Annual Financial Report
07/11/2024 07:00
FIDELITY SPECIAL VALUES PLC
Final Results for the year ended 31 August 2024
Financial Highlights:
* During the year ended 31 August 2024, Fidelity Special Values PLC reported a
net asset value return of +24.1% and an ordinary share price total return of
+24.3%.
* The Benchmark Index, the FTSE All-Share Index, produced a total return of
+17.0% over the same period.
* The Board recommends a final dividend of 6.30 pence per share which together
with the interim dividend payment of 3.24 pence per share (totalling 9.54
pence) represents an increase of 8.4% over the prior year.
* Strong earnings delivery and positioning in financials contributed
positively to performance.
Contacts
For further information, please contact:
Smita Amin
Company Secretary
01737 836347
CHAIRMAN’S STATEMENT
Whilst geopolitical challenges remain, from the conflict in the Middle East
and war in Ukraine to the forthcoming US Presidential election, there is a
growing sense that, from an economic and market standpoint, things are
beginning to return to some sort of ‘normality’. Heightened post-Covid
rates of inflation across developed markets have moderated significantly, and
monetary policy is beginning to follow suit, while economic growth
expectations are tending towards a more ‘soft landing’ scenario than may
have been the case this time last year. All these factors would normally point
to a more benign backdrop for equity investment, and indeed some of the larger
equity markets – from the US to Japan – have reached new highs in the year
under review, albeit not without some volatility.
While investor attention may largely have been captured by US technology
stocks, particularly those relating to artificial intelligence, there has been
a quiet renaissance in the still-unloved UK equity market, with the FTSE
All-Share Index (Benchmark) producing a very creditable total return of 17.0%
in the 12 months to 31 August 2024. It is therefore particularly pleasing to
be able to report another year of outperformance by your Company, with a net
asset value (“NAV”) total return of 24.1% and a share price total return
of 24.3%.
One of the things that sets your Company apart is your Portfolio Managers’
focus on opportunities across the market cap spectrum. Perhaps unusually,
there was no one standout area in the UK market’s performance for the year,
with total returns of 16.9% for the large-cap FTSE 100 Index, 17.3% for the
mid-cap FTSE 250 Index and 18.7% for the FTSE Small-Cap Index. This provides
some context to your Company’s performance, with positive contributions
coming from all areas, from banking giant NatWest Group to mid-cap support
services stock Babcock International Group and Irish housebuilder Glenveagh
Properties. You can find out more about the contributors to performance in the
Portfolio Managers’ Review below.
The UK equity market, which has been broadly out of favour on the
international stage since the Brexit vote in 2016, continues to trade at a
material valuation discount to some other large developed markets,
particularly the US. A key element to your Company’s investment approach is
to identify quality companies with valuations lower than peers within the UK
market. Thus, while a more positive backdrop may see investor attention
returning to the UK and pushing up valuations in aggregate, the cheaper
companies that your Portfolio Manager favours could see an additional
tailwind.
Of course, equity investing is a long-term endeavour, and one year of standout
performance should not be viewed in isolation. Alex Wright has now been your
lead Portfolio Manager for 12 years, and it is pleasing to report that he has
outperformed the Benchmark in eight of those 12 years, generating a NAV total
return of +272.2% and a share price total return of +305.5%. Over this period,
an investment of £1,000 would have returned £3,055 with dividends
reinvested.
Alex has been supported since 2020 by co-Portfolio Manager Jonathan Winton.
Jonathan and Alex share the same contrarian value based philosophy and process
and have worked closely together for more than a decade, since Jonathan became
co-manager of the open-ended Fidelity UK Smaller Companies fund in 2013. He
has been lead manager of this fund since 2014, and in July this year was
awarded the Investment Week Fund Manager of the Year Award in the UK Smaller
Companies category. While Alex has the final say on buy and sell ideas for
your Company’s portfolio, Jonathan’s wealth of expertise in the smaller
companies space means that he is a key contributor to such ideas, and the two
often attend company meetings together.
DIVIDENDS
While your Company’s investment approach is focused on long-term capital
growth rather than income generation, dividends have historically formed an
important part of the total shareholder return. The Board’s policy is to pay
dividends twice a year in order to smooth the dividend payments for the
Company’s financial year.
The Company’s revenue return for the year to 31 August 2024 was 11.58 pence
per share (2023: 10.67 pence). The Board raised the interim dividend
significantly at the half-year stage, with the payout of 3.24 pence per share
(backed by a revenue return of 3.34 pence per share) being 28.1% higher than
the 2.53 pence per share interim dividend in 2023. The Board is recommending a
final dividend of 6.30 pence per share for the year ended 31 August 2024
(2023: 6.27 pence) for approval by shareholders at the Annual General Meeting
(“AGM”) on 12 December 2024. Together the interim and final dividends
total 9.54 pence, representing an above-inflation increase of 8.4% over the
8.80 pence paid for the year ended 31 August 2023. The final dividend will be
payable on 10 January 2025 to shareholders on the register at the close of
business on 29 November 2024 (ex-dividend date 28 November 2024).
The total dividends for the year will provide shareholders with a 15th
consecutive year of sustained annual dividend growth. While income is not the
core objective of your Company’s investment strategy, we as a Board
understand the value of a regular dividend stream to smooth the less certain
trajectory of short-term capital performance.
GEARING
As your Portfolio Managers explain in their review below, net gearing
increased somewhat during the financial year, rising from 6.5% on 31 August
2023 to a peak of 9.2% in July, and ending the period at 7.9% on 31 August
2024. While still relatively low in the context of the Board’s target range
of 0-25%, the increase reflects an improving corporate earnings environment as
well as continued attractive valuation opportunities within the investment
universe. Although the overall macroeconomic picture remains somewhat
uncertain, the Board has agreed with the Portfolio Managers that the
Company’s gearing should be allowed to rise further if required to take
advantage of compelling investment ideas in the year ahead.
The ability to gear is a key structural advantage of investment trusts
compared with their open-ended counterparts. Rather than using bank borrowing
(which is often deployed across a portfolio on a pro-rata basis), your
Company’s gearing is achieved using contracts for difference (“CFDs”),
which are implemented on a stock-by-stock basis, allowing a targeted increase
in exposure to your Investment Manager’s favoured positions. The Board
reviews the use of CFDs annually, and has concluded that they remain
appropriate, in terms of both their greater flexibility and their lower costs,
versus more structural forms of gearing, such as bank borrowings.
Combined with Alex and Jonathan’s contrarian and value-focused investment
approach, your Board believes that the judicious use of gearing should
continue to add value for shareholders over the longer-term, as has been
proven historically. The Board believes that a gearing range of 0-25% remains
appropriate in normal market conditions.
DISCOUNT
The last two years under review has seen discounts across the investment trust
market remaining both more volatile and wider than long-term averages. The
picture has improved somewhat in the year under review compared to the
previous 12 months, with the sector average discount at the time of writing
around 14%, compared with nearly 19% at the same point in 2023. Against such a
backdrop, it is reassuring that your Company’s discount to NAV, although
wider than historically, has remained both relatively stable and narrower than
those of its peers, beginning the financial year at 8.8% and ending it at
8.9%, in a range from 10.0% at its widest to 4.9% at its narrowest.
Under the Company’s discount management policy, the Board seeks to maintain
the discount in single digits in normal market conditions. With the exception
of a single day in April, the discount did not breach 10% in the year under
review, and as in the previous year, the Board has not undertaken any share
repurchases. While it remains somewhat frustrating to be trading at a discount
after performing so strongly in the reporting year, your Company has continued
to trade on the narrowest discount to NAV in its peer group (8.9% at the time
of writing, compared with an average of 10.0% for the other companies in its
peer group), despite some peers having bought back shares or undertaken
corporate actions.
Each year at the AGM, the Board seeks shareholders’ authority to repurchase
up to 14.99% of the issued share capital. Rest assured that we continue to
monitor the level of the Company’s discount closely and will take action
when we believe that to do so will be effective and to the benefit of
shareholders.
RAISING OUR PROFILE
Share repurchases are only one of the tools available to investment company
boards seeking to ensure that share prices do not materially diverge from the
value of underlying investments. Increasing demand is arguably of far greater
value than absorbing excess supply through share repurchases, and your Board
and Fidelity – helped enormously by your Portfolio Managers’ strong
long-term performance record and differentiated investment approach – have
continued to work hard to raise the Company’s profile with both retail and
institutional investors. This is critically important work, and while a lot of
it happens behind the scenes, you may have also seen coverage in the press as
a result of Alex and Jonathan’s engagement.
We were very pleased to have won the prestigious Investment Company of the
Year award from Investment Week magazine for the best trust in the UK All
Companies sector in November 2023, repeating our success at the 2022 awards,
and we are delighted to be on the shortlist once again for this year’s
award.
BOARD OF DIRECTORS
Nigel Foster, our Senior Independent Director, will retire from the Board at
the AGM on 12 December, having completed nine years’ service. As our
longest-serving Director, he has made a great contribution to the smooth
running of the Company over his tenure, and we thank him for his efforts and
wish him well for the future. The Board is currently well advanced in the
process of seeking a new Director to replace Nigel, and we will make an
announcement in due course. Claire Boyle will replace him as the Senior
Independent Director when he steps down, whilst also continuing to serve as
Audit Committee Chair. There have been no other changes to the Board in the
year under review.
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 12
December 2024. 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 will be held at 11.00am on Thursday, 12 December 2024 at 4
Cannon Street, London EC4M 5AB and virtually via the online Lumi AGM meeting
platform.
The AGM provides a great opportunity for shareholders to meet the Company’s
Directors, and of course, for us to meet you, and hear first-hand from Alex
Wright, your Portfolio Manager. We hope to see as many of you as possible on
the day. Full details of the AGM are below.
OUTLOOK
In his presentation to shareholders at the Company’s 2023 AGM, Alex outlined
his positive prognosis for the UK equity market, and it is pleasing to see his
optimism has been rewarded in the year under review. I referred at the
beginning of this statement to a ‘quiet renaissance’ in UK equities and,
as Alex and Jonathan point out in their review, inflows to the market have
remained muted, proving that they are not a necessary condition for positive
performance. However, an improving corporate earnings environment, the
prospect of some political stability and a gradual economic recovery may help
to bring greater attention to the many good companies listed on the London
Stock Exchange, which would undoubtedly give further impetus to the market.
Against such a backdrop, your Board and Portfolio Managers continue to believe
that a well diversified, multi-cap portfolio of unloved but high-quality
companies has the potential to deliver compelling long-term returns. UK shares
remain undervalued in a global context, and the dividend income on offer from
many companies could prove an increasing draw in a lower interest rate
environment. We will have to wait and see if this can be the catalyst to turn
a quiet renaissance into something with greater volume.
DEAN BUCKLEY
Chairman
6 November 2024
ANNUAL GENERAL MEETING – THURSDAY, 12 DECEMBER 2024 AT 11.00 AM
The AGM of the Company will be held at 11.00 am on Thursday, 12 December 2024
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 141-269-839. 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 2024?
ANSWER
The Company has recorded strong absolute returns over the reporting year with
a net asset value and a share price total return of 24.1% and 24.3%
respectively, compared to the Benchmark (FTSE All-Share Index) return of
17.0%. Overall, our portfolio holdings have had an unusually strong earnings
delivery, and performance has benefited from improving trading outlooks. The
stronger economic backdrop has also meant that the share prices of our more
economically sensitive small and mid-cap holdings have started to recover
after a tough 2022-23 period.
Top contributor Keller Group reported positive trading trends and predicted
that its results would be materially ahead of the previous year. The company
is a market leader in ground engineering, a small niche sub-sector that
provides it with exposure to various development and infrastructure trends
globally, and particularly in the US, where it is a key beneficiary of federal
spending plans, such as the Inflation Reduction Act, but has flown under the
radar compared to US-listed beneficiaries. Irish housebuilders Cairn Homes and
Glenveagh Properties also reported favourable market conditions and strong
sales outlooks, reflecting Ireland’s housing shortage and population growth,
improving mortgage market and supportive government initiatives and policies.
Our financial holdings have continued to perform strongly with the likes of
Just Group, NatWest Group, Aviva and AIB Group all among the top contributors.
Just Group specialises in annuities (pensions which pay a fixed income for
life) and has benefited from a surge in demand for insurance for corporate
pension schemes known as bulk annuities. Higher interest rates have also
lifted demand for individual annuities. Composite insurer Aviva also reported
a good set of results with earnings, capital generation and solvency all
better than expected. Its management has built credibility through the
successful restructuring of the company and are starting to establish a track
record of consistent operational performance. Meanwhile, banking groups
NatWest and AIB continued to benefit from the higher interest rate environment
and reported strong results.
Elsewhere, food manufacturer Bakkavor Group reported strong performance in the
first half of 2024 and has also raised its annual profit forecast several
times. Results from support services holdings Babcock International Group and
Mitie Group provided further evidence that their turnarounds were beginning to
materialise. Merger and acquisition (“M&A”) activity continued to benefit
portfolio performance; information and analytics group Ascential featured
among the top contributors to fund returns after Informa, the UK events and
academic publisher, confirmed plans to acquire it in a deal worth close to
£1.2 billion, a 53% premium to prevailing market value.
QUESTION
What were some of the major changes you made to the portfolio during the year
and what drove those?
ANSWER
The market outflows from small and medium sized stocks have presented us with
some interesting opportunities at the smaller end of the market cap spectrum.
Interestingly, this included a handful of prior growth darlings, such as the
online personalised greetings card and gifts company Moonpig Group, web
services firm Team Internet and specialist media platform Future. Sector wise,
we have been finding new ideas in cyclical areas such as industrials,
advertising, staffing, real estate and housing, where demand is stabilising
and valuations remain low. Another area where we found more opportunities is
defensives, where we have initiated a new position in food and grocery
retailer Tesco and added to the likes of consumer health and hygiene brand
owner Reckitt Benckiser Group, tobacco firm BAT and electricity network
operator National Grid on weakness. Financials remain well represented in the
portfolio given very attractive valuations, a more conducive backdrop and
plenty of opportunities, with idiosyncratic factors driving their growth.
However, we have taken some profits given the strong performance of some of
our holdings. One stock we added to in the space is Standard Chartered, a
diversified banking group with a focus on Emerging Markets whose turnaround
story is finally coming through. Elsewhere, we remain meaningfully underweight
in resources, a reflection of our lack of exposure to the large miners given
our negative outlook for iron ore and thermal coal, and a reduction in our
energy exposure.
QUESTION
How has gearing evolved over the period?
ANSWER
Gearing has increased somewhat over the past year reflecting the improving
corporate earnings environment, continued attractive valuations and
opportunities on offer. It stood at 7.9% at the end of August 2024, and
contributed positively to performance over the period. We continue to use CFDs
rather than debt for gearing purposes which provides us with the flexibility
to increase or decrease gearing. Unlike conventional bank loan facilities, we
only pay financing costs when we wish to be geared, paying nothing when we are
not.
QUESTION
Your approach is to look for companies from across sectors and the market-cap
spectrum that are overlooked and therefore undervalued by the market. How
important is diversification to your approach?
ANSWER
Given our focus on unloved stocks with potential for change, diversification
is an important aspect of our approach, as not all investment theses will play
out and it can take time for the changes to come through and the market to
recognise the improvements. We typically hold between 80 and 120 positions. By
building a portfolio of stocks that are at different stages of their recovery
process, the intention is to deliver outperformance across the market cycle.
We are privileged to be able to leverage Fidelity International’s extensive
research resources to find opportunities and subsequently monitor our holdings
on a day-to-day basis. The smaller end of the market cap spectrum is
particularly inefficient as fewer sell-side analysts cover these stocks, and
running a diversified portfolio allows us to gain exposure to companies with
smaller market caps. We aim for stock selection to be the primary driver of
performance and therefore a good spread of holdings across industries helps us
to ensure the portfolio is not overly susceptible to particular
sector-specific, regulatory or macroeconomic risks. If we feel a sector is
meaningfully under represented, we will typically focus on trying to find
opportunities where possible.
QUESTION
UK equities continue to trade at a wide discount compared to other global
markets. What catalysts are required to change this?
ANSWER
While UK equities have generated good returns since the pandemic, fund flows
have remained negative, which is puzzling. Many domestic investors seem to
have had their heads turned by the strong historic returns generated by US and
technology stocks. However, the latter’s lofty valuations make them
vulnerable to disappointments, as we have seen in recent months and any
sustained underperformance may well cause investors to reassess their
allocation.
Labour’s landslide victory is expected to result in improved political
stability in the UK. This should prove attractive to investors against a
backdrop of increased uncertainty in Europe and the US, where the future
course of domestic and foreign policies looks more unpredictable. The new UK
government, with its large majority, has sought to foster more favourable
business and market sentiment by stressing the importance of fiscal discipline
and boosting economic growth, as well as its desire to work towards improved
relations with the European Union. This, combined with a domestic economy that
has performed better than anticipated, and corporate earnings that have proved
particularly resilient in a global context, may help draw more attention to
the UK.
We have recently seen a pick-up in M&A activity, as corporates grow in
confidence amid improving economic and business conditions. This trend should
continue given how attractive large parts of the UK market are. Other
supportive dynamics include attractive dividends in a global context and the
fact that a record number of UK companies are buying back their own shares.
Conditions surrounding the UK equity market are beginning to improve and this
should hopefully help turn the tide. However, as the past year has shown,
inflows into UK equities are not necessary to be able to generate attractive
returns, although they would clearly have helped.
QUESTION
What is the outlook for the Company over the next twelve months and beyond?
ANSWER
We continue to believe that the combination of attractive valuations and the
large divergence in performance between different parts of the market creates
good opportunities for attractive returns from UK stocks on a
three-to-five-year view.
Given the relatively robust performance of UK companies, it has been a
surprise that we have not started to see the valuation gap between the UK and
other global markets narrow. For us, this demonstrates the strong opportunity
for savvy investors willing to buy into the UK market today. Compared with
their own historic averages, as well as stock markets across the globe, UK
shares remain cheap and we are seeing value across the market cap spectrum.
While there continues to be a degree of uncertainty both in the UK as well as
globally, overall the UK economic outlook has improved. Companies have proved
surprisingly resilient and we are encouraged by the performance of our
holdings in the recent reporting season.
Overall, we believe the portfolio is well positioned to benefit from the
improving economic backdrop and we remain excited about the opportunity set on
offer. Our holdings continue to trade at a meaningful c.20% discount to the
broader UK market, despite resilient earnings, superior returns on capital and
relatively low levels of debt. This quality profile gives us confidence that
we can continue to deliver attractive returns to investors.
ALEX WRIGHT
Portfolio Manager
6 November 2024
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 the Company’s 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. Globally,
climate change effects are already being experienced in the form of changing
weather patterns. Extreme weather events can potentially impact the operations
of investee companies, their supply chains and their customers. The Board
notes that the Manager includes ESG considerations, including climate change,
into the Company’s investment process. The Board will continue to monitor
how this may impact the Company as a risk to investment valuations and
potentially shareholder returns.
Other emerging risks may continue to evolve from unforeseen geopolitical and
economic events.
The Board, together with the Manager, is also monitoring the emerging risks
posed by the rapid advancement of artificial intelligence (“AI”) and
technology and how it may threaten the Company’s activities and its
potential impact on the portfolio and investee companies. Although advances in
computing power mean that AI is a powerful tool that will impact society,
there are risks from its increasing use and manipulation with the potential to
harm, including a heightened threat to cybersecurity.
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 UK economic recovery, volatility from the war in Ukraine and conflict in the
Middle East and the Red Sea. 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. Although inflation in the UK and across most economies has
stabilised, risks remain driven by a combination of 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 ongoing armed conflicts effects, deglobalisation trends and significant supply
disruption, as well as concerns around global growth and uncertainties on effects of changes in monetary policies. Russia and the Middle East 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 ongoing conflicts add to geopolitical risk and economic instability, including social unrest across Europe. The conflict in the Red Sea poses risk of
disruption to shipping routes and the supply and cost of goods, thereby affecting the global economy and trade. Globally, geopolitical uncertainty is significantly impacted by deglobalisation trends driven by the prioritisation of the resiliency of supply
chains national security concerns as well as from political pressure. The ramifications of onshoring include regulatory protectionism across regions, heightening geopolitical tensions on the continent and overseas. US-China and EU-China tensions over trade
and technology rivalry increase the concerns of China- Taiwan relations potentially escalating to military conflict as well as increasing tensions over trade and economic issues due to competing territorial claims. As the year progresses, political risks
are also set to increase heading towards the US elections in November, and coupled with ongoing geopolitical conflicts, could lead to higher volatility for broader markets and oil in particular. In China, divergent growth patterns persist, as exports and
manufacturing growth accelerate, but domestic consumption remains subdued, and the property sector continues to weigh on growth momentum. 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. The Portfolio Manager provides an investment review at each meeting which includes a review of the economic and political environment and any
risks and challenges faced by the Company. 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 achievement of the Company’s investment performance objective relative to the market requires the taking of risk such as investment strategy, asset allocation and stock selection, and may lead to NAV and share price underperformance compared to the
Company’s Benchmark and/or peer group companies. 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 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.
Regulatory Risk The Company may be impacted by changes in legislation, taxation, regulation or other external influence that require changes to the nature of the Company’s business. More recently, there have been increased concerns around investment cost disclosures and
its impact in the industry. Regulatory changes for investment companies are monitored regularly by the Board and managed through active engagement with regulators and trade bodies by the Manager and also the AIC.
Cybercrime and Information Security Risks The operational risk and business impact from heightened external levels of cybercrime and the risk of data loss 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 and risk teams have developed a number of initiatives and controls in order to provide enhanced mitigating protection to this ever-increasing threat, and
also potentially addressing the risks of artificial intelligence (AI). The risk is regularly re-assessed by Fidelity’s information security teams and risk frameworks are continually enhanced. This has resulted in the implementation of additional tools and
processes, including improvements to existing ones. Fidelity has dedicated cybersecurity and technology risk teams which provide continuous oversight, regular awareness updates and best practice guidance. Risks also remain due to the war in Ukraine and
conflict in the Middle East and the trend to more working from home. These primarily relate to phishing, ransomware, remote access threats, extortion and denial of services attacks, threats from highly organised criminal networks and sophisticated
ransomware operators. The Manager has dedicated detect and respond resources specifically to monitor the cyber threats associated within the workplace and 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 are also subject to regular oversight and provide assurances and have similar control measures in place to detect and respond to cyber
threats and activity.
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 war in Ukraine and conflict in the Middle East, specifically regarding cyberattacks and the potential loss of power and/or broadband services. The Manager continues to take all necessary and reasonable steps to assure operational resilience
and 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 operational resilience and 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 risk oversight and 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. These are mitigated through operational resilience frameworks.
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. Jonathan Winton, the Co-Portfolio Manager, 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.
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, such as the risk of extreme weather events that may impact global supply chains for companies and customers. 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. Whilst Fidelity considers ESG factors in its investment decision-making process, the Company does
not carry the label. 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. The Portfolio Manager considers the effects of ESG when making investment decisions. ESG ratings of the companies within the Company’s portfolio
compared to MSCI ratings are provided in the Annual Report.
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. The last
continuation vote was at the AGM held on 14 December 2022, and 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 and the Board’s discount
management policy;
· 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
2024 was well ahead of the Benchmark. The NAV total return was +60.0% and the
share price total return was +47.3% compared to the Benchmark total return of
+37.9%. 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 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
continued impact of climate change and potential emerging risks from the use
of artificial intelligence as detailed above. The Board has also considered
the impact of regulatory changes, unforeseen market events, geopolitical
issues and the ongoing global implications of the war in Ukraine and the
Middle East conflict 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 2025 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, the Middle
East conflict and significant market and geopolitical 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 company, the Company has no employees or
physical assets, and a number of its 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 receives regular reports from the Company’s Broker which covers
market activity, how the Company compares with its peers in the AIC UK All
Companies sector.
The Board places great importance on communication with shareholders. The
Annual General Meeting provides the key forum for the Board and the Portfolio
Manager to present to the shareholders on the Company’s performance and
future plans and the Board encourages all shareholders to attend in person or
virtually and raise any questions or concerns. The Chairman and other Board
members are available to meet shareholders as appropriate. Shareholders may
also communicate with Board members at any time by writing to them at the
Company’s registered office at FIL Investments International, Beech Gate,
Millfield Lane, Tadworth, Surrey KT20 6RP or via the Company Secretary 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. It believes that a proper consideration
of Environmental, Social and Governance (“ESG”) issues aligns with the
Company’s investment objective to deliver long-term capital growth.
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, initiating a recruitment process
to replace Nigel Foster who having completed nine years on the Board on 1
September 2024 will step down at the conclusion of the AGM on 12 December
2024. His replacement will be announced in due course;
· The decision to appoint Claire Boyle as the Senior Independent Director to
replace Nigel Foster from 12 December 2024;
· The decision to pay an interim dividend of 3.24 pence per share and to
recommend the payment of a final dividend of 6.30 pence per share (a total of
9.54 pence per share), to maintain the 15 year track record of increasing
dividends, while retaining funds for reinvestment, consistent with the
objective of long-term capital growth;
· Meetings by the Chairman with some of the Company’s key shareholders
during the reporting year; and
· The decision to once again hold a hybrid AGM in 2024 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 fair and balanced
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 2024 and signed on its behalf by:
DEAN BUCKLEY
Chairman
INCOME STATEMENT FOR THE YEAR ENDED 31 AUGUST 2024
Year ended 31 August 2024 Year ended 31 August 2023
Notes Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Gains/(losses) on investments 10 – 166,057 166,057 – (12,021) (12,021)
Gains on derivative instruments 11 – 19,524 19,524 – 35,770 35,770
Investment and derivative income 3 48,413 – 48,413 43,717 – 43,717
Other interest 3 2,751 – 2,751 2,971 – 2,971
Investment management fees 4 (6,095) – (6,095) (5,698) – (5,698)
Other expenses 5 (898) – (898) (948) – (948)
Foreign exchange gains/(losses) – 204 204 – (4,032) (4,032)
--------------- --------------- --------------- --------------- --------------- ---------------
Net return on ordinary activities before finance costs and taxation 44,171 185,785 229,956 40,042 19,717 59,759
Finance costs 6 (5,794) – (5,794) (4,774) – (4,774)
--------------- --------------- --------------- --------------- --------------- ---------------
Net return on ordinary activities before taxation 38,377 185,785 224,162 35,268 19,717 54,985
Taxation on return on ordinary activities 7 (848) – (848) (672) – (672)
--------------- --------------- --------------- --------------- --------------- ---------------
Net return on ordinary activities after taxation for the year 37,529 185,785 223,314 34,596 19,717 54,313
========= ========= ========= ========= ========= =========
Return per ordinary share 8 11.58p 57.32p 68.90p 10.67p 6.08p 16.75p
========= ========= ========= ========= ========= =========
The Company does not have any other comprehensive income. Accordingly, the net
return 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 2024
Company number 2972628
Notes 2024 2023
£’000 £’000
Fixed assets
Investments 10 1,120,686 882,692
--------------- ---------------
Current assets
Derivative instruments 11 4,318 1,769
Debtors 12 8,200 8,937
Cash and cash equivalents 11,749 59,460
--------------- ---------------
24,267 70,166
========= =========
Current liabilities
Derivative instruments 11 (200) (949)
Other creditors 13 (1,212) (860)
--------------- ---------------
(1,412) (1,809)
--------------- ---------------
Net current assets 22,855 68,357
========= =========
Net assets 1,143,541 951,049
========= =========
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 15 834,580 648,795
Revenue reserve 15 45,906 39,199
--------------- ---------------
Total Shareholders’ funds 1,143,541 951,049
========= =========
Net asset value per ordinary share 16 352.84p 293.44p
========= =========
The Financial Statements were approved by the Board of Directors on 6 November
2024 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 2024
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 2023 16,205 238,442 3,256 5,152 648,795 39,199 951,049
Net return on ordinary activities after taxation for the year – – – – 185,785 37,529 223,314
Dividends paid to Shareholders 9 – – – – – (30,822) (30,822)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total Shareholders’ funds at 31 August 2024 16,205 238,442 3,256 5,152 834,580 45,906 1,143,541
========= ========= ========= ========= ========= ========= =========
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
========= ========= ========= ========= ========= ========= =========
The Notes below form an integral part of these Financial Statements.
CASH FLOW STATEMENT FOR THE YEAR ENDED 31 AUGUST 2024
Notes Year ended Year ended
31.08.24 31.08.23
£’000 £’000
Operating activities
Investment income received 42,980 39,436
Net derivative income received 4,454 5,934
Interest received 2,723 2,971
Investment management fee paid (6,008) (5,699)
Directors' fees paid (170) (173)
Other cash payments (696) (777)
--------------- ---------------
Net cash inflow from operating activities before finance costs and taxation 20 43,283 41,692
========= =========
Finance costs paid (5,853) (4,622)
Overseas taxation suffered (536) (1,119)
--------------- ---------------
Net cash inflow from operating activities 36,894 35,951
========= =========
Investing activities
Purchases of investments (353,057) (429,178)
Sales of investments 282,830 368,171
Receipts on long CFDs 51,625 70,856
Payments on long CFDs (35,747) (45,085)
Receipts on short CFDs 950 –
Payments on short CFDs (588) –
Movement on amounts held at futures clearing houses and brokers – 8,190
--------------- ---------------
Net cash outflow from investing activities (53,987) (27,046)
========= =========
Net cash (outflow)/inflow before financing activities (17,093) 8,905
========= =========
Financing activities
Dividends paid 9 (30,822) (25,863)
--------------- ---------------
Net cash outflow from financing activities (30,822) (25,863)
========= =========
Net decrease in cash and cash equivalents (47,915) (16,958)
Cash and cash equivalents at the beginning of the year 59,460 80,450
Effect of movement in foreign exchange 204 (4,032)
--------------- ---------------
Cash and cash equivalents at the end of the year 11,749 59,460
========= =========
Represented by:
Cash at bank 2,072 2,028
Amount held in Fidelity Institutional Liquidity Fund 9,677 57,432
--------------- ---------------
11,749 59,460
========= =========
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 2025 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 for
the Company are quoted bid prices for investments in active markets at the
balance sheet date. Investments, which are unlisted are priced using
market-based valuation approaches. All investments therefore reflect the
market participants view of climate change risk on the investments held by the
Company.
The Company’s Going Concern Statement set out above takes account of all
events and conditions up to 30 November 2025, 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 on 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 short 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
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 gains/(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 and short 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 £10,868,000 (2023: losses of £9,684,000).
3 INCOME
Year ended Year ended
31.08.24 31.08.23
£’000 £’000
Investment income
UK dividends 30,235 29,189
UK property income distributions 135 –
UK scrip dividends 1,310 –
UK property income scrip dividends 157 –
Interest on securities 1,528 805
Overseas dividends 10,395 10,543
--------------- ---------------
43,760 40,537
========= =========
Derivative income
Dividends received on long CFDs 4,653 3,180
--------------- ---------------
Investment and derivative income 48,413 43,717
========= =========
Other interest
Interest received on bank deposits, collateral and money market funds 2,723 2,965
Interest received on tax reclaims – 6
Interest received on short CFDs 28 –
--------------- ---------------
2,751 2,971
========= =========
Total income 51,164 46,688
========= =========
Special dividends of £5,206,000 (2023: £1,904,000) have been recognised in
capital during the year.
4 INVESTMENT MANAGEMENT FEES
Year ended Year ended
31.08.24 31.08.23
£’000 £’000
Investment management fees 6,095 5,698
========= =========
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
31.08.24 31.08.23
£’000 £’000
AIC fees 21 21
Custody fees 27 35
Depositary fees 58 57
Directors’ expenses 15 17
Directors’ fees 1 170 172
Legal and professional fees 101 82
Marketing expenses 229 303
Printing and publication expenses 122 116
Registrars’ fees 74 68
Fees payable to the Company’s Independent Auditor for the audit of the Financial Statements 2 53 50
Sundry other expenses 28 27
--------------- ---------------
Other expenses 898 948
========= =========
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
31.08.24 31.08.23
£’000 £’000
Interest paid on long CFDs 5,765 4,761
Interest paid on bank overdrafts 29 13
--------------- ---------------
5,794 4,774
========= =========
7. TAXATION ON RETURN ON ORDINARY ACTIVITIES
Year ended Year ended
31.08.24 31.08.23
£’000 £’000
a) Analysis of the taxation charge for the year
Overseas taxation 848 672
--------------- ---------------
Taxation charge for the year (see Note 7b) 848 672
========= =========
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% (2023: blended rate
of 25.00%). A reconciliation of the standard rate of UK corporation tax to the
taxation charge for the year is shown below:
Year ended Year ended
31.08.24 31.08.23
£’000 £’000
Net return on ordinary activities before taxation 224,162 54,985
--------------- ---------------
Net return on ordinary activities before taxation multiplied by the blended rate of UK corporation tax of 25.00% (2023: blended rate of 21.52%) 56,040 11,833
Effects of:
Capital gains not taxable 1 (46,446) (4,243)
Income not taxable (10,485) (8,550)
Excess management expenses 891 960
Overseas taxation (848) 672
--------------- ---------------
Total taxation charge for the year (see Note 7a) (848) 672
========= =========
1 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 £18,126,000 (2023: £17,235,000), in respect of
excess expenses of £72,504,000 (2023: £68,940,000) 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 (2023: 25.00%).
8. RETURN PER ORDINARY SHARE
Year ended Year ended
31.08.24 31.08.23
Revenue return per ordinary share 11.58p 10.67p
Capital return per ordinary share 57.32p 6.08p
--------------- ---------------
Total return per ordinary share 68.90p 16.75p
========= =========
The return per ordinary share is based on the net return on ordinary
activities after taxation for the year divided by the weighted average number
of ordinary shares held outside Treasury during the year, as shown below:
£’000 £’000
Net revenue return on ordinary activities after taxation 37,529 34,596
Net capital return on ordinary activities after taxation 185,785 19,717
--------------- ---------------
Net total return on ordinary activities after taxation 223,314 54,313
========= =========
Number Number
Weighted average number of ordinary shares held outside of Treasury 324,098,920 324,098,920
========= =========
9. DIVIDENDS PAID TO SHAREHOLDERS
Year ended Year ended
31.08.24 31.08.23
£’000 £’000
Dividends paid
Interim dividend of 3.24 pence per ordinary share paid for the year ended 31 August 2024 10,501 –
Final dividend of 6.27 pence per ordinary share paid for the year ended 31 August 2023 20,321 –
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
--------------- ---------------
30,822 25,863
========= =========
Dividends proposed
Final dividend proposed of 6.30 pence per ordinary share for the year ended 31 August 2024 20,418 –
Final dividend proposed of 6.27 pence per ordinary share for the year ended 31 August 2023 – 20,321
--------------- ---------------
20,418 20,321
========= =========
The Directors have proposed the payment of a final dividend of 6.30 pence per
ordinary share for the year ended 31 August 2024 which is subject to approval
by Shareholders at the Annual General Meeting on 12 December 2024 and has not
been included as a liability in these Financial Statements. The dividends will
be paid on 10 January 2025 to Shareholders on the register at the close of
business on 29 November 2024 (ex-dividend date 28 November 2024).
10 INVESTMENTS
2024 2023
£’000 £’000
Listed investments 1,119,970 880,839
Unlisted investments 716 1,853
--------------- ---------------
Total investments at fair value 1,120,686 882,692
========= =========
Opening book cost 914,377 813,135
Opening investment holding (losses)/gains (31,685) 22,537
--------------- ---------------
Opening fair value 882,692 835,672
========= =========
Movement in the year
Puchases at cost 354,795 426,404
Sales – proceeds (282,858) (367,363)
Gains/(losses) on investments 166,057 (12,021)
--------------- ---------------
Closing fair value 1,120,686 882,692
========= =========
Closing book cost 1,003,728 914,377
Closing investment holding gains/(losses) 116,958 (31,685)
--------------- ---------------
Closing fair value 1,120,686 882,692
========= =========
The Company received £282,858,000 (2023: £367,363,000) from investments sold
in the year. The book cost of these investments when they were purchased was
£265,444,000 (2023: £325,162,000). 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 gains/(losses) on investments above, were as
follows:
Year ended Year ended
31.08.24 31.08.23
£’000 £’000
Purchases transaction costs 1,606 1,688
Sales transaction costs 135 167
--------------- ---------------
1,741 1,855
========= =========
11. DERIVATIVE INSTRUMENTS
Year ended Year ended
31.08.24 31.08.23
£’000 £’000
Gains on long CFD positions closed 15,864 25,778
Gains on short CFD positions closed 362 –
Movement in investment holding gains on long CFDs 3,400 9,992
Movement in investment holding losses on short CFDs (102) –
--------------- ---------------
19,524 35,770
========= =========
2024 2023
Fair value Fair value
£’000 £’000
Derivative instruments recognised on the Balance Sheet
Derivative instrument assets 4,318 1,769
Derivative instrument liabilities (200) (949)
--------------- ---------------
4,118 820
========= =========
2024 2023
Fair value Asset Fair value Asset
£’000 exposure £’000 exposure
£’000 £’000
At the year end the Company held the following derivative instruments
Long CFDs 4,220 115,050 820 130,073
Short CFDs (102) 2,117 – –
--------------- --------------- --------------- ---------------
4,118 117,167 820 130,073
========= ========= ========= =========
12. DEBTORS
2024 2023
£’000 £’000
Securities sold for future settlement 146 117
Amounts receivable on settlement of derivatives – 14
Accrued income 6,598 7,058
Overseas taxation recoverable 1,408 1,720
Other debtors and prepayments 48 28
--------------- ---------------
8,200 8,937
========= =========
13. OTHER CREDITORS
2024 2023
£’000 £’000
Securities purchased for future settlement 271 –
Finance costs payable 150 209
Creditors and accruals 791 651
--------------- ---------------
1,212 860
========= =========
14. SHARE CAPITAL
2024 2023
Number of Nominal Number of Nominal
shares value shares value
£’000 £’000
Issued, allotted and fully paid Ordinary shares of 5 pence each held outside of Treasury
Total share capital – Beginning of the year 324,098,920 16,205 324,098,920 16,205
New ordinary shares issued/repurchased – – – –
----------------- ----------------- ----------------- -----------------
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 (2023: nil shares). At 31
August 2024, 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 2023 16,205 238,442 3,256 5,152 648,795 39,199 951,049
Gains on investments (see Note 10) – – – – 166,057 – 166,057
Gains on long CFDs (see Note 11) – – – – 19,264 – 19,264
Gains on short CFDs (see Note 11) – – – – 260 – 260
Foreign exchange gains – – – – 204 – 204
Revenue return on ordinary activities after taxation for the year – – – – – 37,529 37,529
Dividends paid to Shareholders (see Note 9) – – – – – (30,822) (30,822)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
At 31 August 2024 16,205 238,442 3,256 5,152 834,580 45,906 1,143,541
========= ========= ========= ========= ========= ========= =========
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
========= ========= ========= ========= ========= ========= =========
The capital reserve balance at 31 August 2024 includes investment holding
gains of £116,958,000 (2023: losses of £31,685,000) as detailed in Note 10.
The revenue and capital reserves are distributable by way of dividend. See
Note 2 (q) 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.
2024 2023
Total Shareholders’ funds £1,143,541,000 £951,049,000
Ordinary shares held outside of Treasury at year end 324,098,920 324,098,920
Net asset value per ordinary share 352.84p 293.44p
============ ============
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), regulatory, cybercrime and information security, business
continuity, key person and operational support, discount control and
environmental, social and governance (“ESG”). 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 corporate 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:
2024 2023
£’000 £’000
Exposure to financial instruments that bear interest
Long CFDs – exposure less fair value 110,830 129,253
--------------- ---------------
Exposure to financial instruments that earn interest
Cash and cash equivalents 11,749 59,460
Short CFDs – exposure plus fair value 2,015 –
--------------- ---------------
13,764 59,640
========= =========
Net exposure to financial instruments that bear interest 97,066 69,793
========= =========
Foreign currency risk
The Company does not carry out currency speculation. The Company’s net
return 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:
2024
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 54,522 41,800 751 – 97,073
US dollar 39,752 – 542 33 40,327
Swiss franc 37,673 – 273 – 37,946
Swedish krona 22,811 – – – 22,811
Australian dollar 12,439 – – – 12,439
South African rand 2,024 – – – 2,024
Canadian dollar – – – 28 28
UK sterling 951,465 73,250 6,634 11,688 1,043,037
--------------- --------------- --------------- --------------- ---------------
1,120,686 115,050 8,200 11,749 1,255,685
========= ========= ========= ========= =========
1 The exposure to the market of long CFDs.
2 Cash and cash equivalents are made up of £2,072,000 cash at bank and
£9,677,000 held in Fidelity Institutional Liquidity Fund.
2023
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 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.
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 Short exposure to Other 2024
derivative creditors
instruments 1 £’000 Total
£’000 £’000
US dollar 2,117 1 2,118
Euro – 62 62
UK sterling – 1,149 1,149
--------------- --------------- ---------------
2,117 1,212 3,329
========= ========= =========
1 The exposure to the market of short CFDs.
Currency Short exposure to Other 2023
derivative creditors
instruments 1 £’000 Total
£’000 £’000
Swiss franc – 135 135
UK sterling – 725 725
--------------- --------------- ---------------
– 860 860
========= ========= =========
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 2024, the undiscounted gross cash outflows of the financial
liabilities were all repayable within one year and consisted of derivative
instrument liabilities of £200,000 (2023: £949,000) and other creditors of
£1,212,000 (2023: £860,000).
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 2024,
£3,410,000 (2023: £580,000) 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
£2,370,000 (2023: £220,000), UBS AG £510,000 (2023: £nil), HSBC Bank plc
£380,000 (2023: £360,000) and Goldman Sachs International Ltd £150,000
(2023: £nil). At 31 August 2024, 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
(2023: £nil).
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 Risk Management Process
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 2024,
an increase of 1.00% in interest rates throughout the year, with all other
variables held constant, would have decreased the Company’s net return on
ordinary activities after taxation for the year and decreased the net assets
of the Company by £971,000 (2023: decreased the net return and decreased the
net assets by £698,000). 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 2024, 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 return on ordinary activities after taxation for
the year and decreased the net assets of the Company by £19,133,000 (2023:
decreased the net return and decreased the net assets by £25,706,000). 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
return on ordinary activities after taxation for the year and increased the
net assets of the Company by £23,385,000 (2023: increased the net return and
increased the net assets by £31,418,000).
Other price risk – exposure to investments sensitivity analysis
Based on the listed investments held and share prices at 31 August 2024, 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 £111,997,000
(2023: increased the net return and increased the net assets by £88,084,000).
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
2024 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
£72,000 (2023: increased the net return after taxation and increased the net
assets by £185,300). 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 2024,
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 return on ordinary activities after taxation for the year and increased
the net assets of the Company by £11,717,000 (2023: increased the net return
and increased the net assets by £13,007,000). 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:
2024
Financial assets at fair value through profit or loss Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Investments 1,096,402 23,413 871 1,120,686
Derivative instrument assets – 4,318 – 4,318
--------------- --------------- --------------- ---------------
1,096,402 27,731 871 1,125,004
========= ========= ========= =========
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities – (200) – (200)
========= ========= ========= =========
2023
Financial assets at fair value through profit or loss Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’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)
========= ========= ========= =========
The table below sets out the movements in level 3 financial instruments during
the year:
Year ended Year ended
31.08.24 31.08.23
£’000 £’000
Beginning of the year 2,095 448
Sales proceeds – Marwyn Value Investors (99) –
Sales gain – Marwyn Value Investors 59 –
Transfer into level 3 at cost – Prax Exploration & Production and Unbound Group 1 – 1,942
Movement in investment holding (losses) (1,184) (295)
-------------- --------------
End of the year 871 2,095
======== =========
1 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 31 August 2024 is
based on the indicative bid price in the absence of a last trade price.
Following a corporate action event in October 2023, the current year valuation
is based on a reduced number of shares compared to the prior year. As part of
this transaction, £99,000 was received as cash in the reporting year. As at
31 August 2024, its fair value was £154,000 (2023: £242,000).
TVC Holdings
TVC Holdings is an unlisted investment holding company incorporated in
Ireland. The valuation at 31 August 2024 is based on the NAV from the 2022
audited company’s financial report. As at 31 August 2024, its fair value was
£251,000 (2023: £254,000). Subsequent to the year end, and following an
extraordinary general meeting on 17 October, it was agreed to put the company
into liquidation. It is anticipated that an initial distribution of c. €0.09
will be made to shareholders, subject to liquidator approval.
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 2024, its fair
value was £nil (2023: £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 2024, its fair value was £nil (2023: £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. The valuation on 31 August 2024 is based on the latest trade
price from the JP Jenkins platform. As at 31 August 2024, its fair value was
£466,000 (2023: £1,599,000).
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 2024,
its fair value was £nil (2023: £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 Annual Report. The principal
risks and their management are disclosed above and in Note 17.
The Company’s gearing at the year end is set out below:
2024
Gross gearing Ne
Asset exposure t
ge
ar
in
g
A
ss
et
ex
po
su
re
£’000 % 1 £’000 % 1
Investments 1,120,686 98.0 1,120,686 98.0
Long CFDs 115,050 10.1 115,050 10.1
--------------- --------------- --------------- ---------------
Total long exposures 1,235,736 108.1 1,235,736 108.1
Short CFDs 2,117 0.2 (2,117) (0.2)
--------------- --------------- --------------- ---------------
Gross asset exposure/net market exposure 1,237,853 108.3 1,233,619 107.9
========= ========= ========= =========
Shareholders’ funds 1,143,541 1,143,541
========= =========
Gearing 2 8.3% 7.9%
========= =========
2023
Gross gearing Ne
Asset exposure t
ge
ar
in
g
A
ss
et
ex
po
su
re
£’000 % 1 £’000 % 1
Investments 882,692 92.8 882,692 92.8
Long CFDs 130,073 13.7 130,073 13.7
--------------- --------------- --------------- ---------------
Total long exposures 1,012,765 106.5 1,012,765 106.5
========= ========= ========= =========
Shareholders’ funds 951,049 951,049
========= =========
Gearing 2 6.5% 6.5%
========= =========
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 £6,095,000 (2023: £5,698,000). At the
Balance Sheet date, fees for portfolio management services of £570,000 (2023:
£483,000) 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 £229,000 (2023: £303,000). At the Balance Sheet date,
marketing services of £52,000 (2023: £nil) 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, £19,000 (2023: £18,000)
of Employers’ National Insurance contributions were paid by the Company. At
the Balance Sheet date, Directors' fees of £14,000 (2023: £14,000) were
accrued and payable.
20 RECONCILIATION OF NET RETURN ON ORDINARY ACTIVITIES BEFORE FINANCE COSTS
AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES BEFORE FINANCE COSTS
AND TAXATION
Year ended Year ended
31.08.24 31.08.23
£’000 £’000
Net total return on ordinary activities before finance costs and taxation 229,956 59,759
Less: net capital return on ordinary activities before finance costs and taxation (185,785) (19,717)
--------------- ---------------
Net revenue return on ordinary activities before finance costs and taxation 44,171 40,042
Scrip dividends (1,467) –
Decrease in debtors 440 1,650
Increase in other creditors 139 –
--------------- ---------------
Net cash inflow from operating activities before finance costs and taxation 43,283 41,692
========= =========
Alternative Performance Measures
The Company uses the following Alternative Performance Measures which are all
defined in the Glossary of Terms in the Annual Report.
DISCOUNT/PREMIUM
The discount/premium is considered to be an Alternative Performance Measure.
It is the difference between the net asset value 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 are on the
Financial Highlights page in the Annual Report.
GEARING
Gearing (both gross and net) 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
The ongoing charges are considered to be an Alternative Performance Measure.
It 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.
2024 2023
Investment management fees (£’000) 6,095 5,698
Other expenses (£’000) 898 948
--------------- ---------------
Ongoing charges (£’000) 6,993 6,646
========= =========
Ongoing charges 0.70% 0.70%
========= =========
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 2024 and 31
August 2023.
2024 Net asset Ordinary
value per share
ordinary price
share
31 August 2023 293.44p 267.50p
31 August 2024 352.84p 321.50p
Change in year +20.2% +20.2%
Impact of dividend reinvestments +3.9% +4.1%
-------------- --------------
Total return for the year +24.1% +24.3%
========= =========
2023 Net asset Ordinary
value per share
ordinary price
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 reinvestments +2.8% +2.9%
-------------- --------------
Total return for the year +5.9% +5.6%
========= =========
The Annual Financial Report Announcement is not the Company's statutory
accounts. The above results for the year ended 31 August 2024 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 2023 and 2024
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
2023 is derived from the statutory accounts for 2023 which have been delivered
to the Registrar of Companies. The 2024 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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