REG-Invesco Perp Sel Tst: Annual Financial Report
31/07/2019 07:05
Invesco Perpetual Select Trust plc
Annual Financial Report Announcement
Year Ended 31 May 2019
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FINANCIAL PERFORMANCE
CUMULATIVE TOTAL RETURNS((1)(2)) TO 31 MAY 2019
UK Equity Portfolio ONE YEAR THREE YEARS FIVE YEARS
Net Asset Value –4.9% 17.3% 33.6%
Share Price –3.1% 19.0% 36.3%
FTSE All-Share Index –3.2% 28.4% 29.3%
Global Equity Income Portfolio ONE YEAR THREE YEARS FIVE YEARS
Net Asset Value –1.3% 37.4% 55.1%
Share Price –0.1% 38.4% 56.1%
MSCI World Index (£) 5.3% 49.6% 75.0%
Balanced Risk Allocation Portfolio ONE YEAR THREE YEARS FIVE YEARS
Net Asset Value –2.7% 13.6% 17.8%
Share Price –0.7% 16.1% 19.4%
Merrill Lynch 3 month LIBOR +5% pa 5.8% 16.7% 27.8%
Managed Liquidity Portfolio ONE YEAR THREE YEARS FIVE YEARS
Net Asset Value 1.3% 1.7% 1.5%
Share Price –0.5% 0.5% 0.1%
YEAR END NET ASSET VALUE, SHARE PRICE AND PREMIUM/(DISCOUNT)
SHARE CLASS NET ASSET VALUE (PENCE) SHARE PRICE (PENCE) DISCOUNT
UK Equity 173.1 173.5 0.2%
Global Equity Income 197.6 195.0 (1.3)%
Balanced Risk Allocation 139.5 138.5 (0.7)%
Managed Liquidity 104.9 101.5 (3.2)%
((1) ) Defined in the Glossary of Terms and Alternative Performance Measures,
including reconciliations, on pages 105 to 108.
((2) ) Source: Refinitiv.
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CHAIRMAN’S STATEMENT
The Company
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 and policies of all of the Portfolios are set out on
pages 29 to 32.
The Company enables shareholders to adjust their asset allocation to reflect
their views of prevailing market conditions. As set out on the inside of the
front cover, shareholders have the opportunity to convert between share
classes, free of capital gains tax, every three months.
Performance
The NAV total return of the UK Equity Share Portfolio over the year was
–4.9%, which compares with the total return of –3.2% from the FTSE
All-Share Index. The share price total return was –3.1%.
The NAV total return of the Global Equity Income Share Portfolio over the year
was –1.3%, which compares with the total return from the MSCI World Index
(£) of +5.3%. The share price total return was –0.1%.
The NAV total return of the Balanced Risk Allocation Share Portfolio was
–2.7%, which compares with its benchmark of 3 months LIBOR plus 5% which
returned +5.8%. The share price total return was –0.7%.
The NAV total return of the Managed Liquidity shares was +1.3%. The share
price total return was –0.5%.
It is disappointing, both for the Board and for shareholders, to report on a
year in which all three portfolios based on risk assets failed to meet or
exceed their benchmarks. It is some small consolation that the second half of
the financial year saw a significant improvement. The total return of the UK
Equity Share Portfolio was +7.1% for the six months to the end of May compared
with a return of +4.5% for the FTSE All-Share Index. Similarly the Balanced
Risk Allocation Share Portfolio recovered its poise and rose by 4.7% compared
with a rise in 3 months LIBOR plus 5% of 3.0%. The margin of underperformance
by the Global Equity Income Share Portfolio was much smaller than in the first
half of the year with a rise of 1.6% compared with a rise of 2.7% in the MSCI
World Index (£). The Board has engaged in active discussion with the
portfolio management team to understand the sources of this underperformance.
The UK Portfolio benefited from the listing of AJ Bell, our only unquoted
investment. The company has been extremely successful during our ownership of
the shares and was very well received on its public debut. The holding dates
from 2007 and was the only exception to a policy of not investing in unquoted
companies that has been in place from the Company’s launch. With the listing
of AJ Bell we have taken the decision to include this restriction in the
annual report investment policy disclosure. Otherwise the Portfolio benefited
from better recognition of the significant inherent value within the unloved
UK market, especially when it became apparent through strong corporate
progress. The Board has recognised that the UK Equity Share Portfolio
manager’s stance is based on clear value and remains supportive. The Global
Equity Income Share Portfolio’s improvement stemmed from the better relative
performance of the laggard UK and Continental European markets and also the
unfashionable oil sector as the large US technology stocks lost some of their
bounce.
On the other two share classes, the Balanced Risk Allocation Share Portfolio
seems to be recovering from a setback, the causes of which are well
articulated by the portfolio manager, in October and November; and holders of
Managed Liquidity Shares will recall from my statement in the half year report
that the principal investment has been changed to PIMCO Sterling Short
Maturity Source UCITS ETF, from the Invesco Money Fund (UK), following a
regulatory change.
Economic development over the period was quite stable though there does appear
to be a gentle trend towards slower growth worldwide. This caused some sharp
reversals in financial markets as they swung from the expectation of several
rises in the US Federal Reserve (Fed) Funds rate to the belief that the next
change is more likely to be downwards.
The political scene was much more dramatic, especially in the UK and the US.
The Brexit saga seems to come in several acts, each painfully like the
previous one. It remains to be seen whether the new Prime Minister will adopt
a different and more implementable policy both towards the European Union and
the House of Commons. The US government, or at least the President, seems
unconcerned by major policy swings, especially in trade, and, regarding the
Middle East, seems only to be committed to Israel (or at least a Likud-led
government there) and Saudi Arabia as allies. It also appears to have decided
that China is a long-term adversary and not a collaborator.
Outlook
After a financial year of low returns and reasonable profit growth, markets
have become rather cheaper. Economic growth is still continuing, though at a
slightly slower pace, and profits are still rising. Given the prevalence of
very low nominal and real interest rates, markets should offer reasonable,
though probably not very exciting returns, especially because there is very
little euphoria around. However, it seems likely that growth will be slower
and may indeed tip over into recession further out as US tax cuts lose their
effect and China suffers from possible weakness of demand as it shifts from
export and investment-led growth to domestic consumption. Europe still suffers
from the problems of the Euro, exacerbated by German economic policy and the
weakness of the banking system. To combat any recessionary tendency may
require a shift towards government-led infrastructure and climate change based
investment and therefore a different mix of fiscal and monetary policy.
The political scene is different and unpredictable. At any given moment it is
possible that there is about to be either a real war in, for example, the Gulf
or Venezuela, or a trade war between the US and almost any other country. Most
of this comes from the extremely volatile character of the current US
administration and President and it is impossible to predict whether
sabre-rattling will turn into anything serious. The greatest restraint is the
polling knowledge that the US public now has a deep aversion to foreign
adventures and wars. More parochially, I wrote a year ago that “a Brexit
settlement will be reached [during this year].” It hasn’t, yet a year on
the prediction still seems valid. What form it will take is still unclear, and
even a new Prime Minister may take a little while to assess the opposing
forces bearing on his government and formulate a coherent policy. Meantime 31
October isn’t very far away.
If one tries to stand back from the immediate noise and look further ahead it
is probable that China’s relative rise will continue, even if its lack of
population growth holds it back a little. It will acquire competitive
technology where it doesn’t have it and the existing economic
interdependence makes it much harder for the US to shut it out than was the
case with the Soviet Union. Climate change will be a dominant theme for
decades to come, whether its effects are ultimately contained or cause major
dislocation and political strife. Politicians, whether in democracies or
autocracies, will have to deal with the disillusionment now felt by many of
their citizens.
The Board
I am retiring as Chairman, and as a Director, at the Annual General Meeting in
October. My successor will be Graham Kitchen who has great knowledge of
investment and the investment company sector. We are also close to appointing
a new Director, details of whom will be announced in due course. I am proud to
have been a Director, and then Chairman, of an innovative investment company
whose aim has always been to satisfy the needs of the groups of shareholders
who originally joined this Company’s predecessor in 1999 and to provide the
same service to like minded individuals. I believe that despite occasional
setbacks we have achieved this and that the Company is well placed to continue
to do so.
Dividends
We continue to apply the dividend policy adopted four years ago, and approved,
albeit with advisory votes, by shareholders last year, 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 both Share classes were 1.5p per share. The
fourth dividends were 2.1p per share for the UK Equity Shares, bringing the
total to 6.6p per share for the year, and 2.4p per share for the Global Equity
Income Shares, bringing that total to 6.9p per share for the year.
For the Global Equity Income Shares the revenue earned in the year matched the
dividends paid and no contribution from capital was required (2018: nil).
However, for the UK Equity Shares a contribution from capital of approximately
0.9p per share was required to achieve the dividend level (2018: 0.3p) per
share.
We intend to continue with this policy and investors are again being given
advisory votes on it. We continue to target at least maintaining the dividend
level from year to year for each of the equity Portfolios.
The first interim dividends declared in respect of the year to May 2020, which
will be paid on 16 August 2019 to shareholders on the register on 26 July
2019, were 1.5p per share for UK Equity and 1.55p per share for Global Equity
Income.
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 the Balanced Risk Allocation Shares to the extent required,
having taken into account the dividends paid on the other Share classes, to
maintain the Company’s status as an investment trust. No dividends have been
paid on the Balanced Risk Allocation Shares.
In the prevailing low interest rate environment the Managed Liquidity
Portfolio had not been producing sufficient net revenue to cover the
administrative costs of distribution and Managed Liquidity shareholders had
consequently not received any dividends since May 2012. I am pleased to report
the situation has improved a little during this past year and the Board has
declared a dividend of 0.8p per Managed Liquidity Share, payable on 16 August
2019 to shareholders on the register on 26 July 2019. It remains the
Directors’ intention to distribute substantially all net revenues earned by
the Portfolio going forward. Given the quantum involved it is unlikely that
such payments will be more frequent than annual and may indeed be less
frequent.
Discount Policy
The 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 policy has been successful to date and the
level of share buy backs since its adoption has been relatively modest. The
ongoing implementation of this policy is dependent upon the 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.
Share Capital Movements
During the year to 31 May 2019, the Company bought back and placed in treasury
2,313,500 UK Equity Shares, 2,422,023 Global Equity Income Shares, 376,218
Balanced Risk Allocation Shares and 472,000 Managed Liquidity Shares. Other
than as an artefact of the share conversion process no Shares were issued or
sold from treasury and no treasury shares were cancelled. Since the year end a
further 39,772 UK Equity Shares and 201,766 Global Equity Income Shares have
been bought back into treasury. The Board intends to use the Company’s buy
back and issuance authorities when this will benefit existing shareholders as
a whole and to operate the discount control policy mentioned above, and will
ask shareholders to renew the authorities as and when appropriate.
Share Class Conversions
The Company enables shareholders to adjust their asset allocation to reflect
their views of prevailing market conditions. 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 2019; 1 November 2019; 3
February 2020; and 1 May 2020. Should you wish to convert Shares at any of
these dates, conversion forms, which are available on the Manager’s website
at www.invesco.co.uk/investmenttrusts, or CREST instructions must be received
at least 10 days before the relevant conversion date.
Annual General Meeting (‘AGM’)
The business of the AGM is summarised in the Directors’ Report on pages 54
to 56. The AGM will be held at 43-45 Portman Square, London W1H 6LY at 11.30
am on 3 October 2019 and shareholders are cordially invited to attend.
Refreshments will be provided. The Board recommends that shareholders vote in
favour of all resolutions as each of the Directors intend to do in respect of
their own shares.
Patrick Gifford
Chairman
30 July 2019
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STRATEGIC REPORT
UK EQUITY SHARE PORTFOLIO
MANAGER’S REPORT
Investment Objective
The investment objective of the UK Equity Portfolio is to provide shareholders
with an attractive real long-term total return by investing primarily in UK
quoted equities.
Market and Economic Review
The last twelve months have been a challenging time to manage equity
portfolios. The FTSE All-Share Index reached a record high a week before the
period under review began. I wrote at the time that the outlook for global
economic growth had improved. Expectations for interest rates had increased
accordingly and, along with more positive signs from Brexit negotiations, this
suggested that a recovery in the share prices of modestly valued, economically
sensitive companies, especially UK Financials, could be imminent. This would
have been to the benefit of the Portfolio. Sadly, a year on, this has proved
to have been a false dawn with two principal issues affecting global growth
and weighing on extremely volatile equity markets over the last twelve months.
The first is the US-China trade war. What began with an innocuous-looking
tariff on Chinese solar panels escalated through the year with increasing
levies affecting a wider range of goods before ratcheting up significantly in
December with the arrest in Canada of the Huawei CFO. From the start of the
period under review in June 2018, confidence was dented and equity markets
began to decline.
The second and arguably bigger impact was US interest rate policy. The US
Federal Reserve (Fed) had begun to raise rates two years earlier. Against the
supportive backdrop this time last year of full employment, wage growth of 3%,
strong consumer confidence and GDP growth in the second quarter of 2018 of
over 4%, they saw the opportunity to continue the progress towards more normal
monetary policy. However just as the boost from tax cuts faded, the trade
dispute worsened and growth weakened. After three rate rises through the
balance of the year and with bond markets increasingly nervous of the economic
outlook, the Fed’s assertion in December that policy was on “autopilot”
caused a loss of confidence and bond markets moved to price in cuts to
interest rates.
A sharp fall in the price of Brent crude oil from $85 in October to $50 in
December added to the narrative that global growth was slowing, and by the
half-year stage in November, the FTSE All-Share Index had fallen by almost 8%.
In December, the worst final month of the year for the S&P since 1931, the
FTSE All-Share Index declined a further 4%.
The new year saw greater optimism surrounding US-China trade talks as well as
signals from the Fed that monetary policy may not be on “autopilot” after
all. Between October and May the bond market moved from pricing in three
increases for 2019 to three cuts and global equity markets duly rallied. By
the end of March the FTSE All-Share Index had recovered two thirds of the
losses from the fourth quarter of 2018 and by the end of April was 14% above
the December low. Brent crude oil had climbed back to US$75 per barrel.
Despite the optimism creeping into headline index levels, political
uncertainty persisted at home. The Bank of England cut its official 2019 UK
growth estimate from +1.7% to just +1.2% as the question of the UK’s
departure from the European Union continued to dominate the agenda. As the 29
March deadline for Britain’s exit drew closer, Parliament prepared to take
control of the process. The Prime Minister’s stance softened and the chances
of leaving without a deal were seen to recede. Sterling strengthened against
international currencies over the first quarter, peaking at US$1.33 and
€1.17 in March as an extension to Article 50 was secured, avoiding a no-deal
exit.
The UK economy proved remarkably resilient throughout this period, as did
trends in employment and disposable income. However, as the 29 March deadline
was missed and the new 31 October deadline was set, some uncertainty crept in
and impacted consumer confidence and retail sales, the latter not helped by an
extremely tough comparative period in 2018, which was boosted by both weather
and the Royal wedding. UK GDP and manufacturing output data for the month of
April were very weak at -0.4% and -3.9% respectively, hinting at an artificial
boost in the prior quarter as inventories were built into March to ensure
continuity of supply.
In late May the Prime Minister announced her intention to resign as leader of
the Conservatives. With most of the candidates to replace her from the
Eurosceptic wing of the party and a number of them stating that they intended
to take the UK out on 31 October with or without a deal, sterling showed
renewed weakness and at the end of May had fallen to US$1.255.
Whilst the index was volatile during the period there were even more extreme
relative sector and style moves as the market once again defaulted to old
favourites, leaving reliable sources of growth such as Consumer Staples and
Industrial Engineering companies trading at elevated levels.
Portfolio Performance
AJ Bell provided the standout contribution to returns over the period. The
investment platform is a longstanding holding and completed an initial public
offering in December 2018. The shares traded very strongly, ending the period
up 150% on the IPO price, as strong institutional demand increased further
following a positive trading update at the end of April.
In retail, the holdings in JD Sports Fashion and Next defied the crisis facing
many high-street retailers to provide strong contributions to performance over
the year. In March 2019, Next released full-year results that were in line
with consensus expectations. The 15% rise in online sales offset declines
in-store, demonstrating the resilience of the company’s multi-channel
offering as industry sales move increasingly online. Meanwhile, JD Sports
Fashion completed the acquisitions of US sportswear retailer The Finish Line
Inc., and smaller UK rival Footasylum.
The Portfolio has only very selective exposure to the mining sector and the
sole industrial metal name, Bushveld Minerals, proved a notable contributor.
Shares in the AIM-listed vanadium producer rose steadily through to November
2018. The shares were buoyed by rising vanadium prices and by news that the
company had struck a deal to consolidate its ownership of Strategic Minerals
Corporation, the holding company of Vametco, Bushveld’s South African
vanadium asset. More recent performance has been subdued, but the miner
remained among the biggest contributors to performance over the year.
Media business Future was another strong performer. The company has executed
to plan over the past year, trading well and making a number of strategic
acquisitions. This mix of organic and acquisition-led growth resulted in
meaningful upgrades to analyst forecasts which in turn drove a rerating, a
powerful combination that saw the shares almost treble. Johnson Service
performed particularly strongly in 2019 as the market began to recognise the
quality and defensive nature of the earnings, supported by the release of its
full year results for 2018.
Conversely, the Portfolio’s holding in Babcock International proved very
disappointing for performance over the year. The company’s share price had
started the period well, rallying almost 50% from the February 2018 low, as
management appeared to convince the market that concerns around margins and
the outlook for revenues were unfounded. However, the company then reduced its
full year revenue growth guidance in July and the share price once again came
under pressure. This negativity persisted for the rest of the review period
compounded by an anonymous piece of research that questioned the
sustainability of margins. Despite subsequent downgrades the recent capital
markets day provided reassurance that the current levels of profitability and
returns are sustainable. In light of the extreme reached in the valuation the
position has been substantially increased.
easyJet was also among the largest detractors to performance. The share price
was weak for much of the year, beset by disappointing demand during an
unusually hot summer across Northern Europe and also by Brexit. In May 2019,
the company released half-year results that were in line with guidance and
reiterated full-year forecasts.
The share price of floorings manufacturer Victoria fell very sharply at the
end of October 2018, following the release of an unexpected trading update.
The company had sought to simplify and extend its debt finance arrangements,
and in so doing was obliged to release commentary on trading and near-term
strategy. The guidance for lower margins but higher revenues was taken badly
by the market and the logic of the proposed bond issue was misunderstood,
leaving the shares exposed to heavy short-selling. A meeting with company
management provided comfort that the fundamental investment case remained
intact. I have since conducted visits to three of the company’s
manufacturing sites and my conviction in the stock remains. As such I have
taken advantage of the significant share price weakness to increase the
Portfolio’s holding by almost half.
Amid extended political uncertainty, the market has continued to avoid
domestically exposed cyclicals and banks have been weak globally given the
declining outlook for interest rates. The Portfolio retains a large weighting
in Barclays and the attempt by activist investor Sherborne Investors
(Guernsey) to gain a seat on the Board of Directors created further
uncertainty. The size of the position reflects my continued conviction that
the stock market’s valuation of Barclays is overly pessimistic, failing to
reflect the company’s prospects of achieving long standing targets for
capital generation and therefore the potential to return additional capital to
shareholders. The shares are priced for no improvement in net interest margins
and for a sharp increase in impairments, which looks something like a worst
case scenario. This leaves the balance of risk and reward skewed firmly in
favour of holding the shares.
Elsewhere in financials a relatively new position in Plus500, a financial
trading platform, proved problematic. The company guided downwards on revenues
which called into question the quality and sustainability of the business and
introduced significant volatility to the outlook for profits. On balance I
decided to exit the position.
Portfolio Strategy and Outlook
Once again I find myself reflecting on a very difficult environment to be
managing money, at least with a valuation focused philosophy and a portfolio
so weighted to outright Value. There have been the odd rays of sunlight - AJ
Bell, HomeServe, Future - all holdings in high growth companies that have
performed very strongly and now trade on very high multiples of near term
earnings. However, this performance has also served to underline the
polarisation that now exists in the market between perceived winners and
losers, between the Value style on one hand and the Growth and Quality styles
on the other.
Unfortunately there are few signs of imminent relief. Geopolitics and the
global economic picture look more uncertain by the day, most obviously as a
result of the escalating US-China trade war which has seen lead indicators
weaken globally and forced a reluctant Fed to back off tightening interest
rates and contemplate monetary easing of one form or another.
Low growth and low interest rates therefore look set to persist and central
banks appear as determined as ever to do “whatever it takes” to avoid a
debt deflation. No sooner has unconventional monetary policy been reversed
than it is once again being contemplated, such that the ‘Japanification’
of other developed economies is now a regularly discussed theme. The UK
picture is clouded further by Theresa May’s resignation and the ensuing
leadership contest which leaves a parliamentary stalemate and a no deal exit
from the EU a possibility once again.
Companies with predictable revenues and earnings have always attracted a
premium rating and those offering less visibility have always merited a
discount. However, the current climate has produced a divergence in valuations
between perceived winners and losers that is extreme, levels only seen twice
in the last thirty years, at the height of the tech bubble in 1999 and
immediately prior to the Global Financial Crisis in 2008/9. At the top end, I
believe stock markets are now at the limits of the rerating that has driven
share price performance in recent years. The reciprocal of these high
multiples is such low earnings yields that even if growth expectations are
met, investing in these companies is unlikely to deliver an attractive total
return. At the bottom end, earnings yields are so high that they alone offer a
compelling total return. Should these companies grow earnings in the way I
believe possible or ever be considered worthy of a rerating by the market, the
total return from this point will be significant. This is not what the market
expects. It is an increasingly contrarian approach that has seen
underperformance in recent periods. Regardless, now is not the time to
compromise on my conviction that valuation does matter.
So I am not changing the shape of the Portfolio but have exited positions
where conviction had fallen or where I saw some risk of missing earnings
forecasts that was not adequately reflected in the valuation. In the process I
have taken gearing from 11% to 3%. This both reduces risk and creates scope to
take advantage of any pronounced market weakness that may emerge in the
future. I have also increased the weighting to gold miners to 8%. These
holdings should provide insurance against tail risks, both geo-political
(Iran, US/China tensions, loss of the US dollar’s reserve currency status)
and economic (a credit event, widening US fiscal deficit and dollar weakness)
and should in theory be inversely correlated with the market in times of
stress.
I believe that a low valuation is the ultimate defensive attribute and a
stretched valuation is a risk. The stock market seems instead to be
interpreting a low valuation as evidence of a weak business and a high
valuation to be the evidence of a company that can do no wrong. The investment
objective for this Portfolio is “to provide shareholders with an attractive,
real, long-term total return”. The Portfolio today consists largely of
companies that provide the prospect of that return from the current level of
capital generation: if earnings do not grow and current depressed multiples
simply persist, I believe that objective can still be met. If earnings grow as
I anticipate or if a rerating should occur, it should be exceeded.
James Goldstone
Portfolio Manager
30 July 2019
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UK EQUITY SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 31 MAY 2019
Ordinary shares listed in the UK unless stated otherwise
COMPANY SECTOR† MARKET VALUE £’000 % OF PORTFOLIO
BP Oil & Gas Producers 3,246 5.3
AJ Bell Financial Services 2,889 4.7
Barclays Banks 2,714 4.4
British American Tobacco Tobacco 2,145 3.5
Royal Dutch Shell – B Shares Oil & Gas Producers 2,117 3.5
Coats General Industrials 2,104 3.4
Tesco Food & Drug Retailers 2,062 3.4
JD Sports Fashion General Retailers 1,875 3.1
Next General Retailers 1,814 3.0
Royal Bank of Scotland Banks 1,635 2.7
RELX Media 1,512 2.5
Johnson Service Support Services 1,273 2.1
Babcock International Aerospace & Defence 1,240 2.0
Legal & General Life Insurance 1,156 1.9
Rolls-Royce Aerospace & Defence 1,074 1.8
Rolls-Royce – C shares 9
Summit Properties Real Estate Investment & Services 1,076 1.8
Victoria Household Goods & Home Construction 1,073 1.7
XPS Pensions Financial Services 1,053 1.7
Phoenix Spree Deutschland Real Estate Investment & Services 1,033 1.7
Future Media 1,022 1.7
Bushveld Minerals Mining 984 1.6
MJ Gleeson Household Goods & Home Construction 968 1.6
PRS REIT Real Estate Investment Trusts 945 1.5
Chesnara Life Insurance 939 1.5
Sigma Capital Financial Services 933 1.5
Hollywood Bowl Travel & Leisure 868 1.4
Endeavour Mining – Canadian listed Mining 815 1.3
P2P Global Investments Equity Investment Instruments 789 1.3
Agnico Eagle Mines – Canadian listed Mining 784 1.3
Barrick Gold – Canadian listed Mining 776 1.3
BCA Marketplace Support Services 758 1.2
Acacia Mining Mining 749 1.2
Melrose Industries Construction & Materials 723 1.2
Ashtead Support Services 719 1.2
McBride Household Goods & Home Construction 718 1.2
Ultra Electronics Aerospace & Defence 710 1.2
On the Beach Travel & Leisure 706 1.1
Harworth Real Estate Investment & Services 703 1.1
Newmont Goldcorp – US listed Mining 698 1.1
easyJet Travel & Leisure 689 1.1
Hibernia REIT – Irish listed Real Estate Investment Trusts 678 1.1
Secure Trust Bank Banks 649 1.1
HomeServe Support Services 633 1.0
BT Fixed Line Telecommunications 631 1.0
N Brown General Retailers 619 1.0
Amigo Financial Services 586 1.0
Aviva Life Insurance 582 0.9
CVS General Retailers 575 0.9
Capita Support Services 545 0.9
DS Smith General Industrials 535 0.9
Balfour Beatty Construction & Materials 514 0.8
Distribution Finance Capital Financial Services 491 0.8
Cairn Homes Household Goods & Home Construction 481 0.8
Hadrian’s Wall Secured Investments Equity Investment Instruments 480 0.8
Whitbread Travel & Leisure 470 0.8
Essentra Support Services 455 0.7
Safestyle UK General Retailers 407 0.7
Alfa Financial Software Software & Computer Services 378 0.6
Sherborne Investors (Guernsey) C Financial Services 371 0.6
Zegona Communications Non-equity Investment Instruments 340 0.6
Wheaton Precious Metals Mining 317 0.5
Tungsten Financial Services 297 0.5
TruFin Financial Services 120 0.2
Total Holdings 63 (2018: 75) 61,250 100.0
† FTSE Industry Classification Benchmark.
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GLOBAL EQUITY INCOME SHARE PORTFOLIO
MANAGER’S REPORT
Investment Objective
The investment objective of the Global Equity Income Share 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.
Market and Economic Review
Global equity markets delivered positive though volatile returns over the
review period. Economic growth disappointed almost everywhere except for the
US, where the equity market continued to be supported by fiscal stimulus in
the shape of tax cuts and still-favourable domestic financial conditions.
Disappointingly for us, UK and European equity markets were weak in
comparison, with concerns around Brexit and political uncertainty in Italy
affecting European equities. Our expectation throughout the reporting period
was that a sensible deal between the EU and the UK would eventually be struck
on Brexit, originally by 31 March 2019 and then by the extended EU deadlines.
This did not happen and it increasingly appears that our optimism may have
been misplaced.
The Japanese and Asian equity markets were held back by a slowing Chinese
economy and fears over a tariff war between China and the US. Despite efforts
to increase domestic consumption and wean the key Asian economies off reliance
on exports to generate growth, the US economy remains a key driver of that
regional economy. Other emerging markets were also affected by the malaise of
slowing world trade growth, with Brazil and to some extent South Africa
bucking the weak trend as investors welcomed new governments with reformist
agendas.
Volatility peaked in the fourth quarter of 2018 and markets were led lower by
the US as concerns over economic slowdown and high stock market valuations,
particularly of previously high flying e-commerce and technology companies,
intensified. The December slump was amongst the worst in history, with the US
equity market having its biggest December fall since the Great Depression of
1931.
Markets regained some of the lost ground in January as fears of recession and
a trade war eased and continued to rally in February in view of an increased
likelihood of a trade deal between the US and China. Indications from the US
Federal Reserve (Fed) of a softening of stance on monetary policy
normalisation, together with some modest Chinese fiscal stimulus, helped to
underpin sentiment further. Overall, global equity markets ended the first
quarter of 2019 in positive territory amid hopes for progress in US-China
trade talks and optimism that the Fed would remain less aggressive in raising
interest rates. With the US equity market being the strongest performer,
global stocks saw their largest quarterly gains since 2010.
Global equity markets remained in positive territory in April, driven by
strong performance from US stocks in particular. The US equity market reached
fresh record highs on the back of better than forecast company earnings.
Sentiment was also boosted by stronger than expected US economic growth for
the first three months of 2019. However, in a reversal of fortune, global
equity markets had their worst month of the year in May as escalating trade
tensions once again left market participants assessing the implications for
slower economic growth. China hit back at Washington with its own retaliatory
tariffs. The escalation in the trade war between the world’s two largest
economies drew investors back to so-called ‘safe-haven’ assets. Market
sentiment soured further as Donald Trump threatened higher tariffs on Mexican
goods.
Portfolio Strategy and Review
On a total return basis, the Portfolio’s net asset value fell by 1.3% over
the 12 months to the end of May 2019, compared to a rise of 5.3% in the MSCI
World Index (in sterling terms, total return, net of withholding tax).
The Portfolio’s disappointing performance against its reference index over
the year was largely due to its underweight exposure to the US (the US equity
market was by far the strongest performer of all the major regions) and its
overweight exposure to the UK and Europe (relatively weak markets versus the
reference index). Our underweight exposure to the US has been longstanding due
in large part to the relatively high valuations we see across a range of
sectors and the low level of dividends available in that region.
We acknowledge the underperformance of the portfolio in recent years and it is
of deep concern to us in the portfolio management team. We constantly review
and reappraise our approach in view of market conditions and ongoing news
relating to stocks within the portfolio. Prolonged periods in which a
valuation driven approach underperforms is not unknown - the last prolonged
period was from 1998 to 2000. In addition we note that competitors with
similar income objectives have also struggled to perform. We continue to
believe our focus on corporate valuations and free cashflow will deliver
outperformance across a full economic and stock market cycle.
At the sector level, global equity market leadership has been dominated by a
narrow range of growth orientated stocks concentrated in US ‘Big tech’
companies and the Portfolio’s lack of exposure to the so-called FAANG stocks
(Facebook, Amazon, APPLE, Netflix, and Alphabet (Google)) detracted from
returns. However, these companies appear expensive to us on many metrics and
they offer zero income, hence the Portfolio’s underweight exposure versus
the reference index. Furthermore, we see very strong valuation upside in the
financial sector, in the last few years our holdings have underperformed, with
European financials particularly weak. This is the result of slower than
expected monetary policy normalisation, together with renewed political
instability in Italy and, in our view, excessive regulation. However, we would
highlight the outstanding valuations we see in this sector and significant
dividend yields. Many well capitalised banks are trading at a significant
discount to book value. Whist we believe this to be an anomaly, our
overexposure to the banking sector was a material drag on performance versus
the benchmark in the year.
Furthermore, our industrials and semiconductor holdings such as Taiwan
Semiconductor Manufacturing and Broadcom have come under pressure more
recently as trade tensions flared between the US and China. Markets have
digested the implications of new US export restrictions placed on Chinese
telecom firm Huawei and many US semiconductor companies, which are heavily
exposed to China, have seen their share prices fall as a result of the ongoing
trade dispute. We remain confident these businesses offer attractive upside
and are clear market leaders in their respective areas of the market.
The consumer staples sector generally performed well through the year as it
benefitted from its status as a safe haven on the assumption that company
earnings will be sheltered from the economic fallout of the trade war.
However, our underweight exposure, together with negative share price
performance from our holding in the tobacco sector, had a negative impact on
relative returns. We have been longstanding holders of British American
Tobacco and continue to like its strong cash generation and attractive
dividend yield. The shares reacted badly to comments from the US Federal Drug
Administration restricting sales of certain tobacco products, exacerbated by
strong competition in the new ‘lower risk' non-combustible products. We
believe the market has overreacted and the company offers solid long term
returns.
Our large energy exposure also detracted from returns and the decline in the
price of oil was a significant factor. The price of oil peaked in October at
around US$85 and then started its rather rapid decline in November, ending
that month down over 20%. The weakness was driven by concerns over the demand
risk outlook as global growth concerns increased. Furthermore, investors
fretted over increases in supply as shale oil production in the US continues
to grow rapidly, and OPEC seems unwilling to cut production further, which had
a negative impact on a number of the energy stocks held within the Portfolio.
Our bullishness on the sector, however, is not around the oil price being
extremely strong, but rather on operating cost reductions and cuts to capital
expenditure, which we believe is leading to extremely strong cash generation
and will enable both rising dividends and some share buybacks over the coming
three years.
Health care delivered positive performance for the Portfolio over the 12
months as markets became more defensively positioned, particularly in the
fourth quarter of 2018. The share prices of Pfizer, Novartis and Roche all
benefited as a result.
Portfolio Changes
Over the period new positions were established in Rolls-Royce, Carrefour, CRH,
Samsung Electronics, Verizon Communications and Sanofi.
In our view Rolls-Royce is set to become a highly cash generative business and
it has a good self-help story arising from increased operating efficiencies
and new engine rollouts. The industry is highly regulated, with cutting-edge
engineering giving them strong barriers to entry and has meant they have
gained market share in respect of wide bodied jets. Increased flight hours per
engine also makes the maintenance and spares business increasingly profitable.
Carrefour is a well-known food retailer in France. We believe that it has a
strong balance sheet and an impressive new management team, who we feel will
be able to bring about change and improve margins in what remains a strong
franchise.
CRH supplies a broad range of products to the construction industry. It
currently generates lower margins than its peers and is more lowly valued.
However, it has a clear roadmap to improve margins and a management team we
believe to be focussed on returns and capable of delivering on targets. The
business has significant US exposure and thus should benefit from any pick up
in US infrastructure spending.
Samsung Electronics has an improving corporate governance record which is
important to us. The biggest improvement has been to its shareholder returns
policy. Its stated policy is to improve dividend payout, and to pay out 50% of
free cash flow to shareholders in either buybacks or dividends. It is
attractively valued in our opinion, with a very robust balance sheet.
Verizon Communications, the US telecoms company, is likely to see growth in
its mobile telecommunications business over the coming years, in our view. The
competitive dynamics in the wireless industry are improving in the US, which
sets the stage for more consistent growth and returns for Verizon in the
near-to-medium term. Verizon offers a dividend yield in excess of 4%, while in
our view the improving company fundamentals should be positive for
shareholders over the next several years.
Finally, we initiated a new holding in Sanofi, the French multinational
pharmaceutical company, because we believe it looks cheap relative to the rest
of the sector. It appears that no value has been attributed to the new product
pipeline and existing products are being valued at a discount to peers. The
discount to the sector has in large part been due to a perceived weak
management team and disappointing cost management. This we believe is now
changing, with a new management team who we think can unlock the value in this
business. The company has no significant patent expiry issues until 2028. We
see it as a defensive stock offering predictable earnings growth at a
discounted valuation.
We sold out of three positions (Union Pacific, Hiscox and China Mobile) after
strong share price performance. We also exited our position in Airbus as we
felt the share price had reached a level that reflected the positive outlook
for the company. Lastly, we disposed of Nielsen. The company reported a
surprisingly weak set of results and delivered a very negative outlook. This
would not necessarily have prompted a sale of the position, but the lack of a
credible strategy to improve and signs of structural shifts in one of its key
businesses as well as the departure of members of senior management led us to
the conclusion that the capital could be better deployed elsewhere.
Outlook
The global economic outlook is uncertain in our view. On the one hand central
banks across the globe are maintaining a very pro-growth policy stance, and
fiscal policy in many major economies is mildly expansionary. However, on the
other, trade tensions between major trading blocks in Europe (the Brexit
issue) and more importantly between the US and China, together with the
ongoing secular trend of lower productivity improvements, are dragging on
economic growth. Corporate earnings growth is therefore likely to be muted in
the coming years. Our view is that major economies will continue to grow
slowly, avoiding both recession and rising inflation, and that equity markets
may grind higher over the next 12 months.
Whilst in our view not yet of bubble proportions, valuations in global equity
markets are extremely bifurcated. Those stocks which seem to offer secular
growth opportunities and low earnings volatility have risen sharply in price
in recent years and have become increasingly expensive and offer low or no
dividend yields, hence we do not own them. Meanwhile, companies with more
obvious exposure to the economic cycle have, by and large, underperformed and
are, in our view, trading at significant discounts to their intrinsic value.
The gap in valuation terms between stocks exhibiting those differing
characteristics is at record levels, whether you look at price/earnings ratios
or measures related to asset values. Any reversion to mean will be of clear
benefit to the Portfolio, though of course we cannot predict when this might
happen.
Our investment strategy remains constant: to invest in companies at discounted
valuations relative to their history and the market, with strong sustainable
cash flows. We believe that growing and sustainable dividends flow from that,
and in the long run that capital growth from such companies will outperform
the broader market.
Nick Mustoe
Portfolio Manager
30 July 2019
.
GLOBAL EQUITY INCOME SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 31 MAY 2019
Ordinary shares unless stated otherwise.
COMPANY INDUSTRY GROUP† COUNTRY MARKET VALUE £’000 % OF PORTFOLIO
Chevron Energy US 2,167 3.2
Royal Dutch Shell – A shares Energy Netherlands 2,098 3.1
Orange Telecommunication Services France 2,090 3.1
BP Energy UK 2,041 3.0
United Technologies Capital Goods US 1,848 2.8
Pfizer Pharmaceuticals, Biotechnology & Life Sciences US 1,822 2.7
Total Energy France 1,821 2.7
Aon – A shares Insurance US 1,707 2.5
Roche Pharmaceuticals, Biotechnology & Life Sciences Switzerland 1,650 2.5
Novartis Pharmaceuticals, Biotechnology & Life Sciences Switzerland 1,634 2.4
Nasdaq Diversified Financials US 1,602 2.4
Taiwan Semiconductor Manufacturing Semiconductors & Semiconductor Equipment Taiwan 1,596 2.4
Citigroup Banks US 1,547 2.3
Amcor Materials Australia 1,515 2.3
Next Retailing UK 1,496 2.2
Verizon Communications Telecommunication Services US 1,456 2.2
Las Vegas Sands Consumer Services US 1,445 2.2
Allianz Insurance Germany 1,443 2.2
Carrefour Food & Staples Retailing France 1,438 2.2
Williams-Sonoma Retailing US 1,421 2.1
Canadian Natural Resources Energy Canada 1,398 2.1
Toyota Motor Automobiles & Components Japan 1,392 2.1
Sanofi Pharmaceuticals, Biotechnology & Life Sciences France 1,389 2.1
Rolls-Royce Capital Goods UK 1,339 2.0
Rolls-Royce – C shares 11
Tesco Food & Staples Retailing UK 1,347 2.0
Amgen Pharmaceuticals, Biotechnology & Life Sciences US 1,282 1.9
Gilead Sciences Pharmaceuticals, Biotechnology & Life Sciences US 1,273 1.9
TE Connectivity Technology Hardware & Equipment Switzerland 1,270 1.9
JPMorgan Chase Banks US 1,231 1.8
Microsoft Software & Services US 1,219 1.8
BASF Materials Germany 1,192 1.8
Broadcom Semiconductors & Semiconductor Equipment US 1,181 1.8
Caixabank Banks Spain 1,178 1.8
Intesa Sanpaolo Banks Italy 1,156 1.7
Deutsche Post Transportation Germany 1,142 1.7
British American Tobacco Food, Beverage & Tobacco UK 1,088 1.6
Royal Bank of Scotland Banks UK 1,085 1.6
ING Banks Netherlands 1,066 1.6
BNP Paribas Banks France 1,029 1.5
Sumitomo Mitsui Financial Banks Japan 998 1.5
Wells Fargo Banks US 974 1.4
Adecco Commercial & Professional Services Switzerland 960 1.4
Samsung Electronics – preference shares Technology Hardware & Equipment South Korea 926 1.4
Equinor Energy Norway 913 1.4
CRH Materials Ireland 910 1.4
BAE Systems Capital Goods UK 847 1.3
easyJet Transportation UK 721 1.1
Koninklijke Ahold Delhaize Food & Staples Retailing Netherlands 679 1.0
Legal & General Insurance UK 611 0.9
Hyundai Motor – preference shares Automobiles & Components South Korea 560 0.8
Telefonica Brasil Telecommunication Services Brazil 445 0.6
Kangwon Land Consumer Services South Korea 391 0.6
Total Holdings 52 (2018: 53) 67,040 100.0
† MSCI and Standard & Poor’s Global Industry Classification Standard.
.
BALANCED RISK ALLOCATION SHARE PORTFOLIO
MANAGER’S REPORT
Investment Objective
The investment objective of the Balanced Risk Allocation Share 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.
Market and Economic Review
Equities started the financial year in positive territory, but then weakened
over the second half of 2018, becoming particularly volatile over the fourth
quarter as investors fretted over the effects of trade tensions and central
bank actions. Equities staged an impressive rally in the first quarter of
2019, but still posted negative performance, in US dollar terms, for the
Company’s financial year, with volatility returning in May. Bonds posted
strong performance over the financial year, with yields falling across all
markets in which the strategy invests as central banks turned dovish amid
signs of weakening economic measures and below-target inflation. Commodities
started the financial year in positive territory, but ended with negative
returns as a strong US dollar and concerns over international trade caused
most raw materials markets to decline.
Portfolio Performance
The Balanced Risk Allocation Portfolio posted a positive return for the year
of –2.7%, compared with +5.8% for the benchmark, Merrill Lynch 3 month LIBOR
plus 5%.
For the year to 31 May 2019 strategic exposure to bonds was the principal
positive contributor to performance. Strategic exposure to both equities and
commodities detracted from performance for the fiscal year.
Portfolio Strategy and Update
The Balanced Risk strategy seeks to achieve returns through balancing risk
exposure between three asset classes: developed market equities, global
government bonds and commodities. The asset class weightings are determined
using a proprietary investment process, with assets being selected according
to three key criteria: a correlation matrix to ensure diversification; the
ability to generate excess returns relative to cash; and specific liquidity
and transparency criteria. Exposure to the asset classes is principally
obtained through highly liquid and transparently priced exchange-traded
futures contracts, with cash and cash equivalents being held as collateral.
Bond markets started the fiscal year positively, but prices retreated in the
third quarter of 2018 as yields increased across the markets in which the
strategy invests. Prices rebounded in the fourth quarter, as the return of
volatility in equities and commodities engendered safe-haven flight, and the
positive performance continued through the first quarter of 2019. The primary
driver of returns across the asset class was the dovish tone emanating from
the central banks in each of the markets in which the strategy is involved.
The shift removed fears of additional tightening, which was further supported
by revisions to growth and inflation forecasts, especially in Europe. A
general weakening of economic data, particularly in global manufacturing, may
be underpinning some of the flight-to-safety response as bonds held their
gains despite the very strong rally in risk assets. Bond performance was led
by Australia, followed by Canada. Australian yields fell as they played into
the weakness of Chinese economic growth, to which they are geared.
Strategic exposure to equities detracted from performance as volatility
entered the market. Equities started the fiscal year with positive
performance, but fell markedly in both October and December in response to
uncertainty regarding trade tensions between the US and China as well as
concerns over central bank actions. Many markets entered bear market territory
from peaks set earlier in the year. Equities staged an impressive rally in the
first quarter of 2019 as central banks indicated they would hold off on future
rate hikes. Japanese equities were the top detractor, followed by Hong Kong.
Japanese equities were hurt by trade tensions as Japan’s trade balance
shifted to a deficit. Hong Kong equities detracted as they tend to trade in
line with China and manufacturing data from China indicated that activity had
begun to contract, with signs of political unrest also beginning to appear.
Strategic exposure to commodities also detracted, led by agriculture.
Agricultural commodities started the fiscal year in negative territory as
prices suffered on fears of escalating trade war impacts and improvement in
growing conditions. Agriculture prices continued to struggle throughout the
fiscal year on conditions of oversupply. Energy also detracted from
performance. Evidence of slowing manufacturing and economic activity resulting
from the trade spat between the US and China and the effects of central bank
actions, tempered demand expectations. This bearish demand sentiment along
with concerns about robust production led to the sharp drops in energy prices.
Within industrial metals, aluminium prices fell on continued strong exports
and production from China while copper also declined. Within precious metals,
silver declined to a greater extent than gold as it tends to trade in sympathy
with industrial metals. Gold fell on the stronger US dollar.
Outlook
The ongoing trade tensions ratcheted higher in May as the US-China talks broke
down and the Trump administration threatened Mexico with a new schedule of
tariffs. Additionally, it seems that other countries are in the
administration’s crosshairs. While seeming unpredictable in business or
personal negotiations may be a viable tactic, unpredictability around national
policy and the great potential for disrupting trust between nations and
carefully structured business plans is most unwelcome. The surprise decision
on Mexican tariffs – that seems to have been made unilaterally by the
president without the support of or even foreknowledge by his party – could
present several issues. First, Congress potentially could fail to support the
measure against Mexico and wrest the tariff-levying power from the president.
This would weaken Trump’s stance in the eyes of his adversaries. Secondly,
China may dig in its heels, recognising the US administration’s inner-party
turmoil and seeing that the president has opened a multi-front war on himself.
The other major issue is a lack of confidence from US businesses. Companies
have spent many years crafting intricate supply chains and manufacturing
capabilities across borders that may now be upended through these tariff
actions. A lack of trust in the stability of policy along with evidence of
weakening economic activity across the globe may have a stifling impact on
companies’ willingness to engage in capital expenditures until meaningful
clarity returns. Given the level of uncertainty at present, we believe a focus
on economic diversification is a reasonable approach.
Scott Wolle
Portfolio Manager
30 July 2019
.
BALANCED RISK ALLOCATION SHARE PORTFOLIO
LIST OF DERIVATIVE INSTRUMENTS
AT 31 MAY 2019
NOTIONAL EXPOSURE £’000 NOTIONAL EXPOSURE AS % OF NET ASSETS
Government Bond Futures:
Australia 2,339 29.8
Canada 2,088 26.6
UK 1,037 13.2
US 972 12.4
Germany 149 1.9
Total Bond Futures (5) 6,585 83.9
Equity Futures:
Japan 879 11.2
UK 715 9.1
Europe 665 8.5
US large cap 548 7.0
US small cap 525 6.7
Hong Kong 405 5.2
Total Equity Futures (6) 3,737 47.7
Commodity Futures:
Agriculture
Soybean meal 155 2.0
Sugar 141 1.8
Soy bean 141 1.8
Cotton 135 1.7
Soybean oil 41 0.5
Wheat 40 0.5
Live Cattle 35 0.5
Corn 35 0.5
Coffee 30 0.4
Energy
Gasoline 179 2.3
Brent crude 148 1.9
WTI crude 87 1.1
New York Harbor ultra-low sulphur diesel 62 0.8
Gas-oil (diesel) 46 0.6
Natural gas 23 0.3
Industrial Metals
Copper 347 4.4
Aluminium 106 1.4
Precious Metals
Gold 207 2.6
Silver 115 1.5
Total Commodity Futures (19) 2,073 26.6
Total Derivative Instruments (30) 12,395 158.2
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
Bonds 4.0% 50.0%
Equities 2.5% 31.7%
Commodities 1.5% 18.3%
8.0% 100.0%
BALANCED RISK ALLOCATION SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 31 MAY 2019
YIELD % MARKET VALUE £’000 % OF NET ASSETS
Short Term Investments
Short-Term Investments Company (Global Series) plc 0.84 1,735 23.5
UK Treasury Bill 19 Aug 2019 0.75 1,388 18.8
UK Treasury Bill 4 Nov 2019 0.77 797 10.8
UK Treasury Bill 12 Aug 2019 0.71 749 10.1
UK Treasury Bill 11 Nov 2019 0.76 747 10.1
UK Treasury Bill 9 Sep 2019 0.78 549 7.4
UK Treasury Bill 18 Nov 2019 0.75 498 6.8
UK Treasury Bill 7 Oct 2019 0.73 479 6.5
UK Treasury Bill 5 Aug 2019 0.72 318 4.3
UK Treasury Bill 28 Oct 2019 0.73 110 1.5
Total Short Term Investments 7,370 99.8
Hedge Funds ((1))
Harbinger Class L Holdings 13 0.2
Harbinger Class PE Holdings 2 –
Total Hedge Funds 15 0.2
Total Fixed Asset Investments 7,385 100.0
(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 31.
.
MANAGED LIQUIDITY SHARE PORTFOLIO
MANAGER’S REPORT
Investment Objective
The investment objective of the Managed Liquidity Share Portfolio is to
produce an appropriate level of income return combined with a high degree of
security.
Market and Economic Review
Following on from the first hike in the base rate for a decade towards the end
of 2017, the Bank of England raised rates by another 0.25% in August 2018.
Economic data around that time appeared to indicate that the dip in output
earlier in the year had been temporary with momentum recovering in the second
quarter. At the same time, the unemployment rate had continued to fall, and
average earnings had risen to the highest levels since the financial crisis,
signalling some tightness in the labour market. Therefore, with inflation
expected to remain slightly above target over the forecast horizon, the
Monetary Policy Committee (MPC) deemed it necessary to tighten policy.
However, overall, the MPC have remained cautious about the economic outlook,
recognising the potential significant impact around Brexit and have continued
to state that any further increases to the base rate are likely to be at a
gradual pace and to a limited extent.
Over the last 12 months, the US Federal Reserve (Fed) hiked rates twice.
However, having previously forecast further hikes during 2019, the Fed have
recognised the outlook for growth and inflation, partly due to concerns over
potential trade wars, meant that a pause in the tightening cycle was the most
appropriate course of action, with potentially some easing later in the year.
This change of tone has driven core Government bond yields lower across the
globe in recent months.
Portfolio Performance
The Managed Liquidity Portfolio NAV total return for the year ended 31 May
2019 was +1.3%.
Portfolio Strategy and Review
As explained in the half year report, from 18 January 2019 the investment
strategy followed for this Portfolio has been to invest principally in the
PIMCO Sterling Short Maturity Source UCITS ETF, which is managed by PIMCO with
Invesco acting as co-promoter, and also in the Sterling Liquidity Portfolio of
Short-Term Investments Company (Global Series) plc, which is a money market
fund managed by Invesco. Prior to that date the principal investment had been
the Invesco Money Fund (UK). The catalyst for this change was regulatory and
the Board decided that it would be in investors’ best interests to switch
the principal investment to an alternative with characteristics in line with
the original intent of the Portfolio.
The PIMCO Sterling Short Maturity Source UCITS ETF seeks to maximise current
income consistent with the preservation of capital and a high degree of
liquidity. The fund is actively managed by PIMCO and invests in a diversified
portfolio of government, corporate and asset-backed bonds, denominated in, or
hedged back to, sterling. To limit the exposure to interest rate risk and
credit risk (the likelihood of an issuer defaulting), these bonds are both
short dated and of high quality. The portfolio manager at PIMCO is Andrew
Bosomworth.
The Sterling Liquidity Portfolio of the Short-Term Investments Company (Global
Series) plc is managed by Invesco in a laddered maturity structure, investing
in repurchase agreements, time deposits, commercial paper, certificates of
deposit, medium-term notes and floating rate notes rated A-1/P-1 or better. At
31 May 2019 the Sterling Liquidity Portfolio was rated AAAm by Standard and
Poor's and AAAmmf by Fitch Ratings.
Outlook
The PIMCO Sterling Short Maturity Source UCITS ETF is actively managed by
PIMCO and has the flexibility to navigate changes in the macroeconomic
outlook. PIMCO’s baseline outlook includes a shallow recession in the next
three to five years, which means that inflation is likely to remain low and
central banks are likely to maintain base rates below historic averages.
However, this relatively benign baseline is only one of several realistic
scenarios and the probability distribution of economic outcomes is wider and
less certain than usual.
Invesco
30 July 2019
.
MANAGED LIQUIDITY SHARE PORTFOLIO
LIST OF INVESTMENTS
AS AT 31 May
2018 2017
MARKET VALUE £’000 % OF PORTFOLIO MARKET VALUE £’000 % OF PORTFOLIO
Invesco Money Fund (UK)* – – 4,905 99.0
PIMCO Sterling Short Maturity Source UCITS ETF 4,490 95.3 – –
Short-Term Investments Company (Global Series) plc 220 4.7 48 1.0
4,710 100.0 4,953 100.0
* During the year, the Managed Liquidity Share Portfolio switched its
investment in the Invesco Money Fund (UK) to the PIMCO Sterling Short Maturity
Source UCITS ETF, with effect from 18 January 2019, following an announcement
made on that date.
BUSINESS REVIEW
Invesco Perpetual 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 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 the services of Invesco Fund Managers Limited (‘IFML’ or the
‘Manager’) to manage 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 Asset Services 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 by investing primarily in UK
quoted equities.
Investment Policy and Risk
The UK Equity Portfolio is invested primarily in UK equities and
equity-related 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 45 and 80
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 45 and 80
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 in the EU), 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.
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 2019 and of relevant benchmark indices were as follows:
UK Equity Portfolio –4.9%
FTSE All-Share Index –3.2%
Global Equity Income Portfolio –1.3%
MSCI World Index (£) 5.3%
Balanced Risk Allocation Portfolio –2.7%
3 month LIBOR plus 5% 5.8%
Managed Liquidity Portfolio 1.3%
Source: Refinitiv.
Other performance periods, together with share price total returns, are shown
on page 2.
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 5.73p (2018:
5.49p), based on net revenue for the year of £1,982,000 (2018: £2,038,000),
which included receipts of £96,000 (2018: £110,000) of non-recurring special
dividends, equivalent to 0.28p (2018: 0.30p).
Dividend Policy:
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. Further, they have implemented a model of declaring (with
payment in the month following) three equal interim dividends in July, October
and January with a ‘wrap-up’ fourth interim 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 target.
Dividends Declared:
The Directors have declared and paid four interim dividends for the year ended
31 May 2019 totalling 6.60p per UK Equity Share (2018: 6.45p) of which 5.73p
was met from revenue earned in the year. The aggregate of dividends paid in
respect of the year was £2,279,000 (2018: £2,397,000) – the decrease
reflects the reduction of shares in issue following conversions and buybacks
in the year.
A first interim dividend for the year to 31 May 2020 of 1.5p was declared on
17 July 2019, setting the level for the next two dividends, in the absence of
unforeseen circumstances.
Global Equity Income Shares
Revenue earnings per Share for the Global Equity Income Share Portfolio was
6.90p (2018: 6.50p), based on net revenue for the year of £2,234,000 (2018:
£2,149,000), which included £38,000 (2018: £128,000) of special dividends.
Dividend Policy:
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. Further, they have implemented a model of
declaring (with payment in the month following) three equal interim dividends
in July, October and January with a ‘wrap-up’ fourth interim 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 target.
Dividends Declared:
The Directors have declared and paid four interim dividends for the year ended
31 May 2019 totalling 6.90p (2018: 6.70p) per Global Equity Income Share, all
of which was met from revenue earned in the year. The aggregate of dividends
paid in respect of the year was £2,232,000 (2018: £2,211,000).
A first interim dividend for the year to 31 May 2020 of 1.55p was declared on
17 July 2019, setting the level for the next two dividends, in the absence of
unforeseen circumstances.
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 to the extent required, having taken into account the
dividends paid on the other Share classes, to maintain the Company’s status
as an investment trust under section 1158 of the Corporation Tax Act 2010.
No dividends are required to be declared or paid for the year to retain
investment trust status.
Managed Liquidity Shares
The Board intends to declare dividends on the Managed Liquidity Portfolio when
the level of income available allows. The Managed Liquidity Portfolio recorded
a net revenue profit for the year of £27,000 (2018: £12,000). An interim
dividend of 0.8p per Managed Liquidity Share was declared on 17 July 2019 in
respect of the year ended 31 May 2019 (2018: nil). It currently appears
unlikely, given the quantum of revenue being earned, that future dividends
will be more frequent than annual and they could be less frequent.
Discount/(Premium)
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 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 35. At 31 May 2019, the share prices, net asset values
(NAV) and the discounts of the four Share classes were as follows:
2018 2017
SHARE CLASS NET ASSET VALUE (PENCE) SHARE PRICE (PENCE) DISCOUNT NET ASSET VALUE (PENCE) SHARE PRICE (PENCE) DISCOUNT
UK Equity 173.1 173.5 0.2% 189.0 186.0 (1.6)%
Global Equity Income 197.6 195.0 (1.3)% 207.2 202.0 (2.5)%
Balanced Risk Allocation 139.5 138.5 (0.7)% 143.4 139.5 (2.7)%
Managed Liquidity 104.9 101.5 (3.2)% 103.5 102.0 (1.4)%
The following charts show the premium/(discount) at which the Shares traded
over the two years to 31 May 2019.
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.
At the year end the ongoing charges figure of the Company and that for the
different Share classes were as follows:
COMPANY UK EQUITY GLOBAL EQUITY INCOME BALANCED RISK ALLOCATION MANAGED LIQUIDITY
2019 0.87% 0.86% 0.86% 1.21% 0.38%
2018 0.81% 0.80% 0.81% 1.14% 0.35%
The above excludes rebates received by the Managed Liquidity Portfolio and,
since during the past two years neither the UK Equity nor Global Equity Income
Portfolios outperformed their benchmarks, there is no performance fee impact.
However, in 2018 the UK Equity Portfolio wrote back £4,000 of performance fee
previously provided, and the impact of this on the Portfolio in that year was
–0.01%.
Financial Position
Assets and Liabilities
The Company’s balance sheet on page 70 shows the assets and liabilities at
the year end. Details of the Company’s borrowing facility are shown in note
12(b) of the financial statements on page 84, with interest paid (finance
costs) in note 5.
Due 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 1p per Share.
The following table summarises the Company’s share capital at the year end
and movements during the year.
NUMBER OF SHARES UK EQUITY GLOBAL EQUITY INCOME BALANCED RISK ALLOCATION MANAGED LIQUIDITY
Shares in issue at the year end:
– excluding treasury 33,088,595 31,668,234 5,618,428 4,370,361
– held in treasury 10,517,040 7,301,023 5,157,218 7,805,785
Movements during the year:
Increase/(decrease) arising from conversions (584,876) 768,038 (483,246) 141,653
Shares bought back into treasury (2,313,500) (2,422,023) (376,218) (472,000)
Average price thereon 174.1p 199.5p 137.9p 101.6p
Since the year end another 39,722 UK Equity Shares and 201,766 Global Equity
Income Shares have been bought into treasury at prices of 170p and 202p,
respectively.
Further details on net changes in issued share capital are set out in note 14
to the financial statements on pages 84 and 85. 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 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
portfolio managers’ reports and 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, on behalf of the Board (see Audit Committee Report on pages 44
to 46).
The following are considered to be the most significant risks 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.
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 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.
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.
Market Movements and Portfolio Performance
Individual Portfolio performance is substantially dependent on the performance
of the securities (including derivative 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 Manager strives to maximise the total return from 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 out on page 38.
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 3 to 5 and
the portfolio managers’ reports starting on page 7.
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 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. However, 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.
Past performance of the Company’s Shares is not necessarily indicative of
future performance.
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 specified target levels (see pages 32 and
33).
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 Company’s share classes could result in the
relevant Portfolio becoming too small to be viable. 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 portfolios 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.
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.
Accordingly, 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.
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.
Gearing
Performance may be geared by use of the £25 million 364 day multicurrency
revolving credit facility. The Company also has an uncommitted overdraft
facility of up to 10% of net assets. 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.
The Balanced Risk Allocation Portfolio may also be geared (by up to 250%,
according to the investment policy set out on page 31) 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.
Gearing levels of the different Portfolios will change from time to time in
accordance with the respective portfolio managers’ assessments of risk and
reward. Where market exposure is geared, any reduction in the value of the
geared Portfolio’s investments may lead to a correspondingly greater
percentage reduction in its NAV (which is likely to affect Share prices
adversely). Any reduction in the number of Shares in issue (for example, as a
result of buy backs) will, in the absence of a corresponding reduction in
borrowings, result in an increase in a Portfolio’s gearing.
Whilst the use of borrowings by the Company should 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.
Hedging
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.
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 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 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.
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.
Additional Risks Applicable to Balanced Risk Allocation Shares
The use of financial derivative instruments forms part of the investment
policy and strategy of the Balanced Risk Allocation 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. However, 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.
Reliance on Third Party Service Providers
The Company has no employees and the Directors have all been appointed on a
non-executive basis. The Company is therefore reliant upon the performance of
third party service providers for its executive function. In particular, the
Manager performs services that are integral to the operation of the Company
and the custodian appointed by the depositary holds assets on its behalf.
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 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. 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.
Viability Statement
The Directors’ view of the Company’s viability has not changed since last
year. 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
risks to which it is exposed, as set out on pages 36 to 39, 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 were 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. On the question of scale, the Board has 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 is a multiple of the value of the Company’s short
term liabilities and annual operating costs. 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.
Corporate Governance
The Board is committed to maintaining high standards of Corporate Governance.
The Corporate Governance Statement required by the UKLA Listing Rules is set
out on page 43.
Audit Committee Report
The extended audit committee report required by the UK Corporate Governance
Code is set out on pages 44 to 46. There are no areas of concern in relation
to the financial statements to bring to the attention of shareholders.
Board Responsibilities
As set out in the Directors’ Report on page 47 the Directors have a
statutory duty 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 (s172 Companies Act 2006). However, the Company has no employees
and no customers in the traditional sense. 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. Notwithstanding this, the Board has a responsible governance culture
and also has due regard for broader matters so far as they apply. In
particular, the Board engages with the Manager at every Board meeting and
reviews its relationships with other service providers at least annually.
Board Diversity
The Company’s policy on diversity is set out on pages 49 and 50. At the year
end the Board comprised four male and one female non-executive Directors
resulting in female representation of 20%. As disclosed on page 47 the current
Chairman (a male) will retire at the forthcoming AGM. A recruitment process is
underway for a new Director, in respect of which the Board has a strong
preference for the appointee to be female. If an appropriate female appointee
is identified, female representation on the Board will become 40%. Summary
biographical details of all the current Directors are set out on page?41. The
Company has no employees.
Social and Environmental Matters
As an investment company with no employees, property or activities outside
investment, environmental policy has limited application. The Manager
considers various factors when evaluating potential investments. While a
company’s policy towards the environment and social responsibility,
including with regard to human rights, is considered as part of the overall
assessment of risk and suitability for the Portfolio, the Manager does not
make investment decisions on environmental and social grounds alone. The
Manager applies the United Nations Principles for Responsible Investment.
Modern Slavery Act
The Company is an investment vehicle and does not provide goods or services in
the normal course of its business, or 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 30 July 2019.
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
Patrick Gifford
Chairman
30 July 2019
.
INCOME STATEMENT
FOR THE YEAR ENDED 31 MAY
2018 2017
NOTES REVENUE £’000 CAPITAL £’000 TOTAL £’000 REVENUE £’000 CAPITAL £’000 TOTAL £’000
Gains on investments at fair value 9 – (7,814) (7,814) – 1,692 1,692
Gains on derivative instruments 10 28 (268) (240) 47 641 688
Foreign exchange (losses)/gains – 9 9 – (46) (46)
Income 2 5,258 21 5,279 5,173 457 5,630
Investment management fees 3 (229) (520) (749) (253) (576) (829)
Performance fees 3 – – – – 4 4
Other expenses 4 (466) (2) (468) (429) (2) (431)
Net return before finance costs and taxation 4,591 (8,574) (3,983) 4,538 2,170 6,708
Finance costs 5 (77) (179) (256) (66) (154) (220)
Net return before taxation 4,514 (8,753) (4,239) 4,472 2,016 6,488
Tax 6 (246) – (246) (256) – (256)
Return after taxation for the financial year 4,268 (8,753) (4,485) 4,216 2,016 6,232
Basic return per ordinary share: 7
– UK Equity Share Portfolio 5.73p (15.34)p (9.61)p 5.49p (3.82)p 1.67p
– Global Equity Income Share Portfolio 6.90p (9.82)p (2.92)p 6.50p 8.65p 15.15p
– Balanced Risk Allocation Share Portfolio 0.42p (4.86)p (4.44)p 0.24p 8.24p 8.48p
– Managed Liquidity Share Portfolio 0.59p 0.54p 1.13p 0.24p 0.02p 0.26p
The total column of this statement represents the Company’s profit and loss
account, prepared in accordance with UK Accounting Standards. The return after
taxation is the total comprehensive income and therefore no additional
statement of 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 year. Income Statements for the different Share classes
are shown on pages 12, 19, 25 and 28 for the UK Equity, Global Equity Income,
Balanced Risk Allocation and Managed Liquidity Share Portfolios respectively.
.
.
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MAY
SHARE CAPITAL £’000 SHARE PREMIUM ACCOUNT £’000 SPECIAL RESERVE £’000 CAPITAL REDEMPTION RESERVE £’000 CAPITAL RESERVES £’000 REVENUE RESERVE £’000 TOTAL £’000
At 31 May 2017 1,060 1,290 80,542 347 69,608 583 153,430
Cancellation of deferred shares – – (4) 4 – – –
Shares bought back and held in treasury – – (3,838) – – – (3,838)
Share conversions (3) – 3 – – – –
Return after taxation per the income statement – – – – 2,016 4,216 6,232
Dividends paid – note 8 – – (109) – – (4,499) (4,608)
At 31 May 2018 1,057 1,290 76,594 351 71,624 300 151,216
Cancellation of deferred shares – – (2) 2 – – –
Shares bought back and held in treasury – – (9,925) – – – (9,925)
Share conversions (2) – 2 – – – –
Return after taxation per the income statement – – – – 2,016 4,216 6,232
Dividends paid – note 8 – – (297) – – (4,214) (4,511)
As at 31 May 2019 1,055 1,290 66,372 353 62,871 354 132,295
.
BALANCE SHEET
AS AT 31 MAY 2019
NOTES UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 TOTAL £’000
Fixed assets
Investments held at fair value through profit or loss 9 61,250 67,040 7,385 4,710 140,385
Current assets
Derivative assets held at fair value through profit or loss 10 – – 175 – 175
Debtors 11 3,580 518 412 6 4,516
Cash and cash equivalents 476 245 153 10 884
4,056 763 740 16 5,575
Creditors: amounts falling due within one year
Derivative liabilities held at fair value through profit or loss 10 – – (223) – (223)
Other creditors 12(a) (670) (334) (65) (143) (1,212)
Bank loan 12(b) (7,350) (4,880) – – (12,230)
(8,020) (5,214) (288) (143) (13,665)
Net current (liabilities)/assets (3,964) (4,451) 452 (127) (8,090)
Provision 13 – – – – –
Net assets 57,286 62,589 7,837 4,583 32,295
Capital and reserves
Share capital 14(a) 436 389 108 122 1,055
Share premium 15 – – 1,290 – 1,290
Special reserve 15 28,551 30,734 3,106 3,981 66,372
Capital redemption reserve 15 74 78 26 175 353
Capital reserve 15 28,225 31,015 3,363 268 62,871
Revenue reserve 15 – 373 (56) 37 354
Shareholders' funds 57,286 62,589 7,837 4,583 132,295
Net asset value per ordinary share
Basic 16 173.1p 197.6p 139.5p 104.9p
The financial statements were approved and authorised for issue by the Board
of Directors on 30 July 2019.
Signed on behalf of the Board of Directors
Patrick Gifford
Chairman
.
BALANCE SHEET
AS AT 31 MAY 2018
NOTES UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 TOTAL £’000
Fixed assets
Investments held at fair value through profit or loss 9 81,655 72,664 7,333 4,953 166,605
Current assets
Derivative assets held at fair value through profit or loss 10 – – 281 – 281
Debtors 11 379 569 268 4 1,220
Cash and cash equivalents 308 – 1,600 50 1,958
687 569 2,149 54 3,459
Creditors: amounts falling due within one year
Derivative liabilities held at fair value through profit or loss 10 – – (54) – (54)
Other creditors 12(a) (684) (336) (55) (143) (1,218)
Bank overdraft 12(b) – (1,140) (86) – (1,226)
Bank loan 12(b) (13,650) (2,700) – – (16,350)
(14,334) (4,176) (195) (143) (18,848)
Net current (liabilities)/assets (13,647) (3,607) 1,954 (89) (15,389)
Provision 13 – – – – –
Net assets 68,008 69,057 9,287 4,864 151,216
Capital and reserves
Share capital 14(a) 442 382 113 120 1,057
Share premium 15 – – 1,290 – 1,290
Special reserve 15 33,960 34,030 4,287 4,317 76,594
Capital redemption reserve 15 74 78 25 174 351
Capital reserve 15 33,532 34,196 3,653 243 71,624
Revenue reserve 15 – 371 (81) 10 300
Shareholders’ funds 68,008 69,057 9,287 4,864 151,216
Net asset value per ordinary share
Basic 16 189.0p 207.2p 143.4p 103.5p
.
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MAY
NOTES 2018 £’000 2017 £’000
Cash flows from operating activities
Net return before finance costs and taxation (3,983) 6,708
Tax on overseas income (246) (256)
Adjustments for:
Purchase of investments (48,892) (52,735)
Sale of investments 63,997 55,743
Sale of futures 35 531
15,140 3,539
Scrip dividends (53) (83)
(Losses)/gains on investments 7,814 (1,692)
(Losses)/gains on derivatives 240 (688)
(Increase)/decrease in debtors (152) 240
Decrease in creditors and provision (4) (517)
Net cash inflow from operating activities 18,756 7,251
Cash flows from financing activities
Interest paid on bank borrowings (256) (225)
(Decrease)/increase in bank borrowings (5,346) 2,376
Share buy back costs (9,717) (3,828)
Equity dividends paid 8 (4,511) (4,608)
Net cash outflow from financing activities (19,830) (6,285)
Net (decrease)/increase in cash and cash equivalents (1,074) 966
Cash and cash equivalents at the start of the year 1,958 992
Cash and cash equivalents at the end of the year 884 1,958
Reconciliation of cash and cash equivalents to the Balance Sheet is as follows:
Cash held at custodian 884 358
Cash held on term deposit – 1,600
Cash and cash equivalents 884 1,958
Cash flow from operating activities includes:
Interest received 88 55
Dividends received 4,871 5,184
.
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, issued by the Association of Investment
Companies (AIC) in November 2014 (SORP) as updated in February 2018. The
financial statements are issued on a going concern basis as disclosed on page
51.
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 financial statements for the Company comprise the income statement,
reconciliation of movements in shareholders’ funds, the total column of the
balance sheet and the company totals shown in the notes to the financial
statements.
The UK Equity, Global Equity Income, Balanced Risk Allocation and Managed
Liquidity Share Portfolios’ income statements and summaries of net assets
(shown on pages 12, 19, 25 and 28) do not represent statutory accounts, are
not required under UK Generally Accepted Accounting Practice and are not
audited. 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 Financial Statements are presented in sterling, which is the Company’s
functional and presentation currency and is the currency of the Company’s
share capital and the predominant currency in which the Company’s
shareholders operate. This is also the currency in which these accounts are
prepared.
(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 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 Short Term Investments Company
(Global Series) plc 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:
PORTFOLIO REVENUE RESERVE CAPITAL RESERVE
UK Equity 30% 70%
Global Equity Income 30% 70%
Balanced Risk Allocation 30% 70%
Managed Liquidity 100% –
Any entitlement to any investment performance fee which is attributable to the
UK Equity and/or the Global Equity Income Portfolio is allocated 100% to
capital as it is principally attributable to the capital performance of the
investments in that Portfolio.
(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.
2. Income
This note shows the income generated from the portfolios (investment assets)
of the Company and income received from any other source.
2019 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Income from investments
UK dividends:
– ordinary dividends 2,058 463 – – 2,521
– special dividends 96 38 – – 134
– Scrip dividends 36 17 – – 53
2,190 518 – – 2,708
Overseas dividends:
– ordinary dividends 108 2,295 11 14 2,428
Unfranked investment income 44 – – 9 53
Interest from Treasury bills – – 39 – 39
2,342 2,813 50 23 5,228
Other income
Deposit interest 1 1 5 – 7
Rebates of management fee – – – 23 23
Total income 2,343 2,814 55 46 5,258
2018 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Income from investments
UK dividends:
– ordinary dividends 1,933 514 – – 2,447
– special dividends 110 14 – – 124
– scrip dividends 83 – – – 83
2,126 528 – – 2,654
Overseas dividends:
– ordinary dividends 233 2,067 9 1 2,310
– special dividends – 114 – – 114
Unfranked investment income 44 – – 4 48
Interest from Treasury bills – – 17 – 17
2,403 2,709 26 5 5,143
Other income
Deposit interest – 1 4 – 5
Rebates of management fee – – – 25 25
Total Income
There were £21,000 of special dividends in respect of the UK Equity Portfolio
recognised in capital during the year (2018: £455,000 in respect of the UK
Equity Portfolio and £2,000 in respect of the Global Equity Income
Portfolio).
3. Investment management and performance 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 and the performance fees of the UK Equity and
Global Equity Income Portfolios.
2019 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Investment management fee:
– charged to revenue 98 107 18 6 229
– charged to capital 228 250 42 - 520
Total investment management fee 326 357 60 6 749
Performance fee provision written back to capital – – – – –
2018 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Investment management fee:
– charged to revenue 112 113 22 6 253
– charged to capital 262 264 50 – 576
Total investment management fee 374 377 72 6 829
Performance fee provision written back to capital (4) – – – (4)
Details of the investment management agreement, including amendments during
the previous year, are given on page 51 in the Directors’ Report.
The performance fee written back is solely in respect of the UK Equity
Portfolio. No performance fee was earned on the UK Equity and Global Equity
Income Portfolios for the current or previous year. Any underperformance must
be fully offset by overperformance before any performance fee can be paid.
Movements on the UK Equity and Global Equity Income Portfolios’
underperformance carried forward follow:
UK EQUITY 2019 £’000 GLOBAL EQUITY INCOME 2019 £’000 UK EQUITY 2018 £’000 GLOBAL EQUITY INCOME 2018 £’000
(Under)/over performance brought forward (540) (893) 4 (778)
Under performance in the year (228) (598) (544) (115)
Under performance carried forward (768) (1,491) (540) (893)
4. Other expenses
The other expenses of the Company are presented below; those paid to the
Directors and the auditor are separately identified.
2019 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Charged to revenue:
Directors’ remuneration (i) 70 74 9 5 158
Auditor’s fees (ii):
– for the audit of the Company’s financial statements 14 15 2 1 32
Other expenses (iii) 115 125 29 7 276
199 214 40 13 466
Charged to capital:
Custodian transaction charges 1 1 – – 2
Total 200 215 40 13 468
2018 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Charged to revenue:
Directors’ remuneration (i) 61 58 8 5 132
Auditor’s fees (ii):
– for the audit of the Company’s financial statements 12 14 2 1 29
Other expenses (iii) 119 115 28 6 268
192 187 38 12 429
Charged to capital:
Custodian transaction charges 1 1 – – 2
Total 193 188 38 12 431
(i) The Director’s Remuneration Report provides information on
Directors’ fees. Included within other expenses is £14,000 (2018: £13,000)
of employer’s national insurance payable on Directors’ remuneration. As at
31 May 2019, the amounts outstanding on Directors’ fees and employer’s
national insurance was £27,000 (2018: £23,000).
(ii) Auditor’s fees are shown excluding VAT, which is included in
other expenses.
(iii) Includes fees for depositary, broker and registrar, and also
printing, postage and listing costs.
5. Finance costs
Finance costs are the cost of borrowing facilities. These are made up of costs
incurred to have the facility in place and any interest charged when the
facility is used.
2019 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Interest payable on borrowings repayable within one year as follows:
Charged to revenue 55 22 – – 77
Charged to capital 127 52 – – 179
Total 182 74 – – 256
2018 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Interest payable on borrowings repayable within one year as follows:
Charged to revenue 47 19 – – 66
Charged to capital 109 45 – – 154
Total 156 64 – – 220
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
2019 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Overseas tax 9 237 – – 246
2018
Overseas tax 14 242 – – 256
The accounting policy for taxation is disclosed in note 1(h).
(b) Reconciliation of tax charge
2019 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Return before taxation (3,316) (710) (265) 52 (4,239)
Theoretical tax at the current UK Corporation Tax rate of 19.00% (2018: 19.00%) (630) (135) (50) 10 (805)
Effect of:
– Non-taxable losses/(gains) on investments and derivatives 945 546 49 (5) 1,535
– Non-taxable (gains)/losses on foreign exchange (1) 1 (2) – (2)
– Non-taxable scrip dividends (7) (3) – – (10)
– Non-taxable UK dividends (385) (88) – – (473)
– Non-taxable UK special dividends (22) (7) – – (29)
– Non-taxable overseas dividends (20) (427) – – (447)
– Overseas tax 9 237 – – 246
– Accrued income taxable on receipt – (8) – – (8)
– Excess of allowable expenses over taxable income 115 121 3 – 239
Transfer of expenses between Portfolios:
– revenue 5 – – (5) –
Tax charge for the year 9 237 – – 246
2018 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Return before taxation 635 5,249 591 13 6,488
Theoretical tax at the current UK Corporation Tax rate of 19.00% (2017: 19.83%) 121 997 112 2 1,232
Effect of:
– Non-taxable losses/(gains) on investments and derivatives 283 (604) (123) – (444)
– Non-taxable losses on foreign exchange 2 2 4 – 8
– Non-taxable scrip dividends (16) – – – (16)
– Non-taxable UK dividends (363) (97) – – (460)
– Non-taxable UK special dividends (21) (3) – – (24)
– Non-taxable overseas dividends (44) (393) – – (437)
– Non-taxable overseas special dividends (86) (22) – – (108)
– Overseas tax 14 242 – – 256
– Disallowable expenses 1 1 – – 2
– Excess of allowable expenses over taxable income 123 119 7 (2) 247
Tax charge for the year 14 242 – – 256
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 £13,595,000 (2018: £12,311,000) that are available
to offset future taxable revenue. A deferred tax asset of £2,311,000 (2018:
£2,093,000), measured at the standard corporation tax substantively enacted
rate of 17% (2018: 17%) 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.
7. Basic return per Ordinary Share
Return per share is the amount of gain (or loss) generated for each share
class in the financial year divided by the weighted average number of the
shares in issue.
Basic 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:
WEIGHTED AVERAGE NUMBER OF SHARES
SHARE 2019 2018
UK Equity 34,607,613 37,138,452
Global Equity Income 32,378,620 33,043,420
Balanced Risk Allocation 5,966,462 6,965,490
Managed Liquidity 4,597,944 5,025,445
8. Dividends
Dividends represent distributions of income less expenses to shareholders.
Dividends are paid as an amount per share held.
Dividends paid for each applicable Share class, which represent distributions
for the purpose of s1159 of the Corporation Tax Act 2010, follows:
2019 2018
NUMBER OF SHARES DIVIDEND RATE (PENCE) TOTAL £’000 NUMBER OF SHARES DIVIDEND RATE (PENCE) TOTAL £’000
UK Equity
First interim 35,536,971 1.50 534 38,009,255 1.45 551
Second interim 34,757,443 1.50 521 37,256,932 1.45 540
Third interim 34,732,059 1.50 521 36,991,597 1.45 536
Fourth interim 33,490,968 2.10 703 36,648,217 2.10 770
6.60 2,279 6.45 2,397
Global Equity Income
First interim 32,756,219 1.50 492 32,747,913 1.45 475
Second interim 32,410,667 1.50 486 32,708,411 1.45 474
Third interim 32,604,620 1.50 489 32,973,355 1.45 478
Fourth interim 31,888,951 2.40 765 33,333,896 2.35 784
6.90 2,232 6.70 2,211
Total paid in respect of the year 4,511 4,608
No dividends were paid to Balanced Risk Allocation and Managed Liquidity
shareholders during the year (2018: nil).
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 respect of the year from revenue and capital
follows.
2019 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 COMPANY TOTAL £’000
Dividends paid in respect of the year:
From revenue 1,982 2,232 4,214
From capital 297 – 297
2,279 2,232 4,511
Since the year end, a dividend has been declared on the Managed Liquidity
Portfolio Shares, in respect of the year ended 31 May 2019, of 0.8p (2018:
nil) payable on 16 August 2019 to shareholders on the register on 26 July
2019. The dividend will be marked ex-dividend on 25 July 2019. The dividend of
£35,000 (2018: nil) is payable from revenue.
2018 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 COMPANY TOTAL £’000
Dividends paid in respect of the year:
From revenue – current year 2,038 2,149 4,187
From revenue – reserves brought forward 250 62 312
From revenue – total 2,288 2,211 4,499
From capital 109 – 109
2,397 2,211 4,608
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 of those
investments still held at the year end.
(a) Analysis of investments by listing status
2019 £’000 2018 £’000
UK listed investments 68,122 98,132
UK unlisted investments – 1,407
Overseas listed investments(i) 72,248 67,046
Unquoted hedge fund investments 15 20
140,385 166,605
(i) Includes the Short-Term Investments Company (Global Series) plc
positions held by the Balanced Risk Allocation Portfolio of £1,735,000 (2018:
£2,273,000) and Managed Liquidity Portfolio of £220,000 (2018: £48,000).
(b) Analysis of investment gains
2019 £’000 2018 £’000
Opening valuation Movements in year: 166,605 167,824
Purchases at cost 48,735 52,896
Sales – proceeds (67,141) (55,807)
Sales – net realised gains on sales 3,108 11,749
Movement in investment holding gains in year (10,922) (10,057)
Closing valuation 140,385 166,605
Closing book cost 129,931 145,229
Closing investment holding gains 10,454 21,376
Closing valuation 140,385 166,605
Realised gains based on historical cost 3,108 11,749
Movement in investment holding gains in year (10,922) (10,057)
(Losses)/gains on investments (7,814) 1,692
(c) Transaction costs
Transaction costs were £88,000 (2018: £138,000) on purchases and £42,000
(2018: £37,000) on sales.
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.
Excluding forward currency contracts used for currency hedging purposes.
2019 £’000 2018 £’000
Opening derivative assets held at fair value through profit or loss 281 209
Opening derivative liabilities held at fair value through profit or loss (54) (142)
Opening net derivative assets held at fair value shown in the balance sheet 227 67
Closing derivative assets held at fair value through profit or loss 175 281
Closing derivative liabilities held at fair value through profit or loss (223) (54)
Closing net derivative (liabilities)/assets held at fair value shown in the balance sheet (48) 227
Movement in derivative holding (losses)/gains (275) 160
Net realised gains on derivative instruments 7 481
Net capital (loss)/gain on derivative instruments as shown in the income statement (268) 641
Net income arising on derivatives 28 47
Total (loss)/gain on derivatives instruments (240) 688
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 23.
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.
2019 £’000 2018 £’000
Amounts due from brokers 3,246 102
Collateral pledged for futures contracts 398 223
Tax recoverable 271 184
Prepayments and accrued income 601 711
4,516 1,220
12(a). 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.
2019 £’000 2018 £’000
Shares bought back 218 10
Tax payable 137 137
Amounts due to brokers – 210
Performance fee accrued 531 531
Accruals 326 330
Other payables 1,212 1,218
12(b). Bank overdraft and loans
At the year end the Company had a £25 million (2018: £25 million) committed
364 day multicurrency revolving credit facility, which is due for renewal on
15 May 2020 (2018: 17 May 2019). In addition, an overdraft facility for the
purpose of short term settlement is also available. Both facilities are with
The Bank of New York Mellon and from 17 May 2019 the interest payable on the
credit facility is based on LIBOR +0.70% plus a 0.15% commitment fee
(previously 0.85% plus a 0.20% commitment fee) on amounts drawndown.
Under the 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 £75 million (2018: £75
million).
13. Provision
The provision arises from the UK Equity Portfolio's performance fee. The
movements on the performance fee provision are as follows:
2019 £’000 2018 £’000
Provision brought forward – 4
Underperformance offset in year – (4)
Provision carried forward – –
14. Share capital
Share capital represents the total number of shares in issue.
All shares have a nominal value of 1 penny.
(a) Movements in Share Capital during the Year Issued and
fully paid:
UK EQUITY GLOBAL EQUITY INCOME BALANCED RISK ALLOCATION MANAGED LIQUIDITY TOTAL SHARE CAPITAL
ORDINARY SHARES (NUMBER) At 31 May 2018 35,986,971 33,322,219 6,477,892 4,700,708 80,487,790
Shares bought back into treasury (2,313,500) (2,422,023) (376,218) (472,000) (5,583,741)
Arising on share conversion:
– August 2018 (419,528) 440,471 (114,918) 9,109 (84,866)
– November 2018 (25,384) 193,953 (237,107) (21,095) (89,633)
– February 2019 (113,591) 84,331 (4,698) 33,852 (106)
– May 2019 (26,373) 49,283 (126,523) 119,787 16,174
At 31 May 2019 33,088,595 31,668,234 5,618,428 4,370,361 74,745,618
TREASURY SHARES (NUMBER) At 31 May 2018 8,203,540 4,879,000 4,781,000 7,333,785 25,197,325
Shares bought back into treasury 2,313,500 2,422,023 376,218 472,000 5,583,741
At 31 May 2019 10,517,040 7,301,023 5,157,218 7,805,785 30,781,066
UK EQUITY GLOBAL EQUITY INCOME BALANCED RISK ALLOCATION MANAGED LIQUIDITY TOTAL SHARE CAPITAL
ORDINARY SHARES OF 1 PENNY EACH (£’000) At 31 May 2018 360 334 65 47 806
Shares bought back into treasury (23) (25) (4) (5) (57)
Arising on share conversion:
– August 2018 (4) 4 (1) – (1)
– November 2018 – 2 (3) – (1)
– February 2019 (1) 1 – 1 1
– May 2019 (1) – (1) 1 (1)
At 31 May 2019 331 316 56 44 747
TREASURY SHARES OF 1 PENNY EACH (£’000) At 31 May 2018 82 48 48 73 251
Shares bought back into treasury 23 25 4 5 57
At 31 May 2019 105 73 52 78 308
TOTAL SHARE CAPITAL (£’000)
Ordinary share capital 331 316 56 44 747
Treasury share capital 105 73 52 78 308
At 31 May 2019 436 389 108 122 1,055
Average buy back price 174.1p 199.5p 137.9p 101.6p
The total cost of share buy backs was £9,925,000 (2018: £3,838,000). As part
of the conversion process 238,918 (2018: 400,431) 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 (2018: nil).
(b) Movements in Share Capital after the Year End
Since the year end 39,722 UK Equity Shares and 201,766 Global Equity Income
Shares have been bought back into treasury.
(c) Voting Rights
Rights attaching to the Shares are described in the Directors’ Report on
pages 52 and 53.
(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 the inside front cover and in
the Shareholder Information on page 104.
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.
16. Net asset value per Share
The total 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 2019 2018
NET ASSET VALUE PER SHARE PENCE NET ASSETS ATTRIBUTABLE £’000 NET ASSET VALUE PER SHARE PENCE NET ASSETS ATTRIBUTABLE £’000
UK Equity 173.1 57,286 189.0 68,008
Global Equity Income 197.6 62,589 207.2 69,057
Balanced Risk Allocation 139.5 7,837 143.4 9,287
Managed Liquidity 104.9 4,583 103.5 4,864
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 loans and short-term overdrafts, used to finance
operations.
The financial instruments held in each of the four investment portfolios are
shown on pages 11, 18, 23, 24 and 28.
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 36 to 39. 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 29 to 32. The management process is subject to risk
controls, which the Audit Committee reviews on behalf of the Board, as
described on pages 45 and 46.
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 or 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 pages 47 and 48. 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. As a result, movements in exchange rates will affect the
sterling value of those items.
Management of 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 value or amortised cost of the Company’s monetary items that have
foreign currency exposure at 31 May are shown below. Where the Company’s
equity investments (which are not monetary items) are priced in a foreign
currency they have been included separately in the analysis in order to show
the overall level of exposure.
UK EQUITY PORTFOLIO:
CURRENCY DEBTORS (DUE FROM BROKERS AND DIVIDENDS) £’000 CASH/ (OVERDRAFT AT BANK) £’000 CREDITORS (DUE TO BROKERS AND ACCRUALS) £’000 TOTAL FOREIGN CURRENCY EXPOSURE ON NET MONETARY ITEMS £’000 INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS THAT ARE EQUITIES £’000 TOTAL NET FOREIGN CURRENCY EXPOSURE £’000
YEAR ENDED 31 MAY 2019
Canadian Dollar – – – – 1,591 1,591
Euro 34 – – 34 2,235 2,269
Swiss Franc 48 – – 48 – 48
US Dollar 4 – – 4 1,798 1,802
86 – – 86 5,624 5,710
YEAR ENDED 31 MAY 2018
Canadian Dollar – – – – 889 889
Euro 11 – – 11 3,323 3,334
Swiss Franc 46 – – 46 – 46
US Dollar 1 – – 1 1,484 1,485
58 – – 58 5,696 5,754
GLOBAL EQUITY INCOME PORTFOLIO:
CURRENCY DEBTORS (DUE FROM BROKERS AND DIVIDENDS) £’000 CASH/ (OVERDRAFT AT BANK) £’000 CREDITORS (DUE TO BROKERS AND ACCRUALS) £’000 TOTAL FOREIGN CURRENCY EXPOSURE ON NET MONETARY ITEMS £’000 INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS THAT ARE EQUITIES £’000 TOTAL NET FOREIGN CURRENCY EXPOSURE £’000
YEAR ENDED 31 MAY 2019
Australian Dollar – – – – 1,515 1,515
Brazilian Real 55 – – 55 445 500
Canadian Dollar – 1 – 1 1,398 1,399
Euro 120 – – 120 18,631 18,751
Japanese Yen 22 – – 22 2,390 2,412
Korean Won – – – – 1,878 1,878
Norwegian Krone 6 – – 6 913 919
Swiss Franc 123 – – 123 4,243 4,366
Taiwanese Dollar – – – – 1,596 1,596
US Dollar 70 12 – 82 23,445 23,527
396 13 – 409 56,454 56,863
CURRENCY DEBTORS (DUE FROM BROKERS AND DIVIDENDS) £’000 CASH/ (OVERDRAFT AT BANK) £’000 CREDITORS (DUE TO BROKERS AND ACCRUALS) £’000 TOTAL FOREIGN CURRENCY EXPOSURE ON NET MONETARY ITEMS £’000 INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS THAT ARE EQUITIES £’000 TOTAL NET FOREIGN CURRENCY EXPOSURE £’000
YEAR ENDED 31 MAY 2018
Australian Dollar – – – – 985 985
Brazilian Real 15 – – 15 666 681
Canadian Dollar 1 – – 1 1,689 1,690
Euro 140 – – 140 19,092 19,232
Hong Kong Dollar 83 (22) – 61 1,610 1,671
Japanese Yen 19 175 (175) 19 2,424 2,443
Korean Won – – – – 1,019 1,019
Norwegian Krone – – – – 2,049 2,049
Swiss Franc 86 – – 86 4,075 4,161
Taiwanese Dollar – – – – 1,684 1,684
US Dollar 71 – – 71 24,861 24,932
415 153 (175) 393 60,154 60,547
BALANCED RISK ALLOCATION PORTFOLIO:
CURRENCY DERIVATIVE ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS £’000 CASH AT BANK £’000 DERIVATIVE ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS £’000 DEBTORS DUE FROM/ (CREDITORS DUE TO) BROKERS & DIVIDENDS/ (ACCRUALS)* £’000 TOTAL FOREIGN CURRENCY EXPOSURE ON NET MONETARY ITEMS £’000 INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS THAT ARE EQUITIES £’000 TOTAL NET FOREIGN CURRENCY EXPOSURE £’000
YEAR ENDED 31 MAY 2019
Australian Dollar 98 35 – (52) 81 – 81
Canadian Dollar 19 32 – 20 71 – 71
Euro 12 – – 29 41 – 41
Hong Kong Dollar – 2 (6) 35 31 – 31
Japanese Yen – 5 (58) 69 16 – 16
US Dollar 31 29 (159) 270 171 15 186
160 103 (223) 371 411 15 426
CURRENCY DERIVATIVE ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS £’000 CASH AT BANK £’000 DERIVATIVE ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS £’000 DEBTORS DUE FROM/ (CREDITORS DUE TO) BROKERS & DIVIDENDS/ (ACCRUALS)* £’000 TOTAL FOREIGN CURRENCY EXPOSURE ON NET MONETARY ITEMS £’000 INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS THAT ARE EQUITIES £’000 TOTAL NET FOREIGN CURRENCY EXPOSURE £’000
YEAR ENDED 31 MAY 2018
Australian Dollar – 41 – 31 72 – 72
Canadian Dollar 25 35 – (1) 59 – 59
Euro 49 45 – 17 111 – 111
Hong Kong Dollar – 42 (1) 65 106 – 106
Japanese Yen 15 57 – (3) 69 – 69
US Dollar 132 188 (53) 140 407 20 427
221 408 (54) 249 824 20 844
* 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:
2019 2018
£/Australian Dollar +/– 2.0% +/– 3.5%
£/Brazilian Real +/– 3.4% +/– 5.8%
£/Canadian Dollar +/– 1.6% +/– 3.4%
£/Euro +/– 1.6% +/– 1.4%
£/Hong Kong Dollar +/– 1.6% +/– 3.4%
£/Japanese Yen +/– 1.9% +/– 2.6%
£/Korean Won +/– 1.9% +/– 1.9%
£/Norwegian Krone +/– 2.1% +/– 2.6%
£/Swedish Krona +/– 2.5% +/– 3.9%
£/Swiss Franc +/– 1.9% +/– 3.1%
£/Taiwan Dollar +/– 1.2% +/– 2.0%
£/US Dollar +/– 1.5% +/– 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:
2019 2018
REVENUE RETURN £’000 CAPITAL RETURN £’000 TOTAL RETURN £’000 REVENUE RETURN £’000 CAPITAL RETURN £’000 TOTAL RETURN £’000
Canadian Dollar – (25) (25) – (30) (30)
Euro – (36) (36) (1) (47) (48)
Swiss Franc – – – (1) – (1)
US Dollar – (27) (27) (1) (47) (48)
– (88) (88) (3) (124) (127)
GLOBAL EQUITY INCOME PORTFOLIO:
2019 2018
REVENUE RETURN £’000 CAPITAL RETURN £’000 TOTAL RETURN £’000 REVENUE RETURN £’000 CAPITAL RETURN £’000 TOTAL RETURN £’000
Australian Dollar (1) (30) (31) (1) (34) (35)
Brazilian Real (2) (15) (17) (1) (39) (40)
Canadian Dollar (1) (22) (23) (1) (57) (58)
Euro (15) (298) (313) (12) (267) (279)
Hong Kong Dollar (1) – (1) (7) (56) (63)
Japanese Yen (2) (45) (47) (1) (63) (64)
Korean Won (1) (36) (37) (1) (19) (20)
Norwegian Krone (1) (19) (20) (2) (53) (55)
Swiss Franc (3) (81) (84) (4) (126) (130)
Taiwan Dollar (1) (19) (20) (1) (34) (35)
US Dollar (9) (352) (361) (17) (796) (813)
(37) (917) (954) (48) (1,544) (1,592)
BALANCED RISK ALLOCATION PORTFOLIO:
2019 2018
REVENUE RETURN £’000 CAPITAL RETURN £’000 TOTAL RETURN £’000 REVENUE RETURN £’000 CAPITAL RETURN £’000 TOTAL RETURN £’000
Australian Dollar – (2) (2) (1) (3) (4)
Canadian Dollar – (1) (1) – (2) (2)
Euro – (1) (1) – (2) (2)
Hong Kong Dollar – – – – (4) (4)
Japanese Yen – – – – (2) (2)
US Dollar – (3) (3) – (14) (14)
– (7) (7) (1) (27) (28)
If sterling had weakened against the currencies shown, the effect would have
been the exact opposite.
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 £25 million (2018: £25
million), 364 day multicurrency revolving credit facility which is due for
renewal on 15 May 2020. 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:
2019 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 TOTAL £’000
Exposure to floating interest rates:
Investments held at fair value through profit or loss(1) – – 1,735 4,710 6,445
Cash and cash equivalents 476 245 153 10 884
Bank loan (7,350) (4,880) – – (12,230)
(6,874) (4,635) 1,888 4,720 (4,901)
Exposure to fixed interest rates:
Investments held at fair value through profit or loss including UK Treasury Bills – – 5,635 – 5,635
Net exposure to interest rates (6,874) (4,635) 7,523 4,720 734
2018 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 TOTAL £’000
Exposure to floating interest rates:
Investments held at fair value through profit or loss ((1)) – – 2,273 4,953 7,226
Cash and cash equivalents 308 – 1,600 50 1,958
Bank loan (13,650) (2,700) – – (16,350)
Bank overdraft – (1,140) (86) – (1,226)
(13,342) (3,840) 3,787 5,003 (8,392)
Exposure to fixed interest rates:
Investments held at fair value through profit or loss including UK Treasury Bills – – 5,040 – 5,040
Net exposure to interest rates (13,342) (3,840) 8,827 5,003 (3,352)
((1)) Comprises holdings in PIMCO Sterling Short Maturity Source UCITS ETF
and Short-Term Investments Company (Global Series) plc (2018: Invesco Money
Fund (UK) and Short-Term Investments Company (Global Series) plc).
The income on the PIMCO Sterling Short Maturity Source UCITS ETF, Invesco
Money Fund (UK) and Short Term Investments Company (Global Series) plc
investments is 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 of £25 million (2018: £25 million), the
effect over one year of a 0.5% movement in interest rates would result in a
£125,000 (2018: £125,000) maximum movement in the Company’s income and net
assets.
The effect of a 1% movement in the interest rates on investments held at fair
value through profit and loss would result in a £16,000 (2018: £19,000)
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 result of the Manager’s
investment processes and as a result are not wholly correlated with the
individual Portfolios’ benchmarks or the markets in which the Portfolios
invest. The value of the investment portfolios will not move in line with the
markets but will move as a result of the performance of the shares held within
the investment portfolios.
If the 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:
2019 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000
Profit after tax increase/decrease due to rise/fall of 10% 6,125 6,704 739 471
2018
Profit after tax increase/decrease due to rise/fall of 10% 8,166 7,266 733 495
17.2 Liquidity Risk
Management of liquidity risk
Liquidity risk is minimised as the investments held by the Company’s four
portfolios are diversified and the majority are 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 to realise 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:
2019 UK EQUITY 3 MONTHS OR LESS £’000 GLOBAL EQUITY INCOME MORE THAN 3 MONTHS £’000 BALANCED RISK ALLOCATION 3 MONTHS OR LESS £’000 MANAGED LIQUIDITY 3 MONTHS OR LESS £’000 MORE THAN 3 MONTHS £’000 3 MONTHS OR LESS £’000 COMPANY TOTAL £’000
Bank loan 7,350 – 4,880 – – – 12,230
Other creditors and accruals 138 – 334 65 – 143 680
Performance fee accrued – 532 – – – – 532
Derivative financial
instruments – – – 161 62 – 223
7,488 532 5,214 226 62 143 13,665
2018 UK EQUITY 3 MONTHS OR LESS £’000 GLOBAL EQUITY INCOME MORE THAN 3 MONTHS £’000 BALANCED RISK ALLOCATION 3 MONTHS OR LESS £’000 MANAGED LIQUIDITY 3 MONTHS OR LESS £’000 MORE THAN 3 MONTHS £’000 3 MONTHS OR LESS £’000 COMPANY TOTAL £’000
Bank overdraft – – 1,140 86 – – 1,226
Bank loan 13,650 – 2,700 – – – 16,350
Amount due to brokers 7 – 175 27 – 1 210
Other creditors and accruals 146 – 161 28 – 142 477
Performance fee accrued – 531 – – – – 531
Derivative financial
instruments – – – 37 17 – 54
13,803 531 4,176 178 17 143 18,848
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 £2.5 million for
each Portfolio with any one deposit taker (other than cash collateral on
derivative instruments), with only deposit takers approved by the Manager
being 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:
2019 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 TOTAL £’000
Bonds (UK Treasury bills) – – 5,635 – 5,635
Cash held as short-term investment ((1)) – – 1,735 220 1,955
Unquoted securities – – 15 – 15
Derivative financial instruments – – (48) – (48)
Debtors ((2)) 3,580 518 412 6 4,516
Cash and cash equivalents 476 245 153 10 884
4,056 763 7,902 236 12,957
2018 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 TOTAL £’000
Bonds (UK Treasury bills) – – 5,040 – 5,040
Invesco Money Fund (UK) – – – 4,905 4,905
Cash held as short-term investment ((1)) – – 2,273 48 2,321
Unquoted securities 1,408 – 20 – 1,428
Derivative financial instruments – – 227 – 227
Debtors ((2)) 379 569 268 4 1,220
Cash and cash equivalents 308 – 1,600 50 1,958
2,095 569 9,428 5,007 17,099
((1)) Comprises holdings in the Short-Term Investments Company
(Global Series) plc.
((2)) Cash collateral pledged for futures contracts of £398,000
is included in debtors (2018: £223,000).
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 (March 2016) sets out
three fair value levels. These are:
Level 1 – The unadjusted quoted price in an active market for identical
assets or liabilities that the entity can access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are
observable (i.e. developed using market data) for the asset or liability,
either directly or indirectly.
Level 3 – Inputs are unobservable (i.e. for which market data is
unavailable) for the asset or liability.
Categorisation within the hierarchy is determined on the basis of the lowest
level input that is significant to the fair value measurement of each relevant
asset/liability.
The valuation techniques used by the Company are explained in the accounting
policies note. 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.
During the year, the UK Equity Portfolio’s holding in AJ Bell was listed on
the London Stock Exchange on 7 December 2018 and subsequently transferred to
Level 1, valued at £2,889,000 (2018: Level 3, £1,408,000).
2019 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 TOTAL £’000
Financial assets at fair value through profit or loss:
Level 1 61,250 67,040 5,635 4,490 138,415
Level 2 – – 1,910 220 2,130
Level 3 – – 15 – 15
Total for financial assets 61,250 67,040 7,560 4,710 140,560
Financial liabilities:
Level 2 – Derivative instruments – – 223 – 223
2018 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 TOTAL £’000
Financial assets at fair value
through profit or loss:
Level 1 80,244 72,664 5,040 – 157,948
Level 2 3 – 2,554 4,953 7,510
Level 3 1,408 – 20 – 1,428
Total for financial assets 81,655 72,664 7,614 4,953 166,886
Financial liabilities:
Level 2 – Derivative instruments – – 54 – 54
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 2019 was £144,525,000 (2018:
£168,792,000) comprising borrowings of £12,230,000 (2018: £17,576,000) and
equity share capital and other reserves of £132,295,000 (2018:
£151,216,000).
The Company’s total capital employed is managed to achieve the Company’s
investment objective and policy as set out on pages 29 and 32, including that
borrowings may be used to raise equity exposure up to a maximum of 25% of net
assets. At the balance sheet date, maximum gross gearing was 18.9% (2018:
17.3%). 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 36
to 39. 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 12.
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 (2018: £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 58 to
60 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 51 and 52, 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 financial information set out above does not constitute the Company’s
statutory accounts for the year ended 31 May 2019. The financial information
for 2018 is derived from the statutory accounts for the year ended 31 May
2018, which have been delivered to the Registrar of Companies. The auditor
has reported on the 2018 accounts; the audit report was unqualified, did not
include a reference to any matters to which the auditor drew attention by way
of emphasis without qualifying the report and did not contain a statement
under section 498 of the Companies Act 2006. The statutory accounts for the
year ended 31 May 2019 have been finalised and audited but have not yet been
delivered to the Registrar of Companies.
The audited annual financial report will be available to shareholders, 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 .
The Annual General Meeting will be held on 3 October 2019 at 11.30am at 43-45
Portman Square, London W1H 6LY.
By order of the Board
Invesco Asset Management Limited
30 July 2019
Contacts:
Angus Pottinger 020 3753 1000
Paul Griggs 020 3753 1000
.
NOTICE OF ANNUAL GENERAL MEETING
NOTICE IS GIVEN that the Annual General Meeting (AGM) of Invesco Perpetual
Select Trust plc will be held at 43-45 Portman Square, London W1H 6LY at
11.30am on 3 October 2019 for the following purposes:
Ordinary Business of the Company
1. To receive the Annual Financial Report for the year ended 31 May 2019.
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 Alan Clifton as a Director of the Company.
6. To re-elect Graham Kitchen as a Director of the Company.
7. To re-elect Victoria Muir as a Director of the Company.
8. To re-appoint Grant Thornton UK LLP as Auditor to the Company and authorise
the Audit
Committee to determine the Auditor’s remuneration.
Special Business of the Company
To consider and, if thought fit, to pass the following resolution which will
be proposed as an Ordinary Resolution:
9. 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 £1,000,000 of UK Equity Shares, £1,000,000 of Global Equity
Income Shares, £1,000,000 of Balanced Risk Allocation Shares and £1,000,000
of Managed Liquidity Shares, provided that this authority shall expire at the
conclusion of the next AGM of the Company or the date falling fifteen 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:
10. 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 9 set out above 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 £33,048 of UK Equity Shares,
£31,466 of Global Equity Income Shares, £5,618 of Balanced Risk Allocation
Shares and £4,370 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 fifteen 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.
11. 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 at 3 October 2019, the
date of the Annual General Meeting (equivalent, at 29 July 2019, to 4,954,018
UK Equity Shares, 4,716,823 Global Equity Income Shares, 842,202 Balanced Risk
Allocation Shares and 655,117 Managed Liquidity Shares);
(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.
12. THAT:
the period of notice required for general meetings of the Company (other than
Annual General Meetings) shall be not less than 14 days.
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:
13. To approve the UK Equity Share Class Portfolio dividend payment policy as
set out on page 33 of the 2019 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:
14. To approve the Global Equity Income Share Class Portfolio dividend payment
policy as set out on page 33 of the 2019 annual financial report.
Dated 30th July 2019
By order of the Board
Invesco Asset Management Limited
Company Secretary
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