be found in the Annual
Report, and, between them, they have a wide range of appropriate skills and
experience to form a balanced Board to support and oversee the Company in the
best interests of shareholders.
ANNUAL GENERAL MEETING
The Company’s AGM is at 11.00 am on Thursday, 20 July 2023, and the Board
and I hope to see as many of you as possible on the day. Details of the AGM
are below.
OUTLOOK
After a year in which China’s economic growth was hampered by lockdown
restrictions, the current picture looks much brighter. GDP growth is forecast
to come back in line with longer-term trends at above 5% in 2023, and the
authorities are willing to stimulate where needed to ensure sustainable growth
is in line with the government’s Common Prosperity agenda. ESG standards
continue to improve, and as Western governments experiment with increasingly
protectionist policies and try to tame inflation, opportunities increase for
China to move up the value chain in manufacturing and services.
Against this improving backdrop, valuations in the stock market, and in
particular those of small and mid-cap companies in China, remain relatively
modest, with arguably the best opportunities to be found among the less
well-known companies that may be overlooked by funds that lack a solid
on-the-ground research presence. Added to this, Dale’s flexible approach to
portfolio management allows your Company to adapt to changing conditions,
helping to ensure a profitable future.
While the Chinese stockmarkets are always likely to be volatile, we are
encouraged that all the building blocks remain in place for continued healthy
returns. There will be slips along the way and we remain mindful of
geopolitical issues such as the relationship with the US and the status of
Taiwan, however structural trends such as the growing middle class and
on-going innovation support our positive medium to long-term view.
All the Directors on your Board, other than newly appointed Edward and Gordon,
are also shareholders in the Company, and we remain committed to its future
success.
Meanwhile, we hope to see you, in person or virtually, at our Annual General
Meeting on 20 July 2023, details of which are below.
MIKE BALFOUR
Chairman
7 June 2023
ANNUAL GENERAL MEETING – THURSDAY, 20 JULY 2023 AT 11.00 AM
The AGM of the Company will be held at 11.00 am on Thursday, 20 July 2023 at 4
Cannon Street, London EC4M 5AB (nearest tube stations are St Paul’s or
Mansion House) and virtually via the online Lumi AGM meeting platform. Full
details of the meeting are given in the Notice of Meeting in the Annual
Report.
For those shareholders who would prefer not to attend in person, we will
live-stream the formal business and presentations of the meeting online.
Dale Nicholls, the Portfolio Manager, will be making a presentation to
shareholders highlighting the achievements and challenges of the year past and
the prospects for the year to come. He and the Board will be very happy to
answer any questions that shareholders may have. Copies of his presentation
can be requested by email at investmenttrusts@fil.com or in writing to the
Secretary at FIL Investments International, Beech Gate, Millfield Lane, Lower
Kingswood, Tadworth, Surrey KT20 6RP.
Properly registered shareholders joining the AGM virtually will be able to
vote on the proposed resolutions. Please see Note 9 to the Notes to the Notice
of Meeting in the Annual Report for details on how to vote virtually.
Investors viewing the AGM online will be able to submit live written questions
to the Board and the Portfolio Managers and we will answer as many of these as
possible at an appropriate juncture during the meeting.
Further information and links to the Lumi platform may be found on the
Company’s website at www.fidelity.co.uk/china. On the day of the AGM, in
order to join electronically and ask questions via the Lumi platform,
shareholders will need to connect to the website https://web.lumiagm.com.
Please note that investors on platforms, such as Fidelity Personal Investing,
Hargreaves Lansdown, Interactive Investor or AJ Bell Youinvest, will need to
request attendance at the AGM in accordance with the policies of your chosen
platform. They may request that you submit electronic votes in advance of the
meeting. If you are unable to obtain a unique IVC and PIN from your nominee or
platform, we would welcome your online participation as a guest. Once you have
accessed https://web.lumiagm.com from your web browser on a tablet or
computer, you will need to enter the Lumi Meeting ID which is 192-504-083. You
should then select the ‘Guest Access’ option before entering your name and
who you are representing, if applicable. This will allow you to view the
meeting and ask questions, but you will not be able to vote.
PORTFOLIO MANAGER’S REVIEW
QUESTION
It has been an extraordinary period for investors over the past year, both in
China and globally. What are the main factors that shareholders should
understand?
ANSWER
Not too long ago, in fact after the 20th National Congress of the Chinese
Communist Party in October 2022, sentiment towards Chinese equities was
probably the lowest I have witnessed since I started managing Chinese and
broader Asian equities. This bearishness was further fuelled by weakening
macro data and off the back of the country’s zero-COVID policy.
Then just before the end of 2022, there was an unexpected pivot towards the
country’s reopening and the end of China’s zero-COVID policy. This caused
a sudden shift in investor sentiment, as the market started pricing in the
benefits of reopening. The National People’s Congress at the end of March
2023 clarified the government’s focus on quality growth, primarily
underpinned by growth in domestic demand. As I write this year’s annual
review, questions are once again being raised about China’s economic
recovery, which is likely the main factor behind recent market weakness. While
growth rates on the whole have clearly tempered in the second quarter, the
government’s GDP target of 5% for the year looks achievable. This will make
China one of the few large economies that will see accelerating economic
growth in 2023. Corporate earnings should follow suit and see accelerating
growth, which again compares favourably to other markets. In terms of
corporates, messages are mixed, but we are seeing clearer trends and
distinctions between winners and losers, with the stronger players confirming
that operations are returning to normal and are painting an optimistic picture
of recovery. Valuations as a whole remain towards the lower end of historical
levels, and remain attractive versus global peers, despite what is mostly a
stronger growth outlook.
Consumption will most likely be the prime driver of the recovery, supported by
strong household balance sheets with deposit levels increasing significantly
over COVID. Property still remains a significant component of these balance
sheets. On the back of ongoing loosening measures, we are seeing increasing
signs of the residential property market bottoming in terms of both volumes
and pricing. This all bodes well for spending to continue to recover, similar
to the post COVID recoveries we have seen in other economies.
Geopolitics is another factor that continues to dominate headlines and can
cause turmoil in markets at times. As I have said before I believe that
strategic competition and related tensions between China and the US will be
with us for decades and investors should expect this. It is important to
remember that these two economies are heavily intertwined and this is
recognised by the respective governments. The key thing we need to evaluate as
investors is how policies have the potential to impact the fundamentals of
individual companies. In the past year, we have seen the US government further
restrict sales of leading-edge semiconductors and related equipment to China.
I believe there is potential for such restrictions to tighten further –
these are the type of risks that we build into our analysis. For most
companies, such risks are not a factor. Consequently, the team and I continue
to find many attractive opportunities across the market.
QUESTION
How has the Company performed in the year under review, and how have things
changed since China’s zero-COVID policy was removed?
ANSWER
The Company’s NAV delivered a total return of 2.6% for the financial year
ended 31 March 2023, outperforming the MSCI China Index (the Benchmark Index)
which returned 1.4%. Robust stock picking in the Chinese consumption space
(both discretionary and staples) and in materials contributed positively to
performance. An overweight allocation in industrials also added value. In
contrast, selected names in financials and communication services weighed on
returns, as did an overweight exposure to the information technology
(“IT”) sector.
As discussed above, the biggest change post-COVID is the outlook for the
consumer. While the recovery is bumpy and varies somewhat by sector, the path
to recovery is clearly there. Having said this, the obvious beneficiaries of
reopening – particularly travel and certain consumer stocks – saw a
significant upswing as the zero-COVID policy was lifted. However, this has
made the investment case less compelling for some companies and overall I have
reduced exposure to such names.
Clearly the resumption of normal business operations and supply chains is
another important change. As a result, we will be looking for signs of
recovering business confidence and related indications of a pick-up in capex.
Recent credit growth data is encouraging. As the recovery broadens, I would
expect companies in other sectors such as industrials and financials to
benefit. At the same time, one needs to be wary of global trends – many
other economies may slow significantly, which can impede a return in investor
confidence and sentiment.
QUESTION
Which stocks have performed well during the period and why?
ANSWER
Macroeconomically, sensitive names in the consumer discretionary space have
fared well as faster than expected reopening led to an accelerated consumption
recovery in China. Among the top contributors in the portfolio were positions
in branded variety retailer MINISO Group Holding and home appliances
manufacturer Hisense Home Appliances Group. MINISO’s recent results were
better than expected, demonstrating good execution in brand and product
upgrades, overseas expansion and solid efficiency gains. Hisense’s profit
recovery remains well on track, led by robust overseas growth and solid
ongoing profitability from its joint venture with Hitachi. In addition, retail
jewellery player Luk Fook Holdings International has enjoyed a rerating in the
market, driven by pent-up post-pandemic demand and market share gains as a
result of channel expansion. Also, within the consumer discretionary sector, a
short position in an auto manufacturer, known for their design in electric
vehicles (EVs), added to performance as the stock declined owing to concerns
of consumers favouring other brands. The risk of lower market share was a key
aspect of our investment thesis for shorting the stock.
A holding outside the consumer sector that also proved rewarding was the
position in COSCO Shipping Energy Transportation (“CSET”), the largest
global oil tanker operator. CSET benefited from tailwinds associated with a
recovery in oil demand as air and road traffic regained momentum.
Conversely, the lack of exposure to Chinese online retailer PDD Holdings and
an underweight stance in internet and gaming giant Tencent Holdings held back
relative returns. Tencent’s share price was further boosted as it received
new game licenses from the Chinese regulator at the start of this year. This
type of news, such as the issuance of new gaming licenses, has been another
signal that regulatory pressures on the internet sector have eased.
Within financials, shares of credit facilitator Lufax Holding declined,
triggered by concerns over fintech regulation, deteriorating asset quality and
heightened risks about a de-listing of its American Depositary Receipts (ADRs)
shares. Nonetheless, we feel Lufax remains substantially undervalued and
provides upside potential given its leading position in small and medium-sized
enterprises’ (SMEs) online lending. Further, it is likely we will see an
easing of regulatory headwinds, albeit they will not completely disappear.
Challenging market conditions and weak sentiment in 2022 also negatively
weighed on the performance of third-party wealth management company Noah
Holdings. Despite these challenges, Noah’s assets under management remain
resilient. It continues to grow its client base, positioning itself for robust
growth. Its strength is underpinned by structural tailwinds from growth in the
wealth management sector in China amid rising household assets and its shift
into alternative capital market products.
Within the IT sector, a position in Chinese data-centre operator VNET Group
detracted from returns amid some corporate governance concerns – notably,
privatisation offers and then the forced selling of the founder’s pledged
shares by a large shareholder. The company remains undervalued from a
fundamental perspective and its core business remains resilient as evidenced
by its recent huge order win from a new, sizable and well-regarded client.
Finally, it is worth highlighting that the holding in AI (artificial
intelligence) software maker SenseTime weighed on performance owing to issues
over a higher loss ratio and a lack of standardisation in scaling up the
business. We closed out our position in the company in the third quarter.
QUESTION
What is your approach to gearing, and what impact has it had on returns during
the year and over the longer-term?
ANSWER
The Company has the ability to gear (borrow in order to invest) with the view
that in the long-term, the judicious use of borrowing can enhance capital
returns for shareholders. Given the weak market sentiment and broad-based
corrections experienced after the Congress meeting last October, many stocks
with lower regulatory risk were sold-off indiscriminately, and this presented
interesting opportunities to use gearing in order to add to some long
positions.
As at 31 March 2023, the Company’s Net Gearing, which nets off short
positions and hedges was 21.1%. For the year as a whole, gearing slightly
detracted from returns (gearing impact of -1.5%). However, in the long-term
the effect of gearing has been positive, adding a cumulative 12% to total
returns over my tenure as Portfolio Manager.
Over the past few years, the portfolio’s net market exposure bias has been
predominantly long, fluctuating between 110-120%. I dynamically manage gearing
based on opportunities I see in the market – generally gearing moves up when
valuations are lower and vice versa.
QUESTION
What areas of the economy are you particularly looking at? Are there any
sectors that you are specifically interested in?
ANSWER
Further development of the capital markets, which could become an asset
allocation choice for domestic households given that property is no longer
viable for ‘investment purposes’, could give rise to some interesting
opportunities in the financial services sector. For example, brokers are
benefiting from increased trading and the opening of new accounts. Noah
Holdings is also benefiting from decent structural tailwinds seen from the
growing wealth management/asset management industry, which as previously
highlighted, should see the shift in growth from household assets into
alternative and capital market products. While there is large potential for
increased market share gains for Noah, especially in the area of
high-net-worth assets, we are cognisant of intensifying competition.
Within the property sector, the Company remains underexposed to developers due
to the avoidance of private developers. However, a position is maintained in
state-backed China Overseas Land and Investment (“COLI”). Given continued
expectations of consolidation within the segment, COLI stands to gain market
share. We have strong conviction in:
· COLI’s high quality land bank (it has the highest proportion of
land bank in ‘Tier 1 and Tier 2’ cities versus other national developers)
– an important point, as it benefits from ongoing urbanisation;
· Its product quality, which is well-known and well-recognised by
homebuyers;
· It has maintained solid profitability due to discipline and
pricing; and
· Its land acquisition kept pace during 2022, which should ensure
sufficient new sellable resources as demand continues to recover.
Urbanisation continues to support rising consumer purchasing power. Throughout
my tenure as the Company’s Portfolio Manager, I have been focused on the
rise of the Chinese consumer, and that remains the case, with approximately
43% of the portfolio invested in consumer stocks at the year end, mainly in
stocks within the consumer discretionary sector.
JNBY Design is a leading player in the designer fashion apparel industry. Its
differentiated ‘fashion forward’ product offerings are backed by a strong
and stable local design team. Valuation-wise, JNBY is trading on a
price/earnings (P/E) multiple below 10 times, which is very attractive for a
company with a solid growth profile and track record. It also leverages its
strong cash flows to pay a healthy dividend. Encouragingly, within the
consumer discretionary sector, China’s jewellery market is expected to see
attractive growth, owing to higher per capital disposable income growth. We
expect the company Lao Feng Xiang to gain market share and be a long-term
winner in the country’s jewellery sector, which is around RMB800 billion and
growing at a compound annual rate of between 7 and 8%. Similar to JNBY, the
company has strong brand equity and maintains a group of powerful and loyal
distributors. Further, with continued industry growth, it is in a position to
accelerate the pace of new and expanded stores. We are also pleased that from
a governance perspective, Lao Feng Xiang’s management team has been
improving its management incentive plans.
We are continuing to witness a rapid pace of innovation in China. This,
combined with the ‘domestic substitution’ trend and ongoing consolidation
across a range of industries, has underpinned our significant weighting in
industrials. The core thesis around industry consolidation remains very much
in place – i.e. industries such as building materials are very fragmented
relative to more developed markets but are expected to consolidate, seeing the
bigger and better players taking further market share. Although some of our
paint companies have lagged given ongoing property concerns, we maintain a
high level of conviction in the future upside potential as their fundamentals
normalise – notably they should benefit from an increase in infrastructure
investment (albeit these projects are expected to be very targeted compared to
the spending we saw back in 2008).
QUESTION
What are the major domestic developments that investors should be aware of?
ANSWER
In terms of external perception, there was a world of difference in the
reactions to the October 2022 Congress versus the National People’s Congress
in March 2023. However, in reality they were both on the same page in terms of
the government’s direction and emphasis on various policies; of note,
innovation, consumption and the quality versus the quantity of economic growth
(a GDP target of 5% was announced for the year).
The overhaul of Alibaba Group Holding – China’s second-largest listed
company – is a major event. Designed to drive greater autonomy and agility
for each of its businesses, it has also forced the market to consider the
value of each business. This includes the financial business Ant – the
potential float of this business should be taken positively by markets as a
sign of progress beyond the peak of regulatory tightening.
Also, within the internet space, ByteDance (an unlisted holding) made headline
news overseas after its TikTok app was banned on government-owned devices in
the US, UK and EU. Fortunately, its domestic video-sharing app, Douyin, has
seen more attractive growth. The Chinese market accounts for 82% of
ByteDance’s $70 billion total revenues, and domestic revenue growth remains
strong year-on-year amid a tepid economic environment overseas. Focusing again
on its overseas operations, in order to address concerns over unauthorised
access to US user data, ByteDance has launched Project Texas, a comprehensive
system to protect data privacy. This, in turn, could result in a lower
probability of a complete ban. Even under the worst-case scenario of a full
ban, it would likely take a considerable amount of time and negotiation before
anything was enacted. Given all this, we continue to be supportive holders of
ByteDance.
QUESTION
Environmental, social and governance (“ESG”) themes are very topical among
investors. How do you approach ESG, and can you outline specific examples
where engagement has resulted in good outcomes for stakeholders?
ANSWER
All Fidelity managed funds have had ESG considerations embedded in their
investment process for a number of years. Our research analysts consider ESG
as part of their fundamental stock assessments, using Fidelity’s proprietary
Sustainability Rating and Climate Rating frameworks. As well as this research,
we are active owners of our holdings and engage with companies on a regular
basis where we feel ESG practices could be improved.
During the period under review, we engaged with optics manufacturer Sunny
Optical on the subject of board diversity. Fidelity International
(“Fidelity”) became a member of the 30% Club HK Chapter in 2022, and in
September the Group sent letters to 26 companies with all-male boards to
encourage greater gender diversity. Sunny Optical was one of them.
This engagement is part of a 30% Club initiative that Fidelity is involved
with along with other investors. The company was responsive and shared that a
new female director will be joining the board in 2023. While this still falls
short of FIL’s standard, it means that Sunny Optical will have its first
female director, and also that the level of board independence will rise
significantly.
As well as gender, broader labour management for contract workers was also
mentioned. The company has been outsourcing frontline manufacturing worker
positions since 2018, and the recent controversy over Foxconn’s use of
agency workers on less favourable terms than permanent staff has brought this
topic into the spotlight.
We also had an in-depth engagement with Tuhu Car (an automotive services
company, which is yet to list) in order to better understand its ESG
performance and provide advice. The company confirmed it was the first time it
had engaged extensively with investors on ESG. As a private company, Tuhu Car
does not publish an annual ESG report. However, we have put together an ESG
profile for the company based on our engagement, which showed that the
company’s direct environmental impact is limited to the energy consumption
and carbon emission associated with its warehouses and logistic fleets. While
Tuhu Car is still at a very early stage of measuring and managing its direct
environmental footprint as well as that of its franchisees, we expect these
disclosures to improve as the company becomes more mature, and particularly
once it has listed.
Our engagement with state-backed logistics company Sinotrans centred around
its capital allocation. Regulators have called on State-Owned Enterprises
(SOEs) to improve the efficiency of their capital allocation and we are
optimistic that Sinotrans’s efforts in this area could help drive a
re-rating of the company. We first sent a letter to the company on the
subject, and then discussed the suggestion in a face-to-face meeting. In the
past few months, we have continued to supply the company with peer analysis
and case studies for their internal assessment on the matter. Given our
suggestion that the company should increase its cash payout, we were pleased
to see it achieved a 45.2% full-year cash payout ratio (dividend plus buyback)
for its 2022 financial year. We believe this should serve as a good starting
point for further capital allocation discussions with Sinotrans and we will
continue to engage with the company on this subject.
QUESTION
How has the portfolio’s exposure to unlisted companies changed during the
year under review?
ANSWER
There has been no change in the number or names of unlisted companies held in
the portfolio in the year other than the unlisted shares in Xiaoju Kuaizhi
(Didi Chuxing) being converted to listed American Depositary Shares (ADS). The
percentage of the portfolio in unlisted companies has moved around due to
changes in the value of the individual holdings as well as the value of the
overall portfolio. The process of valuing the Company’s unlisted investments
is set out in the Annual Report and as example of its oversight, the
Manager’s Fair Value Committee has revalued ByteDance three times since
October. As at the end of March 2023, the Company had nine unlisted
investments valued at £192,878,000 being 13.6% of its total Net Assets plus
Borrowings (2022: ten unlisted investments valued at £194,650,000 being 13.2%
of Net Assets plus Borrowings). Of the nine companies held during the year,
three rose in value, five fell in value and one was unchanged. The largest
contributor to performance was Pony.ai, with the biggest detractor being DJI
International.
QUESTION
Investment performance in the year under review has been volatile. What
lessons have you learnt over the period and what are your expectations for the
coming months?
ANSWER
This has been a period that reminds me of just how much sentiment can swing in
the Chinese market, and how short-term focused it can be. Policy clearly
remains a key focus for the market, but the market often gets overly focused
on short-term moves while losing perspective of longer-term goals and
historical cyclicality. We now see policy returning to a greater focus on
growth – this should not be a surprise. The lesson that is reinforced is the
importance of staying calm and focusing on risk/ reward. While we added to
positions that were under pressure and capitalised on our capacity to increase
overall gearing, we could, arguably, have been more aggressive when some were
labelling China as “uninvestable”.
Furthermore, the past year has once again underlined how important it is for
us to have people on the ground in China; even when overseas market
participants were most bearish, we were still finding investment opportunities
and were able to capitalise on the input from our locally-based analysts to
make decisions on companies based on fundamentals.
Chinese onshore equities (i.e., A shares) have one of the lowest correlations
– of any major market – with the US S&P 500 Index and, consequently, can
be viewed as a good diversifier in a global portfolio. Economically, China is
at a different point in the policy and economic cycle compared to most
developed countries currently. In fact, we would argue that it is possibly one
cycle ahead of other economies. In its April 2023 World Economic Outlook
(“WEO”), the International Monetary Fund has forecast China’s GDP growth
to be 5.3% in 2023 and 4.5% in 2024, both unchanged from the January WEO
update, but with the 2023 figure showing a 0.8 percentage point improvement on
the last full WEO in October 2022. Some analysts expect the 2023 forecast to
be even higher given the strength of the domestic economic data. Household
finances are very healthy; the savings rate is 35% and has been in the 30s for
many years, compared with around 9% in the UK. Consumption growth hinges on
both the ability and the willingness to spend; the ability to spend is clearly
there given there is effectively no household debt, but the willingness to
spend is dependent upon improved sentiment, and we are now witnessing that
too.
I continue to have a confidence in both the Chinese market and the underlying
companies we are invested in. As such, I maintain a personal holding of
113,036 shares in the Company.
DALE NICHOLLS
Portfolio Manager
7 June 2023
PRINCIPAL RISKS AND UNCERTAINTIES AND RISK MANAGEMENT
As required by provisions 28 and 29 of the 2018 UK Corporate Governance Code,
the Board has a robust ongoing process for identifying, evaluating and
managing the principal risks and uncertainties faced by the Company, including
those that could threaten its business model, future performance, solvency or
liquidity. The Board, with the assistance of the Alternative Investment Fund
Manager (FIL Investment Services (UK) Limited/the “Manager”), has
developed a risk matrix which, as part of the risk management and internal
controls process, identifies the key existing and emerging risks and
uncertainties that the Company faces. The Audit and Risk Committee continues
to identify any new emerging risks and take any action necessary to mitigate
their potential impact. The risks identified are placed on the Company’s
risk matrix and graded appropriately. This process, together with the policies
and procedures for the mitigation of existing and emerging risks, is updated
and reviewed regularly in the form of comprehensive reports considered by the
Audit and Risk Committee. The Board determines the nature and extent of any
risks it is willing to take in order to achieve its strategic objectives.
Climate change, which refers to a large scale shift in the planet’s weather
patterns and average temperatures, continues to be a key emerging issue as
well as a principal risk confronting asset managers and their investors. The
Board notes that the Manager has integrated ESG considerations, including
climate change, into the Company’s investment process. Further details are
in the Annual Report. The Board will continue to monitor how this may impact
the Company as a risk to investment valuations and potentially to shareholder
returns. Another emerging risk may be the de-coupling from China by developed
economies.
The Manager also has responsibility for risk management for the Company. It
works with the Board to identify and manage the principal and emerging risks
and uncertainties and to ensure that the Board can continue to meet its UK
corporate governance obligations.
The Board considers the following as the principal risks and uncertainties
faced by the Company.
Principal Risks Risk Description and Impact Risk Mitigation Trend
Geopolitical Risk · Impact on the value of investments and the Manager’s ability to access markets freely. · Continuing political and trade · The Board receives insights and information, including research notes, from the Manager and independent sources on a regular basis. · The Board receives and reviews reports from the Portfolio Manager on a regular basis. · Major market contingency plans are developed for more extreme events. Increasing
tensions between China and US, e.g. trade sanctions and China encouraging Chinese companies to de-list from the US. · Regulatory
interventions in certain sectors of the financial markets in China. · The ongoing Ukraine/Russia conflict polarising countries
globally, e.g. Western countries supplying counter-offensive weapons and tanks leading to further escalation. · South China Sea
Dispute could have a negative impact on Chinese investments, including reduced access to global markets and technology,
sanctions and retaliatory measures and possible weakening of investment and confidence in Chinese companies. · Implications of
tensions in the Taiwan Strait include potential military conflict and increased tensions over trade and economic issues over
competing territorial claims.
Market and Economic Risks (including Currency Risk) · China’s newly announced economic targets and policy setting are more conservative and stability-oriented. · The momentum from · Growth may still exceed economic targets as the stable policy setting may help restore private sector confidence after a policy-induced slowdown in the prior year. · The Portfolio Manager and Manager’s ability to understand and predict events in China. Risk management insight is provided on a regular basis. · The Company holds a diversified portfolio emphasising sectors of strategic importance to China. · Current projections are for China’s GDP to continue to grow at above the global average. Stable
the growth in size and wealth of the middle class is tempered by the reduction in the size of the working population. · China’s
economy is vulnerable to uncertain world growth prospects, tightening in global financial conditions, energy costs, rising food
prices and currency instability. · The ability of China’s centralised government system to enact regulation rapidly can
adversely affect sectors or individual companies and as a result affect their stock market prices negatively. · The functional
currency in which the Company reports its results is sterling and its shares are traded in sterling, whilst the underlying
investments are in different currencies. The Company does not hedge currencies.
Operational Risk · Financial losses or reputational damage from inadequate or failed internal processes, people and systems or from external · Fidelity’s Operational Risk Management Framework is designed to pro-actively prevent, identify and manage operational risks inherent in most activities. · Fidelity uses robust systems and procedures dedicated to its operational processes. Its risk management structure is designed according to the three lines of defence model. Increasing
parties and events.
Investment Performance Risk (including Gearing Risk) · The Portfolio Manager fails to outperform the Benchmark Index and peers over the longer-term. · High gearing levels in a · An investment strategy overseen by the Board to optimise returns from investing in China. · Diversification of investments through investment restrictions and guidelines which are monitored and reported upon by the Investment Manager. · A well-resourced team of experienced analysts covering the market. · Board scrutiny of the Manager and the ability in extreme circumstances to change the Manager. · Limit on gearing and oversight of the Manager’s use of gearing by the Board. Stable
falling market accentuates share price weakness. NAV performance can be affected by selling stock in a falling market to keep
the gearing level within pre-agreed limits.
Variable Interest Entity Structures Risk · The Company’s exposure to a number of companies with all or part of their businesses in Variable Interest Entities (“VIEs”) is · Whilst it is not expected that China will change the rules to the extent that it will ban foreign investment, this risk is closely monitored. Stable
expected to remain significant. · Regulatory risk from the China Security Regulatory Commission (“CSCR”) guidelines that
companies with VIE structures will require CSCR approval to list overseas and to comply with Chinese laws.
Climate Change Risk · Impact on investment valuations, business operations, the supply chain and shareholder expectations. · China’s climate change · The Board is provided with insights and reports provided by the investment management team. · Fidelity uses a proprietary climate rating designed to complement broader sustainability ratings and is considered by the investment process where appropriate. · Fidelity’s climate rating analyses companies in three core areas - net zero target alignment, climate governance and capital allocation to the transition - which are in line with the guidance from the Task Force on Climate-related Financial Disclosures (TCFD) and the Institutional Investors Group on Climate Change (IIGCC). Increasing
credentials will likely be less favourable if compared to similar companies in developed western markets. · Reputational impact
may arise by being invested in a company with poor climate change matters.
Discount Management Risk · The Board fails to implement its discount management policy successfully to keep the level of the discount in single digits · The Company’s discount management policy has been implemented to keep the discount in single digits during normal market conditions. · Continuing scrutiny by the Board, the Manager and the Company’s Broker within parameters set. · Maintaining a reputation for standing in the market-place when required in order to keep the discount in single digits. · Maintaining close communications with major shareholders. Increasing
and in the face of heavy selling pressure, exhausts its authorised buyback facility. The impact of excessive market volatility
on the Company’s NAV may also lead to a widening of the discount. · If investor perception towards China is negative, then the
shares in the Company may trade at an increasing discount to its underlying NAV.
Unlisted Securities Risk · Valuations of unlisted securities may be adversely affected by market conditions. · Initial public offering (IPO) of the · The Company has a limit on the extent of the investment in unlisted companies and the Manager has a track record of identifying profitable opportunities. · The Board’s Audit and Risk Committee scrutinises the carrying value of unlisted investments, and this is supported by the Manager and an external advisor. Stable
unlisted companies may face difficulties to come to the market and to achieve marketability. · Potential for less stringent
standards of governance compared with those of listed entities. · The valuation of unlisted shares relies on third-party
judgements.
Environmental, Social and Governance (“ESG”) Risk · Investor expectations related to ESG factors of the underlying investee companies and the portfolio are not perceived to be · Whilst the investment portfolio does not target or employ any set limit of ESG investments, the Manager is expected to engage with companies where sustainability issues arise. · Fidelity carries out ESG considerations at the fundamental research level. · The Portfolio Manager and analysts carry out additional quantitative and qualitative analysis of potential investments to form a view on ESG characteristics of every investee company. · The Manager has developed an ESG investment risk oversight framework and updated its Investment Risk Policy to set minimum controls. Stable
met. · Reputational damage to the Company may arise from perception in the marketplace.
Key Person Risk · Loss of the Portfolio Manager or other key individuals could lead to potential performance and/or operational issues. · The Manager has succession plans for key dependencies. · The depth of the team within Fidelity. · The experience of the analysts covering China. Stable
Cybercrime and Information Security Risks · Cybersecurity risk from cyberattacks or threats to the functioning of global markets and to the Manager’s own business model, · The risk is monitored by the Board with the help of the Manager’s global cybersecurity team and their extensive Strategic Cyber and Information Security program and assurances from outsourced suppliers. · Key performance indicators and metrics have been developed by the Manager to monitor the overall efficacy of cybersecurity processes and controls and to further enhance the Manager’s cybersecurity strategy. Stable
including its and the Company’s outsourced suppliers. · Risk of cybercrime such as phishing, remote access threats, extortion
and denial-of-services attacks from geopolitically motivated attacks.
Business Continuity Risk (including Global Pandemic Risk) · Operational resilience risks could result in financial and/or reputational impact to the Company affecting the functioning of · Fidelity has Business Continuity and Event Management Frameworks in place to deal with business disruption and assure operational resilience. Stable
the business and global markets.
Other risks facing the Company include:
TAX AND REGULATORY RISKS
There is a risk of the Company not complying with the tax and regulatory
requirements in the UK and China. A breach of Section 1158 of the Corporation
Tax Act 2010 could lead to a loss of investment trust status, resulting in the
Company being subject to tax on capital gains.
The Board monitors tax and regulatory changes at each Board meeting and
through active engagement with regulators and trade bodies by the Manager.
OPERATIONAL RISKS
The Company relies on a number of third party service providers, principally
the Manager, Registrar, Custodian and Depositary. It is dependent on the
effective operation of the Manager’s control systems and those of its
service providers with regard to the security of the Company’s assets,
dealing procedures, accounting records and the maintenance of regulatory and
legal requirements. The Registrar, Custodian and Depositary are all subject to
a risk-based programme of internal audits by the Manager. In addition, service
providers’ own internal control reports are received by the Board on an
annual basis and any concerns are investigated. Risks associated with these
service providers is rated as low, but the financial consequences could be
serious, including reputational damage to the Company.
VIABILITY STATEMENT
In accordance with provision 31 of the 2018 UK Corporate Governance Code, the
Directors have assessed the prospects of the Company over a longer period than
the twelve month period required by the “Going Concern” basis. The Company
is an investment trust with the objective of achieving long-term capital
growth. The Board considers long-term to be at least five years, and
accordingly, the Directors believe that five years is an appropriate
investment horizon to assess the viability of the Company, although the life
of the Company is not intended to be limited to this or any other period.
In making an assessment on the viability of the Company, the Board has
considered the following:
· The ongoing relevance of the investment objective in prevailing
market conditions;
· The Company’s level of gearing;
· The Company’s NAV and share price performance;
· The principal and emerging risks and uncertainties facing the
Company as set out above and their potential impact;
· The future demand for the Company’s shares;
· The Company’s share price discount to the NAV;
· The liquidity of the Company’s portfolio;
· The level of income generated by the Company; and
· Future income and expenditure forecasts.
The Company’s performance for the five year reporting period to 31 March
2023 was well ahead of the Benchmark Index, with a NAV total return of +8.3%,
a share price total return of +12.3% compared to the Benchmark Index total
return of -7.5%. The Board regularly reviews the investment policy and
considers whether it remains appropriate. The Board has concluded that there
is a reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the next five years
based on the following considerations:
· The Investment Manager’s compliance with the Company’s
investment objective and policy, its investment strategy and asset allocation;
· The fact that the portfolio comprises sufficient readily
realisable securities which can be sold to meet funding requirements if
necessary;
· The Board’s discount management policy; and
· The ongoing processes for monitoring operating costs and income
which are considered to be reasonable in comparison to the Company’s total
assets.
In preparing the Financial Statements, the Directors have considered the
impact of climate change as detailed above. The Board has also considered the
impact of regulatory changes, continuing tensions between the US and China,
tensions with Taiwan and the ongoing global implications of the Ukraine and
Russia war, and how this may affect the Company.
In addition, the Directors’ assessment of the Company’s ability to operate
in the foreseeable future is included in the Going Concern Statement below.
Going Concern Statement
The Directors have considered the Company’s investment objective, risk
management policies, liquidity risk, credit risk, capital management policies
and procedures, the nature of its portfolio and its expenditure and cash flow
projections. The Directors, having considered the liquidity of the Company’s
portfolio of investments (being mainly securities which are readily
realisable), stress testing performed, the projected income and expenditure
and the loan facility agreement, are satisfied that the Company is financially
sound and has adequate resources to meet all of its liabilities and ongoing
expenses and continue in operational existence for the foreseeable future. The
Board has therefore concluded that the Company has adequate resources to
continue to adopt the going concern basis for the period to 30 June 2024 which
is at least twelve months from the date of approval of the Financial
Statements. This conclusion also takes into account the Board’s assessment
of the ongoing risks from evolving variants of COVID, the war in Ukraine,
China’s tensions with the US and Taiwan and significant market events. The
prospects of the Company over a period longer than twelve months can be found
in the Viability Statement above.
Accordingly, the Financial Statements of the Company have been prepared on a
going concern basis.
PROMOTING THE SUCCESS OF THE COMPANY
Under Section 172(1) of the Companies Act 2006, the Directors of a company
must act in a way they consider, in good faith, would be most likely to
promote the success of the Company for the benefit of its members as a whole,
and in doing so have regard (amongst other matters) to the likely consequences
of any decision in the long-term; the need to foster relationships with the
Company’s suppliers, customers and others; the impact of the Company’s
operations on the community and the environment; the desirability of the
Company maintaining a reputation for high standards of business conduct; and
the need to act fairly as between members of the Company.
As an externally managed Investment Trust, the Company has no employees or
physical assets, and a number of the Company’s functions are outsourced to
third parties. The key outsourced function is the provision of investment
management services by the Manager, but other professional service providers
support the Company by providing administration, custodial, banking and audit
services. The Board considers the Company’s key stakeholders to be the
existing and potential shareholders, the external appointed Manager and other
third-party professional service providers. The Board considers that the
interest of these stakeholders is aligned with the Company’s objective of
delivering long-term capital growth to investors, in line with the Company’s
stated objective and strategy, while providing the highest standards of legal,
regulatory and commercial conduct.
The Board, with the Portfolio Manager, sets the overall investment strategy
and reviews this at an annual strategy day which is separate from the regular
cycle of board meetings. In order to ensure good governance of the Company,
the Board has set various limits on the investments in the portfolio, whether
in the maximum size of individual holdings, the use of derivatives, the level
of gearing and others. These limits and guidelines are regularly monitored and
reviewed and are set out in the Annual Report.
The Board places great importance on communication with shareholders. The
Annual General Meeting provides the key forum for the Board and the Portfolio
Manager to present to the shareholders on the Company’s performance and
future plans and the Board encourages all shareholders to attend in person or
virtually and raise any questions or concerns. The Chairman and other Board
members are available to meet shareholders as appropriate. Shareholders may
also communicate with Board members at any time by writing to them at the
Company’s registered office at FIL Investments International, Beech Gate,
Millfield Lane, Tadworth, Surrey KT20 6RP or via the Company Secretary at the
same address or by email at investmenttrusts@ fil.com. The Portfolio Managers
meet with major shareholders, potential investors, stock market analysts,
journalists and other commentators throughout the year. These communication
opportunities help inform the Board in considering how best to promote the
success of the Company over the long-term.
The Board seeks to engage with the Manager and other service providers and
advisers in a constructive and collaborative way, promoting a culture of
strong governance, while encouraging open and constructive debate, in order to
ensure appropriate and regular challenge and evaluation. This aims to enhance
service levels and strengthen relationships with service providers, with a
view to ensuring shareholders’ interests are best served, by maintaining the
highest standards of commercial conduct while keeping cost levels competitive.
Whilst the Company’s direct operations are limited, the Board recognises the
importance of considering the impact of the Company’s investment strategy on
the wider community and environment. The Board believes that a proper
consideration of ESG issues aligns with the Company’s investment objective
to deliver long-term growth in both capital and income, and the Board’s
review of the Manager includes an assessment of their ESG approach, which is
set out in the Annual Report.
In addition to ensuring that the Company’s investment objective was being
pursued, key decisions and actions taken by the Directors during the reporting
year, and up to the date of this report, have included:
· As part of the Board’s succession plan, the appointments of
Georgina Field on 1 July 2022, Edward Tse on 24 November 2022 and Gordon Orr
on 1 January 2023;
· As part of the Board’s succession plan, the decision to appoint
Mike Balfour as Chairman of the Board to replace Nicholas Bull on 20 July 2022
and Alastair Bruce as Chairman of the Audit and Risk Committee on the change
of role for Mr Balfour;
· The decision to hold a hybrid AGM in 2022 (and again this year)
in order to make the AGM more accessible and improve the shareholder
experience;
· Authorising the repurchase of 25,631,781 ordinary shares in the
reporting year when the Company’s discount widened, in line with the
Board’s intention that the ordinary share price should trade at a level
close to the underlying NAV;
· The decision to renew the Company’s revolving fixed rate credit
facility for US$100,000,000 for gearing purposes;
· The decision to change the Company’s corporate broker following
a review of services provided;
· The decision to appoint an apprentice of the Board with effect
from 13 July 2023;
· Following discussions with the Manager, the reduction in the
first tier of the management fee from 0.90% to 0.85% with effect from1 July
2023; and
· The decision to pay a final dividend of 6.25 pence per ordinary
share, the highest rate since the Company was launched.
Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Annual Report and the
Financial Statements in accordance with applicable United Kingdom law and
regulations.
Company law requires the Directors to prepare Financial Statements for each
financial period. Under that law they have elected to prepare the Financial
Statements in accordance with UK-adopted International Accounting Standards
(“IFRS”) in conformity with the requirements of the Companies Act 2006 and
IFRIC interpretations. Under company law the Directors must not approve the
Financial Statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Company and of the profit or loss for the
reporting period.
In preparing these Financial Statements the Directors are required to:
· Select suitable accounting policies in accordance with IAS 8:
Accounting Policies, Changes in Accounting Estimates and Errors, and then
apply them consistently;
· Make judgements and estimates that are reasonable and prudent;
· Present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable information;
· Provide additional disclosures when compliance with the specific
requirements in IFRS is insufficient to enable users to understand the impact
of particular transactions, other events and conditions on the Company’s
financial position and financial performance;
· State whether applicable IFRS and IFRIC interpretations have been
followed, subject to any material departures disclosed and explained in the
Financial Statements; and
· Prepare the Financial Statements on the going concern basis
unless it is inappropriate to assume that the Company will continue in
business.
The Directors are responsible for ensuring that adequate accounting records
are kept which disclose with reasonable accuracy at any time the financial
position of the Company and to enable them to ensure that the Financial
Statements comply with the Companies Act 2006. They are also responsible for
safeguarding the assets of the Company and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, a Directors’ Report, a Corporate Governance
Statement and a Directors’ Remuneration Report that comply with that law and
those regulations.
The Directors have delegated to the Manager the responsibility for the
maintenance and integrity of the corporate and financial information included
on the Company’s pages of the Manager’s website at
www.fidelity.co.uk/china. Visitors to the website need to be aware that
legislation in the UK governing the preparation and dissemination of the
Financial Statements may differ from legislation in their own jurisdictions.
The Directors confirm that to the best of their knowledge:
· The Financial Statements, prepared in accordance with UK-adopted
International Accounting Standards (“IFRS”) and IFRIC interpretations,
give a true and fair view of the assets, liabilities, financial position and
profit of the Company; and
· The Annual 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 it faces.
The Directors consider that the Annual Report and Financial Statements, taken
as a whole, are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company’s performance, business
model and strategy.
Approved by the Board on 7 June 2023 and signed on its behalf
MIKE BALFOUR
Chairman
FINANCIAL STATEMENTS
INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2023
Year ended 31 March 2023 Year ended 31 March 2022
Notes Revenue £’000 Capital £’000 Total £’000 Revenue £’000 Capital £’000 Total £’000
Revenue
Investment income 3 32,704 – 32,704 29,638 – 29,638
Derivative income 3 11,566 – 11,566 11,595 – 11,595
Other income 3 409 – 409 42 – 42
--------------- --------------- --------------- --------------- --------------- ---------------
Total income 44,679 – 44,679 41,275 – 41,275
========= ========= ========= ========= ========= =========
Losses on investments at fair value through profit or loss 10 – (6,912) (6,912) – (603,831) (603,831)
Gains/(losses) on derivative instruments 11 – 14,971 14,971 – (160,189) (160,189)
Foreign exchange gains – 8,167 8,167 – 1,429 1,429
Foreign exchange losses on bank loan – (4,814) (4,814) – (3,569) (3,569)
--------------- --------------- --------------- --------------- --------------- ---------------
Total income and gains/(losses) 44,679 11,412 56,091 41,275 (766,160) (724,885)
========= ========= ========= ========= ========= =========
Expenses
Investment management fees 4 (3,012) (11,715) (14,727) (3,984) (15,659) (19,643)
Other expenses 5 (1,097) (4) (1,101) (1,393) (25) (1,418)
--------------- --------------- --------------- --------------- --------------- ---------------
Profit/(loss) before finance costs and taxation 40,570 (307) 40,263 35,898 (781,844) (745,946)
Finance costs 6 (3,956) (11,869) (15,825) (1,663) (4,989) (6,652)
--------------- --------------- --------------- --------------- --------------- ---------------
Profit/(loss) before taxation 36,614 (12,176) 24,438 34,235 (786,833) (752,598)
Taxation 7 (1,149) – (1,149) (1,186) – (1,186)
--------------- --------------- --------------- --------------- --------------- ---------------
Profit/(loss) after taxation for the year 35,465 (12,176) 23,289 33,049 (786,833) (753,784)
--------------- --------------- --------------- --------------- --------------- ---------------
Earnings/(loss) per ordinary share 8 7.05p (2.42p) 4.63p 6.42p (152.81p) (146.39p)
========= ========= ========= ========= ========= =========
The Company does not have any income or expenses that are not included in the
profit/(loss) after taxation for the year. Accordingly, the profit/(loss)
after taxation for the year is also the total comprehensive income for the
year and no separate Statement of Comprehensive Income has been presented.
The total column of this statement represents the Income Statement of the
Company. The revenue and capital columns are supplementary and presented for
information purposes as recommended by the Statement of Recommended Practice
issued by the AIC.
All the profit/(loss) and total comprehensive income is attributable to the
equity shareholders of the Company. There are no minority interests.
No operations were acquired or discontinued in the year and all items in the
above statement derive from continuing operations.
The Notes below form an integral part of these Financial Statements.
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MARCH 2023
Notes Share capital £’000 Share premium account £’000 Capital redemption reserve £’000 Other reserve £’000 Capital reserve £’000 Revenue reserve £’000 Total equity £’000
Total equity at 31 March 2022 5,710 211,569 917 244,043 889,958 48,424 1,400,621
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
Repurchase of ordinary shares 15 – – – (57,249) – – (57,249)
(Loss)/profit after taxation for the year – – – – (12,176) 35,465 23,289
Dividend paid to shareholders 9 – – – – – (28,240) (28,240)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total equity at 31 March 2023 5,710 211,569 917 186,794 877,782 55,649 1,338,421
========= ========= ========= ========= ========= ========= =========
Total equity at 31 March 2021 5,710 211,569 917 248,491 1,676,791 39,499 2,182,977
Repurchase of ordinary shares 15 – – – (4,448) – – (4,448)
(Loss)/profit after taxation for the year – – – – (786,833) 33,049 (753,784)
Dividend paid to shareholders 9 – – – – – (24,124) (24,124)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total equity at 31 March 2022 5,710 211,569 917 244,043 889,958 48,424 1,400,621
========= ========= ========= ========= ========= ========= =========
The Notes below form an integral part of these Financial Statements.
BALANCE SHEET AS AT 31 MARCH 2023
Company Number 7133583
Notes 31 March 2023 £’000 31 March 2022 £’000
Non-current assets
Investments at fair value through profit or loss 10 1,318,764 1,365,485
--------------- ---------------
Current assets
Derivative instruments 11 22,313 23,994
Amounts held at futures clearing houses and brokers 34,813 32,220
Other receivables 12 11,939 14,204
Cash at bank 72,943 73,673
--------------- ---------------
142,008 144,091
========= =========
Current liabilities
Derivative instruments 11 (20,892) (17,524)
Bank loan 13 (80,857) (76,043)
Other payables 14 (20,602) (15,388)
--------------- ---------------
(122,351) (108,955)
========= =========
Net current assets 19,657 35,136
========= =========
Net assets 1,338,421 1,400,621
========= =========
Equity attributable to equity shareholders
Share capital 15 5,710 5,710
Share premium account 16 211,569 211,569
Capital redemption reserve 16 917 917
Other reserve 16 186,794 244,043
Capital reserve 16 877,782 889,958
Revenue reserve 16 55,649 48,424
--------------- ---------------
Total equity 1,338,421 1,400,621
========= =========
Net asset value per ordinary share 17 274.08p 272.52p
========= =========
The Financial Statements above and below were approved by the Board of
Directors on 7 June 2023 and were signed on its behalf by:
MICHAEL BALFOUR
Chairman
The Notes below form an integral part of these Financial Statements.
CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MARCH 2023
Year ended 31 March 2023 £’000 Year ended 31 March 2022 £’000
Operating activities
Cash inflow from investment income 30,352 26,752
Cash inflow from derivative income 11,484 11,481
Cash inflow from other income 409 42
Cash outflow from Directors’ fees (195) (181)
Cash outflow from other payments (15,638) (21,626)
Cash outflow from the purchase of investments (429,715) (733,693)
Cash outflow from the purchase of derivatives (7,957) (4,095)
Cash outflow from the settlement of derivatives (485,760) (549,387)
Cash inflow from the sale of investments 480,407 936,723
Cash inflow from the settlement of derivatives 510,263 387,497
Cash outflow from amounts held at futures clearing houses and brokers (2,593) (12,348)
--------------- ---------------
Net cash inflow from operating activities before servicing of finance 91,057 41,165
========= =========
Financing activities
Cash outflow from loan interest paid (2,242) (2,009)
Cash outflow from CFD interest paid (12,099) (3,037)
Cash outflow from short CFD dividends paid (254) (1,707)
Cash outflow from the repurchase of ordinary shares (57,119) (4,448)
Cash outflow from dividends paid to shareholders (28,240) (24,124)
--------------- ---------------
Cash outflow from financing activities (99,954) (35,325)
========= =========
(Decrease)/increase in cash at bank (8,897) 5,840
Cash at bank at the start of the year 73,673 66,404
Effect of foreign exchange movements 8,167 1,429
--------------- ---------------
Cash at bank at the end of the year 72,943 73,673
========= =========
The Notes below form an integral part of these Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
1 PRINCIPAL ACTIVITY
Fidelity China Special Situations PLC is an Investment Company incorporated in
England and Wales with a premium listing on the London Stock Exchange. The
Company’s registration number is 7133583, and its registered office is Beech
Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP. The Company
has been approved by HM Revenue & Customs as an Investment Trust under Section
1158 of the Corporation Tax Act 2010 and intends to conduct its affairs so as
to continue to be approved.
2 ACCOUNTING POLICIES
The Company’s Financial Statements have been prepared in accordance with
UK-adopted International Accounting Standards (“IFRS”), IFRIC
interpretations and as far as it is consistent with IFRS, with the Statement
of Recommended Practice: Financial Statements of Investment Trust Companies
and Venture Capital Trusts (“SORP”) issued by the Association of
Investment Companies (“AIC”) in July 2022. The accounting policies adopted
in the preparation of these Financial Statements are summarised below.
a) Basis of accounting – The Financial Statements have been prepared on a
going concern basis and under the historical cost convention, except for the
measurement at fair value of investments and derivative instruments. The
Directors have a reasonable expectation that the Company has adequate
resources to continue in operational existence up to 30 June 2024 which is at
least twelve months from the date of approval of these Financial Statements.
In making their assessment the Directors have reviewed income and expense
projections and the loan agreement, reviewed the liquidity of the investment
portfolio, stress testing performed and considered the Company’s ability to
meet liabilities as they fall due. This conclusion also takes into account the
Director’s assessment of the risks faced by the Company as detailed in the
Going Concern Statement above.
In preparing these Financial Statements the Directors have considered the
impact of climate change risk as a principal and as an emerging risk as set
out above, and have concluded that there was no further impact of climate
change to be taken into account as the investments are valued based on market
pricing. In line with IFRS 13 investments are valued at fair value, which for
the Company are quoted bid prices for investments in active markets at the
balance sheet date. Investments which are unlisted are priced using
market-based valuation approaches. All investments therefore reflect the
market participants view of climate change risk on the investments held by the
Company.
The Company’s Going Concern Statement in the Directors’ Report above takes
account of all events and conditions up to 30 June 2024 which is at least
twelve months from the date of approval of these Financial Statements.
b) Adoption of new and revised International Accounting Standards – the
accounting policies adopted are consistent with those of the previous
financial year.
At the date of authorisation of these Financial Statements, the following
revised IAS were in issue but not yet effective:
· IAS 1 Presentation of Financial Statements (amendments);
· IAS 8 Accounting Policies, Changes in Accounting estimates and
errors (amendments); and
· IAS 12 Income Taxes (amendments).
The Directors do not expect that the adoption of the above Standards will have
a material impact on the Financial Statements of the Company in future
periods.
c) Segmental reporting – The Company is engaged in a single segment business
and, therefore, no segmental reporting is provided.
d) Presentation of the Income Statement – In order to reflect better the
activities of an investment company and in accordance with guidance issued by
the AIC, supplementary information which analyses the Income Statement between
items of a revenue and capital nature has been prepared alongside the Income
Statement. The revenue profit after taxation for the year is the measure the
Directors believe appropriate in assessing the Company’s compliance with
certain requirements set out in Section 1159 of the Corporation Tax Act 2010.
e) Significant accounting estimates, assumptions and judgements – The
preparation of the Financial Statements requires the use of estimates,
assumptions and judgements. These estimates, assumptions and judgements 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 key sources of estimation and uncertainty relate to the fair value of the
unlisted investments.
Judgements
The Directors consider whether each fair value is appropriate following
detailed review and challenge of the pricing methodology. The judgement
applied in the selection of the methodology used (see Note 2 (l) below) for
determining the fair value of each unlisted investment can have a significant
impact upon the valuation.
Estimates
The key estimate in the Financial Statements is the determination of the fair
value of the unlisted investments by the Manager’s Fair Value Committee
(“FVC”), with support from an external valuer and Fidelity’s unlisted
investments specialist, for detailed review and appropriate challenge by the
Directors. This estimate is key as it significantly impacts the valuation of
the unlisted investments at the Balance Sheet date. When no recent primary or
secondary transaction in the company’s shares have taken place, the fair
valuation process involves estimation using subjective inputs that are
unobservable (for which market data is unavailable). The estimates involved in
the valuation process may include the following:
(i) The selection of appropriate comparable companies. Comparable
companies are chosen on the basis of their business characteristics and growth
patterns;
(ii) The selection of a revenue metric (either historical or forecast);
(iii) The selection of an appropriate illiquidity discount factor to
reflect the reduced liquidity of unlisted companies versus their listed peers;
(iv) The estimation of the likelihood of a future exit of the position
through an initial public offering (“IPO”) or a company sale;
(v) The selection of an appropriate industry benchmark index to assist
with the valuation; and
(vi) The calculation of valuation adjustments derived from milestone
analysis and future cash flows (i.e. incorporating operational success against
the plans/forecasts of the business into the valuation).
As the valuation outcomes may differ from the fair value estimates a price
sensitivity analysis is provided in Other Price Risk Sensitivity in Note 18
below to illustrate the effect on the Financial Statements of an over or under
estimation of fair value.
The risk of an over or under estimation of fair value is greater when
methodologies are applied using more subjective inputs.
Assumptions
The determination of fair value by the FVC involves key assumptions dependent
upon the valuation techniques used. The valuation process recognises that the
price of a recent investment may be an appropriate starting point for
estimating fair value. The Multiples approach involves subjective inputs and
therefore presents a greater risk of over or under estimation, particularly in
the absence of a recent transaction.
f) Income – Income from equity investments and long contracts for difference
(“CFDs”) is credited to the revenue column of the Income Statement on the
date on which the right to receive the payment is established, normally the
ex-dividend date. Overseas dividends are accounted for gross of any tax
deducted at source. Where the Company has elected to receive its dividends in
the form of additional shares rather than cash, the amount of the cash
dividend foregone is recognised as income. Any excess in the value of the
shares received over the amount of the cash dividend foregone is recognised as
a gain in the capital column of the Income Statement. Special dividends are
treated as a revenue receipt or a capital receipt depending on the facts and
circumstances of each particular case.
Interest received on CFDs, collateral and bank deposits are accounted for on
an accruals basis and credited to the revenue column of the Income Statement.
Interest received on CFDs represent the finance costs calculated by reference
to the notional value of the CFDs.
g) Functional currency and foreign exchange – The functional and reporting
currency of the Company is UK sterling, which is the currency of the primary
economic environment in which the Company operates. Transactions denominated
in foreign currencies are reported in UK sterling at the rate of exchange
ruling at the date of the transaction. Assets and liabilities in foreign
currencies are translated at the rates of exchange ruling at the Balance Sheet
date. Foreign exchange gains and losses arising on translation are recognised
in the Income Statement as a revenue or a capital item depending on the nature
of the underlying item to which they relate.
h) Investment management and other expenses – These are accounted for on an
accruals basis and are charged as follows:
· The base investment management fee is allocated 25% to revenue
and 75% to capital;
· The variable investment management fee is charged/credited to
capital as it is based on the performance of the net asset value per share
relative to the Benchmark Index; and
· All other expenses are allocated in full to revenue with the
exception of those directly attributable to share issues or other capital
events.
i) Finance costs – Finance costs comprise interest on the bank loan and
overdrafts and finance costs paid on CFDs, which are accounted for on an
accruals basis, and dividends paid on short CFDs, which are accounted for on
the date on which the obligation to incur the cost is established, normally
the ex-dividend date. Finance costs are allocated 25% to revenue and 75% to
capital.
j) Taxation – The taxation charge represents the sum of current taxation and
deferred taxation.
Taxation currently payable is based on the taxable profit for the year.
Taxable profit differs from profit before taxation, as reported in the Income
Statement, because it excludes items of income or expense that are taxable or
deductible in other years and items that are never taxable or deductible. The
Company’s liability for current taxation is calculated using taxation rates
that have been enacted or substantially enacted by the Balance Sheet date.
Deferred taxation is the taxation expected to be payable or recoverable on
differences between the carrying amounts of assets and liabilities in the
Financial Statements and the corresponding taxation bases used in the
computation of taxable profit based on tax rates that have been enacted or
substantively enacted when the taxation is expected to be payable or
recoverable, and is accounted for using the balance sheet liability method.
Deferred taxation liabilities are recognised for all taxable temporary
differences and deferred taxation assets are recognised to the extent that it
is probable that taxable profits will be available against which deductible
temporary differences can be utilised.
Taxation is charged or credited to the revenue column of the Income Statement,
except where it relates to items of a capital nature, in which case it is
charged or credited to the capital column of the Income Statement. Where
expenses are allocated between revenue and capital any tax relief in respect
of the expenses is allocated between revenue and capital returns on the
marginal basis using the Company’s effective rate of corporation tax for the
accounting period. The Company is an approved Investment Trust under Section
1158 of the Corporation Tax Act 2010 and is not liable for UK taxation on
capital gains.
k) Dividend paid to shareholders – Dividends payable to equity shareholders
are recognised when the Company’s obligation to make payment is established.
l) Investments – The portfolio of financial assets is managed and its
performance evaluated on a fair value basis, in accordance with a documented
investment strategy, and information about the portfolio is provided on that
basis to the Company’s Board of Directors. Under IFRS 9 investments are held
at fair value through profit or loss, which is initially taken to be their
cost, and is subsequently measured at bid or last traded prices, depending
upon the convention of the exchange on which they are listed, where available,
or otherwise at fair value based on published price quotations.
Investments which are not quoted, or are not frequently traded, are stated at
the best estimate of fair value. The Manager’s Fair Value Committee
(“FVC”), which is independent of the Portfolio Manager’s team, and with
support from the external valuer and Fidelity’s unlisted investments
specialist, provides recommended fair values to the Directors. These are based
on the principles outlined in Note 2 (e) above. The unlisted investments are
valued at fair value following a detailed review and appropriate challenge by
the Directors of the pricing methodology proposed by the FVC.
The techniques applied by the FVC when valuing the unlisted investments are
predominantly market-based approaches. The market-based approaches are set out
below and are followed by an explanation of how they are applied to the
Company’s unlisted portfolio:
· Multiples;
· Industry Valuation Benchmarks; and
· Available Market Prices.
The nature of the unlisted investment will influence the valuation technique
applied. The valuation approach recognises that the price of a recent
investment, if resulting from an orderly transaction, generally represents
fair value as at the transaction date and may be an appropriate starting point
for estimating fair value at subsequent measurement dates. However,
consideration is given to the facts and circumstances as at the subsequent
measurement date, including changes in the market or performance of the
investee company. Milestone analysis and future cash flows are used where
appropriate to incorporate the operational progress of the investee company
into the valuation. Consideration is also given to the input received from the
Fidelity analyst that covers the company, Fidelity’s unlisted investments
specialist and from an external valuer. Additionally, the background to the
transaction must be considered. As a result, various multiples-based
techniques are employed to assess the valuations particularly in those
companies with established revenues. An absence of relevant industry peers may
preclude the application of the Industry Valuation Benchmarks technique and an
absence of observable prices may preclude the Available Market Prices
approach.
The unlisted investments are valued according to a three month cycle of
measurement dates. The fair value of the unlisted investments will be reviewed
before the next scheduled three monthly measurement date on the following
occasions:
· At the year end and half year end of the Company; and
· Where there is an indication of a change in fair value (commonly
referred to as ‘trigger’ events).
In accordance with the AIC SORP, the Company includes transaction costs,
incidental to the purchase or sale of investments within losses on investments
held at fair value through profit or loss in the capital column of the Income
Statement and has disclosed them in Note 10 below.
m) Derivative instruments – When appropriate, permitted transactions in
derivative instruments are used. Derivative transactions into which the
Company may enter include CFDs, futures, options, warrants and forward
currency contracts. Under IFRS 9 derivatives are classified at fair value
through profit or loss – held for trading, and are initially accounted and
measured at fair value on the date the derivative contract is entered into and
subsequently measured at fair value as follows:
· CFDs – the difference between the strike price and the value of
the underlying shares in the contract, calculated in accordance with
accounting policy 2 (l) above;
· Futures – the difference between contract price and the quoted
trade price; and
· Options – the quoted trade price for the contract.
Where such transactions are used to protect or enhance income, if the
circumstances support this, the income derived is included in derivative
income in the revenue column of the Income Statement. Where such transactions
are used to protect or enhance capital, if the circumstances support this, the
gains and losses derived are included in gains/(losses) on derivative
instruments held at fair value through profit or loss in the capital column of
the Income Statement. Any positions on such transactions open at the year end
are reflected on the Balance Sheet at their fair value within current assets
or current liabilities.
The Company obtains equivalent exposure to equities through the use of CFDs.
All gains and losses in the fair value of the CFDs are included in
gains/(losses) on derivative instruments held at fair value through profit or
loss in the capital column of the Income Statement.
n) Amounts held at futures clearing houses and brokers – Cash deposits are
held in segregated accounts on behalf of brokers as collateral against open
derivative contracts. These are carried at amortised cost.
o) Other receivables – Other receivables include amounts receivable on
settlement of derivatives, securities sold for future settlement, accrued
income, taxation recoverable and other debtors and prepayments incurred in the
ordinary course of business. If collection is expected in one year or less (or
in the normal operating cycle of the business, if longer) they are classified
as current assets. If not, they are presented as non-current assets. Other
receivables are recognised initially at fair value and, where applicable,
subsequently measured at amortised cost using the effective interest rate
method and as reduced by appropriate allowance for estimated irrecoverable
amounts.
p) Bank loans – Loans are initially included in the Financial Statements at
cost, being the fair value of the consideration received net of any issue
costs relating to the borrowing. After initial recognition, the loans are
measured at amortised cost using the effective interest rate method. The
amortised cost is calculated by taking into account any issue costs and any
discount or premium on settlement.
q) Other payables – Other payables include amounts payable on settlement of
derivatives, securities purchased for future settlement, investment management
fees, loan interest payable, amounts payable for repurchase of shares, finance
costs payable and expenses accrued in the ordinary course of business. Other
payables are classified as current liabilities if payment is due within one
year or less (or in the normal operating cycle of the business, if longer). If
not, they are presented as non-current liabilities. Other payables are
recognised initially at fair value and, where applicable, subsequently
measured at amortised cost using the effective interest rate method.
r) Other reserve – The full cost of ordinary shares repurchased and held in
Treasury is charged to the Other Reserve.
s) Capital reserve – The following are transferred to capital reserve:
· Gains and losses on the disposal of investments and derivatives
instruments;
· Changes in the fair value of investments and derivative
instruments, held at the year end;
· Foreign exchange gains and losses of a capital nature;
· Variable investment management fees;
· 75% of base investment management fees;
· 75% of finance costs;
· Dividends receivable which are capital in nature;
· Taxation charged or credited relating to items which are capital
in nature: and
· Other expenses which are capital in nature.
Technical guidance issued by the Institute of Chartered Accountants in England
and Wales in TECH 02/17BL, guidance on the determination of realised profits
and losses in the context of distributions under the Companies Act 2006,
states that changes in the fair value of investments which are readily
convertible to cash, without accepting adverse terms at the Balance Sheet
date, can be treated as realised. Capital reserves realised and unrealised are
shown in aggregate as capital reserve in the Statement of Changes in Equity
and the Balance Sheet. At the Balance Sheet date, the portfolio of the Company
consisted of investments listed on a recognised stock exchange and derivative
instruments contracted with counterparties having an adequate credit rating,
and the portfolio was considered to be readily convertible to cash, with the
exception of the level 3 investments which had unrealised investment holding
gains of £25,993,000 (2022: unrealised investment holding gains of
£17,794,000). See Note 18 below for further details on the level 3
investments.
3 INCOME
Year ended 31 March 2023 £’000 Year ended 31 March 2022 £’000
Investment income
Overseas dividends 31,949 28,632
Overseas scrip dividends 755 1,006
--------------- ---------------
32,704 29,638
========= =========
Derivative income
Dividends received on long CFDs 11,282 11,483
Interest received on CFDs 284 112
--------------- ---------------
11,566 11,595
========= =========
Other income
Interest received on collateral and deposits 409 42
--------------- ---------------
Total income 44,679 41,275
========= =========
Special dividends of £1,155,000 (2022: £nil) have been recognised in
capital.
4 INVESTMENT MANAGEMENT FEES
Year ended 31 March 2023 Year ended 31 March 2022
Revenue £’000 Capital £’000 Total £’000 Revenue £’000 Capital £’000 Total £’000
Investment management fee – base 3,012 9,037 12,049 3,984 11,953 15,937
Investment management fee – variable – 2,678 2,678 – 3,706 3,706
--------------- --------------- --------------- --------------- --------------- ---------------
3,012 11,715 14,727 3,984 15,659 19,643
========= ========= ========= ========= ========= =========
FIL Investment Services (UK) Limited (a Fidelity group company) is the
Company’s Alternative Investment Fund Manager (“the Manager”) and has
delegated portfolio management to FIL Investment Management (Hong Kong)
Limited (“the Investment Manager”).
The base investment management fee is charged at an annual rate of 0.90% on
the first £1.5 billion of net assets, reducing to 0.70% of net assets over
£1.5 billion. In addition, there is a +/-0.20% variable fee based on the
Company’s NAV per share performance relative to the Company’s Benchmark
Index measured daily over a three year rolling basis. In the event of
outperformance against the Benchmark Index, the maximum fee that the Company
would pay overall is 1.10% on net assets up to £1.5 billion and reducing to
0.90% on net assets over £1.5 billion. If the Company underperforms, then the
overall fee can fall as low as 0.70% on net assets up to £1.5 billion and
reducing to 0.50% on net assets over £1.5 billion. Fees are payable monthly
in arrears and are calculated on a daily basis. With effect from 1 July 2023,
the first tier of the management fee will reduce from 0.90% to 0.85%.
The base investment management fee has been allocated 75% to capital reserve
in accordance with the Company’s accounting policies.
Further details of the terms of the Management Agreement are given in the
Directors’ Report in the Annual Report.
5 OTHER EXPENSES
Year ended 31 March 2023 £’000 Year ended 31 March 2022 £’000
Allocated to revenue:
AIC fees 21 21
Custody fees 157 352
Depositary fees 57 73
Directors’ expenses 13 5
Directors’ fees (1) 202 182
Legal and professional fees 77 207
Marketing expenses 263 264
Printing and publication expenses 50 50
Registrars’ fees 69 55
Other expenses 131 131
Fees payable to the Company’s Independent Auditor for the audit of the Financial Statements 57 53
--------------- ---------------
1,097 1,393
========= =========
Allocated to capital:
Legal and professional fees 4 25
--------------- ---------------
Other expenses 1,101 1,418
========= =========
1 Details of the breakdown of Directors’ fees are provided within the
Directors’ Remuneration Report in the Annual Report.
6 FINANCE COSTS
Year ended 31 March 2023 Year ended 31 March 2022
Revenue £’000 Capital £’000 Total £’000 Revenue £’000 Capital £’000 Total £’000
Interest paid on bank loan and overdrafts 663 1,989 2,652 505 1,516 2,021
Interest paid on CFDs* 3,230 9,689 12,919 731 2,193 2,924
Dividends paid on short CFDs 63 191 254 427 1,280 1,707
--------------- --------------- --------------- --------------- --------------- ---------------
3,956 11,869 15,825 1,663 4,989 6,652
========= ========= ========= ========= ========= =========
* Increased compared to the prior year due to an increase in interest
rates.
Finance costs have been allocated 75% to capital reserve in accordance with
the Company’s accounting policies.
7 TAXATION
Year ended 31 March 2023 Year ended 31 March 2022
Revenue £’000 Capital £’000 Total £’000 Revenue £’000 Capital £’000 Total £’000
a) Analysis of the taxation charge for the year
Overseas taxation 1,149 – 1,149 1,186 – 1,186
--------------- --------------- --------------- --------------- --------------- ---------------
Taxation charge for the year (see Note 7b) 1,149 – 1,149 1,186 – 1,186
========= ========= ========= ========= ========= =========
b) Factors affecting the taxation charge for the year
The taxation charge for the year is lower than the standard rate of UK
corporation tax for an investment trust company of 19% (2022: 19%). A
reconciliation of the standard rate of UK corporation tax to the taxation
charge for the year is shown below:
Year ended 31 March 2023 Year ended 31 March 2022
Revenue £’000 Capital £’000 Total £’000 Revenue £’000 Capital £’000 Total £’000
Profit/(loss) before taxation 36,614 (12,176) 24,438 34,235 (786,833) (752,598)
Profit/(loss) before taxation multiplied by the standard rate of UK corporation tax of 19% (2022: 19%) 6,957 (2,313) 4,644 6,505 (149,498) (142,993)
Effects of:
Capital (gains)/losses not taxable* – (2,168) (2,168) – 145,570 145,570
Income not taxable (6,116) – (6,116) (5,560) – (5,560)
Expenses not deductible – 1,987 1,987 – 666 666
Excess expenses (841) 2,494 1,653 (945) 3,262 2,317
Overseas taxation 1,149 – 1,149 1,186 – 1,186
--------------- --------------- --------------- --------------- --------------- ---------------
Taxation charge (Note 7a) 1,149 – 1,149 1,186 – 1,186
========= ========= ========= ========= ========= =========
* The Company is exempt from UK corporation tax on capital gains as it
meets the HM Revenue & Customs criteria for an investment company set out in
Section 1159 of the Corporation Tax Act 2010.
c) Deferred taxation
A deferred tax asset of £37,583,000 (2022: £35,407,000), in respect of
excess expenses of £150,330,000 (2022: £141,629,000) has not been recognised
as it is unlikely that there will be sufficient future taxable profits to
utilise these expenses.
In the Spring Budget of 2021, the UK Government announced that from 1 April
2023 the corporation tax rate will increase to 25%. This rate has been
substantively enacted at the balance sheet date and has therefore been applied
to calculate the unrecognised deferred tax asset for the current year (2022:
25%).
8 EARNINGS/(LOSS) PER ORDINARY SHARE
Year ended 31 March 2023 Year ended 31 March 2022
Revenue earnings per ordinary share 7.05p 6.42p
Capital loss per ordinary share (2.42p) (152.81p)
--------------- ---------------
Total earnings/(loss) per ordinary share 4.63p (146.39p)
========= =========
The earnings/(loss) per ordinary share is based on the profit/(loss) after
taxation for the year divided by the weighted average number of ordinary
shares held outside of Treasury during the year, as shown below:
£’000 £’000
Revenue profit after taxation for the year 35,465 33,049
Capital loss after taxation for the year (12,176) (786,833)
--------------- ---------------
Total profit/(loss) after taxation for the year 23,289 (753,784)
========= =========
Number Number
Weighted average number of ordinary shares held outside of Treasury 503,045,428 514,922,357
========== ==========
9 DIVIDENDS PAID TO SHAREHOLDERS
Year ended 31 March 2023 £’000 Year ended 31 March 2022 £’000
Dividend paid
Dividend of 5.50 pence per ordinary share paid for the year ended 31 March 2022 28,240 –
Dividend of 4.68 pence per ordinary share paid for the year ended 31 March 2021 – 24,124
--------------- ---------------
28,240 24,124
========= =========
Dividend proposed
Dividend proposed of 6.25 pence per ordinary share for the year ended 31 March 2023 30,199 –
Dividend proposed of 5.50 pence per ordinary share for the year ended 31 March 2022 – 28,240
--------------- ---------------
30,199 28,240
========= =========
The Directors have proposed the payment of a dividend for the year ended 31
March 2023 of 6.25 pence per ordinary share which is subject to approval by
shareholders at the Annual General Meeting on 20 July 2023 and has not been
included as a liability in these Financial Statements. The dividend will be
paid on 27 July 2023 to shareholders on the register at the close of business
on 16 June 2023 (ex-dividend date 15 June 2023).
10 INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS
2023 £’000 2022 £’000
Total investments* 1,318,764 1,365,485
--------------- ---------------
Opening book cost 1,630,492 1,701,567
Opening investment holding (losses)/gains (265,007) 465,708
--------------- ---------------
Opening fair value of investments 1,365,485 2,167,275
========= =========
Movements in the year
Purchases at cost 440,666 728,039
Sales – proceeds (480,475) (925,998)
Losses on investments (6,912) (603,831)
--------------- ---------------
Closing fair value 1,318,764 1,365,485
========= =========
Closing book cost 1,514,572 1,630,492
Closing investment holding losses (195,808) (265,007)
--------------- ---------------
Closing fair value of investments 1,318,764 1,365,485
========= =========
* The fair value hierarchy of the investments is shown in Note 18 below.
The Company received £480,475,000 (2022: £925,998,000) from investments sold
in the year. The book cost of these investments when they were purchased was
£556,586,000 (2022: £799,114,000). These investments have been revalued over
time and until they were sold any unrealised gains/losses were included in the
fair value of the investments.
Investment transaction costs incurred in the acquisition and disposal of
investments, which are included in the losses on investments were as follows:
Year ended 31 March 2023 £’000 Year ended 31 March 2022 £’000
Purchases transaction costs 599 1,501
Sales transaction costs 742 1,478
--------------- ---------------
1,341 2,979
========= =========
The portfolio turnover rate for the year was 35.5% (2022: 45.2%). The
portfolio turnover rate measures the Company’s trading activity. It is
calculated by taking the average of the total amount of securities purchased
and the total amount of securities sold in the reporting year divided by the
average fair value of investments.
11 DERIVATIVE INSTRUMENTS
Year ended 31 March 2023 £’000 Year ended 31 March 2022 £’000
Net gains/(losses) on derivative instruments
Realised gains/(losses) on CFDs 6,913 (206,340)
Realised gains on futures 16,590 39,391
Realised (losses)/gains on options (2,645) 4,656
Movement in investment holding gains on CFDs 353 379
Movement in investment holding (losses)/gains on futures (4,466) 1,814
Movement in investment holding losses on options (1,774) (89)
--------------- ---------------
14,971 (160,189)
========= =========
2023 Fair value £’000 2022 Fair value £’000
Fair value of derivative instruments recognised on the Balance Sheet*
Derivative instrument assets 22,313 23,994
Derivative instrument liabilities (20,892) (17,524)
--------------- ---------------
1,421 6,470
========= =========
* The fair value hierarchy of the derivative instruments is shown in Note
18 below.
Fair value £’000 2023 Asset exposure £’000 Fair value £’000 2022 Asset exposure £’000
At the year end the Company held the following derivative instruments
Long CFDs 7,409 512,674 5,898 568,330
Short CFDs (1,238) 19,086 (80) 14,149
Futures (hedging exposure) (6,857) (172,890) (2,391) (176,746)
Call options 204 2,161 387 2,642
Put options (long exposure) (414) 5,097 – –
Put options (short exposure) 29 188 1,128 4,096
Put options (hedging exposure) 2,288 (26,013) 1,528 (12,395)
--------------- --------------- --------------- ---------------
1,421 340,303 6,470 400,076
========= ========= ========= =========
12 OTHER RECEIVABLES
2023 £’000 2022 £’000
Amounts receivable on settlement of derivatives 10,135 12,924
Securities sold for future settlement 148 80
Accrued income 1,513 794
Taxation recoverable 13 202
Other receivables 130 204
--------------- ---------------
11,939 14,204
========= =========
13 BANK LOAN – REPAYABLE WITHIN ONE YEAR
2023 £’000 2022 £’000
Fixed rate unsecured US dollar loan
US dollar 100,000,000 fixed at a rate of 6.335% 80,857 –
US dollar 100,000,000 fixed at a rate of 2.606% – 76,043
--------------- ---------------
80,857 76,043
========= =========
The prior loan agreement with Scotiabank Europe PLC matured on 14 February
2023 and the Company entered into a one year unsecured loan agreement with The
Bank of Nova Scotia, London Branch. The new agreement was obtained by novating
the existing agreement. The interest rate of the new agreement is fixed at
6.335% per annum until the agreement terminates on 13 February 2024.
14 OTHER PAYABLES
2023 £’000 2022 £’000
Securities purchased for future settlement 12,402 2,206
Amounts payable on settlement of derivatives 4,731 10,994
Investment management fees 1,266 1,307
Accrued expenses 1,096 724
Finance costs payable 977 157
Amounts payable for repurchase of shares 130 –
--------------- ---------------
20,602 15,388
========= =========
15 SHARE CAPITAL
Number of shares 2023 £’000 Number of shares 2022 £’000
Issued, allotted and fully paid
Ordinary shares of 1 pence each held outside Treasury
Beginning of the year 513,957,409 5,140 515,463,483 5,155
Ordinary shares repurchased into Treasury (25,631,781) (256) (1,506,074) (15)
------------------ ------------------ ------------------ ------------------
End of the year 488,325,628 4,884 513,957,409 5,140
=========== =========== =========== ===========
Ordinary shares of 1 pence each held in Treasury*
Beginning of the year 57,097,071 570 55,590,997 555
Ordinary shares repurchased into Treasury 25,631,781 256 1,506,074 15
------------------ ------------------ ------------------ ------------------
End of the year 82,728,852 826 57,097,071 570
=========== =========== =========== ===========
Total share capital 5,710 5,710
=========== ===========
* The ordinary shares held in Treasury carry no rights to vote, to receive
a dividend or to participate in a winding up of the Company.
During the year, the Company repurchased 25,631,781 (2022: 1,506,074) ordinary
shares and held them in Treasury. The cost of repurchasing these shares of
£57,249,000 (2022: £4,448,000) was charged to the Other Reserve.
16 CAPITAL AND RESERVES
Share capital £’000 Share premium account £’000 Capital redemption reserve £’000 Other reserve £’000 Capital reserve £’000 Revenue reserve £’000 Total equity £’000
At 1 April 2022 5,710 211,569 917 244,043 889,958 48,424 1,400,621
Losses on investments (see Note 10) – – – – (6,912) – (6,912)
Gains on derivative instruments (see Note 11) – – – – 14,971 – 14,971
Foreign exchange gains – – – – 8,167 – 8,167
Foreign exchange losses on bank loan – – – – (4,814) – (4,814)
Investment management fees (see Note 4) – – – – (11,715) – (11,715)
Other expenses (see Note 5) – – – – (4) – (4)
Finance costs (see Note 6) – – – – (11,869) – (11,869)
Revenue profit after taxation for the year – – – – – 35,465 35,465
Dividend paid to shareholders (see Note 9) – – – – – (28,240) (28,240)
Repurchase of ordinary shares (see Note 15) – – – (57,249) – – (57,249)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
At 31 March 2023 5,710 211,569 917 186,794 877,782 55,649 1,338,421
========= ========= ========= ========= ========= ========= =========
Share capital £’000 Share premium account £’000 Capital redemption reserve £’000 Other reserve £’000 Capital reserve £’000 Revenue reserve £’000 Total equity £’000
At 1 April 2021 5,710 211,569 917 248,491 1,676,791 39,499 2,182,977
Losses on investments (see Note 10) – – – – (603,831) – (603,831)
Gains on derivative instruments (see Note 11) – – – – (160,189) – (160,189)
Foreign exchange gains – – – – 1,429 – 1,429
Foreign exchange losses on bank loan – – – – (3,569) – (3,569)
Investment management fees (see Note 4) – – – – (15,659) – (15,659)
Other expenses (see Note 5) – – – – (25) – (25)
Finance costs (see Note 6) – – – – (4,989) – (4,989)
Revenue profit after taxation for the year – – – – – 33,049 33,049
Dividend paid to shareholders (see Note 9) – – – – – (24,124) (24,124)
Repurchase of ordinary shares (see Note 15) – – – (4,448) – – (4,448)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
At 31 March 2022 5,710 211,569 917 244,043 889,958 48,424 1,400,621
========= ========= ========= ========= ========= ========= =========
The capital reserve balance at 31 March 2023 includes investment holding
losses on investments of £195,808,000 (2022: losses of £265,007,000) as
detailed in Note 10 above. See Note 2 (s) above for further details. The
revenue, capital and other reserves are distributable by way of dividend.
17 NET ASSET VALUE PER ORDINARY SHARE
The calculation of the net asset value per ordinary share is based on the
following:
2023 2022
Net assets £1,338,421,000 £1,400,621,000
Ordinary shares held outside of Treasury at year end 488,325,628 513,957,409
Net asset value per ordinary share 274.08p 272.52p
============ ============
It is the Company’s policy that shares held in Treasury will only be
reissued at net asset value per share or at a premium to net asset value per
share and, therefore, shares held in Treasury have no dilutive effect.
18 FINANCIAL INSTRUMENTS
Management of Risk
The Company’s investing activities in pursuit of its investment objective
involve certain inherent risks. The Board confirms that there is an ongoing
process for identifying, evaluating and managing the risks faced by the
Company. The Board with the assistance of the Investment Manager, has
developed a risk matrix which, as part of the internal control process,
identifies the risks that the Company faces. Principal risks identified are
geopolitical, market and economic (including currency), operational,
investment performance (including gearing), variable interest entity
structures, climate change, discount management, unlisted securities,
environmental, social and governance (“ESG”), key people, cybercrime and
information security and business continuity (including global pandemic).
Other risks identified are tax and regulatory and operational risks, including
those relating to third party service providers covering investment
management, marketing and business development, company secretarial, fund
administration and operations and support functions. Risks are identified and
graded in this process, together with steps taken in mitigation, and are
updated and reviewed on an ongoing basis. Risks identified are shown above.
This Note is incorporated in accordance with IFRS 7: Financial Instruments:
Disclosures and refers to the identification, measurement and management of
risks potentially affecting the value of financial instruments.
The Company’s financial instruments may comprise:
· Equity shares (listed and unlisted), equity linked notes,
convertible bonds and rights issues;
· Derivative instruments including CFDs, warrants, futures and
options written or purchased on stocks and equity indices and forward currency
contracts;
· Cash, liquid resources and short-term receivables and payables
that arise from its operations; and
· Bank borrowings.
The risks identified by IFRS 7 arising from the Company’s financial
instruments are market price risk (which comprises interest rate risk, foreign
currency risk and other price risk), liquidity risk, counterparty risk, credit
risk and derivative instrument risk. The Board reviews and agrees policies for
managing each of these risks, which are summarised below. These policies are
consistent with those followed last year.
Market price risk
Interest rate risk
The Company finances its operations through its share capital raised. In
addition, the Company has derivative instruments and an unsecured fixed rate
loan facility for US$100,000,000 expiring on 13 February 2024. The Company has
drawn down the whole of this facility as disclosed in Note 13 above.
Interest rate risk exposure
The values of the Company’s financial instruments that are exposed to
movements in interest rates are shown below:
2023 £’000 2022 £’000
Exposure to financial instruments that bear interest
Long CFDs – exposure less fair value 505,265 562,432
Bank loan 80,857 76,043
--------------- ---------------
586,122 638,475
========= =========
Exposure to financial instruments that earn interest
Short CFDs – exposure plus fair value 17,848 14,069
Amounts held at futures clearing houses and brokers 34,813 32,220
Cash at bank 72,943 73,673
--------------- ---------------
125,604 119,962
--------------- ---------------
Net exposure to financial instruments that bear interest 460,518 518,513
========= =========
Foreign currency risk
The Company’s profit/(loss) after taxation and its net assets can be
affected by foreign exchange movements because the Company has income, assets
and liabilities which are denominated in currencies other than the Company’s
functional currency which is UK sterling.
Three principal areas have been identified where foreign currency risk could
impact the Company:
· Movements in currency exchange rates affecting the value of
investments and bank loan;
· Movements in currency exchange rates affecting short-term timing
differences, for example, between the date when an investment is bought or
sold and the date when settlement of the transaction occurs; and
· Movements in currency exchange rates affecting income received.
Currency exposure of financial assets
The Company’s financial assets comprise of investments, long positions on
derivative instruments, short-term debtors and cash at bank. The currency
exposure profile of these financial assets is shown below:
Currency Investments held at fair value through profit or loss £’000 Asset exposure of long derivative instruments (1) £’000 Other receivables (2) £’000 Cash at bank £’000 2023 Total £’000
Chinese renminbi 170,913 – – 21,221 192,134
Euro 10,432 – – – 10,432
Hong Kong dollar 601,107 270,181 34,483 24,043 929,814
Japanese yen 35,111 – 84 – 35,195
South Korean won – – – 1 1
Taiwan dollar 19,621 – 72 8 19,701
UK sterling 16,221 – 130 – 16,351
US dollar 465,359 50,848 11,983 27,670 555,860
--------------- --------------- --------------- --------------- ---------------
1,318,764 321,029 46,752 72,943 1,759,488
========= ========= ========= ========= =========
1 The asset exposure of long CFDs and options after the netting of hedging
exposures.
2 Other receivables include amounts held at futures clearing houses and
brokers.
Currency Investments held at fair value through profit or loss £’000 Asset exposure of long derivative instruments (1) £’000 Other receivables (2) £’000 Cash at bank £’000 2022 Total £’000
Chinese renminbi 287,250 – – 48 287,298
Euro 10,977 – – – 10,977
Hong Kong dollar 553,457 313,964 40,791 71,767 979,979
Japanese yen 32,796 – – – 32,796
Singapore dollar 14,421 – – – 14,421
South Korean won – – – 1 1
Taiwan dollar 18,452 – 208 8 18,668
UK sterling 21,493 – 204 – 21,697
US dollar 426,639 67,867 5,221 1,849 501,576
--------------- --------------- --------------- --------------- ---------------
1,365,485 381,831 46,424 73,673 1,867,413
========= ========= ========= ========= =========
1 The asset exposure of long CFDs and options after the netting of hedging
exposures.
2 Other receivables include amounts held at futures clearing houses and
brokers.
Currency exposure of financial liabilities
The Company finances its investment activities through its ordinary share
capital, reserves and borrowings. The Company’s financial liabilities
comprise short positions on derivative instruments, US dollar denominated bank
loan and other payables. The currency profile of these financial liabilities
is shown below:
Currency Asset exposure of short derivative instruments* £’000 US dollar bank loan £’000 Other payables £’000 2023 Total £’000
Hong Kong dollar 13,842 – 13,658 27,500
UK sterling – – 1,823 1,823
US dollar 5,432 80,857 5,121 91,410
--------------- --------------- --------------- ---------------
19,274 80,857 20,602 120,733
========= ========= ========= =========
Currency Asset exposure of short derivative instruments* £’000 US dollar bank loan £’000 Other payables £’000 2022 Total £’000
Hong Kong dollar 8,403 – 12,064 20,467
UK sterling – – 1,773 1,773
US dollar 9,842 76,043 1,551 87,436
--------------- --------------- --------------- ---------------
18,245 76,043 15,388 109,676
========= ========= ========= =========
* The asset exposure of short derivative instruments excluding hedging
exposures.
Other price risk
Other price risk arises mainly from uncertainty about future prices of
financial instruments. It represents the potential loss the Company might
suffer through price movements in its investment positions. The Board meets
quarterly to consider the asset allocation of the portfolio and the risk
associated with particular industry sectors within the parameters of the
investment objective.
The Investment Manager is responsible for actively monitoring the portfolio
selected in accordance with the overall asset allocation parameters and seeks
to ensure that individual stocks also meet an acceptable risk/reward profile.
Other price risks arising from derivative positions, mainly due to the
underlying exposures, are assessed by the Investment Manager’s specialist
derivative instruments team.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulties in
meeting obligations associated with financial liabilities. The Company’s
assets mainly comprise readily realisable securities and derivative
instruments which can be sold easily to meet funding commitments if necessary.
Short-term flexibility is achieved by the use of a bank overdraft, if
required. The Company has the facility to borrow up to US$100,000,000 (2022:
US$100,000,000) until 13 February 2024. The current borrowing is shown in Note
13 above.
Counterparty risk
Certain derivative instruments in which the Company may invest are not traded
on an exchange but instead will be traded between counterparties based on
contractual relationships, under the terms outlined in the International Swaps
and Derivatives Association’s (“ISDA”) market standard derivative legal
documentation. These are known as Over The Counter (“OTC”) trades. As a
result, the Company is subject to the risk that a counterparty may not perform
its obligations under the related contract. In accordance with the risk
management process which the Investment Manager employs, this risk is
minimised by only entering into transactions with counterparties which are
believed to have an adequate credit rating at the time the transaction is
entered into, by ensuring that formal legal agreements covering the terms of
the contract are entered into in advance, and through adopting a counterparty
risk framework which measures, monitors and manages counterparty risk by the
use of internal and external credit agency ratings and evaluates derivative
instrument credit risk exposure.
Collateral
For OTC and exchange traded derivative transactions, collateral is used to
reduce the risk of both parties to the contract. Collateral is managed on a
daily basis for all relevant transactions. At 31 March 2023, £15,601,000
(2022: £21,395,000) was held by the brokers in cash denominated in US dollars
in a segregated collateral account, on behalf of the Company, to reduce the
credit risk exposure of the Company. This collateral comprised: Goldman Sachs
International Ltd £5,814,000 (2022: £5,559,000), HSBC Bank plc £5,397,000
(2022: £nil), UBS AG £4,390,000 (2022: £nil) and J.P. Morgan Securities plc
£nil (2022: £15,836,000). As at 31 March 2023, £34,813,000 (2022:
£32,220,000), shown as amounts held at futures clearing houses and brokers on
the Balance Sheet, was held by the Company, in a segregated collateral account
on behalf of the brokers, to reduce the credit risk exposure of the brokers.
The collateral comprised: UBS AG £24,694,000 (2022: £27,437,000) in cash,
J.P. Morgan Securities plc £7,273,000 (2022: £nil) in cash, Morgan Stanley &
Co. International Ltd £2,846,000 (2022: £3,977,000) in cash and HSBC Bank
plc £nil (2022: £806,000) in cash.
Offsetting
To mitigate counterparty risk for OTC derivative transactions, the ISDA legal
documentation is in the form of a master agreement between the Company and the
broker. This allows enforceable netting arrangements in the event of a default
or termination event. Derivative instrument assets and liabilities that are
subject to netting arrangements have not been offset in preparing the Balance
Sheet.
The Company’s derivative instrument financial assets and liabilities
recognised in the Balance Sheet and amounts that could be subject to netting
in the event of a default or termination are shown below:
Related amounts not set off on balance sheet 2023
Financial assets Gross amount £’000 Gross amount of recognised financial liabilities set off on the balance sheet £’000 Net amount of financial assets presented on the balance sheet £’000 Financial instruments £’000 Margin account received as collateral £’000 Net amount £’000
CFDs 19,792 – 19,792 (9,040) (9,704) 1,048
Options 2,521 – 2,521 (414) (2,107) –
--------------- --------------- --------------- --------------- --------------- ---------------
22,313 – 22,313 (9,454) (11,811) 1,048
========= ========= ========= ========= ========= =========
Related amounts not set off on balance sheet 2023
Financial liabilities Gross amount £’000 Gross amount of recognised financial assets set off on the balance sheet £’000 Net amount of financial liabilities presented on the balance sheet £’000 Financial instruments £’000 Margin account pledged as collateral £’000 Net amount £’000
CFDs (13,621) – (13,621) 9,040 4,581 –
Futures (exchange traded) (6,857) – (6,857) – 6,857 –
Options (414) – (414) 414 – –
--------------- --------------- --------------- --------------- --------------- ---------------
(20,892) – (20,892) 9,454 11,438 –
========= ========= ========= ========= ========= =========
Related amounts not set off on balance sheet 2022
Financial assets Gross amount £’000 Gross amount of recognised financial liabilities set off on the balance sheet £’000 Net amount of financial assets presented on the balance sheet £’000 Financial instruments £’000 Margin account received as Collateral £’000 Net amount £’000
CFDs 20,951 – 20,951 (7,240) (13,711) –
Put options 3,043 – 3,043 – (3,043) –
--------------- --------------- --------------- --------------- --------------- ---------------
23,994 – 23,994 (7,240) (16,754) –
========= ========= ========= ========= ========= =========
Related amounts not set off on balance sheet 2022
Financial liabilities Gross amount £’000 Gross amount of recognised financial assets set off on the balance sheet £’000 Net amount of financial liabilities presented on the balance sheet £’000 Financial instruments £’000 Margin account pledged as collateral £’000 Net amount £’000
CFDs (15,133) – (15,133) 7,240 4,950 (2,943)
Futures (exchange traded) (2,391) – (2,391) – 2,391 –
--------------- --------------- --------------- --------------- --------------- ---------------
(17,524) – (17,524) 7,240 7,341 (2,943)
========= ========= ========= ========= ========= =========
Credit risk
Financial instruments may be adversely affected if any of the institutions
with which money is deposited suffer insolvency or other financial
difficulties. All transactions are carried out with brokers that have been
approved by the Investment Manager and are settled on a delivery versus
payment basis. Limits are set on the amount that may be due from any one
broker and are kept under review by the Investment Manager. Exposure to credit
risk arises on outstanding security transactions and derivative instrument
contracts and cash at bank.
Derivative instrument risk
A Derivative Instrument Charter, including an appendix entitled Derivative
Risk Measurement and Management, details the risks and risk management
processes used by the Investment Manager. This Charter was approved by the
Board and allows the use of derivative instruments for the following purposes:
· To gain exposure to equity markets, sectors or individual
investments;
· To hedge equity market risk in the Company’s investments with
the intention of mitigating losses in the events market falls;
· To enhance portfolio returns by writing call and put options; and
· To take short positions in equity markets, which would benefit
from a fall in the relevant market price, where the Investment Manager
believes the investment is overvalued. These positions distinguish themselves
from other short exposures held for hedging purposes since they are expected
to add risk to the portfolio.
The risk and investment performance of these instruments are managed by an
experienced, specialist derivative team of the Investment Manager using
portfolio risk assessment tools for portfolio construction.
RISK SENSITIVITY ANALYSIS
Interest rate risk sensitivity analysis
Based on the financial instruments held and interest rates at the Balance
Sheet date, an increase of 1.00% in interest rates throughout the year, with
all other variables held constant, would have decreased the profit after
taxation for the year and decreased the net assets of the Company by
£3,797,000 (2022: increased the loss after taxation and decreased the net
assets by £4,425,000). A decrease of 1.00% in interest rates throughout the
year would have had an equal but opposite effect.
Foreign currency risk sensitivity analysis
Based on the financial assets and liabilities held and currency exchange rates
ruling at the Balance Sheet date, a strengthening of the UK sterling exchange
rate by 10% against other currencies, with all other variables held constant,
would have decreased the profit after taxation for the year and decreased the
net assets of the Company (2022: increased the loss after taxation and
decreased the net assets) by the following amounts:
Currency 2023 £’000 2022 £’000
Chinese renminbi 17,467 26,118
Euro 948 998
Hong Kong dollar 82,028 87,228
Japanese yen 3,200 2,982
Singapore dollar – 1,311
Taiwan dollar 1,791 1,697
US dollar 42,223 37,649
--------------- ---------------
147,657 157,983
========= =========
Based on the financial assets and liabilities held and the exchange rates
ruling at the Balance Sheet date, a weakening of the UK sterling exchange rate
by 10% against other currencies would have increased the profit after taxation
for the year and increased the net assets of the Company (2022: decreased the
loss after taxation and increased the net assets) by the following amounts:
Currency 2023 £’000 2022 £’000
Chinese renminbi 21,348 31,922
Euro 1,159 1,220
Hong Kong dollar 100,257 106,613
Japanese yen 3,911 3,644
Singapore dollar – 1,602
Taiwan dollar 2,189 2,074
US dollar 51,606 46,015
--------------- ---------------
180,470 193,090
========= =========
Other price risk sensitivity analysis
Changes in market prices affect the profit/(loss) after taxation for the year
and the net assets of the Company. Details of how the Board sets risk
parameters and performance objectives are disclosed in the Strategic Report in
the Annual Report.
An increase of 10% in the share prices of the listed investments held at the
Balance Sheet date would have increased the profit after taxation for the year
and increased the net assets of the Company by £112,588,000 (2022: decreased
the loss after taxation and increased the net assets by £117,084,000). A
decrease of 10% in share prices of the investments designated at fair value
through profit or loss would have had an equal but opposite effect.
An increase of 10% in the valuation of unlisted investments held at the
Balance Sheet date would have increased the profit after taxation for the year
and increased the net assets of the Company by £19,288,000 (2022: decreased
the loss after taxation and increased the net assets by £19,465,000). A
decrease of 10% in the valuation would have had an equal but opposite effect.
There are no inputs which would result in a material change in the value of
the unlisted investments.
Derivative instruments exposure sensitivity analysis
The Company invests in derivative instruments to gain or reduce exposure to
the equity market. An increase of 10% in the share prices of the investments
underlying the derivative instruments at the Balance Sheet date would have
increased the profit after taxation for the year and increased the net assets
of the Company by £30,176,000 (2022: decreased the loss after taxation and
increased the net assets by £36,359,000). A decrease of 10% in share prices
of the investments underlying the derivative instruments would have had an
equal but opposite effect.
Fair Value of Financial Assets and Liabilities
Financial assets and liabilities are stated in the Balance Sheet at values
which are not materially different to their fair values. As explained in Notes
2 (l) and (m) above, investments and derivative instruments are shown at fair
value. In the case of cash at bank, book value approximates to fair value due
to the short maturity of the instruments. The exception is the US dollar
denominated bank loan, its fair value having been calculated by discounting
future cash flows at current US dollar interest rates.
2023 2022
Fair value £’000 Book value £’000 Fair value £’000 Book value £’000
Fixed rate unsecured loan of US dollar 100,000,000 81,092 80,857 75,897 76,043
========= ========= ========= =========
Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that classifies
its financial instruments measured at fair value at one of three levels,
according to the relative reliability of the inputs used to estimate the fair
values.
Classification Input
Level 1 Valued using quoted prices in active markets for identical assets
Level 2 Valued by reference to inputs other than quoted prices included in level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly
Level 3 Valued by reference to valuation techniques using inputs that are not based on observable market data
Categorisation within the hierarchy has been determined on the basis of the
lowest level input that is significant to the fair value measurement of the
relevant asset. The valuation techniques used by the Company are explained in
Notes 2 (e), (l) and (m). The table below sets out the Company’s fair value
hierarchy:
Financial assets at fair value through profit or loss Level 1 £’000 Level 2 £’000 Level 3 £’000 2023 Total £’000
Investments 1,081,458 44,428 192,878 1,318,764
Derivative instrument assets 2,492 19,821 – 22,313
--------------- --------------- --------------- ---------------
1,083,950 64,249 192,878 1,341,077
========= ========= ========= =========
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities (7,271) (13,621) – (20,892)
========= ========= ========= =========
Financial liabilities at fair value
Bank loan – (81,092) – (81,092)
========= ========= ========= =========
Financial assets at fair value through profit or loss Level 1 £’000 Level 2 £’000 Level 3 £’000 2022 Total £’000
Investments 1,103,568 67,267 194,650 1,365,485
Derivative instrument assets 2,843 21,151 – 23,994
--------------- --------------- --------------- ---------------
1,106,411 88,418 194,650 1,389,479
========= ========= ========= =========
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities (2,391) (15,133) – (17,524)
========= ========= ========= =========
Financial liabilities at fair value
Bank loan – (75,897) – (75,897)
========= ========= ========= =========
Level 3 investments (unlisted and delisted investments)
2023 £’000 2022 £’000
Pony.ai 48,272 41,134
DJI International 30,475 32,363
Chime Biologics 29,064 27,081
Venturous Holdings 26,015 27,831
ByteDance 24,035 25,773
Tuhu Car 14,024 14,296
Cutia Therapeutics 11,575 10,720
Beisen 9,418 10,656
Xiaoju Kuaizhi (Didi Chuxing) (moved to Level 1) – 4,796
Shanghai Yiguo – –
3 listed investments whose listings are currently suspended – –
--------------- ---------------
192,878 194,650
========= =========
Pony.ai
Pony.ai develops artificial intelligence and autonomous driving technology
solutions for transportation and is an unlisted company. The valuation at 31
March 2023 is based on the company’s financial performance, the
macro-environment and benchmarking the position to a range of comparable
market data. As at 31 March 2023, its fair value was £48,272,000 (book cost:
£24,892,000).
DJI International
DJI International is a manufacturer of drones and is an unlisted company. The
valuation at 31 March 2023 is as follows: the D shares valuation is based on
the strike price of the put option in place and the B shares valuation is
based on the company’s performance, the macro-environment, product
development and benchmarking the position to a range of comparable market
data. As at 31 March 2023, its fair value was £30,475,000 (book cost:
£22,416,000).
Chime Biologics
Chime Biologics is a China-based Contract Development and Manufacturing
Organization (CDMO) that provides a solution supporting customers from
early-stage biopharmaceutical development through late-stage clinical and
commercial manufacturing and is an unlisted company. The valuation at 31 March
2023 is based on analysis of the company performance, the terms of the
convertible note and benchmarking the position to a range of comparable market
data. As at 31 March 2023, its fair value was £29,064,000 (book cost:
£25,227,000).
Venturous Holdings
Venturous Holdings is an investment company with a focus in smart city
technology companies and is an unlisted company. The valuation at 31 March
2023 is based on a review of the company’s portfolio including performance,
the wider macro-environment and benchmarking the position to a range of
comparable market data with consideration given to the price of shares when
US$21.2 million of funding was raised in December 2022. As at 31 March 2023,
its fair value was £26,015,000 (book cost: £26,029,000).
ByteDance
ByteDance develops application software and is an unlisted company. The
valuation at 31 March 2023 is based on the company’s financial performance,
the macro-environment and benchmarking the position to a range of comparable
market data. Consideration was also given to a recent transaction whereby G42
bought a US$100m stake in the company. As at 31 March 2023, its fair value was
£24,035,000 (book cost: £7,361,000).
Tuhu Car
Tuhu Car is an online retailer of automobile spare parts and is an unlisted
company. The valuation at 31 March 2023 is based on the company’s
performance, the macro-environment and benchmarking the position to a range of
comparable market data. As at 31 March 2023, its fair value was £14,024,000
(book cost: £13,129,000).
Cutia Therapeutics
Cutia Therapeutics is a specialty pharmaceutical company and is an unlisted
company. The valuation at 31 March 2023 is based on the company’s
performance, the macro-environment and benchmarking the position to a range of
comparable market data. As at 31 March 2023, its fair value was £11,575,000
(book cost: £10,266,000).
Beisen
Beisen is a Chinese talent management company that offers talent management
and measurement solutions and is an unlisted company. The valuation at 31
March 2023 is based on the company’s financial performance, the
macro-environment and benchmarking the position to a range of comparable
market data. As at 31 March 2023, its fair value was £9,418,000 (book cost:
£11,758,000).
Since the year ended 31 March 2023, the company has listed on the Hong Kong
Stock Exchange.
Shanghai Yiguo
Shanghai Yiguo operates an e-commerce platform, selling fruit and vegetables
online to customers in China and is an unlisted company. The company has
commenced liquidation proceedings and following internal review, the valuation
at £nil remained appropriate as at 31 March 2023 (book cost: £11,806,000).
Companies whose listings are suspended
Three listed companies in the portfolio have had their listing suspended: DBA
Telecommunication (Asia) Limited (suspended July 2014), China Animal
Healthcare Limited (suspended March 2015) and BNN Technology Limited
(suspended September 2017). As at 31 March 2023, each holding has been valued
at £nil.
Significant holdings
Details of significant holdings are noted below in accordance with the
disclosure requirements of paragraph 82 of the AIC SORP. The Company is
required to provide a list of all investments at the balance sheet date with a
value greater than 5% of its portfolio and at least the ten largest
investments, including the value of each investment and for unlisted
investments included in the list, additional detail is required as shown
below. This disclosure includes turnover, pre-tax profits and net assets
attributable to investors, as reported within the most recently audited
financial statements of the investee companies.
Latest Financial Statements Income recognised from the holding in the year Turnover £’000 Pre-tax profit/(loss) £’000 Net assets attributable to shareholders £’000
Pony.ai n/a nil Information not publicly available
DJI International n/a nil Information not publicly available
Chime Biologics n/a nil Information not publicly available
Movements in level 3 investments during the year 2023 Level 3 £’000 2022 Level 3 £’000
Level 3 investments at the beginning of the year 194,650 166,464
Purchases at cost – 35,153
Transfers out of level 3 at cost* (9,971) (26,330)
Unrealised profits recognised in the Income Statement 8,199 19,363
--------------- ---------------
Level 3 investments at the end of the year 192,878 194,650
========= =========
* Financial instruments are transferred out of level 3 when they
become listed.
19 CAPITAL RESOURCES AND GEARING
The Company does not have any externally imposed capital requirements. The
financial resources of the Company comprise its share capital, reserves and
gearing, which are disclosed on the Balance Sheet. The Company is managed in
accordance with its investment policy and in pursuit of its investment
objective, both of which are detailed in the Strategic Report in the Annual
Report. The principal risks and their management are disclosed above and in
Note 18 above.
The Company’s gearing at the year end is set out below:
2023
Gross gearing Net gearing
Exposure £’000 % (1) Exposure £'000 % (1)
Investments 1,318,764 98.5 1,318,764 98.5
Long CFDs 512,674 38.3 512,674 38.3
Call options 2,161 0.2 2,161 0.2
Put options (long exposure) 5,097 0.4 5,097 0.4
--------------- --------------- --------------- ---------------
Total long exposures before hedges 1,838,696 137.4 1,838,696 137.4
less: short derivative instruments hedging the above (198,903) (14.9) (198,903) (14.9)
--------------- --------------- --------------- ---------------
Total long exposures after the netting of hedges 1,639,793 122.5 1,639,793 122.5
Short CFDs 19,086 1.4 (19,086) (1.4)
Put options (short exposure) 188 0.0 (188) 0.0
--------------- --------------- --------------- ---------------
Gross Asset Exposure/net market exposure* 1,659,067 123.9 1,620,519 121.1
--------------- --------------- --------------- ---------------
Net Assets 1,338,421 1,338,421
--------------- --------------- --------------- ---------------
Gearing (2) 23.9% 21.1%
========= =========
2022
Gross gearing Net gearing
Exposure £’000 % (1) Exposure £’000 % (1)
Investments 1,365,485 97.5 1,365,485 97.5
Long CFDs 568,330 40.6 568,330 40.6
Call options 2,642 0.2 2,642 0.2
--------------- --------------- --------------- ---------------
Total long exposures before hedges 1,936,457 138.3 1,936,457 138.3
less: short derivative instruments hedging the above (189,141) (13.5) (189,141) (13.5)
--------------- --------------- --------------- ---------------
Total long exposures after the netting of hedges 1,747,316 124.8 1,747,316 124.8
Short CFDs 14,149 1.0 (14,149) (1.0)
Put options (short exposure) 4,096 0.3 (4,096) (0.3)
--------------- --------------- --------------- ---------------
Gross Asset Exposure/net market exposure* 1,765,561 126.1 1,729,071 123.5
--------------- --------------- --------------- ---------------
Net Assets 1,400,621 1,400,621
--------------- --------------- --------------- ---------------
Gearing (2) 26.1% 23.5%
========= =========
* Defined in the Glossary of Terms in the Annual Report.
1 Exposure to the market expressed as a percentage of Net Assets.
2 Gearing is the amount by which Gross Asset Exposure/net market
exposure exceeds Net Assets expressed as a percentage of Net Assets.
20 TRANSACTIONS WITH THE MANAGERS AND RELATED PARTIES
FIL Investment Services (UK) Limited is the Company’s Alternative Investment
Fund Manager and has delegated portfolio management to FIL Investment
Management (Hong Kong) Limited. Both companies are Fidelity group companies.
Details of the current fee arrangements are given in the Directors’ Report
in the Annual Report. During the year, management fees of £14,727,000 (2022:
£19,643,000) were payable to the Manager. At the Balance Sheet date,
management fees of £1,266,000 (2022: £1,307,000) were accrued and included
in other payables. Fidelity also provides the Company with marketing services.
The total amount payable for these services was £263,000 (2022: £264,000).
At the Balance Sheet date, marketing services of £43,000 (2022: £4,000) were
accrued and included in other payables.
Disclosures of the Directors’ interests in the shares of the Company and
fees and taxable expenses, relating to reasonable travel expenses, payable to
the Directors are given in the Directors’ Remuneration Report in the Annual
Report. In addition to the fees and taxable expenses disclosed in the
Directors’ Remuneration Report, £22,000 (2022: £19,000) of employers’
National Insurance contributions were paid by the Company. At the Balance
Sheet date, Directors’ fees of £22,000 (2022: £15,000) were accrued and
included in other payables.
21 POST BALANCE SHEET EVENT
On 13 April 2023 following an initial public offering, Beisen listed on the
Hong Kong Stock Exchange.
Alternative Performance Measures
Discount/Premium
The discount/premium is considered to be an Alternative Performance Measure.
It is the difference between the NAV per Ordinary Share of the Company and the
share price expressed as a percentage of the NAV per Ordinary Share. Details
of the Company’s discount/premium are on the Financial Highlights page in
the Annual Report and both are defined in the Glossary of Terms in the Annual
Report.
Gearing
Gearing is considered to be an Alternative Performance Measure. See Note 19
above for details of the Company’s gearing.
Net Asset Value (“NAV”) per Ordinary Share
The NAV per Ordinary Share is considered to be an Alternative Performance
Measure. See the Balance Sheet and Note 17 above for further details.
Ongoing charges
Ongoing charges are considered to be an Alternative Performance Measure. The
ongoing charges ratio has been calculated in accordance with guidance issued
by the AIC as the total of management fees and other expenses expressed as a
percentage of the average net assets throughout the year.
2023 £’000 2022 £’000
Investment management fees (£’000) 12,049 15,937
Other expenses (£’000) 1,101 1,418
--------------- ---------------
Ongoing charges (£’000) 13,150 17,355
========= =========
Variable management fees (£’000) 2,678 3,706
Average net assets (£’000) 1,338,770 1,848,490
Ongoing charges ratio 0.98% 0.94%
Ongoing charges ratio including variable management fees 1.18% 1.14%
========= =========
Revenue, Capital and Total Earnings per Share
Revenue, capital and total earnings per share are considered to be Alternative
Performance Measures. See the Income Statement and Note 8 above for further
details.
Total Return Performance
Total return performance is considered to be an Alternative Performance
Measure. NAV per share total return includes reinvestment of the dividend in
the NAV of the Company on the ex-dividend date. Share price total return
includes the reinvestment of the net dividend in the month that the share
price goes ex-dividend.
The tables below provide information relating to the NAV per share and share
prices of the Company, the impact of the dividend reinvestments and the total
returns for the years ended 31 March 2023 and 31 March 2022.
2023 Net asset value per share Share price
31 March 2022 272.52p 252.00p
--------------- ---------------
31 March 2023 274.08p 247.50p
--------------- ---------------
Change in the year +0.6% -1.8%
Impact of dividend reinvestment +2.0% +2.1%
--------------- ---------------
Total return for the year +2.6% +0.3%
========= =========
2022 Net asset value per share Share price
31 March 2021 423.50p 419.00p
--------------- ---------------
31 March 2022 272.52p 252.00p
--------------- ---------------
Change in the year -35.7% -39.9%
Impact of dividend reinvestment +0.8% +0.7%
--------------- ---------------
Total return for the year -34.9% -39.2%
========= =========
The Annual Financial Report Announcement is not the Company's statutory
accounts. The above results for the year ended 31 March 2023 are an abridged
version of the Company's full Annual Report and Financial Statements, which
have been approved and audited with an unqualified report. The 2022 and 2023
statutory accounts received unqualified reports from the Company's Auditor and
did not include any reference to matters to which the Auditor drew attention
by way of emphasis without qualifying the reports and did not contain a
statement under s.498 of the Companies Act 2006. The financial information for
2021 is derived from the statutory accounts for 2022 which have been delivered
to the Registrar of Companies. The 2023 Financial Statements will be filed
with the Registrar of Companies in due course.
A copy of the above results announcement will be available on the Company's
website at www.fidelity.co.uk/china within two working days.
A copy of the Annual Report will shortly be submitted to the National Storage
Mechanism and will be available for inspection at:
www.morningstar.co.uk/uk/NSM
The Annual Report will be posted to shareholders later this month and
additional copies will be available from the registered office of the Company
and on the Company's website: www.fidelity.co.uk/china where up to
date information on the Company, including daily NAV and
share prices, factsheets and other information can also be found.
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on the Company's website (or any other website) is
incorporated into, or forms part of, this announcement.
ENDS
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