Annual Financial Report
07/11/2023 07:00
FIDELITY SPECIAL VALUES PLC
Final Results for the year ended 31 August 2023
Financial Highlights:
* Fidelity Special Values PLC reports a +5.9% NAV and a +5.6% share price rise
against a Benchmark return of +5.2%.
* The Board recommends a final dividend of 6.27 pence per share which together
with the interim dividend payment of 2.53 pence per share (totalling 8.80
pence) represents an increase of 13.5% over the prior year.
* In an environment of rising interest rates, the overweight exposure to banks
was the largest contributor to performance.
* The Portfolio Manager believes we are potentially in the very early stages
of a long-term rally in value stocks.
Contacts
For further information, please contact:
Smita Amin
Company Secretary
01737 836347
FIL Investments International
CHAIRMAN’S STATEMENT
The global backdrop for the year under review remains unsettled. The prolonged
Russia/Ukraine war has affected energy prices and global trade as well as
contributing to an increasingly fractious geopolitical environment. More
recently, the developing conflict in the Middle East has added concerns about
the impact on oil prices and disruption to global supply chains and commodity
markets. In the banking sector, the collapse of Credit Suisse in Europe and
several regional banks in the US raised fears of systemic contagion not seen
since the Global Financial Crisis of 2008/9. Fortunately, this did not
materialise. The year under review has certainly been an interesting one for
the UK, featuring three Prime Ministers and as many Chancellors of the
Exchequer, seven months of double-digit CPI inflation and eight consecutive
base rate increases. Against this background, the UK stock market delivered
rather dull returns, with the FTSE All-Share Index (“Benchmark”)
delivering a total return of a little over 5% and the mid-cap and small-cap
indices essentially flat year-on-year.
Your Company marginally outperformed the Benchmark, with a net asset value
(“NAV”) total return of 5.9% and a share price total return of 5.6%
compared with the 5.2% return for the Benchmark. While this may look
unremarkable at face value, it is notable given the significant differences
between the Company’s portfolio and the Benchmark. More than 80% of the
Benchmark is accounted for by the largest stocks that make up the FTSE 100
Index (total return of 6.3% for the year), whereas your Company only has
around a quarter of its holdings which are in the FTSE 100 Index. Overall, the
weighting in small-cap and mid-cap companies hurt relative returns in the year
under review, while stock selection in banks and financials, where the
portfolio is overweight compared to the Benchmark, contributed most to the
outperformance.
As your Portfolio Manager, Alex Wright, outlines in his report, while mid-cap
and small-cap exposure detracted from returns relative to the Benchmark, these
under-researched companies currently offer particularly attractively valued
opportunities and have historically been a strong contributor to the
Company’s long-term outperformance. Over the ten years to 31 August 2023,
the Company’s NAV and share price total returns of 107.1% and 100.0%
respectively are well ahead of the Benchmark total return of 70.6%. It is
pleasing to see that Alex’s long-term, value-focused strategy is still
working well, even as the UK remains out of favour compared with other
developed markets. He is well supported by Jonathan Winton, the co-Portfolio
Manager, and by Fidelity’s extensive investment research team.
DIVIDEND
Dividends are an important component of long-term total returns and the
Board’s policy is to pay dividends twice yearly in order to smooth the
dividend payments for the Company’s financial year.
The Company’s revenue return for the year to 31 August 2023 was 10.67 pence
per share (2022: 9.42 pence). An interim dividend of 2.53 pence per share
(2022: 2.30 pence) was paid on 21 June 2023. The Board recommends a final
dividend of 6.27 pence per share for the year ended 31 August 2023 (2022: 5.45
pence) for approval by Shareholders at the Annual General Meeting (“AGM”)
on 14 December 2023. The interim and final dividends (total of 8.80 pence)
represent an increase of 1.05 pence (13.5%) over the 7.75 pence paid for the
year ended 31 August 2022. The dividend will be payable on 10 January 2024 to
Shareholders on the register at close of business on 1 December 2023
(ex-dividend date 30 November 2023).
The interim and final dividends for the year will provide Shareholders with a
14th consecutive year of sustained annual dividend growth. While income is not
a core objective of your Company’s investment strategy, we as a Board
understand the value of being ‘paid to wait’ in times of more muted stock
market performance.
GEARING
Gearing has remained relatively low during the year under review, beginning
the period at 10.0% and ending at 6.5%. This reflects Alex’s caution on the
economic environment and, while he can find value in individual companies,
there is a risk that the economic outlook may undermine their ability to
deliver on forecast earnings. As he explains in his report, the current modest
level of gearing means Alex has plenty of ‘dry powder’ that he can use to
take advantage of any new investment opportunities in the coming year.
The Board has agreed with the Portfolio Manager that if he is able to find
attractive opportunities in the market, then the Company’s gearing should be
allowed to rise. Combined with Alex’s contrarian and value-focused
investment philosophy, and also making effective use of the Company’s
structural advantages over its open-ended counterparts, this should continue
to add value for Shareholders over the long-term.
It is the current intention of the Board that, in normal market conditions,
the Portfolio Manager will maintain gearing in the range of 0% to 25%. The
Company remained within these levels throughout the reporting year. The
maximum level of gearing allowed is 40%.
DISCOUNT
Investment trust discounts have widened significantly in the past 18 months,
and at the time of writing, the investment trust sector average discount was
18.7%. After several years of trading close to, or at a premium to NAV, your
Company has not been immune to this trend of widening discounts. However, in
the year under review, the discount to NAV remained relatively stable,
beginning the year at 8.5% and ending it at 8.8%. Under the Company’s
discount management policy, the Board seeks to maintain the discount in single
digits in normal market conditions and during the year it briefly reached the
10% level before quickly reverting back into single digits. While a number of
our peers have elected to repurchase shares this year because of the pressure
of rising discounts, we have not undertaken any share repurchases, and as at
31 August 2023, your Company remains the only one in its UK All Companies peer
group to be trading at a single-digit discount to NAV. The average discount
for the other companies in the peer group was 12.3%.
The Board continues to monitor the level of the Company’s discount closely
and will take action when it believes to do so will be effective and to the
benefit of Shareholders.
RAISING OUR PROFILE
While the strength of Alex’s investment performance over many years will
have been a key factor in limiting the rise in the discount, your Board and
Fidelity have also been working hard to raise the Company’s profile with
both retail and institutional investors. You may have seen Alex’s articles
in The Sunday Times or the Daily Express; his views on investing and the UK
stock market attract a lot of media interest, and he also regularly appears at
professional investor roadshows. A discount to NAV tends to arise when there
are more sellers than buyers in the market, and we appreciate Alex’s efforts
to make the time to ensure that your Company remains high on investors’ buy
lists. External recognition is always a bonus, and we were delighted that in
November 2022, the Company was named as the best UK All Companies Trust in the
Investment Company of the Year awards from Investment Week magazine.
BOARD OF DIRECTORS
As part of the Board’s succession plan, Andy Irvine retired from the Board
at the conclusion of the AGM on 14 December 2022, having served on the Board
as a non-executive Director since 2010 and as Chairman since 2016, and we
thank him for his significant contribution to the Company during this period.
At the same time, I succeeded him as Chairman of the Board and Nigel Foster
succeeded me as Senior Independent Director. There have been no other Board
changes during the reporting 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 14
December 2023. 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 for the Company.
ANNUAL GENERAL MEETING
The Company’s AGM is at 11.00 am on Thursday, 14 December 2023.
This is a great opportunity for Shareholders to hear Alex’s thoughts at
first hand and also to meet your Company’s Directors. The Board and I hope
to see as many of you as possible on the day. Details of the Company’s AGM
are below.
OUTLOOK
The UK equity market has remained distinctly out of favour in a global
context, particularly when compared with the US. The macro headwinds are
undeniable: inflation has been stubbornly higher than in other developed
economies, interest rates have risen further and faster, and there is the
added uncertainty of a General Election at some point in the next 15 months.
However, there are also reasons for optimism: both core and headline inflation
have begun to trend downwards, there is an increasing expectation that the
Bank of England base rate is at or close to a cyclical peak and upward
revisions to UK GDP numbers suggest a greater likelihood of avoiding
recession. Added to this, the UK stock market remains at low valuation levels
compared to other developed markets, reducing downside risk and providing the
potential for significant upside when sentiment becomes more positive.
Against this backdrop, we are fortunate to have a Portfolio Manager with an
active and contrarian approach to stock picking that allows him to seek out
pockets of opportunity that may be under-appreciated by investors both at home
and internationally.
As Alex points out in his Portfolio Manager Review, there are many UK-listed
stocks that may be affected by the economic cycle in the short-term but which
have compelling company-specific stories that can be important drivers of
their share price over time. By favouring attractively valued businesses with
lower levels of debt and the resilience to navigate the climate of
uncertainty, we are confident that Alex’s selections have the potential to
deliver solid longer-term returns, as has been demonstrated in your
Company’s strong performance compared to the Benchmark over many years.
On a final note, it was very pleasing to see at the Company’s AGM on 14
December 2022 that the Company’s three-yearly continuation resolution was
passed with 99.89% of votes in favour. We thank our Shareholders for this
overwhelming vote of confidence in Alex’s long-term approach and look
forward to continuing to justify your support of Fidelity Special Values PLC
in the years ahead.
DEAN BUCKLEY
Chairman
6 November 2023
ANNUAL GENERAL MEETING – THURSDAY, 14 DECEMBER 2023 AT 11.00 AM
The AGM of the Company will be held at 11.00 am on Thursday, 14 December 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 are unable to attend in person, we will live-stream
the formal business and presentations of the meeting online.
Alex Wright, 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 Manager 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 www.fidelity.co.uk/specialvalues. 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 will also welcome 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 102-255-614. 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
How has the Company performed in the year to 31 August 2023?
ANSWER
The Company recorded a net asset value (“NAV”) and share price total
return of 5.9% and 5.6% respectively, which was slightly ahead of the FTSE
All-Share Index (Benchmark) return of 5.2%. The positive returns conceal what
proved to be another volatile period as markets grappled with political
uncertainties at home, culminating in last October’s mini-budget debacle,
persistent weaker economic indicators, stubbornly elevated inflation, and
sharply rising interest rates.
In an environment of rising interest rates, our overweight exposure to banks
was the largest contributor to performance, given the low starting point for
valuations and the meaningful impact of higher rates on bank profits. The
largest individual contributors were AIB Group, the leading personal bank and
mortgage provider in Ireland, UK-listed TBC Bank Group, the largest banking
group in Georgia, and Kaspi.kz, the dominant consumer finance, e-commerce and
payments platform in Kazakhstan.
Despite the rising cost of living, retailer Marks & Spencer Group bucked the
trend, reporting strong trading in clothing and food, taking meaningful market
share in both areas. Similarly, the resurgence in travel demand after the
COVID pandemic saw the share prices of low-cost airline Ryanair Holdings and
passport photo booth operator ME Group International (formerly known as
Photo-Me International) recover strongly. Outsourcer Mitie Group reported
record full-year revenues as it posted an increase in operating profits,
boosted by contract wins, renewals and acquisitions. It is now a much-improved
business, with a healthier balance sheet, simplified structure and huge
investments in systems and technology, allowing it to win more work at better
margins.
We make a concerted effort to look for opportunities across the market, and
our resulting bias to small- and mid-cap companies, which account for about
60% of the portfolio, hurt relative returns as they were seen as more
vulnerable to economic weakness. However, this is an under-researched area
where we continue to find particularly attractively valued opportunities.
Sector-wise, our oil and gas positions proved a drag on performance, with our
holding in North Sea producer Ithaca Energy the largest detractor. The stock
was affected by the introduction of a windfall tax, a policy that will hurt
North Sea investments generally, and largely undermine the UK’s energy
security goal. The Government is now looking to partially reverse this
decision.
Government outsourcer Serco Group was a surprising underperformer given that
it has delivered strong profits and recently upgraded its full year earnings
forecast. It is a well-run business that is diversified both geographically
and services-wise and should be capable of producing inflation protected
organic growth with the potential for some margin expansion over the
medium-term. Its exposure to defence and immigration contracts is particularly
attractive in the current political environment, and its strong balance sheet
provides mergers and acquisitions (“M&A”) and buyback optionality.
Drink distributor C&C Group suffered from a slow recovery in pub demand
post-COVID, rising costs and problems with implementing a new IT system. The
market seems to be assuming those issues are permanent, but we believe that
C&C has an unusually dominant position as one of the only national
distributors and should be able to gradually pass on price increases and
overcome its operational challenges to deliver strong profitability growth
over the medium-term as margins improve towards historical levels.
QUESTION
High inflation and the cost-of-living crisis persist. How has this affected
the Company’s portfolio this year?
ANSWER
Overall, we have been pleased by the earnings resilience of the holdings in
the Company’s portfolio. Last year, we materially reduced our consumer
exposure, selling our holdings in domestic housebuilders and cutting exposure
to areas more susceptible to a demand slowdown, such as big-ticket items and
advertising. These decisions contributed positively to this year’s
performance given the profit warnings in those industries, and with the
housing market experiencing a marked slowdown. However, the profit warnings
have not been as widespread as feared and in general the consumer has proved
relatively resilient, helping Marks & Spencer, travel companies and airlines
to beat earnings expectations. This reflects economic indicators that have
been weak but not excessively so.
QUESTION
With interest rates at their highest level for 15 years, how will this affect
markets and the Company’s current portfolio?
ANSWER
Rising interest rates have led to a meaningful de-rating in some areas of the
market where business models are heavily dependent on debt, such as real
estate and infrastructure, and have caused significant weakness in the UK
housing market. These are industries where we had very low exposure.
Conversely, higher interest rates have benefited sectors such as banks and
life insurers, which we favour, and which had been shunned since the global
financial crisis. More generally, the combination of higher rates and the
weaker economic environment is likely to remain challenging in the near-term
for corporates and consumers who need to refinance their debts. As a result,
we remain selective and favour companies with lower levels of debt and the
resilience to navigate the uncertainty.
M&A activity has been prevalent over recent years given cheap financing and
attractive valuations on offer in the UK. Holdings that exited the Company’s
portfolio as a result of successful bids over the past 12 months include
international power producer ContourGlobal, consultancy firm RPS Group and
teleradiology services provider Medica Group. The jump in funding costs may
deter some bids, especially at the larger-cap end of the market, but
smaller-sized deals should be more manageable and valuations in smaller-cap
companies are more appealing.
QUESTION
Value stocks have outperformed growth stocks over the last three years, do you
think this will continue?
ANSWER
Over the past decade, we have experienced a prolonged period of subdued
inflation, low interest rates and modest economic growth. This has favoured
growth companies at the expense of those that we favour – unloved stocks
with lower downside risk. While this trend began to reverse towards the end of
2020, value stocks still have significant ground to catch up.
The current market environment of higher and stickier inflation, rising
interest rates and economic volatility is more aligned to the long-term
pattern seen over the last 100 years. History suggests that over the long-term
value tends to outperform, given generally higher discount rates and a
reversion to the mean. We, therefore, believe that we are in the very early
stages of a long-term rally in value stocks.
QUESTION
How is the UK market valued compared to the rest of the world? Does the UK
still present a good opportunity for investors?
ANSWER
UK equities are pricing in extreme pessimism and, as a result, trade at a
significant discount to other markets. While the near-term outlook is
uncertain and corporate earnings could still disappoint in the UK, this is
also true of other markets such as the US, where valuations are meaningfully
more expensive.
To provide some context, at the time of writing (September 2023), our analysts
estimate that the UK equity market (FTSE All-Share Index) trades on 10.9x 2024
earnings; continental European equities (MSCI Europe ex UK Index) trades on
13.4x earnings and the US (S&P 500 Index) trades on 18.6x earnings. Our
portfolio, which trades on only 7.7x earnings, is at the very bottom of the
valuation range seen over my ten year tenure, despite offering better sales
and profit growth prospects, and carrying significantly less debt. When
considering that the Company’s shares as at 31 August 2023 were available at
a discount of 8.8% to the NAV, we believe that this could be a great
investment opportunity on a three to five year view.
QUESTION
The Company’s portfolio is overweight in banking and life insurers. Why do
you prefer these sectors currently?
ANSWER
Financials form the biggest part of the Company’s portfolio, with banks and
life insurers comprising 16% and 8% respectively of the portfolio. Higher
interest rates have enabled banks to significantly improve their profitability
at a time when earnings in many industries are under pressure. Yet many
investors continue to avoid banks because they are scarred from the 2008
global financial crisis. As a result, banks trade on attractive valuations. UK
and Irish banks have become much higher quality businesses since the changes
to the regulatory environment over the past decade. They have strengthened
their balance sheets, trimmed bloated cost bases and withdrawn from riskier
lending.
Our holdings in the sector are diversified both geographically and through
business models, with idiosyncratic factors driving their growth. For example,
our largest holding is AIB Group which is not only an interest rate story but
also benefits from an improvement in Ireland’s banking industry, where the
number of competing groups has recently shrunk from five to three. The rising
interest rate environment is also positive for life insurers, which benefit
from an acceleration in pension fund re-risking.
While our holdings in these two sectors remain attractively valued, we have
taken some profits following the strong returns achieved over the past year.
We have redeployed some of the proceeds into non-life insurance companies,
adding to our modest exposure (c. 4% of the portfolio at the time of writing)
given the improving pricing environment and moderating cost of insurance
claims.
QUESTION
What do you think are the biggest risks and opportunities for the next 12
months?
ANSWER
The biggest risk is a recession and its impact on corporate earnings. While
there is increasing talk of a soft landing, there is considerable historical
evidence on the impact of monetary tightening to keep us cautious on company
prospects in the near-term. In this uncertain environment, we favour companies
with lower levels of debt and the resilience to navigate the uncertainty. We
are wary of stocks where fundamentals and margins have been strong, and a
deterioration is not priced in.
While we consider the current macroeconomic backdrop when we forecast
financials for our holdings and potential new ideas, we feel our time is best
spent on researching stocks from a bottom-up perspective and taking a
long-term view of their prospects. Many of these companies will be affected by
the economic cycle but have compelling company specific stories that can be
important drivers of their share price over time.
Given the nature of the post-pandemic environment, there are companies that
have already exhibited fundamental weakness resembling a recessionary
scenario, and while corporate earnings have generally performed better than
expected, there have been profit warnings in the small-and mid-cap
companies’ space. Many of these companies have seen their earnings rebased
and trade on low valuations with limited downside and significant upside once
the environment normalises. This is starting to present us with some
interesting opportunities, and we have begun to build positions in some of
these stocks, particularly in smaller companies.
Nonetheless, our caution is reflected in the Company’s modest gearing. While
valuations are attractive and we are finding new ideas, we are conscious of
the near-term uncertainty and want to retain some dry powder to take advantage
of any forced sellers and new opportunities.
ALEX WRIGHT
Portfolio Manager
6 November 2023
Strategic Report
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 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 by the Audit
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 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 Shareholder returns.
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 risks listed below as the principal risks and
uncertainties faced by the Company.
Principal Risks Description and Risk Mitigation
Market, Economic and Political Risks The Company may be affected by market and economic risks. The principal market related risks are market downturn, interest rate movements, inflation and market shocks, such as the post pandemic UK economy recovery, volatility from the war in Ukraine and
more recently conflict in the Middle East. The Company may also be impacted by concerns over global economic growth and major political events affecting the UK market and economy and the consequences of this. Inflation remains elevated across most
economies driven by a combination of increased demand following the pandemic restrictions being lifted, global labour shortages in some sectors and supply chain shortages, including energy and food security. Inflation and economic instability are leading
to a prolonged cost-of-living crisis and potentially impacting investors’ risk appetite. The Company is exposed to a number of geopolitical risks. The fast-changing global geopolitical landscape is largely shaped by the Russia and Ukraine war effects,
deglobalisation trends and significant supply disruption, as well as fears of global recession amid inflationary pressures and financial distress. Russia and Ukraine are both significant net exporters of oil, natural gas and a variety of soft commodities
and supply limitations have fuelled global inflation and economic instability, specifically within Western nations. The Company’s portfolio is made up mainly of listed securities. The Portfolio Manager’s success or failure to protect and increase the
Company’s value against the above background is core to the Company’s continued success. The investment philosophy of stock-picking and investing in attractively valued companies should outperform the Benchmark over time. The risk from the likely effects
of unforeseen economic and market events is somewhat mitigated by the Company’s investment trust structure which means no forced sales need to take place to deal with any redemptions. Therefore, investments can be held over a longer time horizon. The Board
reviews market, economic and political risks and legislative changes at each Board meeting. Risks to which the Company is exposed to in the market risk category are included in Note 17 to the Financial Statements below together with summaries of the
policies for managing these risks.
Investment Performance Risk (including the use of derivatives and gearing) The Board relies on the Portfolio Manager’s skills and judgement to make investment decisions based on research and analysis of individual stocks and sectors. The Board reviews the performance of the asset value of the portfolio against the Company’s
Benchmark and its competitors and also considers the outlook for the market with the Portfolio Manager at each Board meeting. The emphasis is on long-term investment performance as there is a risk for the Company of volatility of performance in the shorter
-term. Derivative instruments are used to protect and enhance investment returns. There is a risk that the use of derivatives may lead to higher volatility in the NAV and the share price than might otherwise be the case. The Board has put in place policies
and limits to control the Company’s use of derivatives and exposures. These are monitored on a daily basis by the Manager’s Compliance team and regular reports are provided to the Board. Further detail on derivative instruments risk is included in Note 17
to the Financial Statements below. The Company gears through the use of long CFDs which provide greater flexibility and are generally cheaper than bank loans as a form of financing. The principal risk is that the Portfolio Manager fails to use gearing
effectively, resulting in a failure to outperform in a rising market or increasing underperformance in a falling market. The Board regularly considers the level of gearing and gearing risk and sets limits within which the Manager must operate.
Cybercrime and Information Security Risks The operational risk from cybercrime is significant. Cybercrime threats evolve rapidly and consequently the risk is regularly re-assessed and the Board receives regular updates from the Manager in respect of the type and possible scale of cyberattacks. The
Manager’s technology team has developed a number of initiatives and controls in order to provide enhanced mitigating protection to this ever-increasing threat. The risk is frequently re-assessed by Fidelity’s information security teams and has resulted in
the implementation of new tools and processes, including improvements to existing ones. Fidelity has a dedicated cybersecurity team which provides regular awareness updates and best practice guidance. Risks are increased due to the Russia/Ukraine conflict
and the trend to more working from home following the pandemic. These primarily relate to phishing, remote access threats, extortion and denial of services attacks. The Manager has dedicated detect and respond resources specifically to monitor the cyber
threats associated within the workplace and increased cyber activity following Russia’s invasion of Ukraine. There are a number of mitigating actions in place including, control strengthening, geo-blocking and phishing mitigants, combined with enhanced
resilience and recovery options. The Company’s third-party service providers also provide assurances and have similar control measures in place to detect and respond to cuber threats and activity.
Environmental, Social and Governance (“ESG”) Risk There is a risk that the value of the assets of the Company are negatively impacted by ESG related risks, including climate change risk. ESG risks include investor expectations and how the Company is positioned from a marketing perspective and whether it
is compliant with its ESG disclosure requirements. Fidelity has embedded ESG factors in its investment decision-making process. ESG integration is carried out at the fundamental research analyst level within its investment teams, primarily through
Fidelity’s Proprietary Sustainability Rating which is designed to generate a forward-looking and holistic assessment of a company’s ESG risks and opportunities based on sector-specific key performance indicators across 127 individual and unique sub
-sectors. The Portfolio Manager is also active in analysing the effects of ESG when making investment decisions. The Board continues to monitor developments in this area and the positioning of the Company’s portfolio considering ESG factors. Further detail
on ESG considerations in the investment process and sustainable investing is in the Annual Report. ESG ratings of the companies within the Company’s portfolio compared to MSCI ratings are provided in the Annual Report.
Competition Risk Threats facing the Company are loss of Shareholders if the demand for investment trusts declines, and the demand for passive funds and active ETFs (Exchange-Traded Funds) continue to increase. ESG funds offered by competitors may pose competition threats
with funds or companies that may offer higher ESG credentials, especially for younger investors. The Board reviews the strategic direction of the Company on an ongoing basis to ensure that it offers a relevant product to Shareholders. It also regularly
reviews the Shareholder profile of the Company with the Company’s Broker. ESG factors are embedded into the Portfolio Manager’s investment decision process.
Business Continuity Risk There continues to be increased focus from financial services regulators around the world on the contingency plans of regulated financial firms. The top risks globally are cybersecurity, geopolitical events and natural disasters. There are also ongoing
risks from the Russia/Ukraine war, specifically regarding the potential loss of power and/or broadband services. Variants of COVID continue to evolve and some risks remain. The Manager continues to take all reasonable steps to meet its regulatory
obligations, assess its ability to continue operating and the steps it needs to take to support its clients, including the Board and has an appropriate control environment in place. The Manager has provided the Board with assurance that the Company has
appropriate business continuity plans and the provision of services has continued to be supplied without interruption. Specific risks posed by the pandemic continue to ease with increasing levels of staff returning to routine office-based working, albeit
under hybrid working arrangements which allows greater flexibility on remote working as part of the new operating model. The Company relies on a number of third-party service providers, principally the Registrar, Custodian and Depositary. They are all
subject to a risk-based programme of internal audits by the Manager and their own internal controls reports are received by the Board on an annual basis and any concerns are investigated. The third-party service providers have also confirmed the
implementation of appropriate measures to ensure no business disruption. Risks associated with these services are generally rated as low, but the financial consequences could be serious, including reputational damage to the Company.
Key Person and Operational Support Risks The loss of the Portfolio Manager or key individuals could lead to potential performance, operational or regulatory issues. The Manager identifies key dependencies which are then addressed through succession plans, particularly for portfolio managers. The
Portfolio Manager, Alex Wright, has a differentiated style in relation to his peers. This style is intrinsically linked with the Company’s investment philosophy and strategy and, therefore, the Company has a key person dependency on him. Fidelity has
succession plans in place for its portfolio managers which have been discussed with the Board and provides some assurance in this regard. There is a Co-Portfolio Manager who works alongside the Portfolio Manager and has extensive experience in the markets
and companies, and shares a common investment approach and complementary investment experience with the Portfolio Manager. There is also a risk that the Manager has inadequate succession plans for other key operational individuals.
Discount Control Risk Due to the nature of investment companies, the price of the Company’s shares and its discount to NAV are factors which are not totally within the Company’s control. The Board has a discount management policy in place and some short-term influence over the
discount may be exercised by the use of share repurchases at acceptable prices and within the parameters set by the Board. The demand for shares can be influenced through good performance and an active investor relations program. The Company’s share price,
NAV and discount volatility are monitored daily by the Manager with the Company’s Broker and considered by the Board on a regular basis.
Regulatory Risk The Company may be impacted by changes in legislation, taxation, regulation or other external influence that require changes to the business. These are monitored regularly by the Board and managed through active engagement with regulators and trade bodies
by the Manager.
Continuation Vote
A continuation vote takes place every three years. There is a risk that
Shareholders do not vote in favour of continuation during periods when
performance of the Company’s NAV and share price is poor. At the AGM held on
14 December 2022, 99.89% of Shareholders voted in favour of the continuation
of the Company. The next continuation vote will take place at the AGM in 2025.
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 of 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 compared to its Benchmark;
· The principal and emerging risks and uncertainties facing the Company and
their potential impact, as set out above;
· The likely 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 August
2023 was a NAV total return of +22.6% and a share price total return of +10.3%
compared to the Benchmark total return of +18.4%. 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, unforeseen market events and the ongoing
implications of the Russia and Ukraine war and developing conflicts in the
Middle East 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) and the projected income and expenditure, 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 November 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 the war in Ukraine and
significant market events.
Accordingly, the Financial Statements of the Company have been prepared on a
going concern basis.
The prospects of the Company over a period longer than twelve months can be
found in the Viability Statement above.
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 (FIL
Investment Services (UK) Limited) 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 (“AGM”) 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 in writing at the same address or by email at
investmenttrusts@fil.com. The Portfolio Manager meets 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 Environmental, Social and Governance (“ESG”) issues
aligns with the investment objective to deliver long-term capital growth, 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 approval of this report, have included:
· As part of the Board’s succession plan, the appointment of Dean Buckley
as Chairman of the Board when Andy Irvine stepped down from the Board at the
last AGM. As a result of the change in Mr Buckley’s role, the decision to
appoint Nigel Foster as Senior Independent Director, both appointments with
effect from 14 December 2022;
· The decision to carry out an external Board evaluation using the services
of Lintstock Ltd. in accordance with the UK Corporate Governance Code;
· The decision to pay an interim dividend of 2.53 pence per share and to
recommend the payment of a final dividend of 6.27 pence per share (a total of
8.80 pence per share), to maintain the 14 year track record of increasing
dividends, while retaining funds for reinvestment, consistent with the
objective of long-term capital growth; and
· The decision to once again hold a hybrid AGM in 2023 in order to make it
more accessible to those investors who are unable to or prefer not to attend
in person.
Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Annual Report and Financial
Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Financial Statements for each
financial period. Under that law, the Directors have elected to prepare the
Financial Statements in accordance with UK Generally Accepted Accounting
Practice (UK Accounting Standards and applicable law), including Financial
Reporting Standard FRS 102: The Financial Reporting Standard applicable in the
UK and Republic of Ireland (“FRS 102”). 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 Section 10 of FRS
102 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;
· State whether applicable UK Accounting Standards, including FRS 102, have
been followed, subject to any material departures disclosed and explained in
the Financial Statements; and
· Prepare the Financial Statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company’s transactions and disclose with
reasonable accuracy at any time the financial position of the Company and to
enable them to ensure that the Company and 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 which comply with that law
and those regulations.
The Directors have delegated 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/specialvalues to the Manager. 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
jurisdictions.
The Directors confirm that to the best of their knowledge:
· The Financial Statements, prepared in accordance with UK Generally
Accepted Accounting Practice, including FRS 102, give a true and fair view of
the assets, liabilities, financial position and profit of the Company;
· The Annual Report, including the Strategic Report, includes a fair review
of the development and performance of the business and the position of the
Company, together with a description of the principal risks and uncertainties
it faces; and
· 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.
The Statement of Directors’ Responsibility was approved by the Board on 6
November 2023 and signed on its behalf by:
DEAN BUCKLEY
Chairman
Income Statement for the year ended 31 August 2023
Year ended 31 August 2023 Year ended 31 August 2022
Notes Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Losses on investments 10 – (12,021) (12,021) – (64,441) (64,441)
Gains/(losses) on long CFDs 11 – 35,770 35,770 – (14,992) (14,992)
Investment and derivative income 3 43,717 – 43,717 37,135 – 37,135
Other interest 3 2,971 – 2,971 877 – 877
Investment management fees 4 (5,698) – (5,698) (5,607) – (5,607)
Other expenses 5 (948) – (948) (838) – (838)
Foreign exchange (losses)/gains – (4,032) (4,032) – 5,874 5,874
--------------- --------------- --------------- --------------- --------------- ---------------
Net return/(loss) on ordinary activities before finance costs and taxation 40,042 19,717 59,759 31,567 (73,559) (41,992)
Finance costs 6 (4,774) – (4,774) (1,243) – (1,243)
--------------- --------------- --------------- --------------- --------------- ---------------
Net return/(loss) on ordinary activities before taxation 35,268 19,717 54,985 30,324 (73,559) (43,235)
Taxation on return/(loss) on ordinary activities 7 (672) – (672) (196) – (196)
--------------- --------------- --------------- --------------- --------------- ---------------
Net return/(loss) on ordinary activities after taxation for the year 34,596 19,717 54,313 30,128 (73,559) (43,431)
========= ========= ========= ========= ========= =========
Return/(loss) per ordinary share 8 10.67p 6.08p 16.75p 9.42p (23.00p) (13.58p)
========= ========= ========= ========= ========= =========
The Company does not have any other comprehensive income. Accordingly, the net
return/(loss) on ordinary activities 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.
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.
Balance Sheet as at 31 August 2023 Company number 2972628
Notes 2023 2022
£’000 £’000
Fixed assets
Investments 10 882,692 835,672
--------------- ---------------
Current assets
Derivative instruments 11 1,769 28
Debtors 12 8,937 10,940
Amounts held at futures clearing houses and brokers – 8,190
Cash and cash equivalents 59,460 80,450
--------------- ---------------
70,166 99,608
========= =========
Current liabilities
Derivative instruments 11 (949) (9,200)
Other creditors 13 (860) (3,481)
--------------- ---------------
(1,809) (12,681)
========= =========
Net current assets 68,357 86,927
========= =========
Net assets 951,049 922,599
========= =========
Capital and reserves
Share capital 14 16,205 16,205
Share premium account 15 238,442 238,442
Capital redemption reserve 15 3,256 3,256
Other non-distributable reserve 15 5,152 5,152
Capital reserve 15 648,795 629,078
Revenue reserve 15 39,199 30,466
--------------- ---------------
Total Shareholders’ funds 951,049 922,599
========= =========
Net asset value per ordinary share 16 293.44p 284.67p
========= =========
The Financial Statements above and below were approved by the Board of
Directors on 6 November 2023 and were signed on its behalf by:
DEAN BUCKLEY
Chairman
The Notes below form an integral part of these Financial Statements.
Statement of Changes in Equity for the year ended 31 August 2023
Notes Share Share Capital Other Capital Revenue Total
capital premium redemption non– reserve reserve Share–
£’000 account reserve distributable £’000 £’000 holders’
£’000 £’000 reserve funds
£’000 £’000
Total Shareholders’ funds at 31 August 2022 16,205 238,442 3,256 5,152 629,078 30,466 922,599
Net return on ordinary activities after taxation for the year – – – – 19,717 34,596 54,313
Dividends paid to Shareholders 9 – – – – – (25,863) (25,863)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total Shareholders’ funds at 31 August 2023 16,205 238,442 3,256 5,152 648,795 39,199 951,049
========= ========= ========= ========= ========= ========= =========
Total Shareholders’ funds at 31 August 2021 15,651 205,466 3,256 5,152 702,637 21,928 954,090
New ordinary shares issued 14 554 33,118 – – – – 33,672
Costs associated with the issue of new ordinary shares – (142) – – – – (142)
Net (loss)/return on ordinary activities after taxation for the year – – – – (73,559) 30,128 (43,431)
Dividends paid to Shareholders 9 – – – – – (21,590) (21,590)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total Shareholders’ funds at 31 August 2022 16,205 238,442 3,256 5,152 629,078 30,466 922,599
========= ========= ========= ========= ========= ========= =========
The Notes below form an integral part of these Financial Statements.
Cash Flow Statement for the year ended 31 August 2023
Notes Year ended Year ended
31.08.23 31.08.22
£’000 £’000
Operating activities
Investment income received 39,436 25,034
Net derivative income 5,934 9,133
Interest received 2,971 493
Investment management fees paid (5,699) (5,597)
Directors’ fees paid (173) (157)
Other cash payments (777) (618)
--------------- ---------------
Net cash inflow from operating activities before finance costs and taxation 20 41,692 28,288
========= =========
Finance costs paid (4,622) (1,186)
Overseas taxation suffered (1,119) (783)
--------------- ---------------
Net cash inflow from operating activities 35,951 26,319
========= =========
Investing activities
Purchases of investments (429,178) (359,829)
Sales of investments 368,171 347,076
Receipts on long CFDs 70,856 73,743
Payments on long CFDs (45,085) (80,763)
Movement on amounts held at futures clearing houses and brokers 8,190 (8,150)
--------------- ---------------
Net cash outflow from investing activities (27,046) (27,923)
========= =========
Net cash inflow/(outflow) before financing activities 8,905 (1,604)
========= =========
Financing activities
Dividends paid 9 (25,863) (21,590)
Net proceeds from issue of shares – 34,132
Costs associated with the issue of new ordinary shares – (142)
--------------- ---------------
Net cash (outflow)/inflow from financing activities (25,863) 12,400
========= =========
Net (decrease)/increase in cash and cash equivalents (16,958) 10,796
Cash and cash equivalents at the beginning of the year 80,450 63,780
Effect of movement in foreign exchange (4,032) 5,874
Cash and cash equivalents at the end of the year 59,460 80,450
--------------- ---------------
Represented by:
Cash at bank 2,028 2,014
Amount held in Fidelity Institutional Liquidity Fund 57,432 78,436
--------------- ---------------
59,460 80,450
========= =========
The Notes below form an integral part of these Financial Statements.
Notes to the Financial Statements
1 Principal Activity
Fidelity Special Values 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 2972628, 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 has prepared its Financial Statements in accordance with UK
Generally Accepted Accounting Practice (“UK GAAP”), including FRS 102
“The Financial Reporting Standard applicable in the UK and Republic of
Ireland”, issued by the Financial Reporting Council (“FRC”). The
Financial Statements have also been prepared in accordance 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.
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 November 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, reviewed the liquidity of the investment portfolio 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 an emerging and a principal 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 FRS 102, investments are valued at fair value, which in
active markets are quoted bid prices 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 above takes account of all events and
conditions up to 30 November 2024 which is at least twelve months from the
date of approval of these Financial Statements.
b) Significant accounting estimates and judgements – The Directors make
judgements and estimates concerning the future. Estimates and judgements are
continually evaluated and are based on historical experience and other
factors, such as expectations of future events, and are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates. The judgements required in order to determine the appropriate
valuation methodology of level 3 financial instruments have a risk of causing
an adjustment to the carrying amounts of assets. These judgements include
making assessments of the possible valuations in the event of a listing or
other marketability related risks.
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 net revenue return 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) Income – Income from equity investments is accounted for 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. Amounts are credited to the revenue column of the Income
Statement. 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 in the revenue column of the Income Statement. Any
excess in the value of the shares received over the amount of the cash
dividend is recognised 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 for securities
is accounted for on an accruals basis and is credited to the revenue column of
the Income Statement.
Derivative instrument income received from dividends on long contracts for
difference (“CFDs”) is accounted for on the date on which the right to
receive the payment is established, normally the ex-dividend date. The amount
net of tax is credited to the revenue column of the Income Statement.
Interest received on CFDs, bank deposits, collateral and money market funds is
accounted for on an accruals basis and credited to the revenue column of the
Income Statement. Interest received on CFDs represents the finance costs
calculated by reference to the notional value of the CFDs.
f) Investment management fees and other expenses – Investment management
fees and other expenses are accounted for on an accruals basis and are charged
as follows:
· Investment management fees are allocated in full to revenue; and
· All other expenses are allocated in full to revenue with the exception of
those directly attributable to share issues or other capital events.
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) Finance costs – Finance costs comprise interest on bank overdrafts and
collateral and finance costs paid on CFDs, which are accounted for on an
accruals basis. Finance costs are charged in full to the revenue column of the
Income Statement.
i) Taxation – The taxation charge represents the sum of current taxation and
deferred taxation.
Current taxation is taxation suffered at source on overseas income less
amounts recoverable under taxation treaties. 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.
Deferred taxation is the taxation expected to be payable or recoverable on
timing differences between the treatment of certain items for accounting
purposes and their treatment for the purposes of computing taxable profits.
Deferred taxation is based on tax rates that have been enacted or
substantively enacted when the taxation is expected to be payable or
recoverable. Deferred tax assets are only recognised if it is considered more
likely than not that there will be sufficient future taxable profits to
utilise them.
j) Dividend paid – Dividends payable to equity Shareholders are recognised
when the Company’s obligation to make payment is established.
k) Investments – The Company’s business is investing in financial
instruments with a view to profiting from their total return in the form of
income and capital growth. This portfolio of investments 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. Investments are measured at fair
value with changes in fair value recognised in profit or loss, in accordance
with the provisions of both Section 11 and Section 12 of FRS 102. The fair
value of investments is initially taken to be their cost and is subsequently
measured as follows:
· Listed investments are valued at bid prices, or last market prices,
depending on the convention of the exchange on which they are listed; and
· Unlisted investments are not quoted, or are not frequently traded, and 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,
meets quarterly to determine the fair value of unlisted investments.
The FVC provide a recommendation of fair values to the Board using
market-based approaches such as multiples, industry valuation benchmarks and
available market prices. Consideration is given to the cost of the investment,
recent arm’s length transactions in the same or similar investments and the
financial performance of the investment since purchase. This pricing
methodology is subject to a detailed review and appropriate challenge by the
Directors.
In accordance with the AIC SORP, the Company includes transaction costs,
incidental to the purchase or sale of investments, within losses on
investments in the capital column of the Income Statement and has disclosed
these costs in Note 10 below.
l) Derivative instruments – When appropriate, permitted transactions in
derivative instruments are used. Derivative transactions into which the
Company may enter include long and short CFDs, futures, options and warrants.
Derivatives are classified as other financial instruments and are initially
accounted for and measured at fair value on the date the derivative contract
is entered into and subsequently measured at fair value as follows:
· Long CFDs – the difference between the strike price and the value of the
underlying shares in the contract;
· Futures – the difference between the contract price and the quoted trade
price; and
· Options – value based on similar instruments or the quoted trade price
for the contract.
Where transactions are used to protect or enhance income, if the circumstances
support this, the income and expenses derived are included in net 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 income
and expenses derived are included: for long CFDs, as gains or losses on long
CFDs, and for short CFDs, futures and options as gains or losses on short
CFDs, futures and options 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.
m) Debtors – Debtors include securities sold for future settlement, amounts
receivable on settlement of derivatives, 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. They are recognised initially
at fair value and, where applicable, subsequently measured at amortised cost
using the effective interest rate method.
n) Amounts held at futures clearing houses and brokers – These are amounts
held in segregated accounts as collateral on behalf of brokers and are carried
at amortised cost.
o) Cash and cash equivalents – Cash and cash equivalents may comprise cash
at bank and money market funds which are short-term, highly liquid and are
readily convertible to a known amount of cash. These are subject to an
insignificant risk of changes in value.
p) Other creditors – Other creditors include securities purchased for future
settlement, finance costs payable, investment management fees and other
creditors and expenses accrued in the ordinary course of business. If payment
is due within one year or less (or in the normal operating cycle of the
business, if longer) they are classified as current liabilities. If not, they
are presented as non-current liabilities. They are recognised initially at
fair value and, where applicable, subsequently measured at amortised cost
using the effective interest rate method.
q) Capital reserve – The following are accounted for in the capital reserve:
· Gains and losses on the disposal of investments and derivative
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;
· Dividends receivable which are capital in nature; and
· Costs of repurchasing or issuing ordinary shares.
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
losses of £9,684,000 (2022: losses of £9,389,000).
3 Income
Year ended Year ended
31.08.23 31.08.22
£’000 £’000
Investment income
UK dividends 29,189 20,437
UK scrip dividends – 85
Interest on securities 805 –
Overseas dividends 10,543 6,684
Overseas scrip dividends – 23
--------------- ---------------
40,537 27,229
========= =========
Derivative income
Dividends received on long CFDs 3,180 9,906
--------------- ---------------
Investment and derivative income 43,717 37,135
========= =========
Other interest
Interest received on bank deposits, collateral and money market funds 2,965 493
Interest received on tax reclaims 6 –
Interest received on long CFDs* – 384
--------------- ---------------
2,971 877
========= =========
Total income 46,688 38,012
========= =========
Special dividends of £1,904,000 (2022: £372,000) have been recognised in
capital during the year.
* Due to negative interest rates in the prior year, the Company received
interest on some of its long CFDs.
4 Investment Management Fees
Year ended Year ended
31.08.23 31.08.22
£’000 £’000
Investment management fees 5,698 5,607
========= =========
FIL Investment Services (UK) Limited is the Company’s Alternative Investment
Fund Manager and has delegated portfolio management to FIL Investments
International (“FII”). Both companies are Fidelity group companies.
FII charges investment management fees at an annual rate of 0.60% of net
assets. Fees are accrued on a daily basis and payable monthly.
5 Other Expenses
Year ended Year ended
31.08.23 31.08.22
£’000 £’000
AIC fees 21 21
Custody fees 35 42
Depositary fees 57 71
Directors’ expenses 17 6
Directors’ fees 1 172 159
Legal and professional fees 82 95
Marketing expenses 303 191
Printing and publication expenses 116 115
Registrars’ fees 68 70
Fees payable to the Company’s Independent Auditor for the audit of the Financial Statements 2 50 46
Sundry other expenses 27 22
--------------- ---------------
Other expenses 948 838
========= =========
1 Details of the breakdown of Directors’ fees are disclosed in the
Directors’ Remuneration Report in the Annual Report.
2 The VAT payable on audit fees is included in sundry other expenses.
6 Finance Costs
Year ended Year ended
31.08.23 31.08.22
£’000 £’000
Interest paid on long CFDs 4,761 1,231
Interest on bank overdrafts and collateral 13 12
--------------- ---------------
4,774 1,243
========= =========
7 Taxation on Return/(Loss) on Ordinary Activities
Year ended Year ended
31.08.23 31.08.22
£’000 £’000
a) Analysis of the taxation charge for the year
Overseas taxation 672 196
--------------- ---------------
Taxation charge for the year (see Note 7b) 672 196
========= =========
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 25.00% (2022: 19.00%). A
reconciliation of the standard rate of UK corporation tax to the taxation
charge for the year is shown below:
Year ended Year ended
31.08.23 31.08.22
£’000 £’000
Net return/(loss) on ordinary activities before taxation 54,985 (43,235)
--------------- ---------------
Net return/(loss) on ordinary activities before taxation multiplied by the blended rate of UK corporation tax of 21.52% (2022: 19.00%) 11,833 (8,215)
Effects of:
Capital (gains)/losses not taxable* (4,243) 13,976
Income not taxable (8,550) (5,173)
Excess management expenses 960 (588)
Overseas taxation 672 196
--------------- ---------------
Total taxation charge for the year (see Note 7a) 672 196
========= =========
* The Company is exempt from UK taxation 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 £17,235,000 (2022: £16,119,000), in respect of
excess expenses of £68,940,000 (2022: £64,476,000) available to be set off
against future taxable profits has not been recognised as it is unlikely that
there will be sufficient future taxable profits to utilise these expenses.
The UK corporation tax rate increased from 19.00% to 25.00% from 1 April 2023.
The rate of 25.00% has been applied to calculate the unrecognised deferred tax
asset for the current year (2022: 25.00%).
8 Return/(Loss) per Ordinary Share
Year ended Year ended
31.08.23 31.08.22
Revenue return per ordinary share 10.67p 9.42p
Capital return/(loss) per ordinary share 6.08p (23.00p)
--------------- ---------------
Total return/(loss) per ordinary share 16.75p (13.58p)
========= =========
The return/(loss) per ordinary share is based on the net return/(loss) on
ordinary activities 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
Net revenue return on ordinary activities after taxation 34,596 30,128
Net capital return/(loss) on ordinary activities after taxation 19,717 (73,559)
--------------- ---------------
Net total return/(loss) on ordinary activities after taxation 54,313 (43,431)
========= =========
Number Number
Weighted average number of ordinary shares held outside of Treasury 324,098,920 319,869,879
========= =========
9 Dividends Paid to Shareholders
Year ended Year ended
31.08.23 31.08.22
£’000 £’000
Dividends paid
Interim dividend of 2.53 pence per ordinary share paid for the year ended 31 August 2023 8,200 –
Final dividend of 5.45 pence per ordinary share paid for the year ended 31 August 2022 17,663 –
Interim dividend of 2.30 pence per ordinary share paid for the year ended 31 August 2022 – 7,454
Final dividend of 4.50 pence per ordinary share paid for the year ended 31 August 2021 – 14,136
--------------- ---------------
25,863 21,590
========= =========
Dividends proposed
Final dividend proposed of 6.27 pence per ordinary share for the year ended 31 August 2023 20,321 –
Final dividend proposed of 5.45 pence per ordinary share for the year ended 31 August 2022 – 17,663
--------------- ---------------
20,321 17,663
========= =========
The Directors have proposed the payment of a final dividend of 6.27 pence per
ordinary share for the year ended 31 August 2023 which is subject to approval
by Shareholders at the Annual General Meeting on 14 December 2023 and has not
been included as a liability in these Financial Statements. The dividend will
be paid on 10 January 2024 to Shareholders on the register at the close of
business on 1 December 2023 (ex-dividend date 30 November 2023).
10 Investments
2023 2022
£’000 £’000
Listed investments 880,839 835,398
Unlisted investments 1,853 274
--------------- ---------------
Total investments at fair value 882,692 835,672
========= =========
Opening book cost 813,135 726,247
Opening investment holding gains 22,537 160,463
--------------- ---------------
Opening fair value 835,672 886,710
========= =========
Movements in the year
Purchases at cost 426,404 361,407
Sales – proceeds (367,363) (348,004)
Losses on investments (12,021) (64,441)
--------------- ---------------
Closing fair value 882,692 835,672
========= =========
Closing book cost 914,377 813,135
Closing investment holding (losses)/gains (31,685) 22,537
--------------- ---------------
Closing fair value 882,692 835,672
========= =========
The Company received £367,363,000 (2022: £348,004,000) from investments sold
in the year. The book cost of these investments when they were purchased was
£325,162,000 (2022: £274,519,000). 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
Transaction costs incurred in the acquisition and disposal of investments,
which are included in the losses on investments above, were as follows:
Year ended Year ended
31.08.23 31.08.22
£’000 £’000
Purchases transaction costs 1,688 1,544
Sales transaction costs 167 195
--------------- ---------------
1,855 1,739
========= =========
The portfolio turnover rate for the year was 44.2% (2022: 42.8%).
11 Derivative Instruments
Year ended Year ended
31.08.23 31.08.22
£’000 £’000
Gains/(losses) on long CFD positions closed 25,778 (7,013)
Movement in investment holding gains/(losses) on long CFDs 9,992 (7,979)
--------------- ---------------
35,770 (14,992)
========= =========
2023 2022
Fair value Fair value
£’000 £’000
Derivative instruments recognised on the Balance Sheet
Derivative instrument assets 1,769 28
Derivative instrument liabilities (949) (9,200)
--------------- ---------------
820 (9,172)
========= =========
Fair value 2023 Fair value 2022
£’000 Asset £’000 Asset
exposure exposure
£’000 £’000
At the year end the Company held the following derivative instruments
Long CFDs 820 130,073 (9,172) 178,898
========= ========= ========= =========
12 Debtors
2023 2022
£’000 £’000
Securities sold for future settlement 117 924
Amounts receivable on settlement of derivatives 14 7
Accrued income 7,058 8,711
Overseas taxation recoverable 1,720 1,273
Other debtors and prepayments 28 25
--------------- ---------------
8,937 10,940
========= =========
13 Other Creditors
2023 2022
£’000 £’000
Securities purchased for future settlement – 2,774
Finance costs payable 209 57
Creditors and accruals 651 650
--------------- ---------------
860 3,481
========= =========
14 Share Capital
2023 2022
Number of £’000 Number of £’000
shares shares
Issued, allotted and fully paid ordinary shares of 5 pence each
Total share capital – Beginning of the year 324,098,920 16,205 313,028,920 15,651
New ordinary shares issued – – 11,070,000 554
--------------- --------------- --------------- ---------------
Total share capital – End of the year 324,098,920 16,205 324,098,920 16,205
========= ========= ========= =========
During the year, no new ordinary shares were issued (2022: 11,070,000 shares).
The premium received on the issue of new ordinary shares for the prior year
ended 31 August 2022 was £33,118,000 and was credited to the share premium
account. At 31 August 2023, no shares were held in Treasury.
15 Capital and Reserves
Share Share Capital Other Capital Revenue Total
capital premium redemption non– reserve reserve Share–
£’000 account reserve distributable £’000 £’000 holders’
£’000 £’000 reserve funds
£’000 £’000
At 1 September 2022 16,205 238,442 3,256 5,152 629,078 30,466 922,599
Losses on investments (see Note 10) – – – – (12,021) – (12,021)
Gains on long CFDs (see Note 11) – – – – 35,770 – 35,770
Foreign exchange losses – – – – (4,032) – (4,032)
Revenue return on ordinary activities after taxation for the year – – – – – 34,596 34,596
Dividends paid to Shareholders (see Note 9) – – – – – (25,863) (25,863)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
At 31 August 2023 16,205 238,442 3,256 5,152 648,795 39,199 951,049
========= ========= ========= ========= ========= ========= =========
Share Share Capital Other Capital Revenue Total
capital premium redemption non– reserve reserve Share–
£’000 account reserve distributable £’000 £’000 holders’
£’000 £’000 reserve funds
£’000 £’000
At 1 September 2021 15,651 205,466 3,256 5,152 702,637 21,928 954,090
Losses on investments (see Note 10) – – – – (64,441) – (64,441)
Losses on long CFDs (see Note 11) – – – – (14,992) – (14,992)
Costs associated with the issue of new ordinary shares – (142) – – – – (142)
Foreign exchange gains – – – – 5,874 – 5,874
New ordinary shares issued 554 33,118 – – – – 33,672
Revenue return on ordinary activities after taxation for the year – – – – – 30,128 30,128
Dividends paid to Shareholders (see Note 9) – – – – – (21,590) (21,590)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
At 31 August 2022 16,205 238,442 3,256 5,152 629,078 30,466 922,599
========= ========= ========= ========= ========= ========= =========
The capital reserve balance at 31 August 2023 includes investment holding
losses of £31,685,000 (2022: gains of £22,537,000) as detailed in Note 10
above. The revenue and capital reserves are distributable by way of dividend.
See Note 2 (q) above for further details.
16 Net Asset Value per Ordinary Share
The calculation of the net asset value per ordinary share is based on the
total Shareholders’ funds divided by the number of ordinary shares held
outside of Treasury.
2023 2022
Total Shareholders’ funds £951,049,000 £922,599,000
Ordinary shares held outside of Treasury at year end 324,098,920 324,098,920
Net asset value per ordinary share 293.44p 284.67p
========= =========
It is the Company’s policy that shares held in Treasury will only be
reissued at net asset value per ordinary share or at a premium to net asset
value per ordinary share and, therefore, shares held in Treasury have no
dilutive effect.
17 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 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 market, economic and
political, investment performance (including the use of derivatives and
gearing), cybercrime and information security, environmental, social and
governance (“ESG”), competition, business continuity, key person and
operational support, discount control and regulatory. Risks are identified and
graded in this process, together with steps taken in mitigation, and are
updated and reviewed on an ongoing basis. These risks and how they are
identified, evaluated and managed are shown above.
This note 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) and bonds held in accordance with the
Company’s investment objective and policies;
· Derivative instruments which comprise CFDs, futures and options on listed
stocks and equity indices; and
· Cash, liquid resources and short-term debtors and creditors that arise
from its operations.
The risks identified 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 and reserves. In
addition, the Company has gearing through the use of derivative instruments.
The Board imposes limits to ensure gearing levels are appropriate. The Company
is exposed to a financial risk arising as a result of any increases in
interest rates associated with the funding of the derivative instruments.
Interest rate risk exposure
The values of the Company’s financial instruments that are exposed to
movements in interest rates are shown below:
2023 2022
£’000 £’000
Exposure to financial instruments that bear interest
Long CFDs – exposure less fair value 129,253 188,070
--------------- ---------------
Exposure to financial instruments that earn interest
Amounts held at futures clearing houses and brokers – 8,190
Cash and cash equivalents 59,460 80,450
--------------- ---------------
59,460 88,640
========= =========
Net exposure to financial instruments that bear interest 69,793 99,430
========= =========
Due to negative interest rates in the prior year, the Company received
interest on some of its long CFD positions.
Foreign currency risk
The Company does not carry out currency speculation. The Company’s net
return/(loss) on ordinary activities after taxation for the year and its net
assets can be affected by foreign exchange movements because the Company has
income and assets which are denominated in currencies other than the
Company’s functional currency which is UK sterling. The Company can also be
subject to short-term exposure to exchange rate movements, for example,
between the date when an investment is purchased or sold and the date when
settlement of the transaction occurs.
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 derivative instruments;
· Movements in currency exchange rates affecting short-term timing
differences; and
· Movements in currency exchange rates affecting income received.
The portfolio management team monitor foreign currency risk but it is not the
Company’s policy to hedge against currency risk.
Currency exposure of financial assets
The currency exposure profile of the Company’s financial assets is shown
below:
2023
Currency Investments Long Debtors Cash Total
held at fair exposure to £’000 and cash £’000
value derivative equivalents 2
£’000 instruments 1 £’000
£’000
Euro 67,412 77,457 823 – 145,692
US dollar 31,515 – 722 36,855 69,092
Swiss franc 36,842 – 224 – 37,066
Swedish krona 14,175 – – – 14,175
Australian dollar 7,782 – 49 – 7,831
Norwegian krone 4,841 – – – 4,841
South African rand 2,468 – – – 2,468
Canadian dollar 1,703 – – 29 1,732
UK sterling 715,954 52,616 7,119 22,576 798,265
--------------- --------------- --------------- --------------- ---------------
882,692 130,073 8,937 59,460 1,081,162
========= ========= ========= ========= =========
1 The exposure to the market of long CFDs.
2 Cash and cash equivalents are made up of £2,028,000 cash at bank and
£57,432,000 held in Fidelity Institutional Liquidity Fund.
2022
Currency Investments Long Debtors 2 Cash Total
held at fair exposure to £’000 and cash £’000
value derivative equivalents 3
£’000 instruments 1 £’000
£’000
Euro 69,765 71,606 316 – 141,687
US dollar 6,665 – 117 39,679 46,461
Swiss franc 20,631 – 376 – 21,007
Swedish krona 16,309 – – – 16,309
Australian dollar 12,179 – – – 12,179
Norwegian krone 6,377 – – – 6,377
Emirati dirham 4,780 – – – 4,780
South African rand 2,711 142 – – 2,853
Danish krone – – 71 – 71
Canadian dollar – – – 33 33
UK sterling 696,255 107,150 18,250 40,738 862,393
--------------- --------------- --------------- --------------- ---------------
835,672 178,898 19,130 80,450 1,114,150
========= ========= ========= ========= =========
1 The exposure to the market of long CFDs.
2 Debtors include amounts held at futures clearing houses and brokers.
3 Cash and cash equivalents are made up of £2,014,000 cash at bank and
£78,436,000 held in Fidelity Institutional Liquidity Fund.
Currency exposure of financial liabilities
The Company finances its investment activities through its ordinary share
capital and reserves. The Company’s financial liabilities comprise other
creditors. The currency profile of these financial liabilities is shown below:
Currency 2023 Other Creditors £’000 2022
Other
creditors
£’000
Euro - 6
Swiss franc 135 2,141
UK sterling 725 1,334
--------------- ---------------
860 3,481
========= =========
Other price risk
Other price risk arises mainly from uncertainty about future prices of
financial instruments used in the Company’s business. It represents the
potential loss the Company might suffer through holding market positions in
the face of price movements. 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 Portfolio
Manager is responsible for actively monitoring the existing portfolio selected
in accordance with the overall asset allocation parameters described above 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 estimated using Value at Risk and Stress Tests
as set out in the Company’s internal Risk Management Process Document.
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.
Liquidity risk exposure
At 31 August 2023, the undiscounted gross cash outflows of the financial
liabilities were all repayable within one year and consisted of derivative
instrument liabilities of £949,000 (2022: £9,200,000) and other creditors of
£860,000 (2022: £3,481,000).
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 by evaluating
derivative instrument credit risk exposure.
For derivative transactions, collateral is used to reduce the risk of both
parties to the contract. All collateral amounts are held in UK sterling and
are managed on a daily basis for all relevant transactions. At 31 August 2023,
£580,000 (2022: £nil) was held by the brokers in a segregated collateral
account on behalf of the Company, to reduce the credit risk exposure of the
Company. This collateral comprised: J.P. Morgan Securities plc £220,000
(2022: £nil) and HSBC Bank plc £360,000 (2022: £nil). At 31 August 2023,
there were no amounts held by the Company at futures clearing houses and
brokers, in a segregated collateral account, on behalf of the brokers, to
reduce the credit risk exposure of the brokers (2022: £8,190,000). In the
year to 31 August 2022, this collateral comprised: J.P. Morgan Securities plc
£5,140,000 in cash and HSBC Bank plc £3,050,000 in cash.
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 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 Manager. Exposure to credit risk arises on unsettled
security transactions and derivative instrument contracts and cash at bank.
Derivative instrument risk
The risks and risk management processes which result from the use of
derivative instruments, are set out in a documented Derivative Risk
Measurement and Management Document. Derivative instruments are used by the
Manager for the following purposes:
· To gain unfunded long exposure to equity markets, sectors or single
stocks. Unfunded exposure is exposure gained without an initial flow of
capital;
· To hedge equity market risk using derivatives with the intention of at
least partially mitigating losses in the exposures of the Company’s
portfolio as a result of falls in the equity market; and
· To position short exposures in the Company’s portfolio. These uncovered
exposures benefit from falls in the prices of shares which the Portfolio
Manager believes to be over-valued. These positions, therefore, distinguish
themselves from other short exposures held for hedging purposes since they are
expected to add risk to the portfolio.
RISK SENSITIVITY ANALYSIS
Interest rate risk sensitivity analysis
Based on the financial instruments held and interest rates at 31 August 2023,
an increase of 1.00% in interest rates throughout the year, with all other
variables held constant, would have decreased the Company’s net gain on
ordinary activities after taxation for the year and decreased the net assets
of the Company by £698,000 (2022: increased the net loss and decreased the
net assets by £994,000). 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 instruments held and currency exchange rates at 31
August 2023, a 10% strengthening of the UK sterling exchange rate against
foreign currencies, with all other variables held constant, would have
decreased the Company’s net gain on ordinary activities after taxation for
the year and decreased the net assets of the Company by £25,706,000 (2022:
increased the net loss and decreased the net assets by £22,692,000). A 10%
weakening of the UK sterling exchange rate against foreign currencies, with
all other variables held constant, would have increased the Company’s net
gain on ordinary activities after taxation for the year and increased the net
assets of the Company by £31,418,000 (2022: decreased the net loss and
increased the net assets by £27,734,000).
Other price risk – exposure to investments sensitivity analysis
Based on the listed investments held and share prices at 31 August 2023, an
increase of 10% in share prices, with all other variables held constant, would
have increased the Company’s net return on ordinary activities after
taxation for the year and increased the net assets of the Company by
£88,084,000 (2022: decreased the net loss and increased the net assets by
£83,540,000). A decrease of 10% in share prices would have had an equal and
opposite effect.
An increase of 10% in the valuation of unlisted investments held at 31 August
2023, would have increased the Company’s net gain on ordinary activities
after taxation for the year and increased the net assets of the Company by
£185,300 (2022: decreased the net loss after taxation and increased the net
assets by £27,000). A decrease of 10% in the valuation would have had an
equal and opposite effect.
Other price risk – net exposure to derivative instruments sensitivity
analysis
Based on the derivative instruments held and share prices at 31 August 2023,
an increase of 10% in the share prices underlying the derivative instruments,
with all other variables held constant, would have increased the Company’s
net gain on ordinary activities after taxation for the year and increased the
net assets of the Company by £13,007,000 (2022: decreased the net loss and
increased the net assets by £17,890,000). A decrease of 10% in share prices
would have had an equal and 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 (k) and (l) above, investments and derivative instruments are shown at fair
value.
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 (l) and (m) above. The table below sets out the Company’s fair value
hierarchy:
Financial assets at fair value through profit or loss Level 1 Level 2 Level 3 2023
£’000 £’000 £’000 Total
£’000
Investments 857,351 23,246 2,095 882,692
Derivative instrument assets – 1,769 – 1,769
----------------- ----------------- ----------------- -----------------
857,351 25,015 2,095 884,461
========== ========== ========== ==========
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities – (949) – (949)
========== ========== ========== ==========
Financial assets at fair value through profit or loss Level 1 Level 2 Level 3 2022
£’000 £’000 £’000 Total
£’000
Investments 835,224 – 448 835,672
Derivative instrument assets – 28 – 28
----------------- ----------------- ----------------- -----------------
835,224 28 448 835,700
========== ========== ========== ==========
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities – (9,200) – (9,200)
========== ========== ========== ==========
The table below sets out the movements in level 3 financial instruments during
the year:
Year ended Year ended
31.08.23 31.08.22
£’000 £’000
Beginning of the year 448 957
Sales – proceeds – (716)
Sales – gains – 278
Transfer into level 3 at cost - Prax Exploration & Production and Unbound Group* 1,942 9,499
Movement in investment holding losses (295) (9,570)
----------------- -----------------
End of the year 2,095 448
========== ==========
* Financial instruments are transferred into level 3 on the date they are
suspended, delisted or when they have not traded for thirty days.
Marwyn Value Investors
Marwyn Value Investors is a closed-ended fund incorporated in the United
Kingdom. The fund is highly illiquid and the valuation at 31st August 2023 is
based on the indicative bid price in the absence of a last trade price. As at
31 August 2023, its fair value was £242,000 (2022: £174,000).
TVC Holdings
TVC Holdings is an unlisted investment holding company incorporated in
Ireland. The valuation at 31 August 2023 is based on the NAV from the 2022
audited company’s financial report. As at 31 August 2023, its fair value was
£254,000 (2022: £274,000).
Studio Retail Group
Studio Retail Group operated as a multi-channel retail company. On 14 February
2022, the company was suspended from trading on the London Stock Exchange. The
company is now delisted and in administration. As at 31 August 2023, its fair
value was £nil (2022: £nil).
McColl’s Retail Group
McColl’s Retail Group owns and operates convenience and newsagent stores.
The company was suspended from trading on 6 May 2022 after appointing
administrators. As at 31 August 2023, its fair value was £nil (2022: £nil).
Prax Exploration & Production
Hurricane Energy plc, an oil and gas exploration company, delisted from the
London Stock Exchange in June 2023, after it was acquired by Prax Exploration
& Production plc. The valuation at 31 August 2023 of Prax Exploration &
Production plc is based on the last trade of Hurricane Energy less the cash
payment received from the acquisition. As at 31 August 2023, its fair value
was £1,599,000 (2022: £nil).
Unbound Group
Unbound Group plc is a UK based company engaged in selling a range of brands
focused on the over 55 age demographics. On 17 July 2023, the company stopped
trading and has subsequently gone into administration. As at 31 August 2023,
its fair value was £nil (2022: £nil).
18 Capital Resources and Gearing
The Company does not have any externally imposed capital requirements. The
financial resources of the Company comprise its share capital and reserves, as
disclosed in the Balance Sheet above and any gearing, which is managed by the
use of derivative instruments. Financial resources are managed in accordance
with the Company’s 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 17 above.
The Company’s gearing at the year end is set out below:
2023 2022
Asset exposure Asset exposure
£’000 % 1 £’000 % 1
Investments 882,692 92.8 835,672 90.6
Long CFDs 130,073 13.7 178,898 19.4
----------------- ----------------- ----------------- -----------------
Total asset exposures 1,012,765 106.5 1,014,570 110.0
========== ========== ========== ==========
Shareholders’ funds 951,049 922,599
Gearing 2 6.5% 10.0%
========== ==========
1 Asset exposure to the market expressed as a percentage of Shareholders’
funds.
2 Gearing is the amount by which Asset Exposure exceeds Shareholders’ funds
expressed as a percentage of Shareholders’ funds.
19 Transactions with the Manager and Related Parties
FIL Investment Services (UK) Limited is the Company’s Alternative Investment
Fund Manager and has delegated portfolio management and the role of company
secretary to FIL Investments International (“FII”). Both companies are
Fidelity group companies.
Details of the current fee arrangements are given in the Directors’ Report
in the Annual Report and in Note 4 above. During the year, fees payable to FII
for portfolio management services were £5,698,000 (2022: £5,607,000). At the
Balance Sheet date, fees for portfolio management services of £483,000 (2022:
£484,000) were accrued and included in other creditors. FII also provides the
Company with marketing services. The total amount payable for these services
during the year was £303,000 (2022: £191,000). At the Balance Sheet date,
marketing services of £nil (2022: £13,000) were accrued and included in
other creditors.
Disclosures of the Directors’ interests in the ordinary shares of the
Company and Director’s 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, £18,000 (2022:
£17,000) of Employers’ National Insurance contributions were paid by the
Company. At the Balance Sheet date, Directors’ fees of £14,000 (2022:
£15,000) were accrued and payable.
20 Reconciliation of Net Return/(Loss) on Ordinary Activities before Finance
Costs and Taxation to Net Cash Inflow from Operating Activities before Finance
Costs and Taxation
Year ended Year ended
31.08.23 31.08.22
£’000 £’000
Net total return/(loss) on ordinary activities before finance costs and taxation 59,759 (41,992)
Net capital (return)/loss on ordinary activities before finance costs and taxation (19,717) 73,559
----------------- -----------------
Net revenue return on ordinary activities before finance costs and taxation 40,042 31,567
========== ==========
Scrip dividends – (108)
Decrease/(increase) in debtors 1,650 (3,208)
Increase in other creditors – 37
Net cash inflow from operating activities before finance costs and taxation 41,692 28,288
========== ==========
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
ordinary share price and is 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 are both defined in the Glossary of
Terms in the Annual Report.
Gearing
Gearing is considered to be an Alternative Performance Measure. See Note 18
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 16 above for further details.
Ongoing Charges Ratio
Ongoing charges ratio 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 2022
Investment management fees (£’000) 5,698 5,607
Other expenses (£’000) 948 838
Ongoing charges (£’000) 6,646 6,445
Average net assets (£’000) 949,787 934,785
Ongoing charges ratio 0.70% 0.69%
========== ==========
Revenue, Capital and Total Returns per Share
Revenue, capital and total returns 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. The NAV per ordinary share total return includes reinvestment of the
dividend in the NAV of the Company on the ex-dividend date. The ordinary 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 ordinary share
and the ordinary share price of the Company, the impact of the dividend
reinvestments and the total returns for the years ended 31 August 2023 and 31
August 2022.
2023 Net asset Share
value per price
ordinary
share
31 August 2022 284.67p 260.50p
31 August 2023 293.44p 267.50p
Change in year +3.1% +2.7%
Impact of dividend reinvestment +2.8% +2.9%
----------------- -----------------
Total return for the year +5.9% +5.6%
========== ==========
2022 Net asset Share
value per price
ordinary
share
31 August 2021 304.79p 308.50p
31 August 2022 284.67p 260.50p
Change in year -6.6% -15.6%
Impact of dividend reinvestment +2.2% +2.1%
----------------- -----------------
Total return for the year -4.4% -13.5%
========== ==========
The Annual Financial Report Announcement is not the Company's statutory
accounts. The above results for the year ended 31 August 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
2022 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 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/specialvalues 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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