Annual Financial Report
02/08/2023 07:01
LEI: 549300JZQ39WJPD7U596
Invesco Select Trust plc
Annual Financial Report for the year ended 31 May 2023
The following text is extracted from the Annual Financial Report of the
Company for the year ended 31 May 2023. All page numbers below refer to the
Annual Financial Report which will be made available on the Company's website.
Financial Performance
Capital Statistics - Company Level
At 31 May 2023 2022 change %
Net Assets (£'000) 199,739 214,421 -6.8%
Revenue Statistics - Company Level
Year ended 31 May 2023 2022
Net revenue return after taxation for the financial year (£'000) Net capital return after taxation for the financial year (£'000) 5,994 (5,664) 5,937 8,828
Net total return after taxation for the financial year (£'000) 330 14,765
Cumulative Portfolio Total Returns (1)(2)
To 31 May 2023
One Three Five
UK Equity Share Portfolio Year Years Years
Net Asset Value -2.6% 39.9% 16.7%
Share Price -4.7% 29.2% 4.9%
FTSE All-Share Index 0.4% 33.9% 15.2%
One Three Five
Global Equity Income Share Portfolio Year Years Years
Net Asset Value 9.8% 63.0% 50.6%
Share Price 4.6% 44.8% 35.9%
MSCI World Index (£) 3.8% 36.3% 56.2%
One Three Five
Balanced Risk Allocation Share Portfolio Year Years Years
Net Asset Value -11.4% 11.4% 5.0%
Share Price -14.3% 2.7% -5.0%
Composite Benchmark Index (3) -17.1% -19.1% -8.8%
ICE BoA Merrill Lynch 3 month LIBOR plus 5% per annum 7.5% 17.7% 29.4%
One Three Five
Managed Liquidity Share Portfolio Year Years Years
Net Asset Value 3.5% 6.9% 9.5%
Share Price -5.2% -8.5% -7.6%
Year end Net Asset Value, Share Price and Discount
Net Asset Share
Value Price Premium/
Share Class (pence) (pence) (Discount)
UK Equity 182.11 159.50 (12.4)%
Global Equity Income 265.53 232.00 (12.6)%
Balanced Risk Allocation 149.56 131.50 (12.1)%
Managed Liquidity 109.51 91.00 (16.9)%
(1) Alternative Performance Measure (APM). See Glossary of Terms and
Alternative Performance Measures on pages 116 to 119 of the financial report
for details of the explanation and reconciliations of APMs.
(2) Source: Refinitiv/Bloomberg.
(3) With effect from 1 June 2021, the benchmark adopted by the Balanced Risk
Allocation Portfolio is comprised of 50% 30-year UK Gilts Index, 25% GBP
hedged MSCI World Index (net) and 25% GBP hedged S&P Goldman Sachs Commodity
Index. Prior to this, the benchmark was ICE BoA Merrill Lynch 3 month LIBOR
plus 5% per annum. Accordingly, both the new and old benchmark are shown.
Chairman's Statement
Highlights
- The Global Equity Income Share Portfolio and the Managed Liquidity Share
Portfolio delivered positive NAV performance over the period, with the Global
Equity Income and Balanced Risk Allocation Share Portfolios outperforming
their respective benchmark indices.
- Dividends per UK Equity Share and Global Equity Income Share rose to 7.05p
and 7.20p respectively. A dividend of 1.00p was maintained per Managed
Liquidity Share and a first dividend in respect of the Balanced Risk
Allocation Shares of 1.00p was also paid.
- Updated Dividend Policy announced post year-end.
- Net assets in the Global Equity Income Share Portfolio increased to £66.7
million, with net conversions into that portfolio.
- Cancellation of the UK Equity and Balanced Risk Allocation Share Premium
accounts completed, freeing up circa £123 million of reserves.
- Winterflood Securities Limited appointed as new corporate brokers.
The Company
Your Company's investment objective is to provide shareholders with a choice
of investment strategies and policies, each intended to generate attractive
risk-adjusted returns.
Your Company's share capital comprises four share classes: UK Equity Shares,
Global Equity Income Shares, Balanced Risk Allocation Shares and Managed
Liquidity Shares, each of which has its own separate portfolio of assets and
attributable liabilities.
The investment objectives and policies of each of the portfolios are set out
on pages 44 to 46.
Your Company's structure enables shareholders to adjust asset allocation to
reflect their views of the prevailing market outlook. As set out on page 2,
shareholders have the opportunity to convert between share classes, free of
capital gains tax, every three months. With the personal allowance for Capital
Gains Tax being reduced for this current tax year to £6,000, this unique
structure allows investors to change their allocation without triggering an
event for the purposes of Capital Gains Tax.
Market Background
As I consider the market backdrop over the past year and into the future, I
reflect on the key points within the outlook I provided in your Company's last
Annual Report. In that outlook, I noted that we continue to be in uncertain
times. At that point in the UK, there was debate and concern around inflation,
with members of the MPC split on interest rate rises, whilst echoes of concern
over a Covid-19 resurgence were stalling hopes of global economic recovery.
Much has changed, yet so much remains the same.
As feared in my last commentary, an early resolution to the conflict in
Ukraine was not forthcoming and, despite Western and NATO support, shows no
signs of resolution.
Global supply chains have returned to some normality and as a consequence in
developed markets the momentum of increasing inflation appears to be
weakening. Forward looking indicators suggesting that inflation is likely to
moderate, as it has already in the US where it is on a downward trajectory.
Central banks are walking an interest rate tight-rope, as they balance
inflation control with maintaining economic growth. In Emerging Markets, the
inflation picture is mixed with a chance of China going into deflation and
inflation levels improving elsewhere.
Active management allows us to be agile in responding to changing market
conditions and seizing potential alpha-generating opportunities. We believe
that the skillful selection of investments, combined with prudent risk
management, will enable us to navigate through market fluctuations and deliver
superior returns over the long term.
Performance
The UK Equity Share Portfolio has been jointly managed by Ciaran Mallon and
James Goldstone over the period. Disappointingly the portfolio saw negative
NAV total return performance during the year, underperforming the benchmark by
3.0%. The NAV total return of the UK Equity Share Portfolio over the year was
-2.6%, which compares with the total return of 0.4% from the FTSE All-Share
Index. The share price total return was -4.7%. Market sentiment was dominated
by the impact of sharply increasing inflation and resulting interest rate
rises, with the Bank of England increasing rates eight times during the year
from 1% to 4.5%. Portfolio performance was mixed, with positive performance
relative to the benchmark in three sectors, including strong performance in
healthcare and energy stocks and with a number of sectors detracting from
overall performance, including basic materials.
The Global Equity Income Portfolio, managed by Stephen Anness, saw positive
NAV total return performance, outperforming the benchmark total return by
6.0%. The NAV total return of the Global Equity Income Share Portfolio over
the year was 9.8%, which compares to the total return from the MSCI World
Index (£) of 3.8%. The share price total return was 4.6%. Globally, market
sentiment has similarly been dominated by concerns around rising inflation and
the impact on economies of central bank actions in raising rates in order to
bring inflation back under control. Against this backdrop the portfolio
remained committed to strong stock selection rather than being focused on the
broader topics of sector over or under weight allocations, geographic or
macro-economic trend forecasting.
The Balanced Risk Allocation Portfolio, by its very nature, has a combination
of equities, bonds and commodities exposures. It is managed by Invesco's
Global Asset Allocation Team, based in Atlanta. During the period under
review, the NAV total return of the Balanced Risk Allocation Share Portfolio
was -11.4%, which outperformed the total return from its composite benchmark,
which was down by -17.1%, by 5.7%. The share price total return was -14.3%.
The portfolio's performance over the period was challenged by the environment
of higher inflation and widespread interest rate hikes, with each asset class
struggling against declines across commodities, equities and bonds. Tactical
allocation was also difficult, with inconsistent returns making positioning in
each asset class problematic.
The NAV total return on the Managed Liquidity Portfolio, managed by Derek
Steeden, was 3.5%. The share price total return was -5.2%. The portfolio's
very short duration helped protect from falls experienced in the wider bond
market as a result of interest rates rising faster than expected. As I
stressed in my statement last year, it is important to note that although this
share class has a lower risk profile than the Company's other three share
classes, it is not designed to be a cash fund, and as such is not without risk
to capital.
Gearing
The UK Equity and Global Equity Income Portfolios are able to employ gearing
by means of a bank loan facility. Your Board has again renewed this facility
at a level of £40 million to allow the Portfolio Managers to employ gearing,
if desired, across the two equity portfolios. The Portfolio Managers use this
facility tactically and actively, increasing or reducing the level to take
advantage of market opportunities. The gross gearing level on the UK Equity
Share Portfolio ended the year at 7.7% and the Global Equity Income Portfolio
had no gearing at the year-end.
Dividends and Dividend Policy
We have continued to apply the dividend policy adopted six years ago, and
supported by shareholder advisory votes, whereby for both UK Equity and Global
Equity Income Shares, dividends are paid by way of three equal interim
dividends declared in July, October and January with a `wrap-up' fourth
interim declared in April. For the year under review the first three dividends
declared for the UK Equity Shares were 1.50p per share and for the Global
Equity Income Shares 1.55p per share. The fourth interim dividends were 2.55p
per share for the UK Equity Shares, bringing the total to 7.05p per share for
the year (2022: 6.70p), and 2.55p per share for the Global Equity Income
Shares, bringing that total to 7.20p (2022: 7.15p) per share for the year.
Your Company's dividend policy permits the payment of dividends in all four
portfolios from capital. With the total income of your Company increasing to
£7.40 million (2022: £6.99 million) the contribution from capital required
for the Company's dividends to meet the Board's target level was reduced from
2022 levels. For the Global Equity Income Shares a contribution from capital
of approximately 2.00p per share was required to achieve the dividend level
(2022: 2.30p per share). For the UK Equity Shares a contribution from capital
of approximately 0.65p per share was required to achieve the dividend level
(2022: 0.70p per share).
The Board intends to continue with the policy of a partial augmentation from
capital where appropriate and as we have updated the dividend policy for those
share classes for the current financial year, UK Equity and Global Equity
Income shareholders are again being given advisory votes on it. We did not set
dividend targets for the year ended 31 May 2023 due to the uncertainty of
income flows as a result of the pandemic.
For the year under review the Board declared one interim dividend of 1.00p for
the Managed Liquidity Shares (2022: 1.00p). The Board has also declared an
interim dividend for the year ended 31 May 2024, payable as noted above, of
1.00p per share for Managed Liquidity Shares. This dividend is payable from
current year revenue. Given the quantum involved it is unlikely that such
payments will be more frequent than annually and may indeed be less frequent.
For the year under review the Board also declared one interim dividend of
1.00p for the Balanced Risk Allocation Shares (2022: nil). The Board had not
previously declared a dividend for the Balanced Risk Allocation Shares.
Additionally, the Board declared an interim dividend for the year ended 31 May
2024, payable as noted above, of 1.00p per share for the Balanced Risk
Allocation Shares and, in expectation of higher levels of income being
received by the Portfolio, a special dividend of 2.00p per share. It continues
to be the case that in order to maximise the capital return on the Balanced
Risk Allocation Shares, the Directors only intend to declare dividends on this
share class annually, when the level of income allows, and dividends may be
paid less frequently.
The first interim dividends declared in respect of the year to May 2024, which
will be paid on 15 August 2023 to shareholders on the register on 21 July
2023, were 1.60p per share for UK Equity Shares, 1.60p per share for Global
Equity Income Shares, 1.00p per share for Balanced Risk Allocation Shares and
a special dividend of 2.00p, (making a total of 3.00p), and 1.00p per share
for Managed Liquidity Shares.
For the year ending 31 May 2024, the Board will target at least maintaining
the dividend level from year to year for each of the UK Equity and Global
Equity Income Shares. Depending on the level of income received in the
relevant quarters, the quarterly dividends for each share class may be
enhanced with contributions from capital. Typically, the first three interim
dividends will be equal in size with a final fourth interim dividend that has
the potential to be increased. The Directors only intend to declare dividends
on the Balanced Risk Allocation Shares and Managed Liquidity Shares annually
when the level of income allows and having taken into account the dividends
paid on the other Share classes.
Discount Policy
Your Company adopted a discount control policy for all four share classes in
January 2013, whereby the Company offers to issue or buy back shares of all
classes with a view to maintaining the prices of the shares at close to their
respective net asset values. The Board remains committed to its utilisation,
although it has stepped back at times during the period under review in light
of market volatility due to the geopolitical events noted in my commentary on
market background above. Discounts have been somewhat wider than before, in
line with discounts generally across the investment trust market, which have
moved out to levels not seen for some time. The ongoing implementation of this
policy is dependent upon your Company's authority to buy back shares, and the
Directors' authority to issue shares for cash on a non pre-emptive basis,
being renewed at general meetings of the Company.
As noted below, the completion of the cancellation of the UK Equity and
Balanced Risk Allocation share premium accounts frees up additional reserves
and gives your Company ample scope to continue share buybacks should it be
perceived to be in shareholder's best interests.
Share Capital Movements
During the year to 31 May 2023 your Company bought back and placed in treasury
3,772,000 UK Equity Shares at an average price of 165.5p, 740,000 Global
Equity Income Shares at an average price of 224.9p, 110,000 Balanced Risk
Allocation Shares at an average price of 132.9p and 80,000 Managed Liquidity
Shares at an average price of 94.75p. Other than in connection with the share
conversion process, no shares were issued during the year. In addition, no
shares were sold from treasury and no treasury shares were cancelled. No
further shares have been bought back into treasury since the year-end. The
Board intends to use the Company's buy back and issuance authorities when this
will benefit existing shareholders; and to operate the discount control policy
mentioned above; and will ask shareholders to renew the authorities as and
when appropriate.
Share Class Conversions
Your Company enables shareholders to adjust their asset allocation to reflect
their views of future market returns. Shareholders have the opportunity to
convert their holdings of shares into any other class of share, without
incurring any tax charge (under current legislation). The conversion dates for
the forthcoming year are as follows: 1 August 2023; 1 November 2023; 1
February 2024; and 1 May 2024. The total number of Share class conversions
that have occurred over the year's conversion opportunities resulted in net
flows of £2.0 million out of the UK Equity Share Portfolio; of £1.8 million
into the Global Equity Income Share Portfolio; of £0.1 million into the
Balanced Risk Allocation Share Portfolio; and £0.1 million into the Managed
Liquidity Share Portfolio. Should you wish to convert shares at any of these
dates, conversion forms, which are available on the Manager's website at
www.invesco.com/uk/en/investment-trusts/invesco-select-trust-plc.html, or
CREST instructions must be received at least ten days before the relevant
conversion date.
Cancellation of the UK Equity and Balanced Risk Allocation Share Premium
Accounts
As I noted in the Half-Yearly Financial Report, following class consents and
approval of shareholders at your Company's Annual General Meeting on 4 October
2022, the Court process to cancel the share premium accounts of the UK Equity
and Balanced Risk Allocation Share Classes was implemented on 17 November
2022. Following the implementation the entire share premium account of each of
the UK Equity and Balanced Risk Allocation Share Classes was cancelled,
amounting to £121,700,000 and £1,290,000, respectively. These distributable
reserves provide your Company with flexibility, subject to financial
performance, to make future distributions and/or, subject to shareholder
authority, in buying back shares.
New Corporate Broker
Winterflood Securities Limited were appointed as the new sole corporate broker
and financial adviser to your Company, with effect from 2 May 2023.
Board Matters
There were no changes to the composition of the Board during the year under
review. In 2022, the FCA published new rules to encourage companies to report
on their board's ethnic and gender diversity. These rules apply to your
Company for the year under review and you will find appropriate disclosures on
pages 55 and 56. The Board will take into account these new requirements in
its next round of succession planning.
All directors will stand for re-election at the forthcoming AGM, details of
which are set out below.
Environmental, Social and Governance (`ESG') Considerations
The Board recognises the importance of ESG and the Portfolio Manager's
scrutiny of these factors in the underlying portfolio of companies as part of
the wider investment process and the consideration of investment risk,
opportunity and valuation. Although the UK Equity and Global Equity Income
Portfolio Managers are not bound by specific ESG criteria and have the ability
to invest across the full ESG spectrum, ESG considerations are fully
integrated into the investment process. In addition, the Portfolio Managers
engage with investee companies on ESG issues, as well as on broader matters of
company strategy and performance, throughout the duration of the investment,
with the aim of challenging, assessing and monitoring risk and which is
further supported by Invesco's large and well-resourced global ESG Team.
Further information on the UK Equity and Global Equity Income Portfolio
Manager's ESG processes and engagement is set out in their ESG Statement on
pages 39 to 43.
Reporting under the Task Force on Climate Related Disclosures
In accordance with the requirements of the Taskforce on Climate Related
Financial Disclosures (`TCFD'), Invesco Fund Managers Limited provided product
level reports for the investment trusts it manages in late June 2023. The
report for your Company, covering the UK Equity and Global Equity Income Share
Classes, is available on the Manager's website at
www.invesco.com/uk/en/investment-trusts/invesco-select-trust-plc.html. Given
the underlying portfolio holdings of the Balanced Risk Allocation and Managed
Liquidity Share Classes are not covered by relevant climate analytic
methodologies, the report for the Company does not cover those two portfolios.
Key elements of the report includes climate metrics for the respective UK
Equity and Global Equity Income portfolios, including versus their applicable
benchmarks, a scenario analysis of how climate change is likely to impact the
respective portfolio assets under orderly, disorderly and hothouse world
scenarios, and a discussion of the most significant drivers of performance
under those scenarios.
Consumer Duty
The Board is cognisant of the FCA's Consumer Duty rules, which set higher and
clearer standards of consumer protection across financial services and aim to
put customer needs first. Whilst the rules do not directly apply to your
Company, they do require the Manager to consider the needs, characteristics
and objectives of their customers and to deliver key outcomes. The Board has
received regular updates from the Manager on its implementation plan,
including the positive results of its value assessment on each of the four
portfolios. The Board will continue to monitor the Manager's compliance, which
will be formally reviewed, as part of the annual assessment of the Manager, by
the Management Engagement Committee.
Annual General Meeting (`AGM')
I am pleased to invite all our shareholders to the Company's AGM which will be
held in person at 43-45 Portman Square, London, W1H 6LY at 11.30am on 2
October 2023.
As well as your Company's formal business, there will be a presentation from
the UK Equity and Global Equity Income Portfolio Managers. Shareholders will
have the opportunity to put questions to the Directors and UK Equity and
Global Equity Income Portfolio Managers. Light refreshments will be available.
Shareholders may bring a guest to this meeting. To register your interest in
attending, please contact us at investmenttrusts@invesco.com.
For those unable to attend the AGM in person, we will be posting updates from
each of the Portfolio Managers on our website after the AGM. The business of
the AGM is summarised in the Directors' Report on pages 64 and 65. It is
recommended that shareholders exercise their votes by means of registering
them with your Company's registrar ahead of the meeting, online or by
completing paper proxy forms, and appoint the Chairman of the meeting as their
proxy. The Board has considered all the resolutions proposed in the Notice of
the AGM and believe they are in the best interests of shareholders and your
Company as a whole. Accordingly, the Directors recommend that shareholders
vote in favour of each resolution, as will the Directors in respect of their
own shareholdings.
Once again, I look forward to meeting as many of you as possible at the AGM.
Outlook
Within the context of my earlier comments on the market backdrop, we expect
market volatility to continue and this may present your Portfolio Managers
with attractive investment opportunities. In times of volatility, the worst
days are often followed by the best days, and one needs to remain invested to
capture those days.
Your Company's UK Equity and Global Equity Income Portfolios are committed to
a `valuation based' approach, which aims to identity the true valuation of a
company and whether the current share price reflects this. Although, it is
difficult to know how long the market will take to appreciate the value of a
company, your Managers identify specific drivers that aim to enable this
recognition. UK equities, in general, have experienced a prolonged period of
being rather unwanted, unfashionable and unloved, and share prices have been
affected by a significant withdrawal from this market. Their value is being
very gradually recognised and we expect an uptick in M&A. In the US, it has
been striking to note how narrow the market has been, with performance
concentrated across a handful of names and a marked difference between the S&P
500's returns versus that minus its seven dominant stocks. We are starting to
see some signs of this normalising. The Managers are of the view that income,
in the form of dividend, is an important constituent of the total return of
the equity portfolios. They have a strong belief in the ability of equities to
protect the investor from the effects of inflation over the long term.
The Balanced Risk Allocation Portfolio aims to deliver equity-like returns but
with half the volatility of equity markets. Although there will still be
day-to-day volatility, over the longer term investors may have a smoother
experience in the price movements, gained through a diversified spread of
exposures across equity, bond and alternative assets.
By investing predominantly in ultra-short dated bonds, the Managed Liquidity
Portfolio aims to offer a higher degree of security for those with a more
conservative outlook; its investments may be impacted by interest rates as
well as other factors.
As I write, we are starting to see evidence of inflationary pressures
beginning to ease slightly, with the expectation across US, European and UK
markets, that the rate rise cycle is coming to an end. Your Managers expect a
more substantive downward move in inflation over the autumn. I continue to
believe that your Company's structure and portfolios remain well positioned to
negotiate the market challenges and opportunities that lie ahead.
Victoria Muir
Chairman
1 August 2023
UK Equity Share Portfolio Performance Record
Total Return
For the year ended 31 May
2023 2022 2021 2020 2019
Net Asset Value (1) -2.6% 6.8% 34.6% -12.4% -4.9%
Share Price (1) -4.7% 3.0% 31.6% -16.2% -3.1%
FTSE All-Share Index (1) 0.4% 8.3% 23.1% -11.2% -3.2%
Revenue return per share 6.40p 6.00p 3.90p 4.12p 5.73p
Dividends 7.05p 6.70p 6.65p 6.60p 6.60p
(1) Source: Refinitiv.
UK Equity Share Portfolio Historical Shareholder Returns from an Initial
Investment of £1,000 on 31 May 2013
Annual dividends from investment(1) £ Cumulative dividends from investment(1) £ Capital value (using mid-market share price) £ Outcome if dividends reinvested on payment date £
Annual dividends per share(1) pence
Mid-market share price pence
31 May
2013 - - - 145.25 1,000 1,000
2014 5.30 36 36 153.00 1,053 1,092
2015 6.15 42 78 172.50 1,187 1,278
2016 6.15 43 121 162.50 1,119 1,250
2017 6.25 43 164 192.00 1,322 1,530
2018 6.45 44 208 186.00 1,280 1,535
2019 6.60 45 253 173.50 1,194 1,488
2020 6.60 46 299 139.50 960 1,247
2021 6.65 46 345 176.00 1,212 1,640
2022 6.70 46 391 175.00 1,205 1,691
2023 7.05 48 439 159.50 1,098 1,608
Source: Refinitiv.
UK Equity Share Portfolio Managers' Report
Q What has been happening in the UK equity market over the period?
A For most of the twelve-month period market sentiment was dominated by the
impact of sharply increasing inflation on the economy primarily driven by
global supply chain disruptions, increased commodity prices and pent-up
consumer demand. In response to rising inflation, the Bank of England took a
cautious approach to monetary policy, considering the potential impact on the
economy that was still partially in a recovery phase post pandemic. Interest
rates were adjusted incrementally in an attempt to strike a balance between
controlling inflation and supporting economic growth. The Bank of England
raised rates eight times during the period from 1% to 4.5% and, subsequent to
the end of the review period, raised rates by a further 0.5% to 5% in response
to persistently high readings on inflation and also pay.
The FTSE All-Share Index has a large weighting to commodity and energy stocks.
As commodity and energy prices moderated in the second-half of the period
under review estimates of aggregate earnings were revised downwards and this
weighed on the performance of the Index. Outside the energy sector underlying
earnings estimates have been broadly flat, although estimates in the banks
sector have been revised up as interest rates have continued to rise. The
technology, industrials and consumer discretionary sectors were the strongest
performing sectors over the period, whilst telecoms, real estate and basic
materials were significantly weaker.
Q How did the portfolio perform and what were the key contributors and
detractors to performance over the year?
A The portfolio underperformed its benchmark over the twelve months to 31 May
2023, with a net asset value return of -2.6%. Over the same period the FTSE
All-Share Index rose +0.4%.
At a sector level the biggest contribution to positive performance versus the
FTSE All-Share Index over the twelve-month period was the portfolio's
underweight to the healthcare sector. The portfolio's holding of PureTech
Health performed well. In March the company announced that it had sold a
portion of its royalties derived from sales of a treatment for schizophrenia
(developed by a company it founded, Karuna) for $100 million upfront and $400
million in future revenues. In our view, the quality of the development
pipeline and the valuation of the PureTech Health business remains compelling.
Not holding GlaxoSmithKline was helpful to overall performance as the
company's share price struggled to recover from litigation concerns around its
Zantac drug which was alleged to have links to cancer.
The price of crude oil and natural gas has fallen steadily over the
twelve-month period as supply has normalised. The portfolio weighting to the
energy sector is in line with the benchmark and both BP and Shell contributed
modestly to performance.
The portfolio is overweight to the industrials sector and despite the sector
detracting from performance overall, there were a number of holdings that
performed well. Ferguson announced better than expected results in the
fourth-quarter and continuing share buy backs. Within the same sector Bunzl
and Coats both delivered better than expected results and were two of the
strongest performing holdings overall, but this performance was offset by
weakness in the portfolio's holdings of Chemring, which issued a downbeat
update earlier in the year following delays in customer procurements, energy
and wage inflation and labour shortages. Subsequent to the end of the review
period the share price has recovered sharply following a report of record
first-quarter order intake. Essentra reported a drop in fourth-quarter sales
and a tough trading environment.
Financials detracted overall as a sector but there were some notable strong
performances in the portfolio. Insurance holdings Lancashire and Hiscox both
contributed strongly to relative performance. Lancashire saw an increase in
gross written premiums and both firms reported smaller than anticipated losses
from Hurricane Ian which made landfall in Florida in September 2022.
Unfortunately, some of this strong performance in financials was offset by
Barclays, a top 10 holding in the portfolio, which was slightly weaker over
the period. Additionally, not holding benchmark heavyweight HSBC which
performed well over the period detracted from relative performance.
Consumer discretionary stocks remained under pressure due to cost of living
increases, however, RELX and Whitbread posted notable performances. RELX,
which has activities in areas such as science journals, risk analytics, legal
databases and exhibitions, issued revenue and profit growth guidance above
expectations which was well received by the market, and Whitbread issued a
strong trading update. JD Sports Fashion also performed strongly in the second
half of the twelve-month period. Unfortunately, these strong performances in
the sector were partially offset by Future which has been weaker following the
announcement last year that the Chief Executive was planning to step down. We
believe that the succession planning for the business has been carefully
conducted and remain confident of the business's prospects.
The portfolio is overweight the utilities sector and SSE, a leading developer
and operator of renewable energy (predominantly wind and hydroelectric) across
the UK and Ireland performed well. We see SSE as one of a number of companies
that are key to the successful transition to Net Zero. Drax is another example
and has successfully transitioned from a coal fired electricity production to
almost completely generating power from sustainably sourced biomass.
Unfortunately, the company's prospective carbon-capture project failed to be
selected for fast-track financing discussions with the UK government and this
weighed on the share price. However, it has been invited for formal
discussions with the UK government to help the deployment of large-scale Power
BECCS (Bioenergy with Carbon Capture and Storage).
Consumer staples was a sector of mixed performance. The portfolio is
underweight the sector but the holdings of Tesco, British American Tobacco
(BAT) and Cranswick contributed overall to relative performance, as did not
holding Diageo and Ocado, both of which were weaker over the period. However,
these gains were offset by the portfolio's holding of Nichols and not holding
large international branded staples producer Unilever, which performed well
and therefore detracted from relative performance.
Sharp rises in interest rates have impacted the whole of the property sector
due to the typically high levels of debt and therefore sensitivity to higher
interest rates. PRS REIT, which provides high quality new build homes for the
rental market has inevitably been weaker in this environment, but the business
has an impressive portfolio of properties and demand for rental homes in the
UK is growing and will likely see further demand as interest rates look set to
remain higher in the immediate future.
Basic materials detracted from relative performance as gold miners Newmont and
Barrick Gold were weaker. Gold rallied strongly from November 2022 to the
beginning of April 2023 before moderately tailing off towards the end of the
period. Newmont reported second-quarter adjusted earnings per share that were
below expectations. Similarly, Barrick Gold's first-quarter results were mixed
with production modestly lower due to maintenance, and elevated costs.
Historically gold has been a good hedge against inflation and with inflation
likely to remain higher for longer, we believe this position will provide some
diversification benefits in the months to come, accompanied by an attractive
yield.
On the flipside, still within the basic materials sector, not owning large
international industrial metals & mining companies Anglo American, Glencore
and Rio Tinto was helpful to relative performance versus the benchmark as the
share prices of all three were weaker over the period due to weaker base metal
and bulk commodity prices since the beginning of this year.
Year end
Total Portfolio
Key Contributors Impact % Weight %
Ferguson +0.60 2.7
Lancashire +0.50 1.4
SSE +0.44 5.1
Bunzl +0.37 2.9
RELX +0.31 4.6
Year end
Total Portfolio
Key Detractors Impact % Weight %
Newmont -1.19 1.8
Future -0.75 0.5
PRS REIT -0.63 3.0
Drax -0.49 2.7
Chemring -0.48 1.3
Q How has gearing impacted the performance and what is your strategy going
forward?
A The use of gearing in the portfolio over the period was slightly
detrimental to overall performance. Gearing at the start of the twelve-month
period was just under 11% and this was reduced to around 0% by December 2022
before rising to around 7.5% at the end of the period in May 2023. This level
is below the limit of 25% set by the Board.
The level of gearing is under regular review. In the current higher interest
rate environment, the cost of gearing the portfolio is now a more important
consideration when ascertaining the appropriate level for the portfolio. We
are comfortable that the current level of gearing provides an opportunity to
enhance the portfolio's returns relative to the FTSE All-Share Index when
considering a wider macro view and the opportunities in the portfolio.
Q Have your views on inflation changed over the last twelve months and have
you altered your approach at all as a result?
A Having risen to levels far higher than anyone had anticipated, the
expectation was that inflation would fall more sharply than has been the case.
Many commentators had described their expectations for inflation as
`transient' but in fact it has been more persistent than most had predicted.
Our view over the review period had been that inflation would remain higher
for longer and that view has strengthened over the course of this year.
Consequently, to curb inflation, interest rates have risen sharply. For the
businesses in which we invest, this increases the cost of capital. Our focus
has therefore become even more concentrated on strong businesses with pricing
power and robust balance sheets.
Q How has the portfolio evolved over the period and how is it currently
positioned?
A There have been no material adjustments to the positioning of the portfolio
although there has been some trading activity. The holdings of Barratt
Developments, DFS Furniture, Johnson Service, Jupiter Fund Management,
Restaurant Group and Vodafone were disposed of whilst Next, AstraZeneca and
Newmont were reduced in size. The sale of Barratt Developments reflected our
view that housebuilders were likely to come under increasing pressure as
interest rates rise, whilst DFS Furniture, Restaurant Group and Johnson
Service were all sold as the consumer came under increased pressure with the
rising cost of living and pressure on disposable incomes. Jupiter Fund
Management was sold as the business continued to struggle with performance and
fund outflows and we lost conviction in the investment case.
New positions in Lloyds and Man were introduced in the portfolio. The
portfolio already has a long standing holding in Barclays, but we think that a
holding in Lloyds will complement and diversify our banking exposure. Lloyds
has the largest share of retail deposits in the UK and less exposure to
corporate business. The business has a new leadership team with a clear
mid-term growth strategy & return potential. Man is a leading hedge fund
manager with a strong track record of investment return and performance fee
generation which should support significant capital returns and share buy
backs. The business has multiple and diversified sources of performance fee
generation across a broad client base, all of which reduces the risk.
On a sectoral basis and relative to the FTSE All-Share Index, we remain
over-weight in utilities and consumer discretionary stocks. The overweight to
utilities offers an inflation-linked return that in our view remains
underappreciated. We have also maintained our exposure to energy as these
companies generate significant free cash flows and make substantial
distributions to shareholders, even at currently reduced oil prices. Even in
the case of economic weakness we would expect oil prices to prove resilient
from here, at least relative to other commodities, as the Organisation of the
Petroleum Exporting Countries (OPEC) will continue to manage supply. It is
also possible that they will benefit from a rerating as they are rewarded for
their increased commitment to invest in low carbon energy projects.
We remain under-weight in consumer staples which we see as expensive, and
financials in general but we do have a sizeable position in banks stocks
Barclays and Lloyds.
Q What is your outlook for the next 12 months and beyond? Why invest in the
UK now?
A The UK economy has weathered its fair share of challenges. However, despite
the headwinds of high inflation and higher interest rates, which have been
more persistent than anticipated and will likely remain higher for longer, we
remain optimistic that inflation will start to moderate towards the end of
2023. The uncertainties in the global economy and the geo-political landscape
continue to make the range of possible outcomes particularly wide. We believe
that to mitigate these continuing headwinds, a strategy of focusing on
companies that are good quality, with sound fundamentals and strong cash
generation, is the right course to follow. By carefully selecting stocks with
strong liquidity, we can remain active and maintain a portfolio of our highest
conviction ideas, across a range of sectors. We remain confident in the
long-term prospects of the companies that we own in the UK Equity Portfolio
and further believe that these companies have the potential to strengthen
their competitive positions in the year ahead irrespective of the economic and
market regime that will develop.
We continue to engage closely with the management teams of the companies in
which we invest. It is often during challenging market conditions that their
insight and expertise, from the sectors and economies in which they operate,
is extremely useful and complementary to the data and analysis that is already
available to us. It is also due to the global footprint of these companies in
the FTSE All-Share Index, that we often say the UK equity market is not a
proxy for the UK economy. More than 75% of corporate earnings in the FTSE
All-Share Index are derived internationally. UK equities continue to appear
attractively valued across a blend of valuation measures, relative to history,
and relative to the US market. This opportunity is not just at an index level,
but in fact across all the major sectors.
The current environment continues to be difficult to predict. The Bank of
England has a difficult task to get inflation under control without inflicting
undue damage on the economy by withdrawing economic stimulus. Whilst we
believe that inflation may begin to fall later this year, this will be largely
due to annualising high prices from last year. The price level for many goods
and services will likely remain elevated. Those companies that are able to
pass on or absorb these increases, will likely fair better in our view; and
although concerns of a shallow recession loom, by strategically positioning
the portfolio for a range of outcomes we hope to navigate the potential
headwinds that might occur.
James Goldstone & Ciaran Mallon
Joint Portfolio Managers
1 August 2023
UK Equity Share Portfolio List of Investments
AT 31 May 2023
Ordinary shares listed in the UK unless stated otherwise
Market
Value % of
Company Sector† £'000 Portfolio
Shell Oil, Gas and Coal 7,299 5.4
SSE Electricity 6,853 5.1
National Grid Gas, Water and Multi-utilities 6,255 4.7
RELX Media 6,254 4.6
BP Oil, Gas and Coal 6,026 4.5
Next Retailers 5,448 4.1
AstraZeneca Pharmaceuticals and Biotechnology 4,687 3.5
Barclays Banks 4,524 3.4
Barrick Gold - US Listed Precious Metals and Mining 4,362 3.2
PRS REIT Real Estate Investment Trusts 4,022 3.0
Top Ten Holdings 55,730 41.5
Bunzl General Industrials 3,955 2.9
Phoenix Life Insurance 3,683 2.8
Ferguson Industrial Support Services 3,678 2.7
Experian Industrial Support Services 3,661 2.7
Drax Electricity 3,592 2.7
Tesco Personal Care, Drug and Grocery Stores 3,212 2.4
Legal & General Life Insurance 2,995 2.2
Young & Co's Brewery - Non-Voting ᴬᴵᴹ Travel and Leisure 2,881 2.2
British American Tobacco Tobacco 2,862 2.1
United Utilities Gas, Water and Multi-utilities 2,549 1.9
Top Twenty Holdings 88,798 66.1
Compass Consumer Services 2,530 1.9
Ashtead Industrial Transportation 2,526 1.9
Whitbread Travel and Leisure 2,381 1.8
Newmont - US Listed Precious Metals and Mining 2,376 1.8
Smith & Nephew Medical Equipment and Services 2,334 1.7
Coats General Industrials 2,237 1.6
Croda International Chemicals 2,158 1.6
JD Sports Fashion Retailers 1,989 1.5
Lloyds Banks 1,907 1.4
Lancashire Non-life Insurance 1,905 1.4
Top Thirty Holdings 111,141 82.7
Market
Value % of
Company Sector† £'000 Portfolio
XPS Pensions Investment Banking and Brokerage Services 1,905 1.4
Hiscox Non-life Insurance 1,833 1.4
Chemring Aerospace and Defence 1,724 1.3
JTC Investment Banking and Brokerage Services 1,651 1.2
CVS ᴬᴵᴹ Consumer Services 1,605 1.2
Chesnara Life Insurance 1,598 1.2
Man Investment Banking and Brokerage Services 1,555 1.1
Cranswick Food Producers 1,467 1.1
Babcock International Aerospace and Defence 1,444 1.1
PureTech Health Pharmaceuticals and Biotechnology 1,423 1.1
Top Forty Holdings 127,346 94.8
Sirius Real Estate Real Estate Investment Trusts 1,361 1.0
Hays Industrial Support Services 1,243 0.9
Nichols ᴬᴵᴹ Beverages 1,212 0.9
Treatt Chemicals 1,126 0.8
Essentra Industrial Support Services 1,076 0.8
Future Media 600 0.5
Sherborne Investors (Guernsey) C Investment Banking and Brokerage Services 382 0.3
Total Holdings 47 (2022: 51) 134,346 100.0
AIM Investments quoted on AIM.
† FTSE Industry Classification Benchmark.
UK Equity Share Portfolio
Individual portfolio breakdowns are provided for additional information only.
See note 1(a)(ii) on page 88 for further details.
Income Statement
FOR THE YEAR ENDED 31 MAY
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains on investments held at fair value - (8,678) (8,678) - 5,449 5,449
Gains/(losses) on foreign exchange - 2 2 - (11) (11)
Income 5,314 176 5,490 5,369 - 5,369
Investment management fees (210) (490) (700) (240) (561) (801)
Other expenses (418) (1) (419) (337) (2) (339)
Net return before finance costs and taxation 4,686 (8,991) (4,305) 4,792 4,875 9,667
Finance costs (97) (226) (323) (50) (118) (168)
Return before taxation 4,589 (9,217) (4,628) 4,742 4,757 9,499
Tax (48) - (48) (45) - (45)
Return after taxation for the financial year 4,541 (9,217) (4,676) 4,697 4,757 9,454
Return per ordinary share - note 7 6.40p (12.99)p (6.59)p 6.00p 6.07p 12.07p
Summary of Net Assets
AT 31 MAY
2023 2022
£'000 £'000
Fixed assets 134,346 158,450
Current assets 1,010 1,126
Creditors falling due within one year, excluding borrowings (270) (452)
Bank facility (9,650) (15,750)
Net assets 125,436 143,374
Net asset value per share 182.11p 194.35p
Gearing:
- gross 7.7% 11.0%
- net 7.5% 10.8%
Summary of Changes in Net Assets
FOR THE YEAR ENDED 31 MAY
2023 2022
£'000 £'000
Net assets brought forward 143,374 166,334
Shares bought back and held in treasury (6,286) (22,245)
Share conversions (1,995) (4,956)
Return after taxation for the financial year (4,676) 9,454
Dividend paid (4,981) (5,213)
Net assets 125,436 143,374
Global Equity Income Share Portfolio Performance Record
Total Return
For the year ended 31 May
2023 2022 2021 2020 2019
Net Asset Value (1) 9.8% 9.6% 35.9% -6.4% -1.3%
Share Price (1) 4.6% 4.4% 32.6% -6.1% -0.1%
MSCI World Index (£) (1) 3.8% 7.4% 22.3% 8.9% 5.3%
Revenue return per share 5.20p 4.85p 3.95p 5.39p 6.90p
Dividends 7.20p 7.15p 7.10p 7.05p 6.90p
(1) Source: Refinitiv.
Global Equity Income Share Portfolio Historical Shareholder Returns from an
Initial Investment of £1,000 on 31 May 2013
Annual dividends from investment (1) £ Cumulative dividends from investment (1) £ Capital value (using mid-market share price) £ Outcome if dividends reinvested on payment date £
Annual dividends per share (1) pence Mid-market share price pence
31 May
2013 - - - 140.00 1,000 1,000
2014 3.55 25 25 148.00 1,057 1,083
2015 4.60 33 58 166.75 1,191 1,257
2016 6.00 43 101 156.00 1,114 1,222
2017 6.40 45 146 197.50 1,411 1,601
2018 6.70 48 194 202.00 1,443 1,691
2019 6.90 49 243 195.00 1,393 1,690
2020 7.05 51 294 176.50 1,261 1,587
2021 7.10 50 344 226.00 1,614 2,103
2022 7.15 51 395 229.00 1,635 2,197
2023 7.20 52 447 232.00 1,657 2,296
Source: Refinitiv.
Global Equity Income Share Portfolio Manager's Report
Q How did the portfolio perform in the year under review?
A We are pleased to report the portfolio outperformed both its peer group and
its relevant benchmark. The net asset value of the portfolio grew in the year
to 31 May 2023, by 9.8%, this exceeded the return of the comparator benchmark
which increased in value by 3.8%.
The whole of the year to May 2023 in financial markets was dominated by
concerns around rising inflation, and the impact on economic activity of
central bank actions (i.e. raising interest rates) to bring it back under
control. Investor sentiment has swung between periods of pessimism such as in
summer and early autumn 2022, where investor expectations became overly
bearish expecting a deep recession in response to the rapid tightening of
monetary policy; to periods through the spring of 2023 where optimism around
new technology (such as AI) and resilient corporate earnings, together with
better inflation data, have fuelled hopes of a soft landing for the global
economy.
At a regional level, the US market has been dominated by sentiment around the
technology sector; it was extremely weak through much of 2022, however
recovered strongly during 2023 despite a mini regional banking crisis on
positive earnings announcements and more recently expectation of a new wave of
earnings growth arising from developments in AI. The UK has been amongst the
worst performers globally over the 12-month period, its large index weight in
commodity and energy stocks was a drag as prices fell back following the sharp
spikes post the Russian invasion of Ukraine. Europe has performed somewhat
better, the expected energy crisis over the winter of 2022 did not materialise
and generally the economy and corporate earnings have exceeded expectations.
In Asia, the recovery of the Chinese economy from Covid-19 has been slower
than expected, the region has performed relatively poorly. In contrast to
Japan, where particularly in 2023 the stock market has outperformed other
regions, being seen by investors as something of a safe haven from rising
interest rates whilst enjoying reasonable valuations.
Q What were the key contributors and detractors to performance?
A Performance of the fund was driven by stock selection rather than over or
under allocation to geographies or sectors. We are comfortable, indeed pleased
with this as we spend most of our time analysing individual stocks rather than
looking at macro-economic trends and forecasts.
The largest position in the portfolio, 3i, was also the largest positive
contributor. We have held 3i, the UK listed private equity company since 2021.
We are attracted to the quality and future growth potential of its largest
asset, Action, a European discount retailer. It generates high returns, and we
believe it retains significant growth potential. We are also impressed by the
quality of 3i's management and how they have managed the remainder of their
portfolio assets.
During the summer/autumn 2022 market weakness we added to our semiconductor
holdings such as Broadcom and Nvidia, both of which subsequently performed
well. We acquired a position in Besi, a Dutch listed company specialising in a
semiconductor packaging technique known as hybrid bonding, which improves the
overall performance, power efficiency and cost of semiconductors. We felt it
was trading well below its intrinsic value. The recovery in the share price
since has been strong, although justified in our view by some significant new
customer wins. We retain a position though we have taken some profits.
Verallia, the French listed glass packaging manufacturer performed well as
natural gas prices collapsed and the resilience of the business model became
better understood.
Other strong contributors included Next where we built a position during the
UK market dislocation following the budget whilst Liz Truss was Prime
Minister, we sold the position in spring 2023 following strong performance.
Also, Broadcom, the US based semiconductor company specialising in chips for
the communications sector, where the company has continued to deliver results
ahead of market expectations.
On the negative side of the ledger our holding in American Tower, the real
estate company focused on owning and renting sites for mobile phone masts was
weak as investors became more concerned by the impact of rising interest rates
on profitability. The other property asset in the portfolio, Link REIT, the
Hong Kong property company, was also weak for this reason, but also the slow
economic recovery in Asia and its decision to raise capital.
We are underweight in the energy sector, but our only holding, Aker BP, the
Norwegian oil producer was an underperformer. There was no bad news, however
the stock drifted lower with the underlying commodity price.
Top Contributors
Year end Average
Portfolio Benchmark Contribution
Weight Weight to Return
Holding (%) (%) (%)
3i 6.3 0.03 3.25
Besi 2.0 - 1.86
Verallia 4.8 - 1.56
Broadcom 5.4 0.44 1.55
Next 0.3 0.02 0.63
Bottom Contributors
Year end Average
Portfolio Benchmark Contribution
Weight Weight to Return
Holding (%) (%) (%)
American Tower 4.3 0.2 -1.68
Link REIT 2.6 0.03 -1.30
Aker BP 2.7 0.02 -1.30
Apple - 4.75 -0.89
Union Pacific 3.4 0.25 -0.44
Q Has the portfolio changed significantly over the period?
A The portfolio has evolved quite considerably over the period. However, it
is interesting to note the largest holdings in the portfolio at year end 2022
remain our largest holdings today, such as 3i, Verallia, American Tower,
Broadcom, AIA and Microsoft. Others such as Standard Chartered and Coca-Cola
are just outside the top ten holdings.
Another constant has been our overweight in the financials sector, however
whilst we are overweight in the insurance sector and private equity companies
(3i and KKR & Co) we continue to be very underweight banks. Whilst we
acknowledge rising interest rates have provided a tailwind to interest income,
we remain concerned by credit quality risks as the global economy slows down.
By year end Standard Chartered was our sole bank holding.
As already mentioned, market sentiment has swung between pessimism and over
optimism, we have taken the opportunities provided by the market to buy good
companies when we felt they were on sale. In the early part of the period, we
reduced exposure to consumer staples such as Nestle, and US DIY chain Home
Depot as we felt they were fully valued. We increased exposure to more
cyclical and technology names such as Celanese, the US based chemical company
with a strong record of value creation, also the aforementioned Besi who
produce equipment that increases the efficiency and performance of
semiconductors. We also added US-based Intercontinental Exchange (ICE), the
global exchange and data services company, after recent share price weakness
led to a more attractive entry point. In the latter part of the year we scaled
back some of our more economically sensitive holdings where our conviction was
lower, selling out of JP Morgan, the US bank and Volkswagen (VW), the German
automotive manufacturer. We added Asahi, and Royal Unibrew, the Japanese and
Danish brewers whose recovery prospects post pandemic we felt were
underappreciated, and toward the end of the period Reckitt Benckiser the UK
listed household consumer products company.
Q Do you worry the crisis during the spring in US regional banks is a
foretaste of banking turmoil in the year ahead?
A Whilst we would never completely rule it out as banks remain leveraged
plays on the global economy, we believe it is extremely unlikely. The
circumstances that pertained to Silicon Valley Bank and First Republic in the
US were quite unique. The larger banks in the US and in particular Europe are
much better capitalised and regulated than before the financial crisis of
2008. However, at present we do not find the risk reward profile attractive
relative to other opportunities in the market.
Q There is much excitement around the potential for Artificial Intelligence,
what's your take?
A The emergence of Chat GPT in recent months, and then the significant rise
in profit guidance from Nvidia toward the end of May 2023 has set interest in
this developing technology alight. Our view is that it is a further evolution
of the digitalisation trends in almost all areas of our lives. It will provide
a further leg to growth for the broader semiconductor and software industries
in years to come.
We held Nvidia through most of the period, making close to 60% profit on our
investment. We sold in March/April 2023 as we saw the company as being fully
valued. Clearly if they can deliver on recent forecasts, we would be proved
wrong, but we felt the risk/ reward trade-off was no longer compelling given
the high valuation of the stock.
We would caution however on getting carried away, other than Nvidia there are
not many pure plays on the theme and share prices across the whole technology
sector have moved sharply higher in recent months. Much future good news is
already priced into the sector.
Q How has the portfolio gearing evolved over the last year?
A We started the year in June 2022 with around 10% portfolio gearing, toward
the end of 2022 following a reasonable recovery in markets it was reduced to
around 7%, then 5% in March 2023 following a strong start to the year. By 31
May 2023 the portfolio had no gearing, reflecting our greater caution
considering strong market performance set against what appears to us to be a
very uncertain macroeconomic outlook around the world.
Q When considering stock selection for the portfolio, how do you incorporate
ESG risks and considerations.
A Our approach whilst always evolving has not changed significantly over the
last year.
We view analysing ESG risks as a key part of our investment process. As
active, fundamental managers we consider every key aspect of a company's true
worth, including material ESG considerations because we believe that the most
sustainable way to make money is to buy companies for less than they are
worth. Establishing an estimated `fair value' of a company is therefore
essential and this entails incorporating ESG aspects into our investment
methodology. We take a holistic approach where a company's ESG credentials are
scrutinised alongside traditional financial and qualitative aspects to derive
a fair value. All companies face challenges regarding ESG and therefore we
must consider materiality (the impact of ESG factors on fair value) and ESG
momentum (the potential for ESG improvement over time). Both can influence a
stock's potential returns and our conviction levels in an investment. As
shareholders we actively engage with companies to enhance the value of our
investments. We encourage companies to create sustainable value and mitigate
risks in relation to their corporate activities. This can include prompting
them to improve governance structures, make better asset allocation decisions,
instilling sustainable practices and policies, and providing better
disclosure. This reinforces our fundamental belief that responsible investing
demands a long-term view and that a stakeholder-centric culture of ownership
and stewardship is at the heart.
Q How do you view the outlook for financial markets in the next 12 months?
A We said last year how difficult we felt the market was to forecast, sadly
this year is no different. We have become progressively more cautious through
2023 as valuations have risen and profit margins widened, whilst at the same
time monetary conditions have tightened, this is reflected in our more
balanced portfolio positioning and lack of gearing.
Our best assessment is that the global economy will continue to slow over the
summer as the sharp rise in interest rates around the world increasingly
impact businesses and the consumer, especially as excess savings built up
during Covid-19 lockdowns have now been largely spent. We could see quite a
contraction in economic activity and sentiment by the early autumn, which may
well impact share prices. The upside would be a further reduction in inflation
and hopefully by year end or early 2024 some modest decline in interest rates,
which may well provide investors with renewed optimism. Our sense at present
is that the US may be first to see falling interest rates, the UK last, Europe
in between.
For our part we will continue to invest in companies with strong balance
sheets and generating free cashflows. Of course, no company or portfolio can
ever fully insulate itself from the prevailing economic weather, but we hope
to continue to outperform our benchmark in what may well be choppy waters.
Stephen Anness
Portfolio Manager
1 August 2023
Global Equity Income Share Portfolio List of Investments
AT 31 May 2023
Ordinary shares unless stated otherwise
At Market
Value % of
Company Sector† Country £'000 Portfolio
3i Financial Services United Kingdom 4,136 6.3
Broadcom Semiconductors & Semiconductor Equipment United States 3,581 5.4
Verallia Materials France 3,177 4.8
Microsoft Software & Services United States 3,020 4.6
American Tower Equity Real Estate Investment Trusts (REITs) United States 2,817 4.3
AIA Insurance Hong Kong 2,812 4.2
Samsung Electronics Technology Hardware & Equipment South Korea 2,374 3.6
- preference shares
UnitedHealth Health Care Equipment & Services United States 2,351 3.5
Union Pacific Transportation United States 2,247 3.4
Royal Unibrew Food, Beverage & Tobacco Denmark 2,107 3.2
Top Ten Holdings 28,622 43.3
Standard Chartered Banks United Kingdom 1,966 3.0
Zurich Insurance Insurance Switzerland 1,850 2.8
Coca-Cola Food, Beverage & Tobacco United States 1,830 2.7
Aker BP Energy Norway 1,800 2.7
Progressive Insurance United States 1,775 2.7
Universal Music Media & Entertainment Netherlands 1,765 2.7
Link REIT Equity Real Estate Investment Trusts (REITs) Hong Kong 1,701 2.6
KKR & Co Financial Services United States 1,656 2.5
Reckitt Benckiser Household & Personal Products United Kingdom 1,634 2.5
Asahi Food, Beverage & Tobacco Japan 1,582 2.4
Top Twenty Holdings 46,181 69.9
RELX Commercial & Professional Services United Kingdom 1,455 2.2
Infrastrutture Telecommunication Services Italy 1,443 2.2
Celanese Materials United States 1,359 2.0
Kone - B shares Capital Goods Finland 1,345 2.0
Intercontinental Exchange Financial Services United States 1,326 2.0
Besi Semiconductors & Semiconductor Equipment Netherlands 1,305 2.0
Home Depot Consumer Discretionary Distribution & Retail United States 1,236 1.9
Taiwan Semiconductor Manufacturing Semiconductors & Semiconductor Equipment Taiwan 1,231 1.9
Recordati Pharmaceuticals, Biotechnology & Life Sciences Italy 1,231 1.9
Texas Instruments Semiconductors & Semiconductor Equipment United States 1,174 1.8
Top Thirty Holdings 59,286 89.8
Herc Holdings Capital Goods United States 1,159 1.8
Ferguson Capital Goods United Kingdom 1,119 1.7
Novartis Pharmaceuticals, Biotechnology & Life Switzerland 927 1.4
Sciences
Canadian Pacific Kansas City Transportation Canada 906 1.4
Rolls-Royce Capital Goods United Kingdom 657 1.0
Danaher Pharmaceuticals, Biotechnology & Life United States 600 0.9
Sciences
TencentR Media & Entertainment China 576 0.9
American Express Financial Services United States 294 0.4
Next Consumer Discretionary Distribution & United Kingdom 184 0.3
Retail
Mainfreight Transportation New Zealand 155 0.2
Top Forty Holdings 65,863 99.8
Howden Joinery Capital Goods United Kingdom 101 0.1
Accenture - A shares Software & Services United States 62 0.1
Sberbank* - ADR Banks Russia - -
Total Holdings 43 (2022: 41) 66,026 100.0
ADR American Depositary Receipts - are certificates that represent
shares in the relevant stock and are issued by a US bank. They are denominated
and pay dividends in US dollars.
R Red Chip Holdings - holdings in companies incorporated outside the PRC,
listed on the Hong Kong Stock Exchange, and controlled by PRC entities by way
of direct or indirect shareholding and/or representation on the board.
† MSCI and Standard & Poor's Global Industry Classification Standard.
* The investment in Sberbank - ADR has been valued at zero as secondary
listings of the depositary receipts on Russian companies have been suspended
from trading.
Global Equity Income Share Portfolio
Individual portfolio breakdowns are provided for additional information only.
See note 1(a)(ii) on page 88 for further details.
Income Statement
FOR THE YEAR ENDED 31 MAY
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments held at fair value - 4,782 4,782 - 4,380 4,380
Gains on foreign exchange - 11 11 - 16 16
Income 1,893 92 1,985 1,601 - 1,601
Investment management fees (107) (250) (357) (102) (237) (339)
Other expenses (176) (4) (180) (136) (2) (138)
Net return before finance costs and taxation 1,610 4,631 6,241 1,363 4,157 5,520
Finance costs (50) (117) (167) (20) (47) (67)
Return before taxation 1,560 4,514 6,074 1,343 4,110 5,453
Tax (261) (14) (275) (146) - (146)
Return after taxation for the financial year 1,299 4,500 5,799 1,197 4,110 5,307
Return per ordinary share - note 7 5.20p 18.03p 23.23p 4.85p 16.66p 21.51p
Summary of Net Assets
AT 31 MAY
2023 2022
£'000 £'000
Fixed assets 66,026 67,630
Current assets 861 566
Creditors falling due within one year, excluding borrowings (144) (206)
Bank facility - (5,352)
Net assets 66,743 62,638
Net asset value per share 265.53p 249.00p
Gearing:
- gross 0.0% 8.5%
- net -0.8% 8.2%
Summary of Changes in Net Assets
FOR THE YEAR ENDED 31 MAY
2023 2022
£'000 £'000
Net assets brought forward 62,638 55,602
Shares bought back and held in treasury (1,677) (1,337)
Share conversions 1,774 4,823
Return after taxation for the financial year 5,799 5,307
Dividend paid (1,791) (1,757)
Net assets at the year end 66,743 62,638
Balanced Risk Allocation Share Portfolio Performance Record
Total Return
For the year ended 31 May
2023 2022 2021 2020 2019
Net Asset Value (1) -11.4% 0.3% 25.4% -3.1% -2.7%
Share Price (1) -14.3% -5.2% 26.4% -6.9% -0.7%
Composite Benchmark (2) -17.1% -6.1% 16.8% 2.8% -1.3%
ICE BoA Merrill Lynch 3 month
LIBOR plus 5% per annum (1) 7.5% 5.1% 5.1% 5.9% 5.8%
Revenue return per share 3.38p 1.05p -0.17p -0.02p 0.42p
Dividends 1.00p nil nil nil nil
(1) Source: Refinitiv.
(2) With effect from 1 June 2021, the benchmark adopted by the Balanced Risk
Allocation Portfolio is comprised of 50% 30-year UK Gilts Index, 25% GBP
hedged MSCI World Index (net) and 25% GBP hedged S&P Goldman Sachs Commodity
Index. Prior to this, the benchmark was ICE BoA Merrill Lynch 3 month LIBOR
plus 5% per annum. Accordingly, both the new and old benchmark are shown.
Balanced Risk Allocation Share Portfolio Historical Shareholder Returns from
an Initial Investment of £1,000 on 31 May 2013
Annual Cumulative dividends from investment (1) £ Capital value (using mid-market share price) £ Outcome if dividends reinvested on payment date £
Annual dividends per share (1) pence dividends
from Mid-market share price pence
investment (1)
31 May £
2013 - - - 111.00 1,000 1,000
2014 - - - 116.00 1,045 1,045
2015 - - - 121.75 1,097 1,097
2016 - - - 119.25 1,074 1,074
2017 - - - 133.50 1,203 1,203
2018 - - - 139.50 1,257 1,257
2019 - - - 138.50 1,248 1,248
2020 - - - 129.00 1,162 1,162
2021 - - - 163.00 1,468 1,468
2022 - - - 154.50 1,392 1,392
2023 1.00 9.00 9.00 131.50 1,185 1,194
Source: Refinitiv.
Balanced Risk Allocation Share Portfolio Manager's Report
Investment Objective
The investment objective of the Balanced Risk Allocation Portfolio is to
provide shareholders with an attractive total return in differing economic
environments, and with low to moderate correlation to equity and bond market
indices by gaining exposure to three asset classes: debt securities, equities,
and commodities.
Q How has the strategy performed in the year under review?
A The Balanced Risk Allocation Portfolio posted a negative return of -11.4%
over the fiscal year, outperforming the benchmark by 5.7%. The past twelve
months proved to be a challenging year amid an environment of higher
inflation, widespread rate hikes and fresh concerns of a growth slowdown,
leading to a renewed bout of volatility. Against this backdrop, risk assets
broadly struggled with commodities declining the most, followed by bonds and
equities.
Q What were the biggest contributors and detractors to performance?
A Exposure to commodity markets was the largest detractor from performance,
with three of the four complexes posting losses, led by energy, reflecting
increasing concerns about the current and future state of the global economy.
Energy saw declines in all six exposures, with natural gas being the
worst-performing commodity in the complex. Agriculture exposure also
detracted, as the soy complex declined on news of a bumper crop in Brazil as
well as a forecast from the International Grains Council that supply is likely
to outpace demand in 2023. Sugar was the top agriculture contributor as a lack
of product available for delivery has taken prices to 2011 levels. Industrial
metals saw losses in both copper and aluminium as prices remain under pressure
following continued disappointing economic data from China, the world's top
consumer of these metals. Precious metals were the sole complex to post gains
with both gold and silver advancing. Both gold and silver rose in response to
the banking crisis, lower interest rates and a weaker US dollar.
Exposure to equities detracted from results for the period as three of the six
markets contended with an environment of higher rates, higher inflation and
ongoing geopolitical turmoil. Emerging market equities were the largest
detractor from results as inflation pressures remained elevated and concerns
of weakness in China, where the recovery has not been as robust as expected.
Both US large and small caps declined as well, as the US Federal Reserve (Fed)
continued to press forward with aggressive rate hikes amid disappointingly
persistent inflation readings. Small caps underperformed large caps as
investors shifted out of higher-beta exposure, the result of investors' clear
preference for larger, more liquid stocks. European equities were a top
contributor, despite rate hikes by the European Central Bank (ECB), benefiting
from rising investor optimism. Lower energy prices helped the European
continent avoid a stagflationary spiral and saw the Euro Stoxx 50 Index near
its highest point since the Global Financial Crisis. Japanese equities were
the top contributor for the period on relative valuations, strong earnings
reports, encouraging corporate reforms and the Bank of Japan maintaining its
accommodative monetary policy.
Exposure to government bonds detracted from results as five of the six markets
produced negative results. A combination of strong tightening moves across
most major central banks and persistently high inflation readings had bond
investors expecting further hikes, reducing the attractiveness of bonds. The
sole market to post positive results for the period was Japan. Yields across
most of the markets in which the portfolio invests have seemingly peaked, but
the path remains choppy and range-bound, reflecting ongoing uncertainty around
the strength of both growth and inflation.
Q How did the tactical allocation perform?
A The tactical allocation detracted from performance as the inconsistency of
returns month-to-month across assets made positioning difficult. Tactical
equity disappointed due to a lack of persistent trend, with equities up one
month, down the next. Tactical commodities detracted largely due to
overweights across energy for most of the period. Tactical bonds detracted due
to mixed positioning for most of the period.
Q What is your 30-day outlook?
A Due to the flexible nature of the portfolio in terms of allocation across
asset classes, the outlook is reassessed every 30 days, hence the reason why
this period has been chosen.
Although the highly anticipated recession has not materialised yet, there is
still reason for caution. Markets have remained resilient, but global economic
indicators are flashing recessionary signals. Multiple vulnerabilities mark
the landscape, including the prospect of more interest rate increases and
their ultimate effect on economic growth. Should economic strength continue,
inflation will likely remain elevated, keeping monetary policy tight. Looking
forward, one of the main questions to be addressed is whether such significant
monetary tightening will lead to credit issues.
The latest tactical positioning, as at the date of this report, includes
overweights across all equity markets. Emerging markets and US small caps have
transitioned from underweight to modestly overweight. In fixed income, the
tactical positioning is now underweight all markets except Japan. Positioning
within commodities is similar to last month, with all four complexes
maintaining net underweight positions.
Scott Wolle
Portfolio Manager
1 August 2023
Balanced Risk Allocation Share Portfolio List of Derivative Instruments
AT 31 MAY 2023
Notional
Notional Exposure
Exposure as % of
£'000 Net Assets
Government Bond Futures:
Australia 1,691 27.3
Japan 1,458 23.6
Germany 935 15.1
Canada 659 10.6
UK 483 7.8
Total Bond Futures (5) 5,226 84.4
Commodity Futures:
Agriculture
Soyabean meal 158 2.5
Sugar 111 1.8
Soyabean 104 1.7
Soyabean oil 67 1.1
Cotton 64 1.0
Coffee 54 0.9
Corn 24 0.4
Energy
Gasoline 168 2.7
Brent crude 118 1.9
Low sulphur gasoline 106 1.7
New York Harbor ultra-low sulphur diesel 77 1.3
WTI crude 55 0.9
Natural gas 28 0.4
Industrial Metals
Copper 164 2.6
Aluminium 134 2.2
Precious Metals
Gold 160 2.6
Silver 96 1.6
Total Commodity Futures (17) 1,688 27.3
Equity Futures:
Japan 736 11.9
UK 521 8.4
Europe 364 5.9
Emerging markets 230 3.7
US small cap 211 3.4
US large cap 169 2.7
Total Equity Futures (6) 2,231 36.0
Total Derivative Instruments (28) 9,145 147.7
Target Annualised Risk
The targeted annualised risk (volatility of monthly returns) for the portfolio as listed above is analysed as follows:
Asset Class Risk Contribution
Fixed Income 3.1% 40.5%
Equities 2.9% 37.7%
Commodities 1.6% 21.8%
7.6% 100.0%
List of Investments
Market %
Yield value of
% £'000 Portfolio
Short Term Investments
Invesco Liquidity Funds plc - Sterling 4.45 3,107 56.1
UK Treasury Bill - 0% 18 Sep 2023 4.09 739 13.3
UK Treasury Bill - 0% 06 Nov 2023 4.70 587 10.6
UK Treasury Bill - 0% 30 Oct 2023 4.71 490 8.8
UK Treasury Bill - 0% 13 Nov 2023 4.60 269 4.9
UK Treasury Bill - 0% 23 Oct 2023 4.66 196 3.5
UK Treasury Bill - 0% 31 Jul 2023 4.13 149 2.7
Total Short Term Investments 5,537 99.9
Hedge Funds (1)
Harbinger Streamline Offshore Fund 5 0.1
Total Hedge Funds 5 0.1
Total Fixed Asset Investments 5,542 100.0
(1) The hedge fund investments are residual holdings of the previous
investment strategy, which are awaiting realisation of underlying investments.
Derivative instruments held in the Balanced Risk Allocation Share Portfolio
are shown on the previous page. At the year end all the derivative instruments
held in the Balanced Risk Allocation Share Portfolio were exchange traded
futures contracts. Holdings in futures contracts that are not exchange traded
are permitted as explained in the investment policy on page 45.
Balanced Risk Allocation Share Portfolio
Individual portfolio breakdowns are provided for additional information only.
See note 1(a)(ii) on page 88 for further details.
Income Statement
FOR THE YEAR ENDED 31 MAY
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Losses on investments held at fair value - (2) (2) - (1) (1)
Gains/(losses) on derivative instruments 27 (963) (936) 72 (32) 40
Gains on foreign exchange - 15 15 - 38 38
Income 172 - 172 12 - 12
Investment management fees (15) (34) (49) (16) (38) (54)
Other expenses (27) (2) (29) (24) (2) (26)
Net return before finance costs and taxation 157 (986) (829) 44 (35) 9
Finance costs - - - - - -
Return before taxation 157 (986) (829) 44 (35) 9
Tax (16) 16 - - - -
Return after taxation for the financial year 141 (970) (829) 44 (35) 9
Return per ordinary share - note 7 3.38p (23.16)p (19.78)p 1.05p (0.83)p 0.22p
Summary of Net Assets
AT 31 MAY
2023 2022
£'000 £'000
Fixed assets 5,542 6,233
Derivative assets held at fair value though profit or loss 125 362
Current assets 735 732
Derivative liabilities held at fair value though profit or loss (186) (225)
Creditors falling due within one year, excluding borrowings (26) (17)
Net assets 6,190 7,085
Net asset value per share 149.56p 169.87p
Notional exposure of derivative instruments as % of net assets 147.7% 145.7%
Summary of Changes in Net Assets
FOR THE YEAR ENDED 31 MAY
2023 2022
£'000 £'000
Net assets brought forward 7,085 6,890
Shares bought back and held in treasury (147) (275)
Share conversions 122 461
Return after taxation for the financial year (829) 9
Dividend paid (41) -
Net assets at the year end 6,190 7,085
Managed Liquidity Share Portfolio Performance Record
Total Return
For the year ended 31 May
2023 2022 2021 2020 2019
Net Asset Value (1) 3.5% -0.3% 3.6% 1.1% 1.3%
Share Price (1) -5.2% -4.0% 0.5% 1.6% -0.5%
Revenue return per share 1.06p -0.02p 1.35p (2) 0.65p 0.59p
Dividends 1.00p 1.00p nil 0.80p 0.80p
(1) Source: Refinitiv.
(2) Includes a £34,000 (1.40p per share) refund of management fees in respect
of prior year overcharges.
Managed Liquidity Share Portfolio Historical Shareholder Returns from an
Initial Investment of £1,000 on 31 May 2013
Annual dividends from investment (1) £ Cumulative dividends from investment (1) £ Capital value (using mid-market share price) £ Outcome if dividends reinvested on payment date £
Annual dividends per share (1) pence
Mid-market share price pence
31 May
2013 - - - 101.00 1,000 1,000
2014 - - - 101.37 1,004 1,004
2015 - - - 101.88 1,009 1,009
2016 - - - 101.00 1,000 1,000
2017 - - - 101.50 1,005 1,005
2018 - - - 102.00 1,010 1,010
2019 0.80 7 7 101.50 1,005 1,005
2020 0.80 8 15 101.50 1,005 1,021
2021 - - 15 102.00 1,010 1,026
2022 1.00 10 25 97.00 960 985
2023 1.00 10 35 91.00 901 934
Source: Refinitiv.
Managed Liquidity Share Portfolio Manager's Report
Q How does the portfolio generate returns?
A The investment objective of the portfolio is to produce an appropriate
level of income return combined with a high degree of security. We aim to
generate returns by investing mainly in sterling-based high quality debt
securities and similar assets but with the flexibility to invest in assets
with a greater weighted average maturity than a money market fund. Accordingly
the value of the portfolio may rise or fall.
The majority of the portfolio is invested in the iShares - Sterling Ultrashort
Bond UCITS ETF. We reviewed the ETF universe in December 2022 and elected to
retain this ETF. We also hold a portion of the portfolio in the Invesco
Liquidity Funds plc - Sterling to meet short term payment obligations.
The iShares - Sterling Ultrashort Bond UCITS ETF invests in sterling
denominated investment grade corporate bonds and quasi-government bonds,
aiming to track performance of the Markit iBoxx GBP Liquid Investment Grade
Ultrashort Index and has a weighted average maturity of around one year.
Q What has the performance of your fund been over the last year?
A The Managed Liquidity Portfolio NAV total return for the year ended 31 May
2023 was 3.5%.
The year was marked by a steady increase in interest rates with the Bank of
England raising base rates from 1% in May 2022 to 4.5% at 31 May 2023 as part
of an effort by central banks globally to cool inflation. Inflation had
started to rise in 2021 as Covid-19 stimulus began to be spent on economies
re-opening. Energy prices accelerated this in 2022 as a result of Russia's
invasion of Ukraine and subsequent sanctions and this has subsequently fed
into a broad rise in consumer prices and wages, resulting in determined action
to cool spending.
The portfolio maintains a very short duration at 0.26 years and so has been
protected from the falls experienced in many bond funds from interest rates
rising faster than expected and performance exceeded the Markit iBoxx GBP
Liquid Investment Grade Ultrashort Index return of 2.8% over the period.
Q What is the outlook for returns given high inflation and rising interest
rates?
A The yield to maturity of the iShares - Sterling Ultrashort Bond UCITS ETF
was 5.13% at 31 May 2023, demonstrating that portfolio returns continue to
benefit from higher interest rates and in particular to continue to deliver a
meaningful pickup over base rates while providing ready access to capital with
a high degree of security.
Turning to the wider monetary environment, in the UK further interest rate
rises are still expected and we would expect this to benefit portfolio
returns.
Opinions differ as to how long higher rates will be with us. The average
interest rate in the decade to 2008 was a little over 5%, and substantially
higher in the four preceding decades that followed post-WWII austerity.
Nevertheless, energy prices have now fallen, globalisation as a driver of
economic growth has largely stalled in favour of greater on-shoring of supply
lines, and developed economies continue to age, meaning that the very
long-term outlook for rates is more likely to be lower than higher. In 2023-24
however, higher interest rates appear to be here to stay to reduce consumer
spending if central banks are to achieve their mandates of around 2%
inflation.
Derek Steeden
Portfolio Manager
1 August 2023
Managed Liquidity Share Portfolio List of Investments
AS AT 31 MAY
2023 2022
Market Market
Value % of Value % of
£'000 Portfolio £'000 Portfolio
Invesco Liquidity Funds plc - Sterling 130 8.8 130 9.0
iShares - Sterling Ultrashort Bond UCITS ETF 1,345 91.2 1,315 91.0
1,475 100.0 1,445 100.0
Managed Liquidity Share Portfolio
Individual portfolio breakdowns are provided for additional information only.
See note 1(a)(ii) on page 88 for further details.
Summary of Net Assets
AT 31 MAY
2023 2022
£'000 £'000
Fixed assets 1,475 1,445
Current assets 34 17
Creditors falling due within one year, excluding borrowings (139) (138)
Net assets 1,370 1,324
Net asset value per share 109.51p 106.92p
Income Statement
FOR THE YEAR ENDED 31 MAY
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on investments held at fair value - 23 23 - (4) (4)
Income 21 - 21 6 - 6
Investment management fees (2) - (2) (2) - (2)
Other expenses (6) - (6) (5) - (5)
Net return before finance costs and taxation 13 23 36 (1) (4) (5)
Finance costs - - - - - -
Return before taxation 13 23 36 (1) (4) (5)
Tax - - - - - -
Return after taxation for the financial year 13 23 36 (1) (4) (5)
Return per ordinary share - note 7 1.06p 1.80p 2.86p (0.07)p (0.28)p (0.35)p
Summary of Changes in Net Assets
FOR THE YEAR ENDED 31 MAY
2023 2022
£'000 £'000
Net assets brought forward 1,324 1,738
Shares bought back and held in treasury (77) (66)
Share conversions 99 (328)
Return after taxation for the financial year 36 (5)
Dividend paid (12) (15)
Net assets at the year end 1,370 1,324
Environmental, Social and Corporate Governance (`ESG') statement from the
Managers
UK Equity Share Portfolio & Global Equity Income Share Portfolio
What does ESG mean to us?
Ciaran Mallon
UK Equities Fund Manager
James Goldstone
UK Equities Fund Manager
Stephen Anness
Global Equities Fund Manager
· Investing in stocks which have good ESG momentum behind them can be a
positive way for our portfolios to potentially generate returns in excess of
the benchmark
· We draw upon ESGintel, Invesco's proprietary tool, which helps us to
better understand how companies are addressing ESG issues
· Engaging with companies to understand corporate strategy today in order to
assess how this could evolve in the future
· Monitoring how companies are performing from an ESG perspective and if the
valuations fairly reflect the progress being made
Our focus as active fund managers is always on finding mispriced stocks and
ESG integration underpins our investment process.
The incorporation of ESG into our investment process considers ESG factors as
inputs into the wider investment process as part of a holistic consideration
of the investment risk and opportunity, from valuation through investment
process to engagement and monitoring. The core aspects of our ESG philosophy
include: materiality; ESG momentum; and engagement.
· Materiality refers to the consideration of ESG issues that are financially
material to the company we are analysing.
· The concept of ESG Momentum, or improving ESG performance over time,
indicates the degree of improvement of various ESG metrics and factors and
help fund managers identify upside in the future. We find that companies which
are improving in terms of their ESG practices may enjoy favourable financial
performance in the longer term.
· Engagement is part of our responsibility as active owners which we take
very seriously, and we see engagement with companies as an opportunity to
encourage continual improvement. Dialogue with portfolio companies is a core
part of the investment process for our investment team. As such, we often
participate in board level dialogue and are instrumental in giving shareholder
views on management, corporate strategy, transparency, and capital allocation
as well as wider ESG aspects.
ESG integration is an ongoing strategic effort to systematically incorporate
ESG Factors into fundamental analysis. The aim is to provide a 360 degree
evaluation of financial and non-financial materially relevant considerations
and to help guide the portfolio strategy.
Our investment process has four stages. In this report we go through in detail
how ESG is integrated into each stage of our process.
Idea Generation
We believe it is important to spread our nets as wide as possible when trying
to come up with stock ideas which may find their way into our portfolios. We
remain open minded as to the type of companies we will consider. This means
not ruling out companies just because they happen to be unpopular at that time
and vice versa. ESG can create opportunities too - for example, the benefits
of moving towards more sustainable sources of energy like wind, solar and
hydroelectric power generation. This was one of the reasons we became
interested in some of our utility holdings which are held in the UK portfolio.
This highlights the importance of opportunities brought about by ESG and not
just the risks. Investing in stocks which have the right ESG momentum behind
them - by focusing on fundamentals and the broader investment landscape - can
be a unique way for our portfolios to potentially generate returns in excess
of the benchmark as those businesses that have got ESG momentum behind them
have the potential to be rerated.
Fundamental Research & ESG Analysis
Research is at the core of what we do. Our fundamental analysis covers many
drivers, for example, corporate strategy, market positioning, competitive
dynamics, the macroeconomic environment, financials, regulation, valuation,
and, of course, ESG considerations, which guide our analysis throughout.
We use a variety of tools from different providers to measure ESG factors. In
addition, at Invesco, we have developed ESGintel, Invesco's proprietary tool
built by our Global ESG research team in collaboration with our Technology
Strategy Innovation and Planning (SIP) team.
ESGintel provides fund managers with environmental, social and governance
insights, metrics, data points and direction of change. In addition, ESGintel
offers fund managers an internal rating on a company, a rating trend, and a
rank against sector peers. The approach ensures a targeted focus on the issues
that matter most for sustainable value creation and risk management.
This provides a holistic view on how a company's value chain is impacted in
different ways by various ESG topics, such as compensation and alignment,
health and safety, and low carbon transition/climate change.
We always try to meet with a company prior to investment. Based on our
fundamental research, including any ESG findings, we focus on truly
understanding the key drivers and, most importantly, the path to change. This
helps us better understand corporate strategy today and how this could evolve
in the future. Today, the subject of ESG is increasingly part of these
discussions, led by us.
Portfolio Construction
We aim to create a well-diversified portfolio of active positions that reflect
our assessment of the potential upside for each stock weighted against our
assessment of the risks. Sustainability and ESG factors will be assessed
alongside other fundamental drivers of valuation. The impact of any new
purchases will need to be considered at a portfolio level. How will it affect
the shape of the portfolio having regard to objectives, existing positions,
overall size of the portfolio, liquidity and conviction?
We do not seek out stocks which score well on internal or third party research
simply to reduce portfolio risk.
Ongoing Monitoring
Our fund managers and analysts continuously monitor how the stocks are
performing as well as considering possible replacements. Is the company
performing from an ESG perspective and are the valuations fairly reflecting
the progress being made or not?
How do we monitor our holdings from an ESG perspective? Again, the same
resources used during the fundamental stage are available to us. Our regular
meetings with the management teams of the companies we own provides an ideal
platform to discuss key ESG issues, which will be researched in advance. We
draw on our own knowledge as well as relevant analysis from our ESG team and
data from our previously mentioned proprietary system ESGintel which allows us
to monitor progress and improvement against sector peers. Outside of company
management meetings we constantly discuss as a team all relevant ESG issues,
either stimulated internally or from external sources.
Additional ESG analysis is carried out by the team, when warranted, on
particular companies. Such cases would be those that are more controversial,
considered to be higher risk and viewed poorly by ESG providers, resulting in
a valuation discount. We don't just look at the specific issue considered to
be higher risk either, for example the environmental risk of an oil company,
but all areas of ESG. This means undertaking extensive analysis of social and
governance policies and actions at the same time.
Challenge, Assessing & Monitoring Risk
In addition, there are two more formal ways in which our portfolios are
monitored:
There is a rigorous semi-annual review process which includes a meeting led by
the ESG team to assess how our portfolios are performing from an ESG
perspective. This ensures a circular process for identifying flags and
monitoring of improvements over time. These meetings are important in
capturing issues that have developed and evolved whilst we have been
shareholders.
There is also the `CIO challenge', a formal review meeting held between the
Henley Investment Centre's Chief Investment Officer (CIO) and each fund
manager. This review includes a full breakdown of the ESG performance using
Sustainalytics and ISS data, such as the absolute ESG performance of the
portfolio, relative performance to benchmarks, stocks exposed to severe
controversies, top and bottom ESG performers, carbon intensity and trends. The
ESG team review the ESG data and develop stock specific or thematic ESG
questions. The ESG performance of the portfolio is discussed with the CIO
using the data and the stock specific questions to analyse the fund manager's
level of ESG integration. The aim of these meetings is not to prevent a fund
manager from holding any specific stock: rather, what matters is that the fund
manager can evidence understanding of ESG issues and show that they have been
taken into consideration when building the investment case.
Climate Risk
UK Equity Portfolio
A core aspect of our philosophy on ESG issues is the concept of ESG momentum
or improving ESG performance over time. We find that companies which are
improving in terms of their ESG practices may enjoy favourable financial
performance in the longer term. As indicated by ISS Scope 1 + 2 measures,
Carbon intensity in the UK Equity Share Portfolio has decreased by 33% from
May 2022 to May 2023 and stands at 114.5. This is just 2% higher than the FTSE
All-Share Index. Looking deeper into the underlying data, reveals additional
interesting detail.
· The biggest single contributor to carbon intensity of the UK Equity Share
Portfolio (we estimate around 24% of the total ISS defined emissions) derives
from the position held in utility company SSE. As a major distributor of
electrical power in the UK, SSE at present has significant exposure to
distribution of power generated from non-renewable sources. However, it is in
our view at the very forefront of progress as an enabler of transition towards
net zero: it develops, builds and operates infrastructure needed to support
the transition, and has set out detailed and specific targets across each of
scope 1, 2 and 3*.
· As of 31 May 2023, 34 out of the 47 holdings (72%) in the UK Equity Share
Portfolio have aligned with, are aligning, or are committed to aligning with
the net zero objective by 2050.
We continue to believe that the approach to climate change, and the
philosophies behind all aspects of ESG deserve to be embedded in an investment
framework which encourages positive change.
Coupling this with a focus on valuation is, to our minds, the best way to
deliver strong investment outcomes over the long term for our clients.
Global Equity Income Portfolio
Climate change continues to be a strategic priority for Invesco, with a
commitment to the Net Zero Asset Managers initiative. Companies' climate
transition plans were the most common topic of our targeted ESG engagements
over the last twelve months. We monitor the progress made in reducing carbon
emissions (ISS Scope 1+2); between May 2022 and May 2023 the portfolio carbon
intensity increased marginally by 3%, this compares with the MSCI World Index
benchmark which reduced emissions by 25%. Despite the slight uptick in this
year's carbon intensity number, we expect to see additional net zero
commitments from the companies in which we invest, as this is the direction of
travel.
We would highlight however that the process may not be smooth. Different
regions are moving at different speeds, with Europe and the UK in front, Asia
and Emerging Markets still lagging. Larger companies are leading smaller and
mid-size companies.
As of 31 May 2023, 28 out of the 43 holdings (65%) in the portfolio have
aligned with, or are committed to aligning, with the net zero objective by
2050. All companies in our portfolio produce sustainability reports and we are
encouraging all companies that we meet to sign up to the net zero initiative,
whilst in acknowledging for some companies it may not be technically feasible
yet.
* Scope 1 and 2 are those emissions that are owned or controlled by a company.
Scope 3 refers to the indirect emissions that occur at different points in the
full range of activities undertaken in order to create the products or
services of the reporting company.
Company Specific Examples
In the selection overleaf, we highlight some of the recent engagements that we
have had with companies to give you a flavour of how active engagement can
create positive outcomes.
UK Equity Portfolio Examples
Retailer of clothing, footwear, accessories and homeware products Key ESG
issues
Rated Low Risk by Sustainalytics.
E Sustainable products, Emissions
S Working conditions, Labour rights
G No major issues
- The UK Equity team engaged with the company in conjunction with the Invesco
ESG team. The discussion centred around responsible materials, product life
cycle, sustainable sourcing and Scope 3 emissions.
- On environmental factors responsible materials were discussed and the
extent to which they are significantly more expensive. The company advised
that for some material there is no upcharge but for others, like polyester &
wool, there are. The degree of the increase varies by material and by sourcing
country.
- With regard to the performance of sustainable product lines the company
have found that this is not yet a significant driver of buyer behaviour. New
plans on product life cycle were discussed and despite it being a challenge at
present they want to be responsible and know exactly where used and recycled
goods are going.
- On balancing sustainable sourcing with working conditions, circa 97% of the
company's products come from factories graded 1-3 (1. Excellent, 2. Good and
3. Fair). Their Code of Practice team has 50 people based in 11 key sourcing
countries. They are unique in having their own people on the ground and an
in-house auditing team. With around 1,800 factories, visits are based on the
audit rating of each one. Generally speaking, each factory is visited once
every 9 months.
- On tackling Scope 3 emissions, through the Higg Index and the Sustainable
Apparel Coalition (SAC) the company is gathering data which is giving them a
greater understanding on their emissions. Through the Higg Index they have
established a UK brand forum whereby they can collaborate with other brands,
share factory data and work together to make the biggest impact.
- We will continue to engage on all of the above matters and monitor
progress. Action: position maintained
International Bank
Key ESG issues
Rated Medium Risk by Sustainalytics.
E Emissions, Net Zero transition
S No major issues
G Sustainable Finance
- Invesco met with the company as part of a regular engagement. We discussed
their introduction of a new methodology which has been developed together with
Sustainalytics for measuring financed emissions and tracking them at a
portfolio level against the goals of the Paris Agreement.
- The new methodology starts by selecting an appropriate benchmark for a
sector, which defines how financed emissions for a portfolio need to change
over time in line with the goals of the Paris Agreement. The company then
determines how their sector portfolios are performing against these
benchmarks. They estimate the emissions that their clients will produce,
determine how those emissions should be linked to the financing they provide,
and then aggregate those measurements into a portfolio-level metric. This
portfolio-level metric is then compared to the benchmark.
- The company believes that they should continue to provide finance to
clients in order to support their energy transitions where appropriate. They
will continue to refine their specific lending policies and the requirement
for clients to share information on their transition plans to determine,
client by client, whether they think they are making appropriate progress.
- The company has appointed 2 MD's who will share responsibility for
sustainable lending. Last year they appointed a CFO for Climate who has a
background in stress testing and reporting. In addition, they have put in
place a specific finance team to focus on this area. Invesco will continue to
engage to understand the effectiveness of this methodology. Action: position
maintained
Global Equity Income Portfolio Examples
A supplier of lifts and escalators
Key ESG issues
Rated Low Risk by Sustainalytics.
E Carbon emissions from production and operation of lifts
S No major issues
G No major issues
- Many lifts in older buildings are more than 30 years old, new lifts consume
60-90% less electricity than old lifts. We discussed progress being made in
improving energy efficiency, also the use of remote monitoring of
installations that can help minimise out of service times, which is particular
benefit to residents, particularly the elderly. We also raised issues around
carbon reduction targets and waste disposal in the production of the company's
products. We have also discussed the timeline of rolling out carbon neutral
maintenance services. Achievement of environmental goals form part of senior
management renumeration targets.
- Although the company scores well on employee satisfaction surveys and
female participation at senior levels of management we continue to ask
questions in relation to employee safety at work, noting several work related
accidents in 2021.
- We also discussed from a governance perspective, issues relating to
financial reporting regarding the segmentation of different business units.
Action: position maintained
A global healthcare services provider
Key ESG issues
Rated Low Risk by Sustainalytics.
E No major issues
S Political contributions and diversity
G Issues around employee pay on termination
- We spent considerable time discussing with management a number of proposals
made on the proxy agenda at their AGM.
- With regard to renumeration the company insisted they would not pay more
than 2.99 times salary and bonus in cash upon employee termination. The
company explained that it wished to retain the right to pay employees deferred
compensation in accelerated form in a limited number of circumstances such as
death, disability, or company takeover. In their view from the perspective of
the employee that would be considered normal.
- We also discussed the vexatious issue of political donations. The company
is acutely conscious around the sensitivities of donations to certain trade
associations at present due to divisive social issues in its major market. The
company is well regarded (CPA-Zicklin Index) for its transparency on political
issues and has a published guide to its policy on donations. The board are
concerned about potentially being seen to take positions on highly polarised
topics which would not be in stakeholders interests.
- We also asked about issues around diversity and inclusion. The company
feels that it has done a huge amount of work on health equity in its major
market, though more can always be done. It monitors closely the proportion of
women and people of colour in the workforce and at senior levels. Staff
surveys are regular and closely watched. We note the company has a published
equal opportunities policy and is not out of line with competitors regarding
women in senior management. Action: position maintained
Voting Policy
We review Annual General Meeting (`AGM') and Extraordinary General Meeting
(`EGM') proposals taking into account our own knowledge of the companies in
which our portfolios are invested, as well as the comments and recommendations
of proxy voting analysis providers ISS*, Glass Lewis and IVIS**. In addition,
Invesco provides proprietary proxy voting recommendations and publishes these
recommendations via its PROXYintel platform. All voting decisions remain with
the portfolio manager, however, where a portfolio manager votes against an
Invesco voting recommendation, the rationale for such decision is recorded and
available on the platform. There will be times when we will follow the
recommendations made by proxy research providers but times where we disagree
with the stance being taken.
Voting in line with management recommendations should not be seen as evidence
of a lack of engagement or challenge on our part, but rather that we believe
that the governance of the companies in which we are invested is appropriately
robust and worthy of support. There may be instances where we vote in support
of management, but the ESG performance of the company is not perfect and
issues have been identified. In this situation we would seek to engage with
the company leading up to the vote and if necessary, would have raised
concerns and likely given a time horizon or measure for improvement which, if
not met, could lead to a vote against in the future. In that respect, our
approach to governance is one of engagement and improvement.
We do not expect companies to change overnight but we do expect continual
review of governance processes and continued improvement. Further details of
how the manager has voted on holdings in the portfolio is available on the
Company's website at
www.invesco.com/uk/en/investment-trusts/invesco-selecttrust-plc.html.
A recent example of voting engagement, which concerned employee pay on
termination, political donations and diversity and inclusion is shown above,
under the global healthcare services provider case study.
* ISS - Institutional Shareholder Services .
** IVIS - Institutional Voting Information Service.
Conclusion
The regulatory landscape is rapidly evolving, which increasingly compels
organisations and investors alike to clearly demonstrate their awareness of
ESG issues in their decisions. Landmark initiatives such as the European
Union's new Sustainable Finance Disclosure Regulation (SFDR) are at the
forefront of this shift.
We believe that our approach is fair, coherent and pragmatic. Whilst we
consider ESG aspects, we are not bound by any specific ESG criteria and have
the flexibility to invest across the ESG spectrum from best to worst in class,
but we think that the principles behind ESG deserve to be embedded in an
investment framework which encourages positive change. Coupling this with a
focus on valuation is, to our minds, the best way to deliver strong investment
outcomes for our clients' long term. This reinforces our fundamental belief
that responsible investing demands a long-term view and that a
stakeholder-centric culture of ownership and stewardship is at the heart of
ESG integration.
Business Review
Purpose, Business Model and Strategy
Invesco Select Trust plc is a UK investment company with four share classes,
each of which has separate investment objectives, as set out below, and is
represented by a separate portfolio. The Company's purpose is to generate
sustainable returns for its shareholders by providing a choice of investment
strategies and the ability to switch between them, free of cost, according to
shareholders' needs. The underlying strategies are each targeted at achieving
returns corresponding with specified objectives through a disciplined
investment process. The strategy the Board follows to achieve its overall
objective and those of each share class is to set investment policy and risk
guidelines, together with investment limits, and to monitor how they are
applied. These are also set out below.
The business model the Company has adopted to achieve its objective has been
to contract investment management and administration to appropriate external
service providers. The Board has oversight of the Company's service providers,
and monitors them on a formal and regular basis. The Board has a collegiate
culture and pursues its fiduciary responsibilities with independence,
integrity and diligence, taking advice and outside views as appropriate and
constructively challenging and interacting with service providers, including
the Manager.
The principal service provider is Invesco Fund Managers Limited (`IFML' or the
`Manager'). In addition to managing the portfolios in accordance with the
Board's strategy and under its oversight, the Manager is also responsible for
providing company secretarial, marketing, accounting and general
administration services. In practice, many of these services are performed
under delegated authority by Invesco Asset Management Limited (IAML), a
company related to IFML. References to the Manager in this Annual Financial
Report should consequently be considered to include both entities.
All administrative support is provided by third parties under the oversight of
the Board. In addition to the management and administrative functions of the
Manager, the Company has contractual arrangements with Link Group to act as
registrar and The Bank of New York Mellon (International) Limited (BNYMIL) as
depositary and custodian.
Investment Policy
The Company's and respective share classes' investment objectives, investment
policies and risk and investment limits combine to form the `Investment
Policy' of the Company.
The Company
Investment Objective and Policy
The Company's investment objective is to provide shareholders with a choice of
investment strategies and policies, each intended to generate attractive
risk-adjusted returns.
The Company's share capital comprises four Share classes: UK Equity Shares,
Global Equity Income Shares, Balanced Risk Allocation Shares and Managed
Liquidity Shares, each of which has its own separate portfolio of assets and
attributable liabilities. The investment objectives, policies and risks and
limits of the portfolios for these share classes follow. With the exception of
borrowings, the limits for the Company and the four share classes are measured
at the point of acquisition of investments, unless otherwise stated.
Investment Limits of the Company
The Board has prescribed limits on the Investment Policy of the Company, which
include the following:
· no more than 15% of the gross assets of the Company may be invested in a
single investment; and
· no more than 10% of the gross assets of the Company may be invested in
other listed investment companies (excluding property companies structured as
REITs).
UK Equity Share Portfolio
Investment Objective
The investment objective of the UK Equity Portfolio is to provide shareholders
with an attractive real long-term total return, with an income that will grow
over time, by investing primarily in UK quoted equities.
Investment Policy and Risk
The UK Equity Portfolio is invested primarily in UK-quoted equities and may
also hold equity-related or fixed interest securities of UK companies across
all market sectors. The portfolio will not invest in companies which are not
listed, quoted or traded at the time of investment, although it may have
exposure to such companies where, following investment, the relevant
securities cease to be listed, quoted or traded.
The Manager invests the UK Equity Portfolio so as to maximise exposure to the
most attractive sectors and securities, within a portfolio structure that
reflects the Manager's view of the macroeconomic environment. The Manager does
not set out to manage the risk characteristics of the UK Equity Portfolio
relative to the FTSE All-Share Index (the `benchmark index') and the
investment process may result in potentially very significant over or
underweight positions in individual sectors versus the benchmark. The size of
weightings will reflect the Manager's view of the attractiveness of a security
and the degree of conviction held. If a security is not considered to be a
good investment, it will not be held in the UK Equity Portfolio, irrespective
of its weight in the benchmark index.
The Manager controls the stock-specific risk of individual securities by
ensuring that the UK Equity Portfolio is always diversified across market
sectors. In-depth and continual analysis of the fundamentals of investee
companies allows the Manager to assess the financial risks associated with any
particular security.
It is expected that, typically, the portfolio will hold between 40 and 50
securities.
The Directors believe that the use of borrowings can enhance returns to
shareholders and the UK Equity Portfolio will generally use borrowings in
pursuing its investment objective.
Investment Limits
The Board has prescribed limits on the investment policy of the UK Equity
Portfolio, which include the following:
· no more than 12% of the gross assets of the UK Equity Portfolio may be
held in a single investment;
· no more than 10% of the gross assets of the UK Equity Portfolio may be
held in other listed investment companies (excluding REITs);
· no more than 20% of the gross assets of the UK Equity Portfolio may be
held in overseas assets; and
· borrowings may be used to raise equity exposure up to a maximum of 25% of
the net assets of the UK Equity Portfolio when it is considered appropriate.
Global Equity Income Share Portfolio
Investment Objective
The investment objective of the Global Equity Income Portfolio is to provide
an attractive and growing level of income return and capital appreciation over
the long term, predominantly through investment in a diversified portfolio of
equities worldwide.
Investment Policy and Risk
The portfolio will be invested predominantly in a portfolio of listed, quoted
or traded equities worldwide, but may also hold other securities from time to
time including, inter alia, fixed interest securities, preference shares,
convertible securities and depositary receipts. Investment may also be made in
regulated or authorised collective investment schemes. The portfolio will not
invest in companies which are not listed, quoted or traded at the time of
investment, although it may have exposure to such companies where, following
investment, the relevant securities cease to be listed, quoted or traded. The
Manager will at all times invest and manage the portfolio's assets in a manner
that is consistent with spreading investment risk, but there will be no rigid
industry, sector, region or country restrictions.
The portfolio may utilise derivative instruments including index-linked notes,
contracts for differences, covered options and other equity-related derivative
instruments for efficient portfolio management and investment purposes. Any
use of derivatives for investment purposes will be made on the basis of the
same principles of risk spreading and diversification that apply to the
portfolio's direct investments, as described above.
It is expected that, typically, the portfolio will hold between 40 and 55
securities.
The Directors believe that the use of borrowings can enhance returns to
shareholders, and the Global Equity Income Portfolio may use borrowings in
pursuing its investment objective.
The Company's foreign currency investments will not be hedged to sterling as a
matter of general policy. However, the Manager may employ currency hedging,
either back to sterling or between currencies (i.e. cross hedging of portfolio
investments).
Investment Limits
The Board has prescribed the following limits on the investment policy of the
Global Equity Income Portfolio:
· no more than 20% of the gross assets of the Global Equity Income Portfolio
may be invested in fixed interest securities;
· no more than 10% of the gross assets of the Global Equity Income Portfolio
may be held in a single investment;
· no more than 10% of the gross assets of the Global Equity Income Portfolio
may be held in other listed investment companies (excluding REITs); and
· borrowings may be used to raise equity exposure up to a maximum of 20% of
the net assets of the Global Equity Income Portfolio, when it is considered
appropriate.
Balanced Risk Allocation Share Portfolio
Investment Objective
The investment objective of the Balanced Risk Allocation Portfolio is to
provide shareholders with an attractive total return in differing economic and
inflationary environments, and with low correlation to equity and bond market
indices by gaining exposure to three asset classes: debt securities, equities
and commodities.
Investment Policy and Risk
The portfolio utilises two main strategies: the first seeks to balance the
risk contribution from each of three asset classes (equities, bonds and
commodities), with the aim of reducing the probability, magnitude and duration
of capital losses, and the second seeks to shift tactically the allocation
among the assets with the aim of improving expected returns.
The portfolio is constructed so as to achieve appropriate diversity and to
balance risk by asset class (bonds, equities and commodities) and by asset
within each asset class. Neutral risk weighting is achieved when each asset
class contributes an equal proportion of the total portfolio risk and each
asset contributes an equal proportion of the total risk for its respective
asset class. The Manager is permitted to actively vary asset class weightings,
subject to a maximum of 150% and a minimum of 50% of each asset class's
neutral weight. The Manager is also permitted to actively vary individual
asset weightings, provided the asset class guidelines are not violated. Asset
weights may not be less than zero (short) and will not exceed twice the
neutral weight. For the purposes of the maximum weighting only, commodity
exposures are aggregated and measured by commodity complex rather than by
individual assets.
The portfolio will be mainly invested directly in highly liquid and
transparently priced exchange-traded futures contracts, with cash and cash
equivalents being held as collateral. However, the portfolio may also be
invested in equities, equity-related securities and debt securities (including
floating rate notes). Financial derivative instruments (including but not
limited to futures and total return swaps) are used only to achieve long
exposure to the three asset classes. The portfolio may also use financial
derivative instruments, including currency futures and forwards, for efficient
portfolio management, hedging and investment purposes. Financial derivative
instruments will not be used to create net short positions in any asset class.
The derivatives portfolio will typically comprise between 20 and 33 investment
positions.
It is expected that the portfolio's investments will mainly be denominated in
sterling. Any non-sterling derivative investments may be hedged back into
sterling at the discretion of the Manager when it is economic to do so.
Investment Limit
The Board has prescribed the following limits on the investment policy of the
Balanced Risk Allocation Portfolio:
· the aggregate notional amount of financial derivative instruments
positions may not exceed 250% of the net assets of the Balanced Risk
Allocation Portfolio; and
· no more than 10% of the gross assets of the Balanced Risk Allocation
Portfolio may be held in other listed investment companies.
Managed Liquidity Share Portfolio
Investment Objective
The investment objective of the Managed Liquidity Portfolio is to produce an
appropriate level of income return combined with a high degree of security.
Investment Policy and Risk
The Managed Liquidity Portfolio invests mainly in a range of sterling-based or
related high quality debt securities and similar assets (which may include
transferable securities, money market instruments, warrants, collective
investment schemes and deposits), either directly or indirectly through
authorised funds investing in such instruments, including funds managed
by Invesco.
The Managed Liquidity Portfolio generally invests in funds authorised as UCITS
schemes (Undertakings for Collective Investments in Transferable Securities,
being open ended retail investment funds), which are required under governing
regulations to provide a prudent spread of risk. In the event that the Managed
Liquidity Portfolio is invested directly in securities and instruments, the
Manager will observe investment restrictions and risk diversification policies
that are consistent with UCITS regulations.
Investment Limits
The Board has prescribed limits on the investment policy of the Managed
Liquidity Portfolio, which include the following:
· no more than 10% of the gross assets of the Managed Liquidity Portfolio
may be held in a single investment, other than authorised funds or high
quality sovereign debt securities; and
· no more than 5% of the gross assets of the Managed Liquidity Portfolio may
be held in unquoted investments, other than authorised funds.
Investors should note that the Managed Liquidity Shares are not designed to
replicate the returns or other characteristics of a bank or building society
deposit or money market fund. In particular, the portfolio will typically
contain some assets with a greater residual maturity, and as a whole will have
greater weighted average maturity, than is prescribed by regulation governing
money market funds. As such, the portfolio may be more sensitive to and
impacted by interest rate movements and other factors.
Key Performance Indicators
The Board reviews the performance of the Company by reference to a number of
Key Performance Indicators, at either a Company or portfolio level, which
include the following:
· Investment Performance
· Revenue and Dividends
· Discount/Premium
· Ongoing Charges
Investment Performance
To assess investment performance the Board monitors the net asset value (NAV)
performance of the individual Share classes relative to that of benchmark
indices it considers to be appropriate. However, given the requirements and
constraints of the investment objectives and policies followed, no index can
be expected to fully represent the performance that might reasonably be
expected from any one or all of the Company's Share classes.
The NAV total return performance of each of the portfolios over the year to 31
May 2023 and of relevant benchmark indices were as follows:
UK Equity Portfolio -2.6%
FTSE All-Share Index 0.4%
Global Equity Income Portfolio 9.8%
MSCI World Index (£) 3.8%
Balanced Risk Allocation Portfolio -11.4%
Composite Benchmark -17.1%
ICE BoA Merrill Lynch 3 month LIBOR plus
5% per annum 7.5%
Managed Liquidity Portfolio 3.5%
Source: Refinitiv.
Other performance periods, together with share price total returns, are shown
on pages 11, 19, 27 and 34.
Further details on the definition and calculation of total returns can be
found in the Glossary and Alternative Performance Measures on pages 116 to 119
of the financial report.
Revenue and Dividends
The Directors review revenue estimates and prospective dividend levels at each
Board meeting. For the equity share classes the Directors have become more
focused on total return since sanctioning contributions to dividends from
capital, but dividends paid continue to be mostly constituted from revenue and
revenue is an important element of overall portfolio returns.
UK Equity Shares
Revenue earnings per Share for the UK Equity Share Portfolio was 6.40p (2022:
6.00p), based on net revenue for the year of £4,541,000 (2022: £4,697,000),
which included £92,000 (2022: £438,000) of non-recurring special dividends.
Dividend Policy:
It is the Board's policy that the Directors will declare four dividends in
respect of each accounting year (with payment in the month following)
comprising of three equal interim dividends, declared in July, October and
January, and a `wrap-up' fourth interim dividend, declared in April. Depending
on the level of income received in each quarter, and in the year, these
four dividends may be enhanced with contributions from capital profits to
achieve the Board's target level. In recent years the Directors have set a
target of at least maintaining, in the absence of unforeseen circumstances,
the level of annual UK Equity dividends per share from year to year. The
Directors did not set dividend targets for the year to 31 May 2023 due to the
ongoing uncertainty to income flows, due in particular to the risk of entering
a period of global recession. Having considered the income expectations of the
UK Equity Share Portfolio for the year to 31 May 2024, the Directors have set
a target of at least maintaining the dividend level paid on the UK Equity
Shares for the year to 31 May 2023.
Dividends Declared:
The Directors have declared and paid four interim dividends for the year ended
31 May 2023 totalling 7.05p per UK Equity Share (2022: 6.70p) of which 6.40p
(2022: 6.00p) was met from revenue earned in the year. The aggregate of
dividends paid in respect of the year was £4,981,000 (2022: £5,213,000).
A first interim dividend for the year to 31 May 2024 of 1.60p was declared on
13 July 2023. In the absence of unforeseen circumstances, and in accordance
with the dividend policy set out above, the Board intends for this to set the
level for the next two quarterly dividends.
Global Equity Income Shares
Revenue earnings per Share for the Global Equity Income Share Portfolio was
5.20p (2022: 4.85p), based on net revenue for the year of £1,299,000 (2022:
£1,197,000), which included £1,000 (2022: £149,000) of non-recurring
special dividends.
Dividend Policy:
It is the Board's policy that the Directors will declare four dividends in
respect of each accounting year (with payment in the month following)
comprising of three equal interim dividends, declared in July, October and
January, and a `wrap-up' fourth interim dividend, declared in April. Depending
on the level of income received in each quarter, and in the year, these
four dividends may be enhanced with contributions from capital profits to
achieve the Board's target level. In recent years the Directors have set a
target of at least maintaining, in the absence of unforeseen circumstances,
the level of annual Global Equity Income dividends per share from year to
year. The Directors did not set dividend targets for the year to 31 May 2023
due to the ongoing uncertainty to income flows, due in particular to the risk
of entering a period of global recession. Having considered the income
expectations of the Global Equity Income Portfolio for the year to 31 May
2024, the Directors have set a target of at least maintaining the dividend
level paid on the Global Equity Income Shares for the year to 31 May 2023.
Dividends Declared:
The Directors have declared and paid four interim dividends for the year ended
31 May 2023 totalling 7.20p (2022: 7.15p) per Global Equity Income Share, of
which 5.20p (2022: 4.85p) was met from revenue earned in the year. The
aggregate of dividends paid in respect of the year was £1,791,000 (2022:
£1,757,000).
A first interim dividend for the year to 31 May 2024 of 1.60p was declared on
13 July 2023. In the absence of unforeseen circumstances, and in accordance
with the dividend policy set out above, the Board intends for this to set the
level for the next two quarterly dividends.
Balanced Risk Allocation Shares
In order to maximise the capital return on the Balanced Risk Allocation
Shares, the Directors only intend to declare dividends on the Balanced Risk
Allocation Shares annually when the level of income allows and having taken
into account the dividends paid on the other share classes. The Directors
declared and paid one interim dividend for the year ended 31 May 2023
totalling 1.00p (2022: nil). The portfolio recorded a net revenue return of
£141,000 in the year (2022: £44,000).
A first interim dividend and a special dividend for the year to 31 May 2024
of 1.00p and 2.00p respectively were declared on 13 July 2023.
Managed Liquidity Shares
The Board only intends to declare dividends on the Managed Liquidity Share
Portfolio annually when the level of income available allows and having taken
into account the dividends paid on the other share classes. The Directors
declared and paid one interim dividend for the year ended 31 May 2023
totalling 1.00p (2022: 1.00p). The Managed Liquidity Portfolio recorded a net
revenue return for the year of £13,000 (2022: loss of £1,000).
A first interim dividend for the year to 31 May 2024 of 1.00p was declared on
13 July 2023 and this will be funded from current year revenue. It is
unlikely, given the quantum of revenue being earned, that future dividends
will be more frequent than annual and they could be less frequent.
Discount
The Company has a discount control policy in place for all four share
classes, whereby the Company offers to issue or buy back shares of all classes
with a view to maintaining the market price of the shares at close to their
respective net asset values and, by so doing, avoid significant overhangs or
shortages in the market. It is the Board's policy to buy back shares and to
sell shares from treasury on terms that do not dilute the net asset value
attributable to existing shareholders at the time of the transaction. The
Board reviews the buy back parameters from time to time taking into account
current market conditions and other factors and instructs the brokers
accordingly.
The operation of this policy is dependent upon the authorities to buy back and
issue shares being renewed by shareholders. Notwithstanding the intended
effect of this policy, there can be no guarantee that the Company's shares
will trade at close to their respective net asset values. Shareholders should
also be aware that there is a risk that this discount policy may lead to
a reduction in the size of the Company over time.
The Board and the Manager closely monitor movements in the Company's share
prices and dealings in the Company's shares. Share movements in the year are
summarised on page 48. At 31 May 2023, the share prices, net asset values
(`NAV') and the discounts of the four share classes were as follows:
2023 2022
Net Asset Value (Pence) Share Price (Pence) Net Asset Value (Pence) Share Price (Pence)
Share Class Discount (1) Discount (1)
UK Equity 182.11 159.50 (12.4)% 194.35 175.00 (10.0)%
Global Equity Income 265.53 232.00 (12.6)% 249.00 229.00 (8.0)%
Balanced Risk Allocation 149.56 131.50 (12.1)% 169.87 154.50 (9.0)%
Managed Liquidity 109.51 91.00 (16.9)% 106.92 97.00 (9.3)%
(1) Further details on the definition and calculation of the discount can be
found in the Glossary and Alternative Performance Measures on pages 116 to 119
of the financial report.
The charts on pages 47 and 48 show the premium/(discount) at which the shares
traded over the two years to 31 May 2023. The shares of all four portfolios
have generally traded in a range of 3% premium to 25% discount. As can be
seen on pages 47 and 48, given the macro-economic environment and ongoing
geopolitical events, including the conflict in Ukraine, the volatility in
markets has led to higher levels of discount being seen throughout the period.
Source: Refinitiv.
Ongoing Charges
The expenses of managing the Company are reviewed by the Board at every
meeting. The Board aims to minimise the ongoing charges figure which provides
a guide to the effect on performance of all annual operating costs of the
Company. The ongoing charges figure is calculated by dividing the annualised
ongoing charges, including those charged to capital, by the average daily net
asset value during the year, expressed as a percentage.
Further details on the definition and calculation of ongoing charges can be
found in the Glossary and Alternative Performance Measures on pages 116 to 119
of the financial report.
At the year end the ongoing charges figure of the Company and that for the
different share classes were as follows:
Global Balanced
UK Equity Risk Managed
Company Equity Income Allocation Liquidity
2023 0.83% 0.81% 0.82% 1.16% 0.60%
2022 0.76% 0.74% 0.78% 1.09% 0.45%
The above excludes rebates received by the Managed Liquidity Portfolio. In
addition to inflationary effects, shrinkage from buybacks in connection with
the discount control policy will tend to cause the ongoing charge percentages
to gradually increase.
Financial Position
Assets and Liabilities
The Company's balance sheet on page 85 shows the assets and liabilities at the
year end. Details of the Company's borrowing facility are shown in note 13 of
the financial statements on page 96, with interest paid (finance costs) in
note 5.
Owing to the readily realisable nature of the Company's assets, cash flow does
not have the same significance as for an industrial or commercial company. The
Company's principal cash flows arise from the purchases and sales of
investments and the income from investments against which must be set the
costs of borrowing and management expenses.
Borrowing Policy
Borrowing policy is under the control of the Board, which has established
effective parameters for the portfolios. Borrowing levels are regularly
reviewed. As part of the Company's Investment Policy, the approved borrowing
limits are 25% of the net assets of the UK Equity Portfolio and 20% of net
assets of the Global Equity Income Portfolio. The Balanced Risk Allocation
Portfolio does not use borrowings, but is geared by means of the derivative
instruments used to implement its investment policy. The Managed Liquidity
Portfolio does not use borrowings.
Issued Share Capital
All share classes have a nominal value of 1 penny per share.
Authorities given to the Directors at the AGM on 4 October 2022 to allot
shares, disapply statutory pre-emption rights and buy back shares will expire
at the forthcoming AGM. The following table summarises the Company's share
capital at the year end and movements during the year.
Global Balanced
UK Equity Risk Managed
Number of shares Equity Income Allocation Liquidity
Shares held at the year end
- excluding treasury 68,881,153 25,135,742 4,138,995 1,251,360
- held in treasury 38,515,775 16,776,159 6,547,218 9,393,678
- % of issued shares held in treasury 35.86 40.03 61.27 88.24
Movements during the year:
- (decrease)/increase arising from conversions (1,119,504) 719,958 78,057 93,106
- shares bought back into treasury (3,772,000) (740,000) (110,000) (80,000)
- % of issued shares bought back during year 3.51 1.77 1.03 0.75
- average price thereon 165.5p 224.9p 132.9p 94.8p
- nominal value of shares bought back £37,720 £7,400 £1,100 £800
Since the year end no further shares have been bought back into treasury.
Further details on net changes in issued share capital are set out in note 14
to the financial statements on pages 97 and 98. No treasury shares were
cancelled during the year.
Current and Future Developments
As part of the Company's overall strategy, the Company seeks to manage its
affairs so as to maximise returns for shareholders. The Board also has a
longer-term objective, consistent with the business combination with Invesco
Income Growth Trust plc in April 2021, to increase the size of the Company in
the belief that increasing the assets of the Company in this way will make the
Company's shares more attractive to investors and improve the liquidity of the
shares.
Details of trends and factors likely to affect the future development,
performance and position of the Company's business can be found in the
Chairman's Statement and the Portfolio Managers' reports. Further details as
to the risks affecting the Company are set out under `Principal Risks and
Uncertainties' below.
Principal Risks and Uncertainties
The Audit Committee regularly undertakes a robust assessment of the risks the
Company faces, including those that would threaten its business model, future
performance, solvency, reputation or liquidity and emerging risks, on behalf
of the Board (see Audit Committee Report on pages 68 and 69). In carrying out
this assessment, the Audit Committee together with the Manager, have
considered emerging risks such as geopolitical risks, evolving cyber threats
and ESG, including climate related risks.
The following are considered to be the most significant risks, after
consideration of mitigating factors, to the Company and to shareholders in
relation to their investments in the Company. Further details of risks and
risk management policies as they relate to the financial assets and
liabilities of the Company are detailed in note 17 to the financial
statements.
Category and Principal Risk Description Mitigating Procedures and Controls Risk trend during the year
Strategic Risk
Investment Objectives and Attractiveness to Investors There is no guarantee that the Investment Policy of the Company and of each portfolio will provide the returns The Board monitors the share registers and the performance of the Company and each portfolio. It has established a structure offering a range of options for investors and has set guidelines to ensure that the Investment Policy of the Company and each portfolio is pursued by the Manager. ► Unchanged
sought by the Company. There can be no guarantee, therefore, that the Company will achieve its investment objectives or that the shares will continue to meet investors'
needs (for example if the Company fails to adapt to changes in investor demand including in relation to ESG and climate change). As a result the Company may become
unattractive to investors, leading to decreased demand for its shares and a widening discount.
Market Movements and Portfolio Performance Individual portfolio performance is substantially dependent on the performance of the securities (including derivative The performance of the Manager is carefully monitored by the Board and the continuation of the Manager's mandates is reviewed each year. The Board has established guidelines to ensure that the investment policies of each class of share are pursued by the Manager. For a fuller discussion of the economic and market conditions facing the Company and the current and future performance of the different portfolios of the Company, please see both the Chairman's Statement on pages 6 to 9 and the Portfolio Managers' reports starting on pages 10 to 38. The Company has a nil-valued holding in Sberbank, a Russian bank, but no other direct investments in Russia or other holdings with significant links to Russia. ▲ Increased
instruments) held within the portfolio. The prices of these securities are influenced by many factors including the general health of regional and worldwide economies;
interest rates; inflation; government policies; industry conditions; political and diplomatic events; tax laws; environmental laws; and by the demand from investors. The
current conflict in Ukraine has had an impact on the global economy, ranging from decreases to the supply (and/or increases to the costs) of goods to increases (and
increased volatility) in energy and commodity prices and inflation. In addition, the portfolios' investments are subject to risks arising from inflation and rising
interest rates. This was driven by the knock-on effects of the ongoing Covid-19 pandemic and other geopolitical tensions and uncertainties which have impacted global
supply chains. These risks represent the potential loss the portfolio might suffer through holding investments in the face of negative market movements. The Manager
strives to maximise the total return from the portfolios, but the investments held are influenced by market conditions and the Board acknowledges the external influences
on the performance of each portfolio. Further risks specifically applicable to the Balanced Risk Allocation Shares are set on page 52 below.
Risks Applicable to the Company's Shares Shares in the Company are designed to be held over the long-term and may not be suitable as short-term investments. There can be The Board has adopted a discount control policy that applies to all share classes and the Board and the Manager monitor the market rating of each share class. While it is the intention of the Directors to pay dividends to holders of the UK Equity, Global Equity Income and Managed Liquidity Shares, this will be affected by the returns achieved by the respective portfolios and the dividend policy adopted by the Board. Accordingly, the amount of dividends paid to shareholders may fluctuate. Any change in the tax or accounting treatment of dividends received or other returns may also affect the level of dividend paid on the shares in future years. The Directors have resolved, in the absence of unforeseen circumstances, to supplement revenue with capital profits in order to pay equity portfolio dividends at levels set by the Board (see pages 46 and 47). ► Unchanged
no guarantee that any appreciation in the value of the Company's shares will occur and investors may not get back the full value of their investments. Owing to the
potential difference between the mid-market price of the shares and the prices at which they are sold, there is no guarantee that their realisable value will reflect
their mid-market price. The market value of a share, as well as being affected by its net asset value (NAV), is also influenced by investor demand, its dividend yield,
where applicable, and prevailing interest rates, amongst other factors. As such, the market value of a share can fluctuate and may not reflect its underlying NAV. Shares
may therefore trade at discounts to their NAVs. Past performance of the Company's shares is not necessarily indicative of future performance.
Viability and Compulsory Conversion of a Class of Share It is possible that through poor performance, market sentiment, or otherwise, lack of demand for one of the The Board monitors share conversions and portfolio sizes and liaises with the Manager on the continued viability of each share class. The Board has received assurances from the Manager that the size of the portfolio is not critical to the Manager being able to continue to offer its investment management services in respect of any of the Company's four portfolio strategies. If at any time the Board considers that the listing of any class of share on the Official List is likely to be cancelled and the loss of such listing would mean that the Company would no longer be able to qualify for approval as an investment trust under section 1158 of the Corporation Tax Act 2010, the Board may serve written notice on the holders of the relevant shares requiring them to convert their shares into another share class. ► Unchanged
Company's share classes could result in the relevant portfolio becoming too small to be viable. The continued listing on the Official List of each class of share is
dependent on at least 25% of the shares in that class being held in public hands. This means that if more than 75% of the shares of any class were held by, inter alia,
the Directors, persons connected with Directors or persons interested in 5% or more of the relevant shares, the listing of that class of share might be suspended or
cancelled. The Listing Rules state that the FCA may allow a reasonable period of time for the Company to restore the appropriate percentage if this rule is breached, but
in the event that the listing of any class of shares were cancelled the Company would lose its investment trust status.
Liability of a Portfolio for the Liabilities of Another Portfolio The Directors intend that, in the absence of unforeseen circumstances, each portfolio will effectively operate as if it were a stand-alone company. However, investors should be aware of the following factors: · As a matter of law, the Company is a single entity. Therefore, in the event that any of the portfolios has insufficient funds or assets to meet all of its liabilities, on a winding-up or otherwise, such a shortfall would become a liability of the other portfolios and would be payable out of the assets of the other portfolios in such proportions as the Board may determine; and · The Companies Act 2006 prohibits the Directors from declaring dividends in circumstances where, following the distribution, the Company's assets would represent less than one and a half times the aggregate of its liabilities or the amount of net assets would be less than the aggregate of its share capital and undistributable reserves. If the Company were to incur material liabilities in the future, a significant fall in the value of the Company's assets as a whole may affect the Company's ability to pay dividends on a particular class of share, even though there are distributable profits attributable to the relevant portfolio. ► Unchanged
Gearing Borrowing will amplify the effect on shareholders' funds of gains and losses on the underlying securities. Whilst the use of borrowings by the Company should Gearing levels of the different portfolios will change from time to time in accordance with the respective Portfolio Managers' assessments of risk and reward. The Manager assesses the exposure to gearing on a regular basis, including the level of borrowings and covenants of the credit facility. The Balanced Risk Allocation Portfolio may also be geared (by up to 250%, according to the investment policy set out on page 45) by means of the derivative instruments in which it invests. This is discussed separately below, under the heading: Additional Risks Applicable to Balanced Risk Allocation Shares. The Manager assesses the exposure to gearing on a regular basis, including the level of borrowings and covenants of the credit facility. ► Unchanged
enhance the total return on a particular class of share where the return on the underlying securities is rising and exceeds the cost of borrowing, it will have the
opposite effect where the underlying return is falling, further reducing the total return on that share class. Similarly, the use of gearing by investment companies or
funds in which the Company invests increases the volatility of those investments. The Company has a £40 million 364 day multicurrency revolving credit facility and there
is no guarantee that these facilities will be renewed at maturity or on terms acceptable to the Company. If it were not possible to renew these facilities or replace them
with one from another lender, the amounts owing by the Company would need to be funded by the sale of securities.
Hedging Where hedging is used there is a risk that the hedge will not be effective. The Company may use derivatives to hedge its exposure to currency or other risks and for the purpose of efficient portfolio management. There may be a correlation between price movements in the underlying securities, currency or index, on the one hand, and price movements in the investments, which are the subject of the hedge, on the other hand. In addition, an active market may not exist for a particular hedging derivative instrument at any particular time. ► Unchanged
Regulatory and Tax Related The Company is subject to various laws and regulations by virtue of its status as a public limited investment company registered under the The Manager reviews the level of compliance with the Corporation Tax Act 2010 and other financial regulatory requirements on a daily basis. All transactions, income and expenditure are reported to the Board. The Board regularly considers the risks to which the Company is exposed, the measures in place to control them and the potential for other risks to arise. The Board ensures that satisfactory assurances are received from service providers. The depositary and the Manager's compliance and internal audit officers report regularly to the Company's Audit Committee. The risks and risk management policies and procedures as they relate to the financial assets and liabilities of the Company are also detailed in note 17 to the financial statements. ► Unchanged
Companies Act 2006, its status as an investment trust and its listing on the London Stock Exchange. Loss of investment trust status could lead to the Company being
subject to UK Capital Gains Tax on the sale of its investments. A serious breach of other regulatory rules could lead to suspension from the London Stock Exchange, a fine
or a qualified Audit Report. Other control failures, either by the Manager or any other of the Company's service providers, could result in operational or reputational
problems, erroneous disclosures or loss of assets through fraud, as well as breaches of regulations.
Additional Risks Applicable to Balanced Risk Allocation Shares The use of financial derivative instruments, in particular futures, forms part of the investment policy and The Manager actively seeks the most liquid means of obtaining the required exposures. The financial derivative instruments used for the strategy are geared instruments and the aggregate notional exposure will usually exceed the net asset value of the portfolio. Whilst this could result in greater fluctuations in the net asset value, and consequently the share price, the use of leverage is normally necessary to achieve the target volatility required to meet the return objective. The degree of leverage inherent in futures trading potentially means that a relatively small price movement in a futures contract may result in an immediate and substantial loss and it would be necessary to increase the collateral held at the clearing broker to cover such loss. This is mitigated by the Company not using financial derivative instruments to create net short positions in any asset class combined with holding cash balances sufficient to meet collateral requirements. ► Unchanged
strategy of the Balanced Risk Allocation Portfolio. The degree of leverage inherent in futures trading potentially means that a relatively small price movement in a
futures contract may result in an immediate and substantial loss to the portfolio. The portfolio's ability to use these instruments may be limited by market conditions,
regulatory limits and tax considerations. The absence of a liquid market for any particular instrument at any particular time may inhibit the ability of the Manager to
liquidate a financial derivative instrument at an advantageous price.
Third Party Service Providers Risk
Reliance on Third Party Service Providers The Manager may be exposed to reputational risks. In particular, the Manager may be exposed to the risk that litigation, Third-party service providers are subject to ongoing monitoring by the Manager and the Company. The Manager reviews the performance of all third-party providers regularly through formal and informal meetings. The Audit Committee reviews regularly the performance and internal controls of the Manager and all third-party providers through audited service organisation control reports, together with updates on information security, the results of which are reported to the Board. The Manager's business continuity plans are reviewed on an ongoing basis and the Directors are satisfied that the Manager has in place robust plans and infrastructure to minimise the impact on its operations so that the Company can continue to trade, meet regulatory obligations, report and meet shareholder requirements. The Board receives regular update reports from the Manager and third-party service providers on business continuity processes and has been provided with assurance from them all insofar as possible that measures are in place for them to continue to provide contracted services to the Company. ► Unchanged
misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its reputation. Any damage to the reputation of the
Manager could result in potential counterparties and third parties being unwilling to deal with the Manager and by extension the Company. This could have an adverse
impact on the ability of the Company to successfully pursue its Investment Policy. The Company has no employees and the Board comprises non-executive directors only. The
Company is therefore reliant upon the performance of third-party service providers for its executive function and service provisions. The Company's operational structure
means that all cyber risk (information and physical security) arises at its third-party service providers, including fraud, sabotage or crime against the Company. The
Company's operational capability relies upon the ability of its third-party service providers to continue working throughout the disruption caused by a major event such
as the Covid-19 pandemic. Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a
materially detrimental impact on the operation of the Company and could affect the ability of the Company to successfully pursue its investment policy. The Company's main
service providers, of which the Manager is the principal provider, are listed on page 115. The Manager may be exposed to reputational risks. In particular, the Manager
may be exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its
reputation. Damage to the reputation of the Manager could potentially result in counterparties and third parties being unwilling to deal with the Manager and by extension
the Company, which carries the Manager's name. This could have an adverse impact on the ability of the Company to pursue its investment policy successfully.
Viability Statement
The Company is an investment company which operates as a collective investment
vehicle, designed and managed for long term investment. The Board considers
long term for this purpose to be at least three years and so has assessed the
Company's viability over this period. However, the life of the Company is not
intended to be limited to that or any other period.
In assessing the viability of the Company the Board considered the principal
and emerging risks to which it is exposed, as set out on pages 49 to 53,
together with mitigating factors. The risks of failure to meet the Company's
and the portfolios' investment objectives, contributory market and investment
risks and the challenges of lack of scale have been considered to be of
particular importance. The Board also took into account the capabilities of
the Manager and the varying market conditions already experienced by the
Company since its launch in 2006, including the impact of the Covid-19
pandemic on global economies and the ongoing conflict in Ukraine. Despite the
disruption to markets from these and other more recent geopolitical and
macro-economic events, the Directors remain confident that the Company's
investment strategies will continue to serve shareholders well over the longer
term. On the question of scale, the Board has also concluded that if an
individual portfolio became too small it should not cause the Company itself
to be unviable.
In terms of financial risks to viability, materially all of the investments
comprising the portfolios are readily realisable. The equity portfolios also
produce a stream of dividend income, which may fluctuate but which the Board
expects to continue. The Company has no long term liabilities and the total
value of the portfolios more than covers the value of the Company's short term
liabilities and annual operating costs. In arriving at this assessment, the
Board considered stressed scenario-testing for both income and loan covenants;
borrowing structure; level of gearing; and the liquidity of the portfolios.
Consequently, there appears little to no prospect of the Company not being
able to meet its financial obligations as they fall due in the next
three years.
Based on the above, the Board has a reasonable expectation that the Company
will be able to continue in operation and meet its liabilities as they fall
due over the three-year period of their assessment.
Audit Committee Report
The audit committee report required by the AIC Corporate Governance Code is
set out on pages 68 and 69. There are no areas of concern in relation to
the financial statements to bring to the attention of shareholders.
Duty to Promote the Success of the Company (s.172)
The Directors have a statutory duty under section 172 of the Companies Act
2006 to promote the success of the Company whilst also having regard to
certain broader matters, including the need to engage with employees,
suppliers, customers and others, and to have regard to their interests. The
Company has no employees and no customers in the traditional sense and in
accordance with the Company's nature as an investment trust, the Board's
principal concern has been, and continues to be, the interests of the
Company's shareholders taken as a whole. In doing so, it has due regard to the
impact of its actions on other stakeholders including the Manager, other
third-party service providers and the impact of the Company's operations on
the community and the environment which are all taken into account during all
discussions and as part of the Board's decision making.
The Board is committed to maintaining open channels of communication and
engagement with stakeholders in a manner which they find most meaningful. The
table below sets out how the Board engages with each of its key stakeholders:
Stakeholder Key considerations and engagement
Shareholders - continued shareholder support and engagement are important to the business and the delivery of its long-term strategy. Further details of our strategy can be found on pages 44 to 46. Shareholder relations are given high priority by the Board and the Manager. The prime means by which the Company communicates with shareholders are the annual and half-yearly financial reports, which aim to provide shareholders with a full understanding of
the Company's activities and its results. This information is supplemented by daily publication of the NAVs of the Company's shares via the London Stock Exchange, ad hoc regulatory announcements, monthly factsheets and other information on the Manager's
website www.invesco.com/uk/en/investment-trusts/invesco-select-trust-plc.html, including pre-investment information, Key Information Document (`KID'), shareholder circulars, portfolio disclosures, conversion forms and instructions, Stock Exchange
announcements, schedule of matters reserved for the Board, terms of reference of Board Committees, Directors' letters of appointment, the Company's share price and proxy voting results. The Chairman and Directors welcome contact with shareholders. There is
a regular dialogue between the Manager and individual major shareholders to discuss aspects of investment performance, governance and strategy and to listen to shareholder views in order to help develop a balanced understanding of their issues and
concerns. The Company's corporate broker, Winterflood Securities Limited, is also consulted. General presentations to institutional shareholders and analysts take place throughout the year. All meetings between the Manager and institutional shareholders
are reported to the Board. It is the intention of the Board that the annual financial report and the notice of the AGM be issued to shareholders so as to provide at least twenty working days' notice of the AGM. Shareholders wishing to lodge questions in
advance of the AGM are invited to do so in writing to the Company Secretary at the address given on page 115.
The Manager - the Manager's performance is critical for the Company to successfully deliver its investment strategy and meet its objective to provide shareholders with consistent long-term returns. Further details of the Portfolio Managers investment approach can be found in the Portfolio Manager Reports on pages 13 to 36. The Board engages with the Manager at every Board meeting and reviews the Company's relationships with other service providers, such as the registrar, depositary and custodian, at least annually. During the year the most significant engagement was with the
Manager and, in particular the individual Portfolio Managers. At every Board meeting the Directors receive an investor relations update from the Manager, which details any significant changes in the Company's shareholder register, shareholder feedback, as
well as notifications of any publications or press articles. Maintaining a close and constructive working relationship with the Manager is crucial as the Board and the Manager both aim to achieve consistent, long-term returns in line with the Company's
investment strategy. Important components in the collaboration with the Manager, representative of the Company's culture are: - Encouraging an open discussion with the Manager, allowing time and space for original and innovative thinking; - Recognising
that the interests of shareholders and the Manager are, for the most part, well aligned, adopting a tone of constructive challenge, balanced with robust negotiation of the Manager's terms of engagement if those interests should not be fully united; - The
regular review of underlying strategic and investment objectives; - Drawing on Directors' individual experience and knowledge to support and challenge the Manager in its monitoring of portfolio companies and engagement with its investee companies; and -
Willingness to make the Directors' experience available to support and challenge the Manager in the sound long-term development of its business and resources, recognising that the long-term health of the Manager's business is in the interests of
shareholders in the Company.
Third-party Service Providers - in order to function as an investment trust with a premium listing on the London Stock Exchange, the Company relies on a diverse range of reputable advisers for support in meeting all relevant obligations. The Board through the Manager maintains regular contact with its key external service providers and receives regular reporting from them, both through the Board and committee meetings, as well as outside of the regular meeting cycle. Their advice, as well
as their needs and views are routinely taken into account. The Board (through the Management Engagement Committee) formally assesses the third-party service providers' performance, fees and continuing appointment annually to ensure that the key service
providers continue to function at an acceptable level and are appropriately remunerated to deliver the expected level of service. The Audit Committee reviews and evaluates the financial reporting control environments in place at each service provider.
There have been no material changes to the level of service provided by the Company's third-party suppliers as a result of the Covid-19 pandemic.
Investee Companies - the Board recognises the importance of good stewardship and communication with investee companies in meeting the Company's investment objective and strategy. On the Company's behalf the Portfolio Managers engage with investee companies, particularly in relation to ESG matters and shares held in the portfolio are voted at general meetings. Examples of the UK Equity and Global Equity Income Portfolio Managers'
engagement with investee companies can be found on pages 42 and 43.
Regulators - the Company can only operate as an investment trust if it conducts its affairs in compliance with such status. Interaction with regulators such as the Financial Conduct Authority (`FCA)' and Financial Reporting Council (`FRC'), who have a legitimate interest in how the Company operates in the market and treats its shareholders, and industry bodies such as the Association of Investment Companies, remains an area of Board focus. The Company regularly considers how it meets various regulatory and statutory obligations and how any governance decisions it makes can have an impact on its stakeholders, both in the shorter and in the longer term. The Board receives reports from the
Manager and Auditor on their respective regulatory compliance and any inspections or reviews that are commissioned by regulatory bodies. The Company is a member of the AIC, which looks after the interests of investment trusts and provides information to
the market. Comprehensive information relating to the Company can be found on the AIC website, www.aic.co.uk. As a member of the AIC, the Company is welcomed to comment on consultations and proposal documents on matters affecting the Company and annually
to nominate and vote for future board members.
The mechanisms for engaging with stakeholders are kept under review by the
Directors and will be discussed on a regular basis at Board meetings to ensure
that they remain effective. Examples of key discussions and considerations of
the Board made during the year were:
· to consider and approve the appointment of a new corporate broker and
financial adviser (see page 8for further details);
· to consider and recommend to shareholders the cancellation of the UK
Equity and Balanced Risk Allocation share premium accounts (see page 8 and
note 14 on page 97 for further details);
· to consider and approve the renewal of the Company's loan facility;
· to consider and approve four quarterly dividend payments (see pages 46 and
47 for further details);
· to consider and approve four quarterly share conversions (see page 2 for
further details); and
· to consider and approve the ongoing use of share buybacks as part of the
Board's adopted discount policy (see page 47 for further details).
Board Diversity
The Company's policy on diversity is set out on page 62, under the section
`Nomination Committee'. The Board considers diversity, including the balance
of skills, knowledge, experience and gender amongst other factors when
reviewing its composition and appointing new directors. The Board continues to
recognise the importance of having a range of skilled, experienced individuals
with the right knowledge represented on the Board in order to allow it to
fulfil its obligations.
In view of its relatively small size, the Board will continue to ensure that
all appointments are made on the basis of merit against the specification
prepared for each appointment. In doing so, the Board will seek to meet the
targets set out in the FCA's Listing Rule 9.8.6R (9)(a), which are summarised
below.
In accordance with Listing Rule 9.8.6R (9), (10) and (11) the Board has
provided the following information in relation to its diversity as at 31 May
2023, being the financial year-end of the Company. The information included in
the tables below has been obtained following confirmation from the individual
Directors. As shown in the tables, the Company did not meet the FCA ethnic
diversity target as at 31 May 2023, however the Board will continue to take
all matters of diversity into account as part of its succession planning.
Board Gender as at 31 May 2023
Number of senior positions on the Board Number in executive management A Percentage of executive management A
Number of Board members Percentage of the Board
Men 3 60% 0 C n/a n/a
Women 2 40% B 2 C,D n/a n/a
A The Company does not disclose the number of directors in executive
management as this is not applicable for an investment trust.
B Meets the target of 40% as set out in LR 9.8.6R (9)(a)(i).
C The positions of Chairman and Senior Independent Director are held by
women. The position of Chair of the Audit Committee is held by a man but this
is not currently defined as a senior position.
D Exceeds target of 1 as set out in LR 9.8.6R (9)(a)(ii).
Number of senior positions on the Board Number in executive management A Percentage of executive management A
Number of Board members Percentage of the Board
White British or other White
(including minority-white groups) 5 100% 2 n/a n/a
Minority ethnic 0 B 0% 0 n/a n/a
A The Company does not disclose the number of directors in executive
management as this is not applicable for an investment trust.
B Does not meet the target as set out in LR 9.8.6R (9)(a)(iii).
There have been no changes since the year end that have affected the Company's
ability to meet the targets set in LR 9.8.6R (9)(a).
Environment, Social and Governance (`ESG') Matters
In relation to the portfolios, the Company has delegated the management of the
Company's investments to the Manager, who has an ESG Guiding Framework which
sets out a number of principles that are considered in the context of its
responsibility to manage investments in the financial interests of
shareholders.
The Manager is committed to being a responsible investor and applies, and is a
signatory to, the United Nations Principles for Responsible Investment
(`PRI'), which demonstrates its extensive efforts in terms of ESG integration,
active ownership, investor collaboration and transparency. The Manager scored
four stars for its Investment & Stewardship Policy under new scoring
methodology produced by PRI. This followed five consecutive years of achieving
an A+ rating for responsible investment (Strategy & Governance) under the
previous methodology. In addition, the Manager is an active member of the UK
Sustainable Investment and Finance Association as well as a supporter of the
Task Force for Climate Related Financial Disclosure (`TCFD') since 2019 and
published its third iteration of its TCFD-aligned Climate Change Report in
2022.
The Manager is complying with the spirit of the Sustainable Finance Disclosure
Regulation (`SFDR') which came into effect within the European Union on 10
March 2021 and is disclosing in its AIFM document as well as its website how
sustainability risks are integrated.
The wider Invesco investment team incorporates ESG considerations in its
investment process as part of the evaluation of new opportunities, with
identified ESG concerns feeding into the final investment decision and
assessment of relative value. The Portfolio Managers make their own
conclusions about the ESG characteristics of each investment held and about
the overall ESG characteristics of the portfolios, although third party ESG
ratings may inform their view. Additionally, the Manager's ESG team provides
formalised ESG portfolio monitoring. This is a rigorous semi-annual process
where the portfolios are reviewed from an ESG perspective.
Regarding stewardship, the Board considers that the Company has a
responsibility as a shareholder towards ensuring that high standards of
corporate governance are maintained in the companies in which it invests. To
achieve this, the Board does not seek to intervene in daily management
decisions, but aims to support high standards of governance and, where
necessary, will take the initiative to ensure those standards are met. The
principal means of putting shareholder responsibility into practice is through
the exercise of voting rights. The Company's voting rights are exercised on an
informed and independent basis.
Further details are shown in the ESG Statement from the UK Equity and Global
Equity Income Portfolio Managers on pages 39 to 43.
The Company's stewardship functions have been delegated to the Manager. The
Manager has adopted a clear and considered policy towards its responsibility
as a shareholder on behalf of the Company. As part of this policy, the Manager
takes steps to satisfy itself about the extent to which the companies in which
it invests look after shareholders' value and comply with local
recommendations and practices, such as the UK Corporate Governance Code. The
Manager is also a Tier 1 signatory of the Financial Reporting Council's
Stewardship Code, which seeks to improve the quality of engagement between
institutional investors and companies to help improve long-term returns to
shareholders and the efficient exercise of governance responsibilities.
A copy of the current Manager's Stewardship Policy can be found at
www.invesco.com/uk.
A greenhouse gas emissions statement is included in the Directors' Report on
page 63.
The Manager's Group Level Task Force on Climate-Related Financial Disclosures
(`TCFD') Climate Report is available on the Managers' Website at
www.invesco.com/uk. The Manager has provided a TCFD climate report covering
the Company's UK Equity and Global Equity Income Share Classes and this is
available on the Company's website at
www.invesco.com/uk/en/investment-trusts/invesco-select-trust-plc.html. The
TCFD climate report does not cover the Balanced Risk Allocation and Managed
Liquidity Share Classes given the underlying nature of their portfolio assets.
Modern Slavery
As an investment vehicle the Company does not provide goods or services in the
normal course of business, and does not have customers. Accordingly, the
Directors consider that the Company is not within the scope of the Modern
Slavery Act 2015.
This Strategic Report was approved by the Board on 1 August 2023.
Invesco Asset Management Limited
Company Secretary
Statement of Directors' Responsibilities
IN RESPECT OF THE PREPARATION OF THE ANNUAL FINANCIAL REPORT.
The Directors are responsible for preparing the Annual Financial Report in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under the law the Directors have elected to prepare financial
statements in accordance with UK Accounting Standards, including FRS 102 `The
Financial Reporting Standard applicable in the UK and Republic of Ireland.'
Under company law, the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Company and of the profit or loss of the Company for that
period.
In preparing these financial statements, the Directors are required to:
· select suitable accounting policies and then apply them consistently;
· make judgements and estimates that are reasonable and prudent;
· state whether applicable accounting standards 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
which enable them to ensure that the financial statements comply with the
Companies Act 2006. They have general responsibility for taking such steps as
are reasonably open to them to safeguard the assets of the Company and to
prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, a Directors' Report, which includes a Corporate
Governance Statement, and a Directors' Remuneration Report that comply with
that law and those regulations.
The Directors confirm that:
· in so far as they are aware, there is no relevant audit information of
which the Company's Auditor is unaware; and
· each Director has taken all the steps that they ought to have taken as a
Director in order to make themselves aware of any relevant audit information
and to establish that the Company's Auditor is aware of that information.
The Directors of the Company each confirm to the best of their knowledge that:
· the financial statements, prepared in accordance with the applicable set
of accounting standards, give a true and fair view of the assets, liabilities,
financial position, net return and cash flows of the Company; and
· this Annual Financial Report includes a fair review of the development and
performance of the business and the position of the Company together with a
description of the principal risks and uncertainties that it faces.
The Directors consider that this Annual Financial Report, taken as a whole, is
fair, balanced and understandable and provides the information necessary for
shareholders to assess the Company's position and performance, business model
and strategy.
Signed on behalf of the Board of Directors
Victoria Muir
Chairman
1 August 2023
Electronic Publication
The Annual Financial Report is published on the Manager's website
www.invesco.com/uk/en/investment-trusts/invesco-select-trust-plc.html. The
Directors are responsible for the maintenance and integrity of the corporate
and financial information included on the Company's website, which is
maintained by the Company's Manager. Legislation in the UK governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
Income Statement
FOR THE YEAR ENDED 31 MAY
2023 2022
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains on investments held
at fair value 9 - (3,875) (3,875) - 9,824 9,824
Gains/(losses) on derivative instruments 10 27 (963) (936) 72 (32) 40
Gains on foreign exchange - 28 28 - 43 43
Income 2 7,400 268 7,668 6,988 - 6,988
Investment management fees 3 (334) (774) (1,108) (360) (836) (1,196)
Other expenses 4 (627) (7) (634) (502) (6) (508)
Net return before finance costs and taxation 6,466 (5,323) 1,143 6,198 8,993 15,191
Finance costs 5 (147) (343) (490) (70) (165) (235)
Return before taxation 6,319 (5,666) 653 6,128 8,828 14,956
Tax 6 (325) 2 (323) (191) - (191)
Return after taxation for the financial year 5,994 (5,664) 330 5,937 8,828 14,765
Return per ordinary share (basic and diluted) 7
- UK Equity Share Portfolio 6.40p (12.99)p (6.59)p 6.00p 6.07p 12.07p
- Global Equity Income Share Portfolio 5.20p 18.03p 23.23p 4.85p 16.66p 21.51p
- Balanced Risk Allocation Share Portfolio 3.38p (23.16)p (19.78)p 1.05p (0.83)p 0.22p
- Managed Liquidity Share Portfolio 1.06p 1.80p 2.86p (0.07)p (0.28)p (0.35)p
The total column of this statement represents the Company's Income Statement
prepared in accordance with UK Accounting Standards. The return after taxation
is the total comprehensive income and therefore no additional statement of
other comprehensive income is presented. The supplementary revenue and capital
columns are presented for information purposes in accordance with the
Statement of Recommended Practice issued by the Association of Investment
Companies. All items in the above statement derive from continuing operations
of the Company. No operations were acquired or discontinued in the current
year. Income Statements for the different share classes are shown on pages 17,
25, 32 and 38 for the UK Equity, Global Equity Income, Balanced Risk
Allocation and Managed Liquidity Share Portfolios respectively.
The accompanying accounting policies and notes are an integral part of these
financial statements.
Statement of Changes in Equity
FOR THE YEAR ENDED 31 MAY
Capital
Share Share Special redemption Capital Revenue
capital premium reserve reserve reserve reserve Total
Notes £'000 £'000 £'000 £'000 £'000 £'000 £'000
At 31 May 2021 1,715 122,990 25,463 364 80,059 (27) 230,564
Cancellation of deferred shares - - (8) 8 - - -
Shares bought back and held in treasury 14 - - (10,438) - (13,485) - (23,923)
Share conversions (6) - 4,478 - (4,472) - -
Return after taxation per the income
statement - - - - 8,828 5,937 14,765
Dividends paid 8 - - (560) (516) (5,909) (6,985)
At 31 May 2022 1,709 122,990 18,935 372 70,414 1 214,421
Cancellation of deferred shares - - (5) 5 - - -
Shares bought back and held in treasury 14 - - (4,671) - (3,516) - (8,187)
Share conversions (2) - 1,107 - (1,105) - -
Return after taxation per the income
statement - - - - (5,664) 5,994 330
Dividends paid 8 - - (932) - - (5,893) (6,825)
Cancellation of share premium account 15 - (122,990) 122,990 - - - -
At 31 May 2023 1,707 - 137,424 377 60,129 102 199,739
Balance Sheet
AS AT 31 MAY 2023
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
Notes £'000 £'000 £'000 £'000 £'000
Fixed assets
Investments held at fair value through
profit or loss 9 134,346 66,026 5,542 1,475 207,389
Current assets
Derivative assets held at fair value through
profit or loss 10 - - 125 - 125
Debtors 11 732 350 460 4 1,546
Cash and cash equivalents 278 511 275 30 1,094
1,010 861 860 34 2,765
Creditors: amounts falling due within one year
Derivative liabilities held at fair value through
profit or loss 10 - - (186) - (186)
Other creditors 12 (270) (144) (26) (139) (579)
Bank facility 13 (9,650) - - - (9,650)
(9,920) (144) (212) (139) (10,415)
Net current (liabilities)/assets (8,910) 717 648 (105) (7,650)
Net assets 125,436 66,743 6,190 1,370 199,739
Capital and reserves
Share capital 14(a) 1,074 419 107 107 1,707
Special reserve 15 117,607 16,809 2,263 745 137,424
Capital redemption reserve 15 84 81 28 184 377
Capital reserve 15 6,671 49,434 3,713 311 60,129
Revenue reserve 15 - - 79 23 102
Shareholders' funds 125,436 66,743 6,190 1,370 199,739
Net asset value per ordinary share 16 182.11p 265.53p 149.56p 109.51p
Individual portfolio breakdowns are provided for additional information only.
See note 1(a)(ii) on page 88 for further details.
The total column of this statement represents the Company's Balance Sheet
prepared in accordance with UK accounting standards.
The financial statements were approved and authorised for issue by the Board
of Directors on 1 August 2023.
Signed on behalf of the Board of Directors
Victoria Muir
Chairman
The accompanying accounting policies and notes are an integral part of these
financial statements.
Balance Sheet
AS AT 31 MAY 2022
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
Notes £'000 £'000 £'000 £'000 £'000
Fixed assets
Investments held at fair value through profit
or loss 9 158,450 67,630 6,233 1,445 233,758
Current assets
Derivative assets held at fair value through profit
or loss 10 - - 362 - 362
Debtors 11 804 351 331 8 1,494
Cash and cash equivalents 322 215 401 9 947
1,126 566 1,094 17 2,803
Creditors: amounts falling due within one year
Derivative liabilities held at fair
value through profit or loss 10 - - (225) - (225)
Other creditors 12 (448) (206) (17) (138) (809)
Bank facility 13 (15,754) (5,352) - - (21,106)
(16,202) (5,558) (242) (138) (22,140)
Net current (liabilities)/assets (15,076) (4,992) 852 (121) (19,337)
Net assets 143,374 62,638 7,085 1,324 214,421
Capital and reserves
Share capital 14(a) 1,085 412 106 106 1,709
Share premium 15 121,700 - 1,290 - 122,990
Special reserve 15 - 17,211 1,000 724 18,935
Capital redemption reserve 15 80 81 27 184 372
Capital reserve 15 20,509 44,934 4,683 288 70,414
Revenue reserve 15 - - (21) 22 1
Shareholders' funds 143,374 62,638 7,085 1,324 214,421
Net asset value per ordinary share 16 194.35p 249.00p 169.87p 106.92p
Individual portfolio breakdowns are provided for additional information only.
See note 1(a)(ii) on page 88 for further details.
The total column of this statement represents the Company's Balance Sheet
prepared in accordance with UK accounting standards.
The accompanying accounting policies and notes are an integral part of these
financial statements.
Cash Flow Statement
FOR THE YEAR ENDED 31 MAY
2023 2022
Notes £'000 £'000
Cash flows from operating activities
Net return before finance costs and taxation 1,143 15,191
Tax on overseas income (323) (191)
Adjustments for:
Purchase of investments (50,391) (50,081)
Sale of investments 73,142 74,109
(Purchase)/sale of futures (738) 177
22,013 24,205
Scrip dividends (342) (676)
Losses/(gains) on investments 3,875 (9,824)
Losses/(gains) on derivatives 936 (40)
Increase in debtors (52) (449)
Increase/(decrease) in creditors 32 (213)
Net cash inflow from operating activities 27,282 28,003
Cash flows from financing activities
Interest paid on bank borrowings (493) (234)
(Decrease)/increase in bank facility (11,456) 708
Share buy back costs (8,361) (23,749)
Equity dividends paid 8 (6,825) (6,985)
Net cash outflow from financing activities (27,135) (30,260)
Net increase/(decrease) in cash and cash equivalents 147 (2,257)
Cash and cash equivalents at the start of the year 947 3,204
Cash and cash equivalents at the end of the year 1,094 947
Reconciliation of cash and cash equivalents to the Balance Sheet is as follows:
Cash held at custodian 1,094 747
Invesco Liquidity Funds plc - Sterling, money market fund - 200
Cash and cash equivalents 1,094 947
Cash flow from operating activities includes:
Interest received 27 (1)
Dividends received 6,900 5,732
The accompanying accounting policies and notes are an integral part of these
financial statements.
Reconciliation of net debt
At At
1 June Cash 31 May
2022 Flows 2023
£'000 £'000 £'000
Cash and cash equivalents 947 147 1,094
Bank facility (21,106) 11,456 (9,650)
Total (20,159) 11,603 (8,556)
Notes to the Financial Statements
1. Accounting Policies
Accounting policies describe the Company's approach to recognising and
measuring transactions during the year and the position of the Company at the
year end.
The principal accounting policies are set out below:
(a) Basis of Preparation
(i) Accounting Standards Applied
The financial statements have been prepared in accordance with applicable
United Kingdom Accounting Standards, including FRS 102 `the Financial
Reporting Standard applicable in the UK and Republic of Ireland', and
applicable law (UK Generally Accepted Accounting Practice (`UK GAAP')) and
with the Statement of Recommended Practice Financial Statements of Investment
Trust Companies and Venture Capital Trusts, updated by the Association of
Investment Companies (`AIC') in July 2022. The financial statements are issued
on a going concern basis as disclosed on page 62.
The accounting policies applied to these financial statements are consistent
with those applied for the preceding year.
(ii) Definitions used in the financial statements
`Portfolio' the UK Equity Share Portfolio, the Global Equity Income Share
Portfolio, the Balanced Risk Allocation Share Portfolio and/or the Managed
Liquidity Share Portfolio (as the case may be). Each comprises, or may
include, an investment portfolio, derivative instruments, cash, loans, debtors
and other creditors, which together make up the net assets as shown in the
balance sheet.
`Share' UK Equity Share, Global Equity Income Share, Balanced Risk Allocation
Share, Managed Liquidity Share and/or Deferred Share (as the case may be).
The UK Equity, Global Equity Income, Balanced Risk Allocation and Managed
Liquidity Share Portfolios' income statements and summaries of net assets
(shown on pages 17, 25, 32 and 38) do not represent statutory accounts, are
not required under UK Generally Accepted Accounting Practice and the auditor
does not express an opinion on each individual portfolio. These have been
disclosed to assist shareholders' understanding of the assets and liabilities,
and income and expenses of the different share classes.
In order to better reflect the activities of an investment trust 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 presented alongside the income statement.
(iii) Functional and presentational currency
The Company's investments are made in several currencies, however, the
financial statements are presented in sterling, which is the Company's
functional currency. In arriving at this conclusion, the Directors considered
that the Company's shares are listed and traded on the London Stock Exchange,
the shareholder base is predominantly in the United Kingdom and the Company
pays dividends and expenses in sterling.
(iv) Transactions and balances
Transactions in foreign currency, whether of a revenue or capital nature, are
translated to sterling at the rates of exchange ruling on the dates of such
transactions. Foreign currency assets and liabilities are translated to
sterling at the rates of exchange ruling at the balance sheet date. Any gains
or losses, whether realised or unrealised, are taken to the capital reserve or
to the revenue account, depending on whether the gain or loss is of a capital
or revenue nature. All gains and losses are recognised in the income
statement.
(v) Significant Accounting Estimates and Judgements
The preparation of the financial statements may require the Directors to make
estimations where uncertainty exists. It also requires the Directors to make
judgements, estimates and assumptions, in the process of applying the
accounting policies. There have been no significant judgements, estimates or
assumptions for the current or preceding year.
(b) Financial Instruments
The Company has chosen to apply the provisions of Sections 11 and 12 of FRS
102 in full in respect of the financial instruments, which is explained below.
(i) Recognition of Financial Assets and Financial Liabilities
The Company recognises financial assets and financial liabilities when the
Company becomes a party to the contractual provisions of the instrument. The
Company will offset financial assets and financial liabilities if the Company
has a legally enforceable right to set off the recognised amounts and
interests and intends to settle on a net basis.
(ii) Derecognition of Financial Assets
The Company derecognises a financial asset when the contractual rights to the
cash flows from the asset expire or it transfers the right to receive the
contractual cash flows on the financial asset in a transaction in which
substantially all the risks and rewards of ownership of the financial asset
are transferred. Any interest in the transferred financial asset that is
created or retained by the Company is recognised as an asset.
(iii) Derecognition of Financial Liabilities
The Company derecognises financial liabilities when its obligations are
discharged, cancelled or expire.
(iv) Trade Date Accounting
Purchases and sales of financial assets are recognised on trade date, being
the date on which the Company commits to purchase or sell the assets.
(v) Classification and measurement of financial assets and financial
liabilities
Financial assets
The Company's investments, including financial derivative instruments, are
classified as held at fair value through profit or loss.
Financial assets held at fair value through profit or loss are initially
recognised at fair value, which is taken to be their cost, with transaction
costs expensed in the income statement, and are subsequently valued at fair
value.
Fair value for investments, including financial derivative instruments, that
are actively traded in organised financial markets is determined by reference
to stock exchange quoted bid prices at the balance sheet date. For investments
that are not actively traded or where active stock exchange quoted bid prices
are not available, fair value is determined by reference to a variety of
valuation techniques including broker quotes and price modelling. Where there
is no active market, unlisted/illiquid investments are valued by the Directors
at fair value with regard to the International Private Equity and Venture
Capital Valuation Guidelines and on recommendations from Invesco's Pricing
Committee, both of which use valuation techniques such as earnings multiples,
recent arm's length transactions and net assets.
Financial liabilities
Financial liabilities, excluding financial derivative instruments but
including borrowings, are initially measured at fair value, net of transaction
costs and are subsequently measured at amortised cost using the effective
interest method.
(c) Derivatives and hedging
Derivative instruments are valued at fair value in the balance sheet.
Derivative instruments may be capital or revenue in nature and, accordingly,
changes in their fair value are recognised in revenue or capital in the income
statement as appropriate.
Forward currency contracts entered into for hedging purposes are valued at the
appropriate forward exchange rate ruling at the balance sheet date. Profits or
losses on the closure or revaluation of positions are included in capital
reserves.
Futures contracts may be entered into for hedging purposes and any profits and
losses on the closure or revaluation of positions are included in capital
reserves. Where futures contracts are used for investment exposure any income
element arising on bond futures is recognised as a gain on derivative
instruments in the income statement and shown in revenue.
(d) Cash and cash equivalents
Cash and cash equivalents may comprise cash (including short term deposits
which are readily convertible to a known amount of cash and are subject to an
insignificant risk of change in value) as well as cash equivalents, including
money market funds. Investments are regarded as cash equivalents if they meet
all of the following criteria: highly liquid investments held in the Company's
base currency that are readily convertible to a known amount of cash, are
subject to an insignificant risk of change in value, have a maturity of less
than three months at date of origination and provide a return no greater than
the rate of a three-month high quality government bond. For the Balanced Risk
Allocation and Managed Liquidity Portfolios, cash and cash equivalents do not
include investments in Invesco Liquidity Funds plc - Sterling as this forms
part of those Portfolio's fixed assets.
(e) Income
Dividend income from investments is recognised when the shareholders' right to
receive payment has been established, normally the ex-dividend date. UK
dividends are stated net of related tax credits. Interest income arising from
cash is recognised on an accruals basis and underwriting commission is
recognised as earned. Special dividends are taken to revenue unless they arise
from a return of capital, when they are allocated to capital in the income
statement. Income from fixed income securities is recognised in the income
statement using the effective interest method.
(f) Expenses and finance costs
All expenses are accounted for on an accruals basis. Expenses are charged to
the income statement and shown in revenue except where expenses are presented
as capital items when a connection with the maintenance or enhancement of the
value of the investments held can be demonstrated and thus management fees and
finance costs are charged to revenue and capital to reflect the Directors'
expected long-term view of the nature of the investment returns of each
Portfolio.
Expenses charged to the Company in relation to a specific Portfolio are
charged directly to that Portfolio.
Expenses charged to the Company that are common to more than one Portfolio are
allocated between those Portfolios in the same proportions as the net assets
of each Portfolio at the latest conversion date.
Finance costs are accounted for on an accruals basis using the effective
interest rate method.
The management fees and finance costs are charged in accordance with the
Board's expected split of long-term returns, in the form of capital gains and
income, to the applicable Portfolio as follows:
Revenue Capital
Portfolio Reserve Reserve
UK Equity 30% 70%
Global Equity Income 30% 70%
Balanced Risk Allocation 30% 70%
Managed Liquidity 100% -
(g) Dividends
Dividends are accrued in the financial statements when there is an obligation
to pay the dividends at the balance sheet date.
(h) Taxation
Tax expense represents the sum of tax currently payable and deferred tax. Any
tax payable is based on taxable profit for the period. Taxable profit differs
from profit before tax as reported in the income statement because it excludes
items of income or expenses that are taxable or deductible in other years and
it further excludes items that are never taxable or deductible. The Company's
liability for current tax is calculated using tax rates that have been enacted
or substantively enacted by the balance sheet date.
For the Company, any allocation of tax relief to capital is based on the
marginal basis, such that tax allowable capital expenses are offset against
taxable income. Where individual Portfolios have extra tax capacity arising
from unused tax allowable expenses which can be used by a different Portfolio,
this extra tax capacity is transferred between the Portfolios at a valuation
of 1% of the amount transferred.
Deferred taxation is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more tax or a right to pay less tax
in the future have occurred. Timing differences are differences between the
Company's taxable profits and its results as stated in the financial
statements. Deferred taxation assets are recognised where, in the opinion of
the Directors, it is more likely than not that these amounts will be realised
in future periods.
A deferred tax asset has not been recognised in respect of surplus management
expenses as the Company is unlikely to have sufficient future taxable revenue
to offset against these.
Investment trusts which have approval under the appropriate tax regulations
are not liable for taxation on capital gains.
(i) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single
segment of business being investment business.
2. Income
This note shows the income generated from the portfolios (investment assets)
of the Company and income received from any other source.
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
2023 £'000 £'000 £'000 £'000 £'000
Income from investments:
UK dividends:
- ordinary dividends 4,159 273 - - 4,432
- special dividends 92 - - - 92
- scrip dividends 342 - - - 342
4,593 273 - - 4,866
Overseas dividends:
- ordinary dividends 714 1,615 92 20 2,441
- special dividends - 1 - - 1
Interest from Treasury bills - - 64 - 64
5,307 1,889 156 20 7,372
Other income:
Deposit interest 7 4 16 - 27
Rebates of management fee - - - 1 1
Total income 5,314 1,893 172 21 7,400
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
2022 £'000 £'000 £'000 £'000 £'000
Income from investments:
UK dividends:
- ordinary dividends 3,694 204 - - 3,898
- special dividends 438 91 - - 529
- scrip dividends 676 - - - 676
4,808 295 - - 5,103
Overseas dividends:
- ordinary dividends 561 1,248 8 5 1,822
- special dividends - 58 - - 58
Interest from Treasury bills - - 4 - 4
5,369 1,601 12 5 6,987
Other income:
Rebates of management fee - - - 1 1
Total income 5,369 1,601 12 6 6,988
Special dividends recognised as revenue for the year are as shown above.
Special dividends of £176,000 in respect of UK Equity Portfolio and £92,000
in respect of Global Equity Portfolio were recognised in capital during the
year (2022: nil).
3. Investment management fees
This note shows the fees paid to the Manager. These are made up of the
individual Portfolio investment management fees calculated quarterly on the
basis of their net asset values in respect of the UK Equity and Global Equity
Income Portfolios.
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
2023 £'000 £'000 £'000 £'000 £'000
Investment management fee:
- charged to revenue 210 107 15 2 334
- charged to capital 490 250 34 - 774
Total investment management fee 700 357 49 2 1,108
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
2022 £'000 £'000 £'000 £'000 £'000
Investment management fee:
- charged to revenue 240 102 16 2 360
- charged to capital 561 237 38 - 836
Total investment management fee 801 339 54 2 1,196
Details of the investment management agreement are given on pages 62 and 63 in
the Directors' Report.
4. Other Expenses
The other expenses of the Company, including those paid to Directors and the
auditor, are presented below; those paid to the Directors and the auditor are
separately identified.
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
2023 £'000 £'000 £'000 £'000 £'000
Charged to revenue:
Directors' remuneration (i)(ii) 103 49 5 1 158
Auditor's fees (iii):
- for the audit of the Company's financial statements 39 20 2 1 62
Other expenses (iv) 276 107 20 4 407
418 176 27 6 627
Charged to capital:
Custodian transaction charges 1 4 2 - 7
Total 419 180 29 6 634
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
2022 £'000 £'000 £'000 £'000 £'000
Charged to revenue:
Directors' remuneration (i)(ii) 103 38 4 1 146
Auditor's fees (iii):
- for the audit of the Company's financial statements 34 15 2 1 52
Other expenses (iv) 200 83 18 3 304
337 136 24 5 502
Charged to capital:
Custodian transaction charges 2 2 2 - 6
Total 339 138 26 5 508
(i) The Director's Remuneration Report provides information on Directors'
fees. Included within other expenses is £16,000 (2022: £13,000) of
employer's national insurance payable on Directors' remuneration.
(ii) As at 31 May 2023, the amounts outstanding on Directors' fees and
employer's national insurance was £28,000 (2022: £26,000).
(iii) The Auditor's fees shown include out of pocket expenses, but exclude
VAT, which is included in other administrative expenses.
(iv) Includes fees for depositary, broker and registrar, and also printing,
postage and listing costs.
5. Finance Costs
Finance costs arise on any borrowing the Company has utilised in the year. The
Company has a committed £40 million revolving credit facility (see note 13
for further details).
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
2023 £'000 £'000 £'000 £'000 £'000
Interest payable on borrowings repayable within one year
as follows:
- charged to revenue 97 50 - - 147
- charged to capital 226 117 - - 343
Total 323 167 - - 490
2022
Interest payable on borrowings repayable within one year
as follows:
- charged to revenue 50 20 - - 70
- charged to capital 118 47 - - 165
Total 168 67 - - 235
6. Tax
As an investment trust, the Company pays no tax on capital gains. However, the
Company suffers tax on certain overseas dividends that is irrecoverable and
this note shows details of the tax charge. In addition, this note clarifies
the basis for the Company having no deferred tax asset or liability.
(a) Tax charge
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
2023 £'000 £'000 £'000 £'000 £'000
Overseas tax 48 275 - - 323
2022
Overseas tax 45 146 - - 191
The accounting policy for taxation is disclosed in note 1(h).
(b) Reconciliation of tax charge
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
2023 £'000 £'000 £'000 £'000 £'000
Return before taxation (4,628) 6,074 (829) 36 653
Theoretical tax at the
UK Corporation Tax rate of 20.00% (2022: 19.00%) (926) 1,215 (166) 8 131
Effect of:
- Non-taxable losses/(gains) on investments and derivatives 1,735 (956) 194 (5) 968
- Non-taxable gains on foreign exchange - (2) (3) - (5)
- Non-taxable scrip dividends (68) - - - (68)
- Non-taxable UK dividends (818) (55) - - (873)
- Non-taxable UK special dividends (53) - - - (53)
- Non-taxable overseas dividends (141) (286) - - (427)
- Non-taxable overseas special dividends - (19) - - (19)
- Foreign tax expensed - (3) - - (3)
- Overseas tax 48 275 - - 323
- Disallowable expenses - 1 - - 1
- Excess of allowable expenses over taxable income 271 105 (25) (3) 348
Tax charge for the year 48 275 - - 323
2022
Return before taxation 9,499 5,453 9 (5) 14,956
Theoretical tax at the
UK Corporation Tax rate of 19.00% (2021: 19.00%) 1,805 1,036 2 (1) 2,842
Effect of:
- Non-taxable (gains)/losses on investments and derivatives (1,035) (832) (2) 1 (1,868)
- Non-taxable losses/(gains) on foreign exchange 2 (3) - - (1)
- Non-taxable scrip dividends (128) - - - (128)
- Non-taxable UK dividends (677) (39) - - (716)
- Non-taxable UK special dividends (83) (15) - - (98)
- Non-taxable overseas dividends (107) (218) - - (325)
- Non-taxable overseas special dividends - (13) - - (13)
- Foreign tax expensed - (2) - - (2)
- Overseas tax 45 146 - - 191
- Accrued income taxable on receipt - 6 - - 6
- Excess of allowable expenses over taxable income 223 80 - - 303
Tax charge for the year 45 146 - - 191
Given the Company's status as an investment trust, and the intention to
continue meeting the conditions required to retain such status for the
foreseeable future, the Company has not provided any UK corporation tax on any
realised or unrealised capital gains or losses arising on investments.
(c) Factors that may affect future tax charges
The Company has excess management expenses and loan relationship deficits of
£18,674,000 (2022: £16,922,000) that are available to offset future taxable
revenue. A deferred tax asset of £4,668,000 (2022: £4,230,000), measured at
the standard corporation tax substantively enacted rate of 25% (2022: 25%) has
not been recognised in respect of these expenses since the Directors believe
that there will be no taxable profits in the future against which the deferred
tax assets can be offset.
The UK corporation tax rate increased from 19% to 25% from 1 April 2023.
Deferred tax assets and liabilities on balance sheets prepared after the
enactment of the new tax rate must therefore be re-measured accordingly, so as
a result the deferred tax asset has been calculated at 25%.
7. Return per Ordinary Share
Return per share is the amount of profit (or loss) generated for each share
class in the financial year divided by the weighted average number of the
shares in issue. The basic and diluted returns per share are identical as the
ordinary shares for each of the portfolios are not dilutive.
Revenue, capital and total return per ordinary share is based on each of the
returns after taxation shown by the income statement for the applicable share
class and on the following numbers of Shares being the weighted average number
of Shares in issue throughout the year for each Share class:
Average number of shares
Share 2023 2022
UK Equity 71,005,942 78,338,470
Global Equity Income 24,967,715 24,671,635
Balanced Risk Allocation 4,190,331 4,178,755
Managed Liquidity 1,252,806 1,440,703
Return per Ordinary Share per Portfolio is shown in the Income Statement on
page 83.
8. Dividends
Dividends are distributions of Portfolio returns to shareholders. These are
determined by the Directors and paid four times a year.
Dividends paid for each applicable share class, which represent distributions
for the purpose of s1159 of the Corporation Tax Act 2010, follows:
2023 2022
Number Dividend Total Number Dividend Total
of shares rate (pence) £'000 of shares rate (pence) £'000
UK Equity
First interim 73,085,657 1.50 1,096 83,711,988 1.50 1,256
Second interim 71,478,782 1.50 1,072 78,889,303 1.50 1,183
Third interim 69,800,692 1.50 1,047 76,191,115 1.50 1,143
Fourth interim 69,244,026 2.55 1,766 74,135,486 2.20 1,631
7.05 4,981 6.70 5,213
Global Equity Income
First interim 24,860,784 1.55 385 23,770,805 1.55 368
Second interim 24,851,044 1.55 385 24,551,255 1.55 381
Third interim 24,927,486 1.55 386 24,846,796 1.55 385
Fourth interim 24,890,617 2.55 635 24,920,131 2.50 623
7.20 1,791 7.15 1,757
Balanced Risk Allocation
First interim 4,138,995 1.00 41 - - -
1.00 41 - -
Managed Liquidity
First interim 1,238,254 1.00 12 1,544,679 1.00 15
1.00 12 1.00 15
Total paid in the year 6,825 6,985
The Company's dividend policy permits the payment of dividends by the UK
Equity, Global Equity Income and Managed Liquidity Portfolios from capital. An
analysis of dividends paid in the year from revenue and capital follows.
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
2023 £'000 £'000 £'000 £'000 £'000
Dividends paid in the year:
From revenue - current year 4,541 1,299 41 12 5,893
From revenue 4,541 1,299 41 12 5,893
From capital 440 492 - - 932
4,981 1,791 41 12 6,825
Global
UK Equity Managed Company
Equity Income Liquidity Total
2022 £'000 £'000 £'000 £'000
Dividends paid in the year:
From revenue - current year 4,697 1,197 - 5,894
From revenue - reserves brought forward - - 15 15
From revenue 4,697 1,197 15 5,909
From capital 516 560 - 1,076
5,213 1,757 15 6,985
9. Investments held at fair value
The Portfolio is made up of investments which are listed, i.e. traded on a
regulated stock exchange, and a small proportion of investments which are
valued by the Directors as they are unlisted or not regularly traded. Gains
and losses are either:
· realised, usually arising when investments are sold; or
· unrealised, being the difference from cost on the investments held at the
year end.
(a) Analysis of investments by listing status
2023 2022
£'000 £'000
UK listed investments 141,292 161,557
Overseas listed investments (i) 66,092 72,196
Unquoted hedge fund investments 5 5
207,389 233,758
(i) Includes the Invesco Liquidity Funds plc - Sterling, money market fund
positions held by the Balanced Risk Allocation Portfolio of £3,107,000 (2022:
£3,512,000) and Managed Liquidity Portfolio of £130,000 (2022: £130,000).
(b) Analysis of investment gains
2023 2022
£'000 £'000
Opening valuation 233,758 247,886
Movements in year:
Purchases at cost 50,648 49,637
Sales proceeds (73,142) (73,589)
(Losses)/gains on investments in the year (3,875) 9,824
Closing valuation 207,389 233,758
Closing book cost 194,009 215,092
Closing investment holding gains 13,380 18,666
Closing valuation 207,389 233,758
The Company received £73,142,000 (2022: £73,589,000) from investments sold
in the year. The book cost of these investments when they were purchased was
£71,730,000 (2022: £61,472,000) realising a profit of £1,412,000 (2022:
profit £12,117,000). These investments have been revalued over time and until
they were sold any unrealised profits/losses were included in the fair value
of the investments.
(c) Transaction costs
Transaction costs were £84,000 (2022: £71,000) on purchases and £36,000
(2022: £36,000) on sales and are included in investment gains and losses.
10. Derivative instruments
Derivative instruments are contracts whose price is derived from the value of
other securities or indices. The Balanced Risk Allocation Portfolio uses
futures, which represent agreements to buy or sell commodities or financial
instruments at a pre-determined price in the future.
2023 2022
£'000 £'000
Opening derivative assets held at fair value through profit or loss 362 292
Opening derivative liabilities held at fair value through profit or loss (225) (18)
Opening net derivative assets held at fair value as shown in balance sheet 137 274
Closing derivative assets held at fair value through profit or loss 125 362
Closing derivative liabilities held at fair value through profit or loss (186) (225)
Closing net derivative (liabilities)/assets held at fair value shown in balance sheet (61) 137
Movement in derivative holding liabilities (198) (137)
Net realised (losses)/gains on derivative instruments (765) 105
Net capital losses on derivative instruments as shown in the income statement (963) (32)
Net income arising on derivatives 27 72
Total (losses)/gains on derivative instruments (936) 40
The derivative assets/(liabilities) shown in the balance sheet are the
unrealised gains/(losses) arising from the revaluation to fair value of
futures contracts held in the Balanced Risk Allocation Share Portfolio, as
shown on page 30.
11. Debtors
Debtors are amounts due to the Company, such as monies due from brokers for
investments sold and income which has been earned (accrued) but not yet
received.
2023 2022
£'000 £'000
Collateral pledged for futures contracts 443 321
Tax recoverable 217 234
Prepayments and accrued income 886 939
1,546 1,494
12. Other creditors
Creditors are amounts owed by the Company and include amounts due to brokers
for the purchase of investments and amounts owed to suppliers, such as the
Manager and auditor.
2023 2022
£'000 £'000
Shares bought back - 174
Tax payable 137 137
Amounts due to brokers - 85
Margin due to brokers 9 -
Accruals 433 413
579 809
Interest payable on the bank facility is included within the amounts
outstanding on the bank facility as shown on the balance sheet.
13. Bank facility and overdraft
At the year end the Company had a £40 million (2022: £40 million) committed
364 day multicurrency revolving credit facility, which is due for renewal on
24 April 2024 (2022: 25 April 2023). In addition, an overdraft facility for
the purpose of short term settlement is also available however, this was
unutilised at year end (2022: unutilised). Both facilities are with The Bank
of New York Mellon. The interest payable on the credit facility is based on
the Adjusted Reference Rate (principally SONIA, SOFR and €STR respectively
in respect of loans drawn in GBP, USD and Euro) plus a margin for amounts
drawn.
Under the bank facility's covenants, the Company's total indebtedness must not
exceed 30% of total assets (excluding any Balanced Risk Allocation Portfolio
assets) and the total assets must not be less than £120 million (2022: £120
million). The Company was in compliance with the covenants throughout the year
and at year end.
At the year end, the interest payable on the bank facility was £nil (2022:
£6,000).
14. Share Capital and Reserves
Share capital represents the total number of shares in issue, including
treasury shares.
All shares have a nominal value of 1 pence.
(a) Movements in Share Capital during the Year
Issued and fully paid:
Global Balanced Total
UK Equity Risk Managed Share
Equity Income Allocation Liquidity Capital
Ordinary Shares (number)
At 31 May 2022 73,772,657 25,155,784 4,170,938 1,238,254 104,337,633
Shares bought back into treasury (3,772,000) (740,000) (110,000) (80,000) (4,702,000)
Arising on share conversion:
- August 2022 (161,875) 85,260 44,643 19,696 (12,276)
- November 2022 (488,090) 326,442 12,568 41,950 (107,130)
- February 2023 (106,666) 63,131 20,432 4,478 (18,625)
- May 2023 (362,873) 245,125 414 26,982 (90,352)
At 31 May 2023 68,881,153 25,135,742 4,138,995 1,251,360 99,407,250
Treasury Shares (number)
At 31 May 2022 34,743,775 16,036,159 6,437,218 9,313,678 66,530,830
Shares bought back into treasury 3,772,000 740,000 110,000 80,000 4,702,000
At 31 May 2023 38,515,775 16,776,159 6,547,218 9,393,678 71,232,830
Ordinary Shares of 1 penny each (£'000)
At 31 May 2022 738 252 41 12 1,043
Shares bought back into treasury (38) (7) (1) (1) (47)
- August 2022 (1) 1 1 1 2
- November 2022 (5) 3 - -≠ (2)
- February 2023 (1) 1 - - -
- May 2023 (4) 2 - - (2)
At 31 May 2023 689 252 41 12 994
Treasury Shares of 1 penny each (£'000)
At 31 May 2022 347 160 65 94 666
Shares bought back into treasury 38 7 1 1 47
At 31 May 2023 385 167 66 95 713
Total Share Capital (£'000)
Ordinary share capital 689 252 41 12 994
Treasury share capital 385 167 66 95 713
At 31 May 2023 1,074 419 107 107 1,707
Average buy back price 165.48p 224.86p 132.86p 94.75p
The total cost of share buy backs was £8,187,000 (2022: £23,923,000). As
part of the conversion process 457,700 (2022: 815,900) deferred shares of 1p
each were created and subsequently cancelled during the year. No deferred
shares were in issue at the start or end of the year.
No ordinary shares were issued from treasury during the year (2022: nil).
Prior to the cancellation of the share premium accounts of the UK Equity and
Balanced Risk Allocation Portfolios on 17 November 2022, shares bought back
and held in treasury were funded from realised capital reserves, as the
balance on the special reserve at 31 May 2022 for UK Equity Portfolio was nil.
Following the cancellation of the share premium accounts and transfer to
special reserves, share buybacks to treasury were funded from special
reserves.
(b) Movements in Share Capital after the Year End
Other than the share capital movements arising from the 1 August 2023
conversion there have been no movements in share capital since the year end.
Full details of the current shares in issue are shown in note 12 to the AGM
notice on page 112.
(c) Voting Rights
Rights attaching to the shares are described in the Directors' Report on page
63.
(d) Deferred Shares
The Deferred shares do not carry any rights to participate in the Company's
profits, do not entitle the holder to any repayment of capital on a return of
assets (except for the sum of 1p) and do not carry any right to receive notice
of or attend or vote at any general meeting of the Company. Any Deferred
shares that arise as a result of conversions of shares are cancelled in the
same reporting period.
(e) Future Convertibility of the Shares
Shares are convertible at the option of the holder into any other class of
share. Further conversion details are given on page 2 and in the Shareholder
Information on page 114.
15. Reserves
This note explains the different reserves attributable to shareholders. The
aggregate of the reserves and share capital (see previous note) make up total
shareholders' funds.
The share premium comprises the net proceeds received by the Company following
the issue of new shares, after deduction of the nominal amount of 1 penny and
any applicable costs.
The special reserve arose from the cancellation of the share premium account,
in January 2007, and is available as distributable profits to be used for all
purposes under the Companies Act 2006, including buy back of shares and
payment of dividends.
The capital redemption reserve arises from the nominal value of shares bought
back and cancelled; this and the share premium are non-distributable.
Capital investment gains and losses are shown in note 9(b), and form part of
the capital reserve. The revenue reserve shows the net revenue retained after
payments of any dividends. The capital and revenue reserves are distributable.
Following class consents and approval of shareholders at the Company's Annual
General on 4 October 2022, the Court process to cancel the share premium
accounts of the UK Equity and Balanced Risk Allocation Share Classes was
implemented on 17 November 2022. Following the implementation the entire
share premium account of each of the UK Equity and Balanced Risk Allocation
Share Classes was cancelled, amounting to £121,700,000 and £1,290,000
respectively. These distributable reserves provide the Company with
flexibility, subject to financial performance, to make future distributions
and/or, subject to shareholder authority, in buying back shares.
16. Net Asset Value per Share
The net assets (total assets less total liabilities) attributable to a share
class are often termed shareholders' funds and are converted into net asset
value per share by dividing by the number of shares in issue.
The net asset value per Share and the net assets attributable at the year end
were as follows:
Ordinary Shares 2023 2022
Net Asset Net Asset
Value Per Net Assets Value Per Net Assets
Share Attributable Share Attributable
Pence £'000 Pence £'000
UK Equity 182.11 125,436 194.35 143,374
Global Equity Income 265.53 66,743 249.00 62,638
Balanced Risk Allocation 149.56 6,190 169.87 7,085
Managed Liquidity 109.51 1,370 106.92 1,324
Net asset value per share is based on net assets at the year end and on the
number of shares in issue (excluding Treasury Shares) for each share class at
the year end.
17. Financial Instruments
This note summarises the risks deriving from the financial instruments that
comprise the Company's assets and liabilities.
The Company's financial instruments comprise the following:
· investments in equities, fixed interest securities and liquidity funds
which are held in accordance with the Company's investment objectives and the
investment objectives of the four Portfolios;
· short-term debtors, creditors and cash arising directly from operations;
· short-term forward foreign currency and futures contracts; and
· bank facility and short-term overdrafts, used to finance operations.
The financial instruments held in each of the four investment portfolios are
shown on pages 15 and l6; 23 and 24; 30 and 3l; and 37.
The accounting policies in note 1 include criteria for the recognition and the
basis of measurement applied for these financial instruments. Note 1 also
includes the basis on which income and expenses arising from financial assets
and liabilities are recognised and measured.
The Company's principal risks and uncertainties are outlined in the Strategic
Report on pages 49 to 53. This note expands on risk areas in relation to the
Company's financial instruments. The Portfolios are managed in accordance with
the Company's investment policies and objectives, which are set out on pages
44 to 46. The management process is subject to risk controls, which the Audit
Committee reviews on behalf of the Board, as described on page 69.
The principal risks that an investment company faces in its portfolio
management activities are set out below:
Market risk - arising from fluctuations in the fair value or future cash flows
of a financial instrument because of changes in market prices. Market risk
comprises three types of risk: currency risk, interest rate risk and other
price risk:
Currency risk - arising from fluctuations in the fair value or future cash
flows of a financial instrument because of changes in foreign exchange rates;
Interest rate risk - arising from fluctuations in the fair value or future
cash flows of a financial instrument because of changes in market interest
rates; and
Other price risk - arising from fluctuations in the fair value or future cash
flows of a financial instrument for reasons other than changes in foreign
exchange rates or market interest rates, whether those changes are caused by
factors specific to the individual financial instrument or its issuer, or
factors affecting all similar financial instruments traded in the market.
Liquidity risk - arising from any difficulty in meeting obligations associated
with financial liabilities.
Credit risk incorporating counterparty risk - arising from financial loss for
a company where the other party to a financial instrument fails to discharge
an obligation.
Risk Management Policies and Procedures
As an investment trust the Company invests in equities and other investments
for the long-term in accordance with its investment policies so as to meet its
investment objectives. In pursuing its objectives, the Company is exposed to a
variety of risks that could result in a reduction in the Company's net assets
or a reduction of the profits available for dividends. The risks applicable to
the Company and the Directors' policies for managing these risks follow. These
have not changed from those applying in the previous year.
The Directors have delegated to the Manager the responsibility for the
day-to-day investment activities of the Company as more fully described in the
Directors' Report.
The main risk that the Company faces arising from its financial instruments is
market risk - this risk is reviewed in detail below. Since the Company mainly
invests in quoted investments and derivative instruments traded on recognised
exchanges, liquidity risk and credit risk are significantly mitigated.
17.1 Market Risk
Market risk arises from changes in the fair value of future cash flows of a
financial instrument because of movements in market prices. Market risk
comprises three types of risk: currency risk (17.1.1), interest rate risk
(17.1.2) and other price risk (17.1.3).
The Company's Portfolio Managers assess the individual investment portfolio
exposures when making each investment decision for their Portfolios, and
monitor the overall level of market risk on the whole of their investment
portfolio on an ongoing basis. The Board meets at least quarterly to assess
risk and review investment performance for the four Portfolios and the
Company, as disclosed in the Board Responsibilities section of the Directors'
Report on page l. Borrowings can be used by the UK Equity and Global Equity
Income Portfolios, which will increase the Company's exposure to market risk
and volatility. The borrowing limits for these Portfolios are 25% and 20% of
attributable net assets, respectively.
17.1.1 Currency Risk
A majority of the Global Equity Income Portfolio, derivative instruments in
the Balanced Risk Allocation Portfolio and a small proportion of the UK Equity
Portfolio consist of assets, liabilities and income denominated in currencies
other than sterling. The Managed Liquidity Portfolio is not exposed to
currency risk and therefore not included in this analysis. As a result,
movements in exchange rates will affect the sterling value of those items.
Management of the currency risk
The Portfolio Managers monitor the separate Portfolios' exposure to foreign
currencies on a daily basis and report to the Board on a regular basis.
Forward foreign currency contracts can be used to limit the Company's exposure
to anticipated future changes in exchange rates and to achieve portfolio
characteristics that assist the Company in meeting its investment objectives
in line with its investment policies. All contracts are limited to currencies
and amounts commensurate with the exposure to those currencies. No such
contracts were in place at the current or preceding year end. Income
denominated in foreign currencies is converted to sterling on receipt. The
Company does not use financial instruments to mitigate the currency exposure
in the period between the time that income is accrued and its receipt.
Foreign Currency Exposure
The fair values of the Company's monetary items that have currency exposure at
31 May are shown below. Where the Company's investments (which are not
monetary items) are priced in a foreign currency they have been included
separately in the analysis so as to show the overall level of exposure.
UK Equity Portfolio:
Year ended 31 May 2023
Investments
Foreign at fair value
currency through
Debtors exposure profit or
(due from Cash on net loss Total net
brokers & and cash monetary that are foreign
dividends) equivalents items equities currency
Currency £'000 £'000 £'000 £'000 £'000
US Dollar 253 - 253 6,738 6,991
253 - 253 6,738 6,991
Year ended 31 May 2022
Canadian Dollar - - - 5,539 5,539
Euro 1 - 1 - 1
US Dollar 169 - 169 4,809 4,978
170 - 170 10,348 10,518
Global Equity Income Portfolio:
Year ended 31 May 2023
Investments
Foreign at fair value
currency through
Debtors exposure profit or
(due from Cash on net loss Total net
brokers & and cash monetary that are foreign
dividends) equivalents items equities currency
Currency £'000 £'000 £'000 £'000 £'000
Canadian Dollar - - - 906 906
Danish Krona 7 - 7 2,107 2,114
Euro 91 10 101 10,266 10,367
Hong Kong Dollar 49 - 49 5,089 5,138
Japanese Yen - - - 1,582 1,582
New Zealand Dollar - - - 155 155
Norwegian Krone 16 - 16 1,800 1,816
South Korean Won - - - 2,374 2,374
Swedish Krona 3 - 3 - 3
Swiss Franc 114 9 123 2,777 2,900
Taiwanese Dollar - - - 1,231 1,231
US Dollar 37 - 37 27,605 27,642
317 19 336 55,892 56,228
Year ended 31 May 2022
Canadian Dollar - - - 1,112 1,112
Euro 83 127 210 7,054 7,264
Hong Kong Dollar 43 - 43 7,156 7,199
Norwegian Krone 6 - 6 - 6
South Korean Won - - - 981 981
Swedish Krona 14 - 14 2,167 2,181
Swiss Franc 134 8 142 4,279 4,421
Taiwanese Dollar - - - 1,998 1,998
US Dollar 27 - 27 32,144 32,171
307 135 442 56,891 57,333
Balanced Risk Allocation Portfolio:
Year ended 31 May 2023
Derivative Derivative Investments
assets held liabilities Foreign at fair value
at fair held at fair currency through
value Debtors value Creditors exposure profit or
through (due from through (due to on net loss Total net
profit brokers & Cash profit brokers monetary that are foreign
or loss dividends)* at bank or loss and accruals) items equities currency
Currency £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Australian Dollar - 91 - (25) - 66 - 66
Canadian Dollar - 20 4 (1) - 23 - 23
Euro 38 16 14 - - 68 - 68
Japanese Yen 49 - 7 - (9) 47 - 47
US Dollar 35 248 19 (144) - 158 5 163
122 375 44 (170) (9) 362 5 367
Year ended 31 May 2022
Australian Dollar - 114 14 (88) - 40 - 40
Canadian Dollar - 20 5 (7) - 18 - 18
Euro 7 96 13 (57) - 59 - 59
Japanese Yen 46 (10) 7 (3) - 40 - 40
US Dollar 272 92 76 (65) - 375 5 380
325 312 115 (220) - 532 5 537
* Debtors includes collateral pledged for futures contracts.
Foreign Currency sensitivity
The preceding exposure analysis is based on the Company's monetary foreign
currency financial instruments held at each balance sheet date and takes
account of forward foreign exchange contracts, if used, that offset the
effects of changes in currency exchange rates.
The effect of strengthening or weakening of sterling against other currencies
to which the Company is exposed is calculated by reference to the volatility
of exchange rates during the year using the standard deviation of currency
fluctuations against the mean, giving the following exchange rate
fluctuations:
2023 2022
£/Australian Dollar +/-3.1% +/-2.6%
£/Canadian Dollar +/-3.7% +/-2.5%
£/Danish Krone +/-1.6% n/a
£/Euro +/-1.6% +/-1.1%
£/Hong Kong Dollar +/-3.3% +/-2.9%
£/Japanese Yen +/-2.3% +/-2.5%
£/New Zealand Dollar +/-2.0% n/a
£/Norwegian Krone +/-4.7% +/-2.0%
£/South Korean Won +/-2.6% n/a
£/Swedish Krona +/-1.9% +/-2.6%
£/Swiss Franc +/-2.3% +/-1.7%
£/Taiwan Dollar +/-2.5% +/-1.8%
£/US Dollar +/-3.4% +/-3.2%
The tables that follow illustrate the exchange rate sensitivity of revenue and
capital returns arising from the Company's financial non-sterling assets and
liabilities for the year for the UK Equity, Global Equity Income and Balanced
Risk Allocation Portfolios using the exchange rate fluctuations shown above.
If sterling had strengthened against other currencies by the exchange rate
fluctuations shown in the table above, this would have had the following after
tax effect:
UK Equity Portfolio:
2023 2022
Revenue Capital Total Revenue Capital Total
return return return return return return
£'000 £'000 £'000 £'000 £'000 £'000
Canadian Dollar - - - - (138) (138)
Euro (4) - (4) (3) - (3)
US Dollar (41) (229) (270) (32) (154) (186)
Total return (45) (229) (274) (35) (292) (327)
Net assets (45) (229) (274) (35) (292) (327)
Global Equity Income Portfolio:
2023 2022
Revenue Capital Total Revenue Capital Total
return return return return return return
£'000 £'000 £'000 £'000 £'000 £'000
Canadian Dollar - (34) (34) - (28) (28)
Danish Krone (1) (34) (35) - - -
Euro (6) (164) (170) (3) (79) (82)
Hong Kong Dollar (6) (168) (174) (3) (208) (211)
Japanese Yen - (36) (36) - - -
New Zealand Dollar - (3) (3) - - -
Norwegian Krone (5) (85) (90) - - -
Swedish Krona - - - (2) (56) (58)
South Korean Won (1) (62) (63) - (13) (13)
Swiss Franc (3) (64) (67) (3) (73) (76)
Taiwan Dollar (1) (31) (32) (1) (36) (37)
US Dollar (20) (939) (959) (16) (1,029) (1,045)
Total return (43) (1,620) (1,663) (28) (1,522) (1,550)
Net assets (43) (1620) (1,663) (28) (1,522) (1,550)
Balanced Risk Allocation Portfolio:
2023 2022
Revenue Capital Total Revenue Capital Total
return return return return return return
£'000 £'000 £'000 £'000 £'000 £'000
Australian Dollar - (2) (2) - (1) (1)
Canadian Dollar - (1) (1) - - -
Danish Krone - (1) (1) - - -
Euro - - - - (1) (1)
Japanese Yen - (1) (1) - (1) (1)
US Dollar - (6) (6) - (12) (12)
Total return - (11) (11) - (15) (15)
Net assets - (11) (11) - (15) (15)
If sterling had weakened by the same amounts, the effect would have been the
converse.
17.1.2 Interest Rate Risk
Interest rate movements may affect:
· the fair value of the investments in fixed interest rate securities;
· the level of income receivable on cash deposits; and
· the interest payable on variable rate borrowings.
Management of interest rate risk
The possible effects on fair value and cash flows that could arise as a result
of changes in interest rates are taken into account as part of the portfolio
management and borrowings processes of the Portfolio Managers. The Board
reviews on a regular basis the investment portfolio and borrowings. This
encompasses the valuation of fixed-interest and floating rate securities and
gearing levels.
When the Company has cash balances, they are held in variable rate bank
accounts yielding rates of interest dependent on the base rate of the
custodian or deposit taker. The Company has a £40 million (2022: £40
million), 364 day multicurrency revolving credit facility which is due for
renewal on 24 April 2024. The Company uses the facility when required at
levels approved and monitored by the Board.
Interest rate exposure
The Company also has available an uncommitted overdraft facility for
settlement purposes and interest is dependent on the base rate determined by
the custodian.
At 31 May the exposure of financial assets and financial liabilities to
interest rate risk is shown by reference to:
· floating interest rates (giving cash flow interest rate risk) - when the
interest rate is due to be reset; and
· fixed interest rates (giving fair value interest rate risk) - when the
financial instrument is due for repayment.
The following table sets out the financial assets and financial liabilities
exposure at the year end:
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
2023 £'000 £'000 £'000 £'000 £'000
Exposure to floating interest rates:
Investments held at fair value through profit or loss (1) - - 3,107 130 3,237
Cash and short term deposits 278 511 275 30 1,094
Bank Loans (9,650) - - - (9,650)
(9,372) 511 3,382 160 (5,319)
Exposure to fixed interest rates:
Investments held at fair value through profit or loss including UK Treasury Bills - - 2,430 - 2,430
Net exposure to interest rates (9,372) 511 5,812 160 (2,889)
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
2022 £'000 £'000 £'000 £'000 £'000
Exposure to floating interest rates:
Investments held at fair value through profit or loss (1) - - 3,512 130 3,642
Cash and short term deposits 322 215 401 9 947
Bank Loans (15,750) (5,350) - - (21,100)
(15,428) (5,135) 3,913 139 (16,511)
Exposure to fixed interest rates:
Investments held at fair value through profit or loss including UK Treasury Bills - - 2,716 - 2,716
Net exposure to interest rates (15,428) (5,135) 6,629 139 (13,795)
(1) Comprises holdings in the Invesco Liquidity Funds plc - Sterling.
The income on the iShares - Sterling Ultrashort Bond UCITS ETF and Invesco
Liquidity Funds plc - Sterling investments are affected by interbank lending
rates; the principal amount should normally remain stable regardless of
interest rate movements.
Interest rate sensitivity
At the maximum possible borrowing level of £40 million (2022: £40 million),
the maximum effect over one year of a 5% movement in interest rates would be
a £2,000,000 (2022: maximum effect over one year of a 0.5% movement:
£200,000) movement in the Company's income and net assets.
The effect of a 5% movement in the interest rates on investments held at fair
value through profit and loss would result in a £38,000 (2022 1% movement:
£7,000) maximum movement in the Company's income statement and net assets.
The above exposure and sensitivity analysis are not representative of the year
as a whole, since the level of exposure changes frequently throughout the
year.
Other price risks (i.e. changes in market prices other than those arising from
interest rate risk or currency risk) may affect the value of the equity
investments, but it is the role of the Portfolio Managers to manage the
Portfolios to achieve the best returns they can.
17.1.3 Other Price Risk
Management of other price risk
The Directors monitor the market price risks inherent in the investment
portfolios by meeting regularly to review performance.
The Company's investment portfolios are the product of the Manager's
investment processes and the application of the Portfolios' investment
policies. Their value will move according to the performance of the shares
held within them. However, the Portfolios do not replicate their respective
benchmarks or the markets in which the Portfolios invest, so their performance
may not correlate with them.
Notwithstanding the issue of correlation, if the fixed asset value of an
investment portfolio moved by 10% at the balance sheet date, the profit after
tax and net assets for the year would increase/decrease by the following
amounts:
Global Balanced
Equity Risk Managed
UK Equity Income Allocation Liquidity
£'000 £'000 £'000 £'000
2023
Profit after tax increase/decrease due to rise/fall of 10% 13,435 6,603 554 148
2022
Profit after tax increase/decrease due to rise/fall of 10% 15,845 6,763 623 145
17.2 Liquidity Risk
Management of liquidity risk
Liquidity risk is mitigated by the investments held by the Company's four
portfolios being diversified and the majority being readily realisable
securities which can be sold to meet funding commitments. If required, the
Company's borrowing facilities provide additional long-term and short-term
flexibility.
The Directors' policy is that in normal market conditions short-term
borrowings be used to manage short term liabilities and working capital
requirements rather than realising investments.
Liquidity risk
The contractual maturities of financial liabilities at the year end, based on
the earliest date on which payment can be required, are as follows:
Global
Equity Balanced Risk Allocation Managed
UK Equity Income Liquidity
3 months 3 months 3 months More than 3 months Company
or less or less or less 3 months or less Total
2023 £'000 £'000 £'000 £'000 £'000 £'000
Bank facility (1) 9,650 - - - - 9,650
Amount due to brokers - - 9 - - 9
Other creditors and accruals 270 144 17 - 2 433
Derivative financial instruments - - 136 50 - 186
9,920 144 162 50 2 10,278
Global
Equity Balanced Risk Allocation Managed
UK Equity Income Liquidity
3 months 3 months 3 months More than 3 months Company
or less or less or less 3 months or less Total
2022 £'000 £'000 £'000 £'000 £'000 £'000
Bank facility (1) 15,754 5,352 - - - 21,106
Amount due to brokers - 85 - - - 85
Other creditors and accruals 448 121 17 - 1 587
Derivative financial instruments - - 200 25 - 225
16,202 5,558 217 25 1 22,003
(1) Interest due on the bank facility at the year end was £nil (2022:
£6,000).
17.3 Credit Risk
Credit risk is that the failure of the counterparty in a transaction to
discharge its obligations under that transaction could result in the Company
suffering a loss.
This risk is managed as follows:
· investment transactions are carried out with a selection of brokers,
approved by the Manager and settled on a delivery versus payment basis.
Brokers' credit ratings are regularly reviewed by the Manager, so as to
minimise the risk of default to the Company;
· the derivative financial instruments are all exchange traded and the
exchange guarantees their settlement;
· the risk of counterparty exposure due to failed trades causing a loss to
the Company is mitigated by the daily review of failed trade reports and the
use of daily stock and cash reconciliations. Only approved counterparties are
used;
· the Company's ability to operate in the short-term may be adversely
affected if the Company's Manager, other outsource service providers, or their
delegates suffer insolvency or other financial difficulties. The Board reviews
annual controls reports from major service providers;
· where an investment is made in a bond, corporate or otherwise, the credit
rating of the issuer is taken into account so as to minimise the risk to the
Company of default; and
· cash balances are limited to a maximum of £5 million for each of the UK
Equity and Global Equity Income Portfolios and £2.5 million for each of the
Balanced Risk Allocation and Managed Liquidity Portfolios, with any one
deposit taker (other than cash collateral on derivative instruments). Only
deposit takers approved by the Manager are used. Cash held at brokers includes
any cash collateral on futures contracts and during the year only one futures
clearing broker, Merrill Lynch, was used.
The following table sets out the maximum credit risk exposure at the year end:
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
2023 £'000 £'000 £'000 £'000 £'000
Bonds (UK Treasury bills) - - 2,430 - 2,430
Cash held as short-term investment (1) - - 3,107 130 3,237
Unquoted securities - - 5 - 5
Derivative financial instruments - - (61) - (61)
Debtors (2) - - 460 4 464
Cash and short-term deposits 278 511 275 30 1,094
278 511 6,216 164 7,169
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
2022 £'000 £'000 £'000 £'000 £'000
Bonds (UK Treasury bills) - - 2,716 - 2,716
Cash held as short-term investment (1) - - 3,512 130 3,642
Unquoted securities - - 5 - 5
Derivative financial instruments - 137 - 137
Debtors (2) - - 321 - 321
Cash and short-term deposits 322 215 401 9 947
322 215 7,092 139 7,768
(1) Invesco Liquidity Funds plc, money market fund.
(2) Cash collateral pledged for futures contracts of £443,000 is included in
debtors (2022: £321,000) and excludes tax recoverable and prepayments and
accrued income.
18. Fair Values of Financial Assets and Financial Liabilities
`Fair value' in accounting terms is the amount at which an asset can be bought
or sold in a transaction between willing parties, i.e. a market-based,
independent measure of value. This note sets out the fair value hierarchy
comprising three `levels' and the aggregate amount of investments in each
level.
The financial assets and financial liabilities are either carried in the
balance sheet at their fair value (investments and derivative instruments), or
the balance sheet amount is a reasonable approximation of fair value.
FRS 102 as amended for fair value hierarchy disclosures sets out three fair
value levels. These are:
Level 1 - fair value based on quoted prices in active markets for identical
assets.
Level 2 - fair values based on valuation techniques using observable inputs
other than quoted prices within level 1.
Level 3 - fair values based on valuation techniques using inputs that are
not based on observable market data.
Categorisation within the hierarchy is determined on the basis of the lowest
level input that is significant to the fair value measurement of each relevant
asset/liability.
The valuation techniques used by the Company are explained in the accounting
policies note. The majority of the Company's investments are quoted equity
investments and Treasury bills which are deemed to be Level 1. Level 2
comprises all other quoted fixed income investments, derivative instruments
and liquidity funds held in the Balanced Risk Allocation and Managed Liquidity
Portfolios. Level 3 investments comprise any unquoted securities and the
remaining hedge fund investments of the Balanced Risk Allocation Portfolio.
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
2023 £'000 £'000 £'000 £'000 £'000
Financial assets designated at fair value through profit or loss:
Level 1 134,346 66,026 2,430 1,345 204,147
Level 2 (1) - - 3,232 130 3,362
Level 3 - - 5 - 5
Total for financial assets 134,346 66,026 5,667 1,475 207,514
Financial liabilities:
Level 2 (1) - derivatives liabilities held at fair value - - 186 - 186
(1) Balanced Risk Allocation Level 2 comprises Invesco Liquidity Funds plc
- Sterling of 3,107,000 and unrealised profit on derivative assets of
125,000. Managed Liquidity comprises entirely of Invesco Liquidity Funds
plc - Sterling. These financial assets have been classed as Level 2 due to
their nature as non-equity investments with underlying holdings using
evaluated prices from a third party pricing vendor.
Global Balanced
UK Equity Risk Managed Company
Equity Income Allocation Liquidity Total
2022 £'000 £'000 £'000 £'000 £'000
Financial assets designated at fair value
through profit or loss:
Level 1 158,450 67,630 2,716 1,315 230,111
Level 2 (1) - - 3,874 130 4,004
Level 3 - - 5 - 5
Total for financial assets 158,450 67,630 6,595 1,445 234,120
Financial liabilities:
Level 2 (1) - derivatives liabilities held at fair value - - 225 - 225
(1) Balanced Risk Allocation Level 2 comprises Invesco Liquidity Funds plc -
Sterling of 3,512,000 and unrealised profit on derivative assets of
362,000. Managed Liquidity comprises entirely of Invesco Liquidity Funds
plc - Sterling. These financial assets have been classed as Level 2 due to
their nature as non-equity investments with underlying holdings using
evaluated prices from a third party pricing vendor.
19. Capital Management
This note is designed to set out the Company's objectives, policies and
processes for managing its capital. The capital is funded from monies invested
in the Company by shareholders (both initial investment and any retained
amounts) and any borrowings by the Company.
The Company's total capital employed at 31 May 2023 was £209,389,000 (2022:
£235,521,000) comprising borrowings of £9,650,000 (2022: £21,106,000) and
equity share capital and other reserves of £199,739,000 (2022:
£214,421,000).
The Company's total capital employed is managed to achieve the Company's
investment objective and policy as set out on pages 44 and 46, including that
borrowings may be used to raise equity exposure up to a maximum of 25% of net
assets for the UK Equity Portfolio and 20% for the Global Equity Income
Portfolio. At the balance sheet date, maximum gross gearing was 4.8% (2022:
9.8%). The Company's policies and processes for managing capital are unchanged
from the preceding year.
The main risks to the Company's investments are shown in the Directors' Report
under the `Principal Risks and Uncertainties' section on pages 49 to 52. These
also explain that the Company has borrowing facilities which can be used in
accordance with each Portfolio's investment objectivity and policy and that
this will amplify the effect on equity of changes in the value of each
applicable portfolio.
The Board can also manage the capital structure directly since it has taken
the powers, which it is seeking to renew, to issue and buy back shares and it
also determines dividend payments.
The Company is subject to externally imposed capital requirements with respect
to the obligation and ability to pay dividends by Corporation Tax Act 2010 and
by the Companies Act 2006, respectively, and with respect to the availability
of the overdraft facility, by the terms imposed by the lender. The Board
regularly monitors, and has complied with, the externally imposed capital
requirements. This is unchanged from the prior year.
Borrowings comprise any drawings on the credit and/or overdraft facilities,
details of which are given in note 13.
20. Contingencies, guarantees and financial commitments
Any liabilities the Company is committed to honour but which are dependent on
a future circumstance or event occurring would be disclosed in this note if
any existed.
There were no contingencies, guarantees or financial commitments of the
Company at the year end (2022: £nil).
21. Related party transactions and transactions with the Manager
A related party is a company or individual who has direct or indirect control
or who has significant influence over the Company. Under accounting standards,
the Manager is not a related party.
Under UK GAAP, the Company has identified the Directors as related parties.
The Directors' remuneration and interests have been disclosed on pages 70 to
72 with additional disclosure in note 4. No other related parties have been
identified.
Details of the Manager's services and fees are disclosed in the Director's
Report on pages 62 and 63 and note 3.
22. Post Balance Sheet Events
Any significant events that occurred after the Company's financial year end
but before the signing of the balance sheet will be shown here.
There are no significant events after the end of the reporting period
requiring disclosure.
The figures and financial information for the year ended 31 May 2023 are
extracted from the Company's annual financial statements for that year and do
not constitute statutory accounts. The Company's annual financial statements
for the year to 31 May 2023 have been audited but have not yet been delivered
to the Registrar of Companies. The Auditor's report on the 2023 annual
financial statements was (i) unqualified, (ii) did not include a reference to
any matters to which the auditor drew attention by way of emphasis without
qualifying their report and (iii) did not contain a statement under section
498 (2) or (3) of the Companies Act 2006.
The figures and financial information for the year ended 31 May 2022 are
compiled from an extract of the published accounts for that year and do not
constitute statutory accounts. Those accounts have been delivered to the
Registrar of Companies. The Auditor's report on the 2022 annual financial
statements was (i) unqualified, (ii) did not include a reference to any
matters to which the auditor drew attention by way of emphasis without
qualifying their report and (iii) did not contain a statement under section
498 (2) or (3) of the Companies Act 2006.
The audited annual financial report will be posted to shareholders during
August 2023, and will be delivered to the Registrar of Companies, shortly.
Copies may be obtained during normal business hours from the Company's
Registered Office, from its correspondence address, 43-45 Portman Square,
London W1H 6LY, and via the web pages of all of the Share classes on the
Manager's website at www.invesco.co.uk/investmenttrusts.
A copy of the annual financial report will be submitted shortly to the
National Storage Mechanism ("NSM") and will be available for inspection at the
NSM, which is situated
at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
Notice of Annual General Meeting
THIS Notice of Annual General Meeting IS IMPORTANT AND REQUIRES YOUR IMMEDIATE
ATTENTION. If you are in any doubt as to what action to take, you should
consult your stockbroker, solicitor, accountant or other appropriate
independent professional adviser authorised under the Financial Services and
Markets Act 2000. If you have sold or otherwise transferred all your shares in
Invesco Select Trust plc, please forward this document and the accompanying
Form of Proxy to the person through whom the sale or transfer was effected,
for transmission to the purchaser or transferee.
NOTICE IS GIVEN that the Annual General Meeting (`AGM') of Invesco Select
Trust plc will be held at 43-45 Portman Square, London W1H 6LY at 11.30am on
2 October 2023 for the following purposes:
Ordinary Business of the Company
To consider and, if thought fit, to pass the following resolutions which will
be proposed as an Ordinary Resolutions:
1. To receive the Annual Financial Report for the year ended 31 May 2023.
2. To approve the Directors' Remuneration Policy.
3. To approve the Annual Statement and Report on Remuneration.
4. To re-elect Craig Cleland as a Director of the Company.
5. To re-elect Davina Curling as a Director of the Company.
6. To re-elect Mark Dampier as a Director of the Company.
7. To re-elect Victoria Muir as a Director of the Company.
8. To re-elect Tim Woodhead as a Director of the Company.
9. To re-appoint Grant Thornton UK LLP as Auditor to the Company.
10. To authorise the Audit Committee to determine the Auditor's remuneration.
Ordinary Business of the UK Equity Share Class
Only holders of UK Equity Shares may vote on this resolution, which will be
proposed as an Ordinary Resolution:
11. To approve the UK Equity Share Class Portfolio dividend payment policy as
set out on page 46 of the 2023 Annual Financial Report.
Ordinary Business of the Global Equity Income Share Class
Only holders of Global Equity Income Shares may vote on this resolution, which
will be proposed as an Ordinary Resolution:
12. To approve the Global Equity Income Share Class Portfolio dividend
payment policy as set out on page 46 of the 2023 Annual Financial Report.
Special Business of the Company
To consider and, if thought fit, to pass the following resolution which will
be proposed as an Ordinary Resolutions:
13. That:
the Directors be and they are hereby generally and unconditionally authorised,
for the purpose of section 551 of the Companies Act 2006 as amended from time
to time prior to the date of passing this resolution (`2006 Act') to exercise
all the powers of the Company to allot relevant securities (as defined in
sections 551(3) and (6) of the 2006 Act) up to an aggregate nominal amount
equal to £457,684 of UK Equity Shares, £168,297 of Global Equity Income
Shares, £28,117 of Balanced Risk Allocation Shares and £8,360 of Managed
Liquidity Shares, provided that this authority shall expire at the conclusion
of the next AGM of the Company or the date falling 15 months after the passing
of this resolution, whichever is the earlier, but so that such authority shall
allow the Company to make offers or agreements before the expiry of this
authority which would or might require relevant securities to be allotted
after such expiry and the Directors may allot relevant securities in pursuance
of such offers or agreements as if the power conferred hereby had not expired.
To consider and, if thought fit, to pass the following resolutions which will
be proposed as Special Resolutions:
14. That:
the Directors be and they are hereby empowered, in accordance with sections
570 and 573 of the Companies Act 2006 as amended from time to time prior to
the date of the passing of this resolution (`2006 Act') to allot shares in
each class (UK Equity, Global Equity Income, Balanced Risk Allocation and
Managed Liquidity) for cash, either pursuant to the authority given by
resolution 13 or (if such allotment constitutes the sale of relevant shares
which, immediately before the sale, were held by the Company as treasury
shares) otherwise, as if section 561 of the 2006 Act did not apply to any such
allotment, provided that this power shall be limited:
(a) to the allotment of shares in connection with a rights issue in favour of
all holders of a class of share where the shares attributable respectively to
the interests of all holders of shares of such class are either proportionate
(as nearly as may be) to the respective numbers of relevant Shares held by
them or are otherwise allotted in accordance with the rights attaching to such
shares (subject in either case to such exclusions or other arrangements as the
Directors may deem necessary or expedient in relation to fractional
entitlements or legal or practical problems under the laws of, or the
requirements of, any regulatory body or any stock exchange in any territory or
otherwise);
(b) to the allotment (otherwise than pursuant to a rights issue) of equity
securities up to an aggregate nominal amount of £68,652 of UK Equity Shares,
£25,244 of Global Equity Income Shares, £4,217 of Balanced Risk Allocation
Shares and £1,254 of Managed Liquidity Shares; and
(c) to the allotment of equity securities at a price of not less than the net
asset value per share as close as practicable to the allotment or sale
and this power shall expire at the conclusion of the next AGM of the Company
or the date 15 months after the passing of this resolution, whichever is the
earlier, but so that this power shall allow the Company to make offers or
agreements before the expiry of this power which would or might require equity
securities to be allotted after such expiry as if the power conferred by this
resolution had not expired; and so that words and expressions defined in or
for the purposes of Part 17 of the 2006 Act shall bear the same meanings in
this resolution.
15. That:
the Company be generally and subject as hereinafter appears unconditionally
authorised in accordance with section 701 of the Companies Act 2006 as amended
from time to time prior to the date of passing this resolution (`2006 Act') to
make market purchases (within the meaning of section 693(4) of the 2006 Act)
of its issued shares in each share class (UK Equity, Global Equity Income,
Balanced Risk Allocation and Managed Liquidity).
PROVIDED ALWAYS THAT:
(i) the maximum number of shares hereby authorised to be purchased shall be
14.99% of each class of the Company's share capital as at the date of the AGM;
(ii) the minimum price which may be paid for a share shall be 1p;
(iii) the maximum price which may be paid for a share in each share class
must not be more than the higher of: (a) 5% above the average of the
mid-market values of the shares for the five business days before the purchase
is made; and (b) the higher of the price of the last independent trade in the
shares and the highest then current independent bid for the shares on the
London Stock Exchange;
(iv) any purchase of shares will be made in the market for cash at prices
below the prevailing net asset value per share (as determined by the
Directors);
(v) the authority hereby conferred shall expire at the conclusion of the next
AGM of the Company or, if earlier, on the expiry of 15 months from the passing
of this resolution unless the authority is renewed at any other general
meeting prior to such time; and
(vi) the Company may make a contract to purchase shares under the authority
hereby conferred prior to the expiry of such authority which will be executed
wholly or partly after the expiration of such authority and may make a
purchase of shares pursuant to any such contract.
16. That:
the period of notice required for general meetings of the Company (other than
Annual General Meetings) shall be not less than 14 days.
Dated 1 August 2023
By order of the Board
Invesco Asset Management Limited
Company Secretary
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