REG-Invesco Perp Sel Tst: Annual Financial Report
03/08/2020 07:05
Invesco Perpetual Select Trust plc
Annual Financial Report Announcement
Year Ended 31 May 2020
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FINANCIAL PERFORMANCE
CUMULATIVE TOTAL RETURNS((1)(2)) TO 31 MAY 2020
UK Equity Share Portfolio
ONE YEAR THREE YEARS FIVE YEARS
Net Asset Value –12.4% –15.7% 1.4%
Share Price –16.2% –18.6% –2.5%
FTSE All–Share Index –11.2% –8.4% 6.9%
Global Equity Income Share Portfolio
ONE YEAR THREE YEARS FIVE YEARS
Net Asset Value –6.4% –0.4% 28.3%
Share Price –6.1% –0.8% 26.3%
MSCI World Index (£) 8.9% 24.1% 64.0%
Balanced Risk Allocation Share Portfolio
ONE YEAR THREE YEARS FIVE YEARS
Net Asset Value –3.1% 0.3% 9.7%
Share Price –6.9% –3.4% 6.0%
Merrill Lynch 3 month LIBOR plus 5% per annum 5.9% 17.1% 28.2%
Managed Liquidity Share Portfolio
ONE YEAR THREE YEARS FIVE YEARS
Net Asset Value 1.1% 2.7% 2.7%
Share Price 1.6% 1.6% 1.2%
YEAR END NET ASSET VALUE, SHARE PRICE AND DISCOUNT
SHARE CLASS NET ASSET VALUE (PENCE) SHARE PRICE (PENCE) DISCOUNT
UK Equity 145.8 139.5 (4.3)%
Global Equity Income 178.5 176.5 (1.1)%
Balanced Risk Allocation 135.1 129.0 (4.5)%
Managed Liquidity 104.4 101.5 (2.8)%
((1)) Alternative Performance Measure (APM). See Glossary of Terms and
Alternative Performance Measures on pages 111 to 114 of the financial report
for details of the explanation and reconciliations of APMs.
((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 32 to 35.
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 UK capital gains tax, every three months.
Performance
The NAV total return of the UK Equity Share Portfolio over the year was
–12.4%, which compares with the total return from its benchmark, the FTSE
All-Share Index, of –11.2%. The share price total return was –16.2%.
The NAV total return of the Global Equity Income Share Portfolio over the year
was –6.4%, which compares with the total return from its benchmark, the MSCI
World Index (£), of +8.9%. The share price total return was –6.1%.
The NAV total return of the Balanced Risk Allocation Share Portfolio was
–3.1%, which compares with its benchmark, Merrill Lynch 3 months LIBOR plus
5%, return of +5.9%. The share price total return was –6.9%.
The NAV total return of the Managed Liquidity Share Portfolio was +1.1%. The
share price total return was +1.6%.
It is extremely disappointing, both for the Board and for shareholders, to
report on another year in which all three Portfolios based on risk assets
underperformed their benchmarks. The Board is very aware that performance has
been decidedly unsatisfactory over an extended period. Our Manager has taken
steps to address the situation with some personnel changes and other
initiatives and we will be closely monitoring the outcomes.
At the half year the UK Equity Portfolio was performing well, but this trend
reversed in the second half of the financial year as equity markets fell in
response to the Covid-19 pandemic. The sell-off impacted almost every stock,
but domestically orientated companies, in which the Portfolio was overweight,
were hit particularly hard. The negative returns were exacerbated by the
gearing employed during this period.
The Global Equity Income Portfolio was also impacted by the level of gearing
during the sell-off. The Portfolio was particularly affected by the
underweight exposure, relative to the benchmark MSCI World Index, to the US
market, which continued to outperform markets in the UK, Europe and Asia. As I
reported in my interim statement, investment management responsibility for the
Global Equity Income Portfolio moved to Stephen Anness in January of this
year. Although the underweight position in the US is now less pronounced, it
has still impacted returns.
The lockdowns across the world in response to the Covid-19 pandemic led to a
significant decline in economic activity. As a result demand for oil and other
commodities fell sharply, and prices dropped. The decline in commodity prices,
along with the collapse in equity markets, resulted in a negative return from
the Balanced Risk Allocation Portfolio. These declines in equities and
commodities were only partially offset by the strong return from government
bonds during the period.
Performance of the Managed Liquidity Portfolio was positive, despite the low
interest rate environment. The underlying portfolio of the principal
investment is primarily invested in short dated bonds and, therefore, this
Share class has a lower risk profile than the Company’s other three Share
classes. Nevertheless, this is not a cash fund, and as such is not without
risk to capital.
Outlook
In my interim statement I suggested we should expect a period of consolidation
in equity and bond markets following a decade of stellar returns. At the time,
I also noted that the Covid-19 outbreak seemed to have been contained in Asia.
Little did I anticipate that the virus would spread rapidly throughout the
world, resulting in an unprecedented collapse in economic activity, and equity
markets. Although there has been some recovery in equity prices, most markets
are still somewhat below the highs reached earlier this year.
Markets have moved up in response to government stimulus packages and in
anticipation of economies recovering as lockdown conditions ease in Europe and
North America. Nevertheless, considerable uncertainty remains as to how
quickly GDP will return to pre-Covid-19 levels. Likewise, some areas of the
global economy, such as travel, leisure and hospitality, could be impacted for
a significant period of time. The ways people work, shop and enjoy leisure
time are likely to change, even when the pandemic has passed.
In such periods of social and economic dislocation, there will be
‘winners’ and ‘losers’ and business models will have to adapt rapidly.
It is incumbent on our portfolio managers to analyse these trends and
construct portfolios which will outperform in these changed circumstances.
Since the inception of the Company, the various Portfolios have produced
positive returns. However, in recent years the portfolios investing in risk
assets have all underperformed their respective benchmarks over the industry
standard reporting periods of one, three and five years. To some extent this
outcome reflects the continued outperformance of growth stocks over the value
stocks which our equity portfolio managers have favoured. Although the impact
of this investment style on performance is understandable, the Board remains
concerned about the returns being generated. Invesco has recently restructured
its Henley investment centre and the Board will be monitoring the impact of
these changes on the management of the Portfolios. It is important to see an
improvement in performance and the Board will update shareholders in due
course.
The impact of the Covid-19 pandemic has been profound in many ways and the
implications for societies, economies and markets are very uncertain. It would
be foolhardy to make bold predictions as to what changes will happen as a
result of this dislocation. Nevertheless, societies and economies will adjust,
GDP growth will resume and, in the longer term, markets will recover. The
Company offers a unique mix of strategies and its structure, with
opportunities to switch between Share classes, makes it ideal for investors
who want enhanced control of their investments.
The Board
We attempted to recruit a new non-executive director last year, but although
we identified a very strong candidate she was ultimately unable to accept the
position. Resumption of the recruitment process has been postponed for the
time being because of the difficulty of conducting interviews in lockdown
conditions. However, we intend for the process to resume later this year. In
the meantime, Alan Clifton, who will be the next Director to retire, has
agreed to remain on the Board until a new Director is appointed.
Dividends
We have continued to apply the dividend policy adopted five years ago, and
supported by shareholder advisory votes, whereby for both UK Equity and Global
Equity Income Shares, dividends are paid by way of three equal interim
dividends declared in July, October and January with a ‘wrap-up’ fourth
interim declared in April. For the year under review the first three dividends
declared for the UK Equity Shares were each 1.5p per share and for the Global
Equity Income Shares 1.55p 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
7.05p per share for the year.
There were a number of dividend cuts in the last quarter of the Company’s
financial year, because of Covid-19, meaning a greater contribution from
capital was required for the Company’s dividends this year to meet the
Board’s target level. For the Global Equity Income Shares a contribution
from capital of approximately 0.4p per share was required to achieve the
dividend level (2019: nil), with another 1.2p per share coming from brought
forward revenue reserve, and for the UK Equity Shares a contribution from
capital of approximately 2.5p per share was required (2019: 0.9p).
We intend to continue with the current policy and investors are again being
given advisory votes on it. However, whereas in recent years we have set a
target of at least maintaining the dividend level from year to year for each
of the equity Portfolios, with the current uncertainty of future income flows
because of Covid-19 the Directors have not set dividend targets for the year
to 31 May 2021.
The first interim dividends declared in respect of the year to May 2021, which
will be paid on 17 August 2020 to shareholders on the register on 24 July
2020, were 1.50p 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 them 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.
I am pleased to report that notwithstanding the continued low interest rate
environment the Managed Liquidity Portfolio generated sufficient net revenue
in the past year for the Board to declare a dividend of 0.8p per Managed
Liquidity Share, which was paid on 15 May 2020. 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 annually 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. The
continued 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-preemptive basis being renewed at general meetings of the
Company.
Share Capital Movements
During the year to 31 May 2020, the Company bought back and placed in treasury
1,460,772 UK Equity Shares, 3,213,136 Global Equity Income Shares, 164,000
Balanced Risk Allocation Shares and 875,893 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 1,698,000 UK Equity Shares and 1,311,000 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: 3 August 2020; 2 November 2020; 1
February 2021; and 4 May 2021. 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 59
to 61. The AGM will be held at 43-45 Portman Square, London W1H 6LY at 11.30
am on 6 October 2020. It is hoped that by that date restrictions due to
Covid-19 will have eased sufficiently for the AGM to be held in the usual way
and, if so, shareholders are encouraged to attend. However, should this not be
the case the AGM may have to be held as a closed meeting. In this eventuality,
or if shareholders are reticent about using public transport to reach the
meeting venue, it is recommended that shareholders exercise their votes by
means of registering them with the Company’s registrar ahead of the meeting,
online or by completing paper proxy forms, and appoint the Chairman of the
meeting as their proxy. Recognising the potential for shareholders to be
unable to attend and ask questions, the Board invites anyone with questions on
the business of the meeting, or otherwise, to address them to the Company
Secretary, by email to investmenttrusts@invesco.com or, by letter, to 43-45
Portman Square, London W1H 6LY. Questions will be relayed to the Board and
responses provided. The Board recommends that shareholders vote in favour of
all resolutions as each of the Directors intends to do in respect of their own
shares.
Graham Kitchen
Chairman
31 July 2020
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STRATEGIC REPORT
MARKET AND ECONOMIC BACKGROUND
Global equity markets have been impacted by a range of issues over the last
twelve months, from political issues, to fears of recession and trade wars,
but these were all surpassed by Covid-19. This challenge has been unique in
our lifetimes and it is perhaps a surprise that global equity markets have
been so resilient.
The period started on a cautious note. Through the summer of 2019 markets were
weak as the global economy showed signs of a modest slowdown, especially in
manufacturing sectors. This was reflected in a further decline in bond yields
in many markets and yield curve inversion in the US and UK, a sign to many
market participants of impending recession. In the late summer central banks,
in particular the US Federal Reserve, once again stepped in with interest rate
cuts and measures to improve liquidity in order to ensure the record-breaking
global expansion would continue into 2020. These measures, together with signs
of a modest rapprochement between the US and China on trade and a Brexit deal
that promised to avoid a UK exit from the European Union on World Trade
Organisation terms, further encouraged optimism for corporate earnings in the
year ahead.
Common to all global equity markets was the persistent theme of stocks
offering secular growth, or positive correlation to bond markets, performing
well, whilst stocks and sectors more sensitive to the global economy or with
more volatile earnings streams generally underperformed, almost regardless of
valuation.
And so to 2020. While US-China trade relations, Brexit and domestic politics
were known uncertainties in 2019, 2020 has delivered the market shock that no
one could have foreseen. Global markets made new highs in February, despite
news of a highly infectious virus in China and the severe lockdown imposed in
some regions of the country. We had all lived through SARS in 2004, H1N1 in
2010 and MERS in 2012, none of which had a material impact on markets outside
Asia. This time it was different. Markets were affected globally as news of
the extent of the spread of Covid-19 to Europe and the resulting lockdowns and
travel restrictions were absorbed. The eruption of an oil price war between
Saudi Arabia and Russia was also unhelpful for markets.
The UK equity market fell by over 25% in the quarter to 31 March 2020, posting
its biggest quarterly drop for more than three decades as the global economic
costs of the Covid-19 pandemic continued to mount. Between 23 January 2020,
the date that the World Health Organisation first met in Geneva to discuss the
gathering crisis, and the low point on 23 March, the FTSE All-Share Index fell
by 34.1%. Extreme levels of volatility were witnessed with large swings in
prices on an intraday basis.
This was reflected globally. Equity markets fell 35% in the four weeks to
mid-March. The impact was especially acute in those sectors most exposed, such
as travel and leisure, banks and energy. Although, in contrast, a range of
e-commerce and certain healthcare stocks were bolstered by the perception that
they would benefit from the lockdown and increased healthcare spending.
In April and May, equity markets staged something of a recovery, on fresh
stimulus measures and hopes that economies were on the mend as lockdowns
eased. In June, the UK market was within around 16% of its level in February
before the Covid-19 correction and the MSCI World Index, in sterling terms,
was all the way back to that level. In large part this can be attributed to
the expected impact of a dramatic easing of fiscal and monetary policies in
all the major economies.
Investors seem to have pinned their hopes on a swift economic rebound, but
some have been left wondering if this market rally has come too far, too fast.
Investors have seemingly shrugged off the economic cost of the pandemic, which
is likely to be significant. The UK is expected to face a severe recession and
gross domestic product (GDP) is estimated to fall by around 16% in the second
quarter, and by 8% for the year (Bloomberg consensus as at 29 May 2020).
However, the strength and depth of the measures announced in the UK by the
Chancellor and the Bank of England should provide material support to
employment, income and bank lending to the real economy, that will be of great
benefit in enabling many businesses to navigate through to the recovery phase.
Overall, the financial response from central banks and governments around the
world was well coordinated and powerful, unique in our opinion outside of
wartime. Through late March, April and May investors were reassured of both
the stability of the financial system and the path to eventual economic
recovery. Share prices recovered sharply, recovering much lost ground,
particularly in the US, Japan and Asia. However, many stocks and sectors
within retail and travel and leisure, whose prospects are seen to be
permanently impaired or their survival threatened, still trade at less than
half the value they did but four short months ago.
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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.
Portfolio Review
The Portfolio modestly underperformed its benchmark over the year to 31 May
2020, with a net asset value total return of –12.4% compared with –11.2%
for the FTSE All-Share Index, having been ahead by a similar margin before the
Covid-19 related market disruption.
At the sector level, the largest source of positive performance was the
Portfolio’s exposure to the basic materials sector. The Portfolio has a
large overweight exposure to basic materials (relative to the FTSE All-Share
Index), almost entirely represented by holdings in four North American gold
mining companies, namely Barrick Gold, Newmont, Wheaton Precious Metals and
Agnico Eagle Mines.
In times of crisis, equities tend to fall, and gold goes up, and this pattern
has been borne out in recent months. As a perceived ‘safe-haven’ asset
class, gold mining companies are a good portfolio diversifier in that they are
inversely correlated with the broader market. The shock to global economies
resulting from the global pandemic has served to accelerate the conditions
favouring gold and, since gold miners are geared to the gold price, their
share prices have performed very strongly. Each of these companies is at the
low end of the cost curve, has a conservative balance sheet, a strong
management team and a very clear capital allocation framework.
Media group Future and veterinary services firm CVS were also strong
performers. Future has continued to grow both organically and via acquisition,
with its full year results in November showing a near trebling of profits.
More recently the company has seen an acceleration of audience growth as
a result of Covid-19, which has helped offset the significant slowdown in
magazine sales as high-street and travel-hub retailers have been closed. The
recently completed acquisition of TI Media should deliver significant
synergies and help to underpin the outlook for earnings. The performance of
veterinary business CVS improved markedly under new management, resulting in a
strong year for the shares, but the impact of Covid-19 lead to a reduction in
both small animal billable visits and revenue. As a result, the decision was
taken to temporarily close half of their small animal practices during the
lockdown and cash management became the priority. More recently restrictions
on vet appointments have been eased and trading is beginning to normalise. The
company should emerge from the crisis relatively unscathed.
Other notable contributors to performance included retailers JD Sports
Fashion and Tesco. JD Sports Fashion has benefited from the casualisation of
fashion and the growth in ‘athleisure’ clothing in recent years. Since the
advent of Covid-19, with its stores closed, the company took swift action to
control its cost base and to maintain its capability to fulfil online orders,
which have been extremely strong. There appears to be significant opportunity
for the company to leverage its relationships with key brand partners and take
market share in both online and offline sales. Meanwhile, Tesco reported a
boost in sales on the back of panic buying in the early days of the pandemic
and has benefited from its strong online presence, but the impact of
additional payroll costs as a result of recruitment to replace self-isolating
employees, distribution costs and store expenses is not insignificant. The
company believes that if customer behaviour returns to normal by August it is
likely that the additional cost headwinds will largely be offset by the
benefits of food volume increases and business rates relief. Their dividend
was maintained.
Fevertree Drinks, which produces soft drinks and mixers, was another strong
performer. Against the challenging backdrop of recent months, sales benefited
from the initial buying ahead of lockdown and subsequent ‘at-home’
consumption has remained robust, mitigating lost sales from shuttered pubs,
bars and restaurants. The firm appears to be well positioned to manage its way
through the current situation. It is a global business with revenue
diversified across regions, channels and customers and has a strong cash
position. The long-term trend towards premium spirits and premium long mixed
drinks continues and the Group will be well placed when the disruption and
uncertainty abate.
Conversely, the Portfolio’s holding in floorings manufacturer Victoria
proved to be disappointing over the twelve months. Whilst short term trading
has been affected by the impact of Covid-19, the long-term outlook appears
positive. The wide geographic spread of both its manufacturing operations and
its customers means that the virus's impact on Group revenue (and its
subsequent recovery) is likely to occur at varying times and not
simultaneously. In the meantime, Victoria enjoys comparatively low operational
gearing across its business and, whilst the balance sheet does carry debt, it
has sufficient cash on hand to support the business and management is taking
every precaution to protect the liquidity of the Group.
Bushveld Minerals, which mines and processes vanadium, detracted from
performance over the period. The share price weakened during 2019, in tandem
with the price of vanadium, and then fell sharply as the company shut down
production in accordance with the South African Government’s lockdown
instructions. The company is well capitalised, operates at the low end of the
cost curve and is now ramping production back up to normal levels. Demand for
and the price of vanadium should be underpinned as end-markets for steel
recover and may benefit in coming years if the nascent market in grid-scale
vanadium redox flow batteries develops further.
Coats, which manufactures thread, zips and trim, was also among the larger
detractors from performance. For the period from 1 January 2020 to 30 April
2020, sales declined 17% year-on-year, with the month of April down around 50%
due to demand and supply impacts from the pandemic. The company had 15
manufacturing sites under enforced government closure. All but one of these
have now reopened and cost mitigating actions taken by management should help
in the months ahead. Importantly, the company’s balance sheet remains strong
with comfortable levels of liquidity and from its starting position as clear
global leader it looks set to take further market share.
In terms of sector exposure, the Portfolio’s holdings of banks (Barclays,
Secure Trust Bank, Royal Bank of Scotland) were negative for performance over
the twelve months, mitigated in relative terms by not holding HSBC or Lloyds.
The portfolio’s limited exposure to health care (specifically not holding
AstraZeneca or GlaxoSmithKline) was also a detractor to relative performance
given that health care was the strongest performing sector over the twelve
month period.
At the beginning of 2020 gearing was around 6% and edged upwards slightly
towards 8% as Covid-19 disruption gradually unfolded. As the extent of the
threat from Covid-19 became apparent exposure to some of the stocks and
sectors that looked likely to be most heavily impacted was reduced, with that
capital deployed into businesses that looked more resilient. As the UK market
recovered gearing was increased, ending the period at around 10%. Looking at
the period overall the deployment of the gearing was not helpful to
performance, but in more recent months, as the FTSE All-Share has recovered
and performance has improved, gearing has made a positive contribution.
Outlook
Economies and markets remain in the grip of perhaps the greatest global crisis
since the late 1920s. In the face of human tragedy from Covid-19, the response
from governments around the world was to shut down swathes of the global
economy. With the gradual easing of these restrictions now underway, we await
the evidence from lagged economic data (expected to include millions of job
losses and many thousands of insolvencies) as well as company earnings to
judge the full impact. Meanwhile, equity markets have made up much of the lost
ground and implicitly are relying on a sharp recovery.
Estimates of second quarter UK GDP range from around -20% to -40% and
economists are sparring over whether forthcoming quarters will resemble a V, a
U, a back-to-front tick or an L, as well as the timing. There is risk on all
sides; risk of further downside should this evolve into a multi-year rolling
lockdown, but also upside risk if government priorities shift to restarting
the economy or should a medical breakthrough appear.
Whilst my approach is centred around traditional, bottom up ‘stock
picking’ and would therefore normally place less emphasis on the macro
outlook, there are from time to time major turning points at which macro
events take on greater significance and lead to meaningful changes in the
investment environment. Covid-19 is clearly one of these turning points.
With no reliable insight into public policy or medical innovations, I have
positioned the portfolio as best I can for the various possible scenarios. The
changes made since February have de-risked the portfolio by reducing direct
exposure to the worst affected sectors of the economy in favour of those that
should prove resilient, but not to such an extent that the Portfolio would be
left behind on the emergence of better news. In making these changes I have
stuck rigidly to my valuation-based philosophy and only sold riskier shares at
attractive relative prices and purchased their more defensive replacements at
appealing absolute valuations. This will not change.
In the midst of all this uncertainty, there is one issue on which I have
strong conviction. The fiscal and monetary response has been emphatic and has
represented an intervention by the authorities on an historic scale. However,
this support comes at a cost. Both in the UK and elsewhere, these programmes
have been funded by an expansion of central banks’ balance sheets on a
hitherto unprecedented scale. In the US in particular, the pace of expansion
(from below US$4 trillion to almost US$7 trillion) and the broadening of the
assets that qualify for purchase has been breath-taking. As we await
deteriorating economic data, governments’ tax bases have been dramatically
reduced whilst their spending commitments have significantly increased. I
believe that announcements of further stimulus are therefore inevitable. There
will be more of the same, but we should also be prepared for various flavours
of Modern Monetary Theory, be that something akin to Ben Bernanke’s famous
helicopter money or direct monetisation of ballooning fiscal deficits on an
ever-larger scale.
The banks enter this crisis in a far stronger position to absorb the coming
losses and are therefore more likely to lend to the real economy as it
recovers. The US monetary base is already growing at twice the pace it did in
2009-2011 and four times the pace Japan’s has done during three decades of
monetary experiment. There is no doubt that the environment today is
deflationary and that is the direction for economic data in the near-term. But
the ‘whatever-it-takes response’ has sown the seeds for that impending
deflation to turn to inflation that will be very difficult to control at a
desirable level. We have been used to monetary policy that has resembled fine
tuning. This is closer to filling a hole in the ground by tipping soil from a
20 tonne truck: the hole will get filled but it will be impossible not to
leave a large mound of soil where the hole used to be.
I have long believed the US fiscal position, and therefore the dollar’s
reserve currency status, to be unsustainable. The economic impact of the virus
has brought forward the inevitable and condensed what might have taken several
years into what is likely to be several quarters. We have just witnessed the
effective unification of the US Treasury and the US Federal Reserve into a
single force to fight deflation, to monetise government deficits and to lay
the ground for recovery. It may very well succeed, but will in my view prove
to be inflationary. Inflationary forces that were already in play from tariffs
and the rolling back of globalisation will also remain once economies
stabilise and recover. Real interest rates can be expected to be in
significantly negative territory for an extended period as all this new debt
is inflated away.
The one currency that cannot be diluted in this way is gold. The portfolio’s
four North American gold mining company holdings have performed their
protective role admirably during this market rout and now represent around 15%
of the portfolio. At the current gold price their valuations remain extremely
attractive and if things develop as I anticipate, gold has further gains to
make. These stocks continue to play a critical role and I intend to maintain
the position at or around its current weighting for the foreseeable future.
As the recovery has continued, I have maintained gearing at around 10%. This
is in part a reflection of my view that equity markets will be buoyed in the
near term by the fiscal and monetary stimulus that has been unleashed. It also
reflects my confidence in the positioning of the portfolio and the prospects
of the companies held.
The outcome I expect will also be good for equities in general, certainly
relative to (non-index-linked) bonds and cash. Within equities, inflation and
negative real interest rates should prove helpful to the Value style relative
to other investment styles. In the meantime, the recent changes I have made to
increase the defensive allocation should offer protection as we face the
potential of a deflationary shock. As the full impact of fiscal and monetary
policy is felt in the coming years, changes may be required, but at this stage
I believe that the portfolio is well balanced to mitigate risk and to generate
attractive returns in such uncertain times.
James Goldstone
Portfolio Manager
31 July 2020
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UK EQUITY SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 31 MAY 2020
Ordinary shares listed in the UK unless stated otherwise
COMPANY SECTOR (†) MARKET VALUE £’000 % OF PORTFOLIO
Barrick Gold – Canadian Listed Mining 2,852 5.5
British American Tobacco Tobacco 2,478 4.8
Barclays Banks 2,131 4.1
Tesco Food & Drug Retailers 2,080 4.0
SSE Electricity 1,857 3.6
BP Oil & Gas Producers 1,837 3.5
Newmont – US Listed Mining 1,814 3.5
Babcock International Aerospace & Defence 1,571 3.0
JD Sports Fashion General Retailers 1,542 3.0
Next General Retailers 1,536 2.9
Agnico Eagle Mines – Canadian Listed Mining 1,389 2.7
Future Media 1,296 2.5
Wheaton Precious Metals – Canadian Listed Mining 1,251 2.4
Royal Dutch Shell – B shares Oil & Gas Producers 987 1.9
Ultra Electronics Aerospace & Defence 985 1.9
Compass Travel & Leisure 984 1.9
Fevertree Drinks (AIM) Beverages 971 1.9
RELX Media 967 1.8
PureTech Health Pharmaceuticals & Biotechnology 884 1.7
CVS (AIM) General Retailers 856 1.6
Ashtead Support Services 853 1.6
Coats General Industrials 828 1.6
Johnson Service (AIM) Support Services 818 1.6
Phoenix Spree Deutschland Real Estate Investment & Services 814 1.6
Sigma Capital (AIM) Financial Services 799 1.5
Chesnara Life Insurance 785 1.5
XPS Pensions Financial Services 772 1.5
MJ Gleeson Household Goods & Home Construction 747 1.4
National Grid Gas, Water & Multiutilities 725 1.4
Vodafone Mobile Telecommunications 712 1.4
PRS REIT Real Estate Investment Trusts 702 1.3
HomeServe General Retailers 681 1.3
Barratt Developments Household Goods & Home Construction 656 1.2
Bushveld Minerals (AIM) Mining 585 1.1
Pennon Gas, Water & Multiutilities 583 1.1
Royal Bank of Scotland Banks 575 1.1
Secure Trust Bank Banks 574 1.1
easyJet Travel & Leisure 529 1.0
DS Smith General Industrials 523 1.0
Essentra Support Services 506 1.0
Harworth Real Estate Investment & Services 498 1.0
Experian Support Services 485 0.9
Urban Logistics REIT Real Estate Investment Trusts 482 0.9
Burford Capital (AIM) Financial Services 481 0.9
United Utilities Gas, Water & Multiutilities 475 0.9
McBride Household Goods & Home Construction 473 0.9
Victoria (AIM) Household Goods & Home Construction 458 0.9
Legal & General Life Insurance 454 0.9
Countryside Household Goods & Home Construction 447 0.8
Sirius Real Estate Real Estate Investment & Services 438 0.8
Hays Support Services 412 0.8
DFS Furniture General Retailers 409 0.8
On the Beach Travel & Leisure 343 0.7
Pearson Media 317 0.6
Elementis Chemicals 288 0.6
IAG Travel & Leisure 264 0.5
Tungsten (AIM) Financial Services 253 0.5
Sherborne Investors (Guernsey) C Financial Services 252 0.5
Safestyle UK (AIM) General Retailers 252 0.5
Alfa Financial Software Software & Computer Services 234 0.4
Hadrian's Wall Secured Investments Equity Investment Instruments 146 0.3
Distribution Finance Capital (AIM) Financial Services 141 0.3
Amigo Financial Services 49 0.1
N Brown General Retailers 20 –
TruFin (AIM) Financial Services 15 –
Total Holdings 65 (2019: 63) 52,121 100.0
(AIM) Investments quoted on AIM
(†) 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.
Portfolio Manager Change
As announced by the Board in January, from the beginning of 2020 Stephen
Anness became the designated manager of the Global Equity Income Portfolio,
taking over from the global equity income group, which was chaired by Nick
Mustoe. Based in Henley, Stephen joined Invesco in 2002 to work in the UK
equities team and moved on to manage global equity portfolios in 2012. Stephen
now leads the dedicated Global Equity team, which takes responsibility for
research, portfolio construction and communications. Additional idea
generation and market insights are provided by regional equity market
specialists in the Henley Investment Centre.
Portfolio Review
The portfolio underperformed its reference benchmark in the twelve months to
the end of May 2020. On a total return basis, the Portfolio’s net asset
value fell by 6.4% over the twelve months to the end of May 2020 compared to a
rise of 8.9% in the MSCI World Index (£, total return, net of withholding
tax).
Our investment process focusses on stocks that are attractively valued versus
their history and the market, but which also pay attractive and growing
dividends. Our valuation driven approach has been out of favour with the
consensus for several years, but the last few months have been especially
difficult.
The early part of the period, through the summer of 2019, was dominated by
concerns of a new global recession and an end to globalisation due to US-Sino
trade conflicts. The collapse in bond yields around the world and yield curve
inversions in the US and UK were additional harbingers of gloom and encouraged
a further stampede into equities perceived to have low volatility of earnings
and secular, bond-like characteristics, almost regardless of valuation. By the
end of August, global equity markets were at record levels of bifurcation in
terms of valuation spread between the most expensive and the cheapest stocks
in the market.
Our relative performance recovered somewhat through the autumn as evidence
emerged of a stabilising global economy and renewed support from central
banks. Several of our holdings in the banking sector, hitherto very much at
the lower end of the valuation spectrum, such as BNP Paribas, JPMorgan Chase
and Citigroup, performed strongly as financial results generally beat
expectations and economic optimism improved. Other more economically sensitive
stocks in the portfolio, unloved by consensus, such as Williams Sonoma, a US
retailer, and Next in the UK, performed well, though the latter was also
supported by some (temporary) resolution to the Brexit issue and a decisive
election result in December 2019.
We have, for a number of years, been overweight in the energy sector due to
the relatively low valuation upon which the sector has traded and the high
level of dividends it offered. We felt the scope for cost cutting had been
underestimated and the market was overly pessimistic about the long term
trajectory for oil and gas demand. Whilst we feel vindicated on the cost
cutting and valuation issue, we must acknowledge that the supply of oil and
gas has exceeded our expectations and this, together with ongoing reluctance
of many investors to engage with the industry due to environmental concerns,
has meant the sector has performed poorly. In January we made the decision to
materially reduce our exposure as we did not see an attractive risk reward
profile in the medium term to justify such a large overweight position. We
disposed of our holdings in Chevron, Royal Dutch Shell and Equinor. We still
have exposure to the sector through BP, Total and Lundin Energy, a low cost
medium sized Swedish oil producer. As to the broader environmental challenges
posed by the sector, we believe it appropriate for us to own and engage with
these companies with the aim of shifting their emphasis over time to less
carbon intensive energy exposures and to mitigate their carbon footprint
today. As much as we may wish fossil fuels away, they will remain an important
component of our economic well-being for some decades to come.
As we entered 2020, we undertook a full portfolio review and decided to make
some material changes in order to reduce risks that had dominated portfolio
performance in previous years, such as over sensitivity to the oil price and
interest rates. Whilst we acknowledge that the US market looks expensive in
aggregate, we feel it contains many high quality cash generative businesses,
not all of which are overvalued, and we have reduced the underweight to this
market. Overall, we have sought to increase stock specific risks rather than
exposure to global macro economic and geopolitical factors. As already
discussed, we reduced exposure to the energy sector, also to European banks,
which after strong performance in late 2019 no longer looked particularly
attractively valued.
We added a range of new holdings to the portfolio through January and
February. In Asia, we added NetEase, a Chinese computer gaming company listed
in the US. Our colleagues in the Asian team have known this business for many
years and, in our view, it has a great roster of gaming titles, is well
managed, has a very strong balance sheet and plays to what is still a secular
growth trend, with ever more time spent on computers and mobile phones.
Purchases of Tencent, perhaps best thought of as a ‘Chinese WhatsApp’,
Facebook, Amazon and Activision Blizzard also play to that theme. Purchases in
the US included Home Depot, the leading home improvement retailer, and Analog
Devices, the semiconductor chip manufacturer, and exposure was increased to
companies such as Microsoft and Texas Instruments. We also saw attractive risk
reward situations in some older, more cyclical, industries such as Ashtead, a
UK listed plant and equipment hire company with very substantial US interests,
Volkswagen and Delta Airlines.
Global equity markets performed well in the early part of 2020, the MSCI World
Index making new all-time highs in mid-February as optimism around the outlook
for economic growth, and hence corporate earnings, continued to improve. A new
virus in a remote part of China was not seen as a problem. Previous outbreaks
such as H1N1, SARS and MERS over the past two decades barely caused a ripple
in equity markets outside Asia. However, all that changed towards the end of
February as lockdowns and travel restrictions started to be implemented across
Europe and the global scale of the pandemic became evident. Global equity
markets fell 35% in five weeks, the most rapid decline in history.
The portfolio underperformed the benchmark index during this turmoil. The
level of gearing in place was modest, at around 7%; nevertheless it magnified
the extent of the underperformance somewhat. Whilst many of the newer holdings
and the large healthcare holdings, such as Roche and Bristol-Myers Squibb,
performed well, they were insufficient to offset underperformance in a few
specific areas; foremost, travel and leisure. We had two relatively small
positions in Delta Airlines and easyJet, and a larger position in Rolls-Royce,
the civil aerospace engine manufacturer. With the collapse in air travel,
these companies underperformed substantially. Holdings in other economically
sensitive sectors such as banks (JPMorgan Chase, Wells Fargo and Erste) and
automotive (Volkswagen) also underperformed. Our holdings in the energy sector
(BP, Lundin Energy and Total) were also negative contributors, given
concurrent geopolitical issues involving OPEC and Russia and the subsequent
fall in the oil price.
Markets began to stabilise in late March 2020 as central banks around the
world began to aggressively intervene to provide liquidity and to finance the
huge increase in government spending needed to support the global economy. The
recovery in equity markets through April and May was remarkable; although
concentrated in those stocks and sectors that had already been resilient in
the downturn. Confidence in a broad based economic recovery is elusive. We
took opportunities where we saw them to improve the quality of the portfolio,
buying good businesses when they were on sale, for example, Amadeus, the
Spanish listed airline passenger management software company, and increasing
our holding in Ashtead. We sold out of positions such as Delta Airlines where
we saw risk of equity dilution and a slow recovery from the crisis. We expect
the portfolio gearing being employed, which had a detrimental impact as the
market fell sharply in March, will benefit the portfolio as confidence,
earnings and dividends become more assured.
Outlook
It seems that in many parts of the world life is starting to normalise and
economies to open for business once more. We would caution that the pace of
recovery may be slower than we would like, given stubbornly high infection
rates in the US and many emerging markets and potential changes in consumer
behaviour. Government schemes in many geographies to minimise unemployment and
preserve consumer spending power will be withdrawn in coming months. That
notwithstanding, we expect a significant increase in economic activity in the
second half of 2020. There is material pent up demand from consumers and we
feel certain that governments will continue to spend on a range of
infrastructure projects designed to stimulate economic activity – they can
borrow at virtually zero interest rates.
Given the rapid recovery of markets from the March lows, and with the
continued uncertainties around a potential second wave of infections, we
believe the balance of risk and reward potential in a range of stocks we have
recently analysed is more even. Consequently, we wish to maintain a degree of
balance in the portfolio between companies with some defensive predictable
earnings, for example in the Healthcare sector, and companies with more
substantial upside if economies were to normalise more rapidly, for example
Inditex and Rolls-Royce.
One area where we see substantial valuation asymmetry is the financial sector,
where we continue to be overweight. This incorporates our positions in banks
and insurance businesses. We believe that the market has discounted both
sectors based on an outlook that is too pessimistic; indeed, in terms of
insurance, we believe we are beginning to see early evidence of a hardening
rate cycle (improving prices), while we believe banks will demonstrate a
greater level of resilience than many believe. They are trading at extremely
low relative valuations compared to the broader market.
Since the beginning of the Covid-19 crisis we have suffered a number of
dividend cuts in the portfolio. These were principally in the most affected
areas we described earlier, such as travel, and also certain industrials,
including Rolls-Royce and Melrose Industries. Our US banks have continued to
pay dividends. However, Standard Chartered has been asked (along with all
other UK domiciled banks) to suspend their dividends until further clarity
emerges later this year as to the likely scale of disruption caused by
Covid-19. We are disappointed in some businesses such as Inditex, the owner of
brands such as Zara, which deferred a dividend it can clearly afford to pay.
We continue to expect dividend cuts globally for 2020 of around 25% to 30%,
with restoration of many of those dividends in 2021.
Our overriding sense, however, is that Covid-19 has accelerated trends already
present in economics and politics around the world; the support for austerity
by policy makers around the world is zero and we may well have entered a new
policy regime with far greater emphasis on fiscal policy and redistribution.
Implications of this could be profound within global equity markets in the
years to come.
Stephen Anness
Portfolio Manager
31 July 2020
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GLOBAL EQUITY INCOME SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 31 MAY 2020
Ordinary shares unless stated otherwise.
COMPANY INDUSTRY GROUP (†) COUNTRY MARKET VALUE £’000 % OF PORTFOLIO
Texas Instruments Semiconductors & Semiconductor Equipment United States 2,761 4.9
Microsoft Software & Services United States 2,735 4.9
Taiwan Semiconductor Manufacturing Semiconductors & Semiconductor Equipment Taiwan 2,372 4.3
Ashtead Capital Goods United Kingdom 2,149 3.9
JPMorgan Chase Banks United States 2,013 3.7
Analog Devices Semiconductors & Semiconductor Equipment United States 1,952 3.5
Samsung Electronics – preference shares Technology Hardware & Equipment South Korea 1,911 3.4
Novartis Pharmaceuticals, Biotechnology & Life Sciences Switzerland 1,826 3.3
Zurich Insurance Switzerland 1,777 3.2
Alphabet Media & Entertainment United States 1,661 3.0
Home Depot Retailing United States 1,618 2.9
Bayer Pharmaceuticals, Biotechnology & Life Sciences Germany 1,559 2.8
Wells Fargo Banks United States 1,549 2.8
American Express Diversified Financials United States 1,525 2.7
Bristol-Myers Squibb Pharmaceuticals, Biotechnology & Life Sciences United States 1,468 2.6
Roche Pharmaceuticals, Biotechnology & Life Sciences Switzerland 1,463 2.6
Automatic Data Processing Software & Services United States 1,418 2.5
Amadeus Software & Services Spain 1,409 2.5
Lundin Energy Energy Sweden 1,395 2.5
Inditex Retailing Spain 1,157 2.1
Berkeley Consumer Durables & Apparel United Kingdom 1,157 2.1
Mastercard Software & Services United States 1,150 2.1
Tencent (R) Media & Entertainment China 1,126 2.0
Allianz Insurance Germany 1,125 2.0
Colgate-Palmolive Household & Personal Products United States 1,066 1.9
NetEase – ADR Media & Entertainment China 1,050 1.9
Volkswagen – preference shares Automobiles & Components Germany 996 1.8
Next Retailing United Kingdom 960 1.7
Rolls-Royce Capital Goods United Kingdom 953 1.7
Sony Consumer Durables & Apparel Japan 952 1.7
Citigroup Banks United States 923 1.7
Standard Chartered Banks United Kingdom 902 1.6
Sberbank – ADR Banks Russia 888 1.6
Melrose Industries Capital Goods United Kingdom 862 1.5
Total Energy France 825 1.5
BP Energy United Kingdom 750 1.3
easyJet Transportation United Kingdom 709 1.3
Pepsico Food, Beverage & Tobacco United States 667 1.2
Activision Blizzard Media & Entertainment United States 610 1.1
Diageo Food, Beverage & Tobacco United Kingdom 601 1.1
AIA Insurance Hong Kong 524 0.9
Accenture – A Shares Software & Services United States 523 0.9
Reckitt Benckiser Household & Personal Products United Kingdom 302 0.5
Las Vegas Sands Consumer Services United States 286 0.5
Cummins Capital Goods United States 153 0.3
Total Holdings 45 (2019: 52) 55,778 100.0
(†) MSCI and Standard & Poor’s Global Industry Classification Standard.
(ADR) American Depositary Receipts – are certificates that represent shares
in the relevant stock and are issued by a US bank. They are denominated and
pay dividends in US dollars.
(R) Red Chip Holdings – holdings in companies incorporated outside the
PRC, listed on the Hong Kong Stock Exchange, and controlled by PRC entities by
way of direct or indirect shareholding and/or representation on the board.
.
BALANCED RISK ALLOCATION SHARE PORTFOLIO
MANAGER’S REPORT
Investment Objective
The investment objective of the Balanced Risk Allocation Portfolio is to
provide shareholders with an attractive total return in differing economic 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.
Portfolio Review
The Balanced Risk Allocation Portfolio NAV total return posted a negative
return for the year of -3.1% in the year under review.
The Balanced Risk Allocation 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.
For the year to 31 May 2020 strategic exposure to bonds was a positive
contributor to performance, whereas strategic exposure to both equities and
commodities detracted from performance.
Strategic exposure to government bond markets aided results for the fiscal
year, as yields fell across all four markets in which the strategy was
invested. Bond markets started the period in positive territory. A combination
of accommodative central bank policy, uncertainty about global economic
activity and trade tensions helped push bond prices higher early in the
period. Prices temporarily retreated later in 2019 as the apparent thawing of
trade tensions between the US and China dampened enthusiasm for bonds.
However, a flight-to-safety was quickly ignited in the first quarter of 2020,
with uncertainty and fear about the Covid-19 health crisis fuelling a sharp
sell-off in risk assets and bolstering safe-haven returns. While returns were
positive through the sharp downturn in risk assets, the path there was
anything but. During the height of the cash crunch in March, bonds became a
source of liquidity, sending prices lower and volatility higher. Massive
intervention by central banks in March to thaw frozen credit markets and
exhaustion of selling pressure combined to buoy bond prices back up. Results
in the asset class were led by the US, followed by Canada, Australia and
finally the UK.
Strategic exposure to equities detracted from performance as the asset class
suffered serious setbacks during the fiscal year. Equity results were
generally positive in the earlier half of the period with many markets in
which the strategy invests benefiting from accommodative central bank policy
and trade deal optimism. However, in the first quarter of 2020 equity markets
almost universally entered bear market territory with prices dropping off
sharply. The main issue pushing prices lower was fear over the global spread
of Covid-19 and concerns over the impact of containment efforts on
manufacturing activity and global supply chains. Equity markets managed to
snap back in the final two months of the period, on hopes that central bank
intervention and the reopening of economies would lead to a rapid recovery.
Hong Kong equities were the top detractor over the period followed by the UK.
Hong Kong equities suffered declines as they were doubly hit by local unrest
during the period. UK equities struggled with unpredictability around Brexit
and were also hit hard in the late period sell-off, partially due to the UK
index’s high energy weight.
Strategic exposure to commodities represented the largest drag on results
during the fiscal year, with the energy complex being by far the hardest hit.
Energy commodities were generally positive in the earlier parts of the period,
but suffered a large setback in the first quarter of 2020 on demand fears
created by efforts to contain the spread of Covid-19 and a supply shock in
early March coming from the eruption of an oil price war between Saudi Arabia
and Russia. Industrial metals also detracted from performance as prices for
aluminium and copper fell on demand fears from the economic shutdown and the
ensuing drop in global manufacturing activity. Agricultural prices declined in
aggregate, with all but wheat and cocoa posting negative results for the
period. Precious metals was the only positive contributor from a commodity
complex perspective, benefiting from the low-rate environment and as nervous
investors sought safe havens amid volatility in risk assets. Prices for both
gold and silver jumped-up late in the period as investors assessed the
potential for future inflation and potential currency debasement as global
central banks massively expanded their balance sheets.
Tactical shifts helped results during the period, as gains from defensive
positioning in commodities outweighed losses from overweight positioning in
equities. The overall impact of tactical positioning in bonds was flat for the
period.
Outlook
Up to this point, the recovery from the economic damage caused by Covid-19
containment efforts has gone about as well as anyone could expect. Economic
activity across several fronts is approaching levels seen just prior to the
lockdowns. However, the easy part of the recovery is likely behind us. The
continued recovery from here is apt to be lumpy as pockets of infections
resurge, which could cause a rollback of earlier containment efforts.
Additionally, several prognosticators are suggesting that a full recapture of
pre-Covid-19 economic activity levels won’t be seen until 2022 at the
earliest. With this in mind, investors may be best served by taking a balanced
approach to a broader set of economic outcomes that allow for fits and starts
along the road to recovery.
Tactical positioning for June was overweight all equity markets, except for
Hong Kong, which was carried at neutral. In fixed income, the strategy
overweighted Australia, Canada, the UK and US, while Germany and Japan were
excluded. Positioning in commodities was underweight agriculture, overweight
metals and overweight energy, except for natural gas and gas oil (diesel),
which were underweight.
For July all equity markets have been overweighted. In fixed income Australia,
Canada and the US continue to be overweighted, with both Germany and the UK
being excluded. Across commodities, the strategy continues to underweight most
agricultural exposures, except for cocoa, lean hogs and live cattle, which are
carried at neutral. Exposure to energy is neutral crudes and unleaded petrol,
but underweight gas oil, natural gas and heating oil. Within metals, the
strategy is overweight gold, silver and copper, but underweight aluminium.
Scott Wolle
Portfolio Manager
31 July 2020
.
BALANCED RISK ALLOCATION SHARE PORTFOLIO
LIST OF DERIVATIVE INSTRUMENTS
AT 31 May 2020
NOTIONAL EXPOSURE £’000 NOTIONAL EXPOSURE AS % OF NET ASSETS
Government Bond Futures:
Australia 2,410 34.1
US 867 12.3
Canada 814 11.5
UK 412 5.8
Total Bond Futures (4) 4,503 63.7
Equity Futures:
Japan 470 6.6
US small cap 448 6.3
UK 363 5.1
Europe 362 5.1
Hong Kong 358 5.1
US large cap 245 3.5
Total Equity Futures (6) 2,246 31.7
Commodity Futures:
Agriculture
Cotton 161 2.3
Soybean meal 138 2.0
Soybean 137 1.9
Sugar 84 1.2
Wheat 42 0.6
Soybean oil 40 0.6
Corn 39 0.6
Coffee 29 0.4
Precious Metals
Gold 427 6.0
Silver 150 2.1
Energy
Gasoline 210 3.0
Brent crude 183 2.6
WTI crude 57 0.8
Low sulphur gasoline 53 0.7
New York Harbor ultra-low sulphur diesel 38 0.5
Natural gas 22 0.3
Industrial Metals
Copper 217 3.1
Aluminium 94 1.3
Total Commodity Futures (18) 2,121 30.0
Total Derivative Instruments (28) 8,870 125.4
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
Equities 3.8% 42.2%
Fixed Income 3.5% 38.3%
Commodities 1.8% 19.5%
9.1% 100.0%
BALANCED RISK ALLOCATION SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 31 MAY 2020
YIELD % MARKET VALUE £’000 % OF PORTFOLIO
Short Term Investments
Invesco Liquidity Funds plc - Sterling 0.35 2,330 36.7
UK Treasury Bill 0% 16 Nov 2020 0.13 1,517 23.9
UK Treasury Bill 0% 09 Nov 2020 0.14 750 11.8
UK Treasury Bill 0% 03 Aug 2020 0.68 550 8.7
UK Treasury Bill 0% 06 Jul 2020 0.74 450 7.1
UK Treasury Bill 0% 02 Nov 2020 0.19 300 4.7
UK Treasury Bill 0% 17 Aug 2020 0.12 282 4.5
UK Treasury Bill 0% 26 Oct 2020 0.15 150 2.4
Total Short Term Investments 6,329 99.8
Hedge Funds ((1))
Harbinger Class PE Holdings 15 0.2
Harbinger Class L Holdings 3 –
Total Hedge Funds 18 0.2
Total Fixed Asset Investments 6,347 100.0
((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 34.
.
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.
Portfolio Review
The Managed Liquidity Portfolio NAV total return for the year ended 31 May
2020 was 1.1%.
This Portfolio is invested principally in the PIMCO Sterling Short Maturity
Source UCITS ETF, which is managed by PIMCO. In addition, since from time to
time it is necessary to be able to realise assets quickly to meet short term
payment obligations, a small proportion of the Portfolio's assets is invested
in the Sterling Liquidity Portfolio of Invesco Liquidity Funds plc (formerly
Short-Term Investments Company (Global Series) plc), which is a money market
fund managed by Invesco. The underlying investments of the ETF carry greater
risks than is typical for a money market fund and accordingly the Portfolio
value may rise or fall.
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 has a diversified
portfolio of UK sterling-denominated fixed income securities, including
government bonds, corporate debt securities and unleveraged mortgage or other
asset-backed securities. The Fund’s weighted average maturity is not
expected to exceed three years and its average portfolio duration will be up
to one year, based on PIMCO’s forecast for interest rates. The Fund invests
only in investment grade securities that are rated at least Baa3 by Moody’s
or BBB- by S&P or equivalently rated by Fitch (or, if unrated, determined by
PIMCO to be of comparable quality).
The Sterling Liquidity Portfolio of Invesco Liquidity Funds plc is a sterling
denominated, short-term low volatility net asset value money market fund. It
invests 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 2020 the Sterling Liquidity Portfolio was rated
AAAm by Standard and Poor's and AAAmmf by Fitch Ratings.
As reported at in the Company’s half year report, although the UK election
had removed much of the near-term Brexit uncertainty, PIMCO expected weakness
in the global economy because of trade tensions and political uncertainty. In
the second half of the Company’s year, financial securities markets suffered
significant falls due primarily to concerns around the impact of Covid-19 on
the global economy. Both of the abovementioned funds were affected, albeit not
to a scale comparable with equities.
During a special meeting on 10 March 2020, the Bank of England (BoE) Monetary
Policy Committee decided to cut the Bank interest rate down from 0.75% to
0.25% to counter the economic shock resulting from the Covid-19 outbreak and
also introduced a new Term Funding Scheme. Then, on 19 March, the BoE
followed in the footsteps of other central banks by announcing a further rate
cut, to bring the Bank rate down to 0.10%, and a new round of QE worth £200
billion, which reduced stress in money markets.
Outlook
PIMCO expect the UK to have a deep but relatively short recession due to the
Covid-19 pandemic, although the subsequent recovery is expected to be slow
with activity remaining below pre-Covid-19 levels through 2021. The UK policy
response has been prompt and coordinated, softening the fall and likely
preventing the shock from creating lasting damage to the supply side of the
economy. It appears that the Bank of England should remain a credible backstop
for the sovereign balance sheet, keeping its policy rate at 0.1%, adding to
existing asset purchases to broadly match the size of the fiscal deficit, and
directly lending to the Treasury where appropriate.
Invesco
31 July 2020
.
MANAGED LIQUIDITY SHARE PORTFOLIO
LIST OF INVESTMENTS
AS AT 31 MAY
2020 2019
MARKET VALUE £’000 % OF PORTFOLIO MARKET VALUE £’000 % OF PORTFOLIO
PIMCO Sterling Short Maturity Source UCITS ETF 2,642 98.5 4,490 95.3
Invesco Liquidity Funds plc – Sterling (formerly Short Term Investment Companies (Global Series) plc) 40 1.5 220 4.7
2,682 100.0 4,710 100.0
.
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 Company’s purpose is to
generate sustainable returns for its shareholders by providing a choice of
investment strategies and the ability to switch between them, free of cost,
according to their needs. The underlying strategies are each targeted at
achieving returns corresponding with specified objectives through a
disciplined investment process. The strategy the Board follows to achieve its
overall objective and those of each Share class is to set investment policy
and risk guidelines, together with investment limits, and to monitor how they
are applied. These are also set out below.
The business model the Company has adopted to achieve its objective has been
to contract investment management and administration to appropriate external
service providers. The Board has oversight of the Company’s service
providers, and monitors them on a formal and regular basis. The Board has a
collegiate culture and pursues its fiduciary responsibilities with
independence, integrity and diligence, taking advice and outside views as
appropriate and constructively challenging and interacting with service
providers, including the Manager.
The principal service provider is Invesco Fund Managers Limited (‘IFML’ or
the ‘Manager’). In addition to managing the Portfolios in accordance with
the Board’s strategy and under its oversight, the Manager is also
responsible for providing company secretarial, marketing, accounting and
general administration services. In practice, many of these services are
performed under delegated authority by Invesco Asset Management Limited
(IAML), a company related to IFML. References to the Manager in this annual
financial report should consequently be considered to include both entities.
All administrative support is provided by third parties under the oversight of
the Board. In addition to the management and administrative functions of the
Manager, the Company has contractual arrangements with Link 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 40 and 55
securities (this guidance was changed by the Board, and announced to the
market, on 20 April 2020. The previous guidance as to the typical range was 45
to 80 stocks).
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 2020 and of relevant benchmark indices were as follows:
UK Equity Portfolio –12.4%
FTSE All-Share Index –11.2%
Global Equity Income Portfolio –6.4%
MSCI World Index (£) 8.9%
Balanced Risk Allocation Portfolio –3.1%
Merrill Lynch 3 month LIBOR plus 5% per annum 5.9%
Managed Liquidity Portfolio 1.1%
Source: Refinitiv.
Other performance periods, together with share price total returns, are shown
on pages 7, 14, 21 and 28.
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 4.12p (2019:
5.73p), based on net revenue for the year of £1,340,000 (2019: £1,982,000),
which included receipts of £61,000 (2019: £96,000) of non-recurring special
dividends, equivalent to 0.19p (2019: 0.28p).
Dividend Policy:
It is the Board’s policy that the Directors will declare four dividends in
respect of each accounting year (with payment in the month following)
comprising of three equal interim dividends, declared in July, October and
January, and a ‘wrap-up’ fourth interim dividend, declared in April.
Depending on the level of income received in each quarter, and in the year,
these four dividends may be enhanced with contributions from capital profits
to achieve the Board’s target level. In recent years the Directors have set
a target of at least maintaining, in the absence of unforeseen circumstances,
the level of annual UK Equity dividends per share from year to year. The
impact of Covid-19 constitutes unforeseen circumstances in this context and,
given the current uncertainty of future income flows, the Directors have not
set dividend targets for the year to 31 May 2021.
Dividends Declared:
The Directors have declared and paid four interim dividends for the year ended
31 May 2020 totalling 6.60p per UK Equity Share (2019: 6.60p) of which 4.12p
was met from revenue earned in the year. The aggregate of dividends paid in
respect of the year was £2,145,000 (2019: £2,279,000) – 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 2021 of 1.50p was declared on
16 July 2020. In the absence of unforeseen circumstances, and in accordance
with the dividend policy set out above, the Board intends for this to set the
level for the next two quarterly dividends.
Global Equity Income Shares
Revenue earnings per Share for the Global Equity Income Share Portfolio was
5.39p (2019: 6.90p), based on net revenue for the year of £1,639,000 (2019:
£2,234,000), which included £49,000 (2019: £38,000) of special dividends.
Dividend Policy:
It is the Board’s policy that the Directors will declare four dividends in
respect of each accounting year (with payment in the month following)
comprising of three equal interim dividends, declared in July, October and
January, and a ‘wrap-up’ fourth interim dividend, declared in April.
Depending on the level of income received in each quarter, and in the year,
these four dividends may be enhanced with contributions from capital profits
to achieve the Board’s target level. In recent years the Directors have set
a target of at least maintaining, in the absence of unforeseen circumstances,
the level of annual UK Equity dividends per share from year to year. The
impact of Covid-19 constitutes unforeseen circumstances in this context and,
given the current uncertainty of future income flows, the Directors have not
set dividend targets for the year to 31 May 2021.
Dividends Declared:
The Directors have declared and paid four interim dividends for the year ended
31 May 2020 totalling 7.05p (2019: 6.90p) per Global Equity Income Share, of
which 5.39p was met from revenue earned in the year. The aggregate of
dividends paid in respect of the year was £2,138,000 (2019: £2,232,000) –
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 2021 of 1.55p was declared on
16 July 2020. In the absence of unforeseen circumstances, and in accordance
with the dividend policy set out above, the Board intends for this to set the
level for the next two quarterly dividends.
Balanced Risk Allocation Shares
In order to maximise the capital return on the Balanced Risk Allocation
Shares, the Directors only intend to declare dividends on the Balanced Risk
Allocation Shares 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. The
Portfolio recorded a net revenue loss of £1,000 in the year (2019: £25,000
net profit).
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 Share
Portfolio when the level of income available allows. The Managed Liquidity
Portfolio recorded a net revenue profit for the year of £23,000 (2019:
£27,000). An interim dividend of 0.8p per Managed Liquidity Share was
declared on 15 April 2020 in respect of the year ended 31 May 2020 (2019:
0.8p), of which 0.65p was met from revenue earned in the year. 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 39. At 31 May 2020, the share prices, net asset values
(NAV) and the discounts of the four Share classes were as follows:
2020 2019
SHARE CLASS NET ASSET VALUE (PENCE) SHARE PRICE (PENCE) DISCOUNT NET ASSET VALUE (PENCE) SHARE PRICE (PENCE) DISCOUNT
UK Equity 145.8 139.5 (4.3)% 173.1 173.5 0.2%
Global Equity Income 178.5 176.5 (1.1)% 197.6 195.0 (1.3)%
Balanced Risk Allocation 135.1 129.0 (4.5)% 139.5 138.5 (0.7)%
Managed Liquidity 104.4 101.5 (2.8)% 104.9 101.5 (3.2)%
The Shares of all four Portfolios generally traded in a range of 0% to 4%
discount, but with the severity and speed of market moves during the height of
the Covid-19 volatility prices became dislocated from NAVs and extreme levels
of premium and discount were seen, particularly for the UK Equity and Global
Equity Income Shares.
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
2020 0.90% 0.89% 0.88% 1.25% 0.35%
2019 0.87% 0.86% 0.86% 1.21% 0.38%
The above excludes rebates received by the Managed Liquidity Portfolio and,
since neither the UK Equity nor Global Equity Income Portfolios outperformed
their benchmarks over the past two years, there is no performance fee impact.
In addition to inflationary effects, shrinkage from buybacks in connection
with the discount control policy will tend to cause the ongoing charge
percentages to gradually increase.
Financial Position
Assets and Liabilities
The Company’s balance sheet on page 76 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 90, with interest paid (finance
costs) in note 5.
Owing to the readily realisable nature of the Company’s assets, cash flow
does not have the same significance as for an industrial or commercial
company. The Company’s principal cash flows arise from the purchases and
sales of investments and the income from investments against which must be set
the costs of borrowing and management expenses.
Borrowing Policy
Borrowing policy is under the control of the Board, which has established
effective parameters for the Portfolios. Borrowing levels are regularly
reviewed. As part of the Company’s Investment Policy, the approved borrowing
limits are 25% of the net assets of the UK Equity Portfolio and 20% of net
assets of the Global Equity Income Portfolio. The Balanced Risk Allocation
Portfolio does not use borrowings, but is geared by means of the derivative
instruments used to implement its investment policy. The Managed Liquidity
Portfolio does not use borrowings.
Issued Share Capital
All Share classes have a nominal value of 1 penny per Share.
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 31,977,941 28,786,800 5,236,886 2,497,032
– held in treasury 11,977,812 10,514,159 5,321,218 8,681,678
Movements during the year:
Increase/(decrease) arising from conversions 350,118 331,702 (217,542) (997,436)
Shares bought back into treasury (1,460,772) (3,213,136) (164,000) (875,893)
Average price thereon 167.4p 197.8p 138.2p 101.3p
Since the year end another 1,698,000 UK Equity Shares and 1,311,000 Global
Equity Income Shares have been bought into treasury at average prices of
141.2p and 178.0p, respectively.
Further details on net changes in issued share capital are set out in note 13
to the financial statements on pages 90 and 91. 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
Chairman’s Statement and the portfolio managers’ reports. Further details
as to the risks affecting the Company are set out under ‘Principal Risks and
Uncertainties’ below.
Principal Risks and Uncertainties
The Audit Committee regularly undertakes a robust assessment of the risks the
Company faces, including those that would threaten its business model, future
performance, solvency, reputation or liquidity and emerging risks, on behalf
of the Board (see Audit Committee Report on pages 49 to 51).
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 16 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 42.
The extreme market volatility experienced in February and March 2020 from the
market reaction to Covid-19, and the continuing effects, exemplify the risks
from external influences. All of the Company’s Portfolios, except for
Managed Liquidity, were, and are still being, considerably affected. There is
an ongoing risk to global economies from the measures taken in response to
Covid-19, many companies are at risk from the effects of the imposed lockdowns
on their production and revenues and this has a consequential effect on the
availability of investment income.
The performance of the Manager is carefully monitored by the Board and the
Chairman has brought attention to the Board’s concerns about recent
performance on page 3. 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 8.
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 target levels set by the Board (see page
36).
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 £20 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. This facility stood at £25 million over most of
the financial year and, although the covenant attached to the facility was not
in danger of being breached during the height of the Covid-19 market
volatility, this risk was further mitigated by reducing the facility, together
with the covenant, at its renewal in May this year.
The Balanced Risk Allocation Portfolio may also be geared (by up to 250%,
according to the investment policy set out on page 34) 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 UK Capital Gains Tax on the sale of its investments. A serious
breach of other regulatory rules could lead to suspension from the London
Stock Exchange, a fine or a qualified Audit Report. Other control failures,
either by the Manager or any other of the Company’s service providers, could
result in operational or reputational problems, erroneous disclosures or loss
of assets through fraud, as well as breaches of regulations.
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 16
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.
The Directors continue to monitor the Covid-19 situation closely, together
with the Manager and third-party service providers. A range of actions have
been implemented to ensure that the Company and its service providers are able
to continue to operate as normal, even in the event of prolonged disruption.
The Manager’s business continuity plans are reviewed on an ongoing basis and
the Directors are satisfied that the Manager has in place robust plans and
infrastructure to minimise the impact on its operations so that the Company
can continue to trade, meet regulatory obligations, report and meet
shareholder requirements.
The Manager has mandated work from home arrangements and split team working
will be implemented when business premises reopen. Any meetings are being held
virtually or via conference calls.
The Company’s other service providers have similar working arrangements in
place.
Viability Statement
The Company is an investment company which operates as a collective investment
vehicle, designed and managed for long term investment. The Board considers
long term for this purpose to be at least three years and so has assessed the
Company’s viability over this period. However, the life of the Company is
not intended to be limited to that or any other period.
In assessing the viability of the Company the Board considered the principal
risks to which it is exposed, as set out on pages 39 to 42, 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, including from Covid-19 this year. Despite the disruption to
markets from Covid-19 and the impact on global economies, the Directors remain
confident that the Company's investment strategies will continue to serve
shareholders well over the longer term. On the question of scale, the Board
has 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.
Audit Committee Report
The extended audit committee report required by the UK Corporate Governance
Code is set out on pages 49 to 51. There are no areas of concern in relation
to the financial statements to bring to the attention of shareholders.
Board’s Duty to Promote the Success of the Company
As set out in the Directors’ Report on page 52 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 fulfilling these duties, and in accordance with the Company’s nature as
an investment trust, the Board’s principal concern has been, and continues
to be, the interests of the Company’s shareholders taken as a whole.
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 the
Company’s relationships with other service providers, such as the registrar,
depositary and custodian, at least annually. During the year the most
significant engagement was with the Manager and, in particular the individual
portfolio managers. Matters engaged upon included the change in the designated
manager of the Global Equity Income Portfolio and the guidance on the number
of holdings typically held in that portfolio, both of which were announced to
the market and are covered elsewhere in this report. As would be expected,
there was also engagement with service providers generally in connection with
the lockdown conditions due to Covid-19, all of which were able to report
business as usual capability.
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 48.
Environment, Social and Governance considerations are dealt with in a separate
section of this Strategic Report on pages 44 and 45.
Shareholder relations are given high priority by the Board and the Manager.
The prime means by which the Company communicates with shareholders are the
annual and half-yearly financial reports, which aim to provide shareholders
with a full understanding of the Company’s activities and its results. This
information is supplemented by daily publication of the NAVs of the
Company’s shares via the London Stock Exchange, ad hoc regulatory
announcements, monthly factsheets and other information on the Manager’s
website, including pre-investment information, key information document (KID),
shareholder circulars, Portfolio disclosures, conversion forms and
instructions, Stock Exchange announcements, schedule of matters reserved for
the Board, terms of reference of Board Committees, Directors’ letters of
appointment, the Company’s share price and proxy voting results.
The Chairman and Directors welcome contact with shareholders, although this
has been difficult recently with the Covid-19 situation. There is a regular
dialogue between the Manager and individual major shareholders to discuss
aspects of investment performance, governance and strategy and to listen to
shareholder views in order to help develop a balanced understanding of their
issues and concerns. The Company’s corporate broker, Investec Bank plc, is
also consulted. General presentations to institutional shareholders and
analysts take place throughout the year. All meetings between the Manager and
institutional shareholders are reported to the Board.
It is the intention of the Board that the annual financial report and the
notice of the AGM be issued to shareholders so as to provide at least twenty
working days’ notice of the AGM. Shareholders wishing to lodge questions in
advance of the AGM are invited to do so, either on the reverse of the proxy
card or in writing to the Company Secretary at the address given on page 109.
There is a clear channel of communication between the Board and the
Company’s shareholders via the Company Secretary. The Company Secretary has
no express authority to respond to enquiries addressed to the Board and all
such communication, other than junk mail, is redirected to the Chairman or
Senior Independent Director as appropriate.
Shareholders normally have the opportunity to communicate directly with the
Directors at the AGM. It is hoped that by the date of this year’s AGM on 6
October 2020 restrictions due to Covid-19 will have eased and, if so,
shareholders are encouraged to attend the AGM. However, should this not be the
case the AGM may have to be held as a closed meeting. In this eventuality it
is recommended that shareholders exercise their votes by means of registering
them with the Company's registrar ahead of the meeting, online or by
completing paper proxy forms, and appoint the Chairman of the meeting as their
proxy. Questions, on the business of the meeting or otherwise, may be
addressed to the Company Secretary, by email to investmenttrusts@invesco.com
or, by letter, to 43-45 Portman Square, London W1H 6LY.
Board Diversity
The Company’s policy on diversity is set out on page 55. At the year end the
Board comprised three male and one female non-executive Directors resulting in
female representation of 25%. A recruitment process last year was ultimately
unsuccessful, as described on page 54, and its resumption has been postponed
because of the difficulty of conducting it in lockdown conditions. The Board
has reaffirmed that when the recruitment process for a new Director
recommences later this year, it 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%, or 50% on the presumption that
Alan Clifton would retire from the Board shortly thereafter (see page 54).
Summary biographical details of all the current Directors are set out on
page 46. The Company has no employees.
Environment, Social and Governance (ESG) Matters
As an investment company with no employees, property or activities outside
investment, environmental policy has limited application. A greenhouse gas
emissions statement is included in the Directors’ Report on page 57. In
relation to the portfolios, the Company has delegated the management of the
Company’s investments to the Manager, who has an ESG Guiding Framework which
sets out a number of principles that are intended to be considered in the
context of its responsibility to manage investments in the financial interests
of shareholders.
The Manager is committed to being a responsible investor and applies, and is a
signatory to, the United Nations Principles for Responsible Investment, which
demonstrates its extensive efforts in terms of ESG integration, active
ownership, investor collaboration and transparency. The Manager is also a
signatory to the FRC Stewardship Code 2012, which seeks to improve the quality
of engagement between institutional investors and companies to help improve
long-term returns to shareholders and the efficient exercise of governance
responsibilities.
The equity investment teams incorporate ESG considerations in their investment
processes as part of the evaluation of new opportunities, with identified ESG
concerns feeding into the final investment decision and assessment of relative
value. The portfolio managers make their own conclusions about the ESG
characteristics of each investment held and about the overall ESG
characteristics of the portfolio, although third party ESG ratings may inform
their view. Additionally, the Manager’s ESG team provides formalised ESG
portfolio monitoring. This is a rigorous semi-annual process where the
portfolios are reviewed from an ESG perspective.
Regarding stewardship, the Board considers that the Company has a
responsibility as a shareholder towards ensuring that high standards of
corporate governance are maintained in the companies in which it invests. To
achieve this, the Board does not seek to intervene in daily management
decisions, but aims to support high standards of governance and, where
necessary, will take the initiative to ensure those standards are met. The
principal means of putting shareholder responsibility into practice is through
the exercise of voting rights. The Company’s voting rights are exercised on
an informed and independent basis.
The Company’s stewardship functions have been delegated to the Manager,
which has adopted a clear and considered policy towards its responsibility as
a shareholder on behalf of the Company. As part of this policy, the Manager
takes steps to satisfy itself about the extent to which the companies in which
it invests look after shareholders’ value and comply with local
recommendations and practices, such as the UK Corporate Governance Code. A
copy of the current Manager’s Stewardship Policy, which is updated annually,
can be found at www.invesco.co.uk/investmenttrusts.
As an investment vehicle the Company does not provide goods or services in the
normal course of business, and does not have customers. Accordingly, the
Directors consider that the Company is not within the scope of the Modern
Slavery Act 2015.
This Strategic Report was approved by the Board on 31 July 2020.
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
Graham Kitchen
Chairman
31 July 2020
.
INCOME STATEMENT
FOR THE YEAR ENDED 31 MAY
2020 2019
NOTES REVENUE £’000 CAPITAL £’000 TOTAL £’000 REVENUE £’000 CAPITAL £’000 TOTAL £’000
Losses on investments held at fair value 9 – (12,632) (12,632) – (7,814) (7,814)
Gains/(losses) on derivative instruments 10 2 (159) (157) 28 (268) (240)
(Losses)/gains on foreign exchange – (22) (22) – 9 9
Income 2 3,950 80 4,030 5,258 21 5,279
Investment management fees 3 (206) (473) (679) (229) (520) (749)
Other expenses 4 (463) (9) (472) (466) (2) (468)
Net return before finance costs and taxation 3,283 (13,215) (9,932) 4,591 (8,574) (3,983)
Finance costs 5 (37) (88) (125) (77) (179) (256)
Return before taxation 3,246 (13,303) (10,057) 4,514 (8,753) (4,239)
Tax 6 (245) – (245) (246) – (246)
Return after taxation for the financial year 3,001 (13,303) (10,302) 4,268 (8,753) (4,485)
Return per ordinary share: 7
– UK Equity Share Portfolio 4.12p (24.75)p (20.63)p 5.73p (15.34)p (9.61)p
– Global Equity Income Share Portfolio 5.39p (16.58)p (11.19)p 6.90p (9.82)p (2.92)p
– Balanced Risk Allocation Share Portfolio (0.02)p (3.88)p (3.90)p 0.42p (4.86)p (4.44)p
– Managed Liquidity Share Portfolio 0.65p 0.03p 0.68p 0.59p 0.54p 1.13p
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 13, 20, 27 and 31 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 RESERVE £’000 REVENUE RESERVE £’000 TOTAL £’000
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 – – – – (8,753) 4,268 (4,485)
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
Cancellation of deferred shares – – (6) 6 – – –
Shares bought back and held in treasury – – (9,986) – – – (9,986)
Share conversions (5) – 5 – – – –
Return after taxation per the income statement – – – – (13,303) 3,001 (10,302)
Dividends paid - note 8 – – (931) – – (3,407) (4,338)
As at 31 May 2020 1,050 1,290 55,454 359 49,568 (52) 107,669
.
BALANCE SHEET
AS AT 31 MAY 2020
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 52,121 55,778 6,347 2,682 116,928
Current assets
Derivative assets held at fair value through profit or loss 10 – – 401 – 401
Debtors 11 236 2,607 248 15 3,106
Cash and cash equivalents – 146 251 50 447
236 2,753 900 65 3,954
Creditors: amounts falling due within one year
Derivative liabilities held at fair value through profit or loss 10 – – (151) – (151)
Other creditors 12(a) (938) (2,179) (23) (140) (3,280)
Bank overdraft 12(b) (2) – – – (2)
Bank loan 12(b) (4,800) (4,980) – – (9,780)
(5,740) (7,159) (174) (140) (13,213)
Net current (liabilities)/assets (5,504) (4,406) 726 (75) (9,259)
Net assets 46,617 51,372 7,073 2,607 107,669
Capital and reserves
Share capital 13(a) 439 393 106 112 1,050
Share premium 14 – – 1,290 – 1,290
Special reserve 14 25,931 24,926 2,556 2,041 55,454
Capital redemption reserve 14 74 78 27 180 359
Capital reserve 14 20,173 25,975 3,151 269 49,568
Revenue reserve 14 – – (57) 5 (52)
Shareholders’ funds 46,617 51,372 7,073 2,607 107,669
Net asset value per ordinary share 15 145.8p 178.5p 135.1p 104.4p
The financial statements were approved and authorised for issue by the Board
of Directors on 31 July 2020.
Signed on behalf of the Board of Directors
Graham Kitchen
Chairman
.
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)
Net assets 57,286 62,589 7,837 4,583 132,295
Capital and reserves
Share capital 13(a) 436 389 108 122 1,055
Share premium 14 – – 1,290 – 1,290
Special reserve 14 28,551 30,734 3,106 3,981 66,372
Capital redemption reserve 14 74 78 26 175 353
Capital reserve 14 28,225 31,015 3,363 268 62,871
Revenue reserve 14 – 373 (56) 37 354
Shareholders' funds 57,286 62,589 7,837 4,583 132,295
Net asset value per ordinary share 15 173.1p 197.6p 139.5p 104.9p
.
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MAY
NOTE 2020 2019
£’000 £’000
Cash flows from operating activities
Net return before finance costs and taxation (9,932) (3,983)
Tax on overseas income (245) (246)
Adjustments for:
Purchase of investments (97,439) (48,892)
Sale of investments 110,920 63,997
Sale of futures (455) 35
13,026 15,140
Scrip dividends (57) (53)
Losses on investments 12,632 7,814
Losses on derivatives 157 240
Decrease/(increase) in debtors 463 (152)
Decrease in creditors and provision (20) (4)
Net cash inflow from operating activities 16,024 18,756
Cash flows from financing activities
Interest paid on bank borrowings (124) (256)
Decrease in bank borrowings (2,448) (5,346)
Share buy back costs (9,551) (9,717)
Equity dividends paid 8 (4,338) (4,511)
Net cash outflow from financing activities (16,461) (19,830)
Net decrease in cash and cash equivalents (437) (1,074)
Cash and cash equivalents at the start of the year 884 1,958
Cash and cash equivalents at the end of the year 447 884
Cash flow from operating activities includes:
Interest received 3 88
Dividends received 3,876 4,871
Analysis of changes in net debt AT 1 JUNE 2019 CASH FLOWS AT 31 MAY 2020
£’000 £’000 £’000
Cash and cash equivalents 884 (437) 447
Bank overdraft – (2) (2)
Bank loans (12,230) 2,450 (9,780)
Total (11,346) 2,011 (9,335)
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 October 2019. The financial statements are issued on a
going concern basis as disclosed on page 56.
The revised SORP issued in October 2019 is applicable for accounting periods
beginning on or after 1 January 2019. As a result, the presentation of gains
and losses arising from disposals of investments and gains and losses on
revaluation of investments have now been combined, as shown in note 9 with no
impact to the net asset value or profit/(loss) reported for both the current
or prior year. No other accounting policies or disclosures have changed as a
result of the revised SORP.
The accounting policies applied to these financial statements are consistent
with those applied for the preceding year.
(ii) Definitions used in the financial statements
‘Portfolio’ the UK Equity Share Portfolio, the Global Equity
Income Share Portfolio, the Balanced Risk Allocation Share Portfolio and/or
the Managed Liquidity Share Portfolio (as the case may be). Each comprises, or
may include, an investment portfolio, derivative instruments, cash, loans,
debtors and other creditors, which together make up the net assets as shown in
the balance sheet.
‘Share’ UK Equity Share, Global Equity Income Share,
Balanced Risk Allocation Share, Managed Liquidity Share and/or Deferred Share
(as the case may be).
The UK Equity, Global Equity Income, Balanced Risk Allocation and Managed
Liquidity Share Portfolios’ income statements and summaries of net assets
(shown on pages 13, 20, 27 and 31) do not represent statutory accounts, are
not required under UK Generally Accepted Accounting Practice and the auditor
does not express an opinion on each individual portfolio. These have been
disclosed to assist shareholders’ understanding of the assets and
liabilities, and income and expenses of the different Share classes.
In order to better reflect the activities of an investment trust company and
in accordance with guidance issued by the AIC, supplementary information which
analyses the income statement between items of a revenue and capital nature
has been presented alongside the income statement.
(iii) Functional and presentational currency
The Company’s investments are made in several currencies, however, the
financial statements are presented in sterling, which is the Company’s
functional currency. In arriving at this conclusion, the Directors considered
that the Company’s shares are listed and traded on the London Stock
Exchange, the shareholder base is predominantly in the United Kingdom and the
Company pays dividends and expenses in sterling.
(iv) Transactions and balances
Transactions in foreign currency, whether of a revenue or capital nature, are
translated to sterling at the rates of exchange ruling on the dates of such
transactions. Foreign currency assets and liabilities are translated to
sterling at the rates of exchange ruling at the balance sheet date. Any gains
or losses, whether realised or unrealised, are taken to the capital reserve or
to the revenue account, depending on whether the gain or loss is of a capital
or revenue nature. All gains and losses are recognised in the income
statement.
(v) Significant Accounting Estimates and Judgements
The preparation of the financial statements may require the Directors to make
estimations where uncertainty exists. It also requires the Directors to make
judgements, estimates and assumptions, in the process of applying the
accounting policies. There have been no significant judgements, estimates or
assumptions for the current or preceding year.
(b) Financial instruments
The Company has chosen to apply the provisions of Sections 11 and 12 of FRS
102 in full in respect of the financial instruments, which is explained below.
(i) Recognition of financial assets and financial liabilities
The Company recognises financial assets and financial liabilities when the
Company becomes a party to the contractual provisions of the instrument. The
Company will offset financial assets and financial liabilities if the Company
has a legally enforceable right to set off the recognised amounts and
interests and intends to settle on a net basis.
(ii) Derecognition of financial assets
The Company derecognises a financial asset when the contractual rights to the
cash flows from the asset expire or it transfers the right to receive the
contractual cash flows on the financial asset in a transaction in which
substantially all the risks and rewards of ownership of the financial asset
are transferred. Any interest in the transferred financial asset that is
created or retained by the Company is recognised as an asset.
(iii) Derecognition of financial liabilities
The Company derecognises financial liabilities when its obligations are
discharged, cancelled or expire.
(iv) Trade date accounting
Purchases and sales of financial assets are recognised on trade date, being
the date on which the Company commits to purchase or sell the assets.
(v) Classification and measurement of financial assets and financial
liabilities
Financial assets
The Company’s investments, including financial derivative instruments, are
classified as held at fair value through profit or loss.
Financial assets held at fair value through profit or loss are initially
recognised at fair value, which is taken to be their cost, with transaction
costs expensed in the income statement, and are subsequently valued at fair
value.
Fair value for investments, including financial derivative instruments, that
are actively traded in organised financial markets is determined by reference
to stock exchange quoted bid prices at the balance sheet date. For investments
that are not actively traded or where active stock exchange quoted bid prices
are not available, fair value is determined by reference to a variety of
valuation techniques including broker quotes and price modelling. Where there
is no active market, unlisted/illiquid investments are valued by the Directors
at fair value with regard to the International Private Equity and Venture
Capital Valuation Guidelines and on recommendations from Invesco’s Pricing
Committee, both of which use valuation techniques such as earnings multiples,
recent arm’s length transactions and net assets.
Financial liabilities
Financial liabilities, excluding financial derivative instruments but
including borrowings, are initially measured at fair value, net of transaction
costs and are subsequently measured at amortised cost using the effective
interest method.
(c) Derivatives and hedging
Derivative instruments are valued at fair value in the balance sheet.
Derivative instruments may be capital or revenue in nature and, accordingly,
changes in their fair value are recognised in revenue or capital in the income
statement as appropriate.
Forward currency contracts entered into for hedging purposes are valued at the
appropriate forward exchange rate ruling at the balance sheet date. Profits or
losses on the closure or revaluation of positions are included in capital
reserves.
Futures contracts may be entered into for hedging purposes and any profits and
losses on the closure or revaluation of positions are included in capital
reserves. Where futures contracts are used for investment exposure any income
element arising on bond futures is recognised as a gain on derivative
instruments in the income statement and shown in revenue.
(d) Cash and cash equivalents
Cash and cash equivalents may comprise cash (including short term deposits
which are readily convertible to a known amount of cash and are subject to an
insignificant risk of change in value) as well as cash equivalents, including
money market funds. Investments are regarded as cash equivalents if they meet
all of the following criteria: highly liquid investments held in the
Company’s base currency that are readily convertible to a known amount of
cash, are subject to an insignificant risk of change in value, have a maturity
of less than three months at date of origination and provide a return no
greater than the rate of a three-month high quality government bond. For the
Balanced Risk Allocation and Managed Liquidity Portfolios, cash and cash
equivalents do not include investments in Invesco Liquidity Funds plc –
Sterling (formerly Short Term Investment Companies (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.
2020 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Income from investments
UK dividends:
– ordinary dividends 1,401 361 – – 1,762
– special dividends 61 29 – – 90
– Scrip dividends 50 7 – – 57
1,512 397 – – 1,909
Overseas dividends:
– ordinary dividends 133 1,787 13 23 1,956
– special dividends – 20 – – 20
Unfranked investment income 11 – – – 11
Interest from Treasury bills – – 38 – 38
1,656 2,204 51 23 3,934
Other income
Deposit interest – – 3 – 3
Rebates of management fee – – – 13 13
Total income 1,656 2,204 54 36 3,950
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
Special dividends of £32,000 in respect of the Global Equity Income Portfolio
and £48,000 in respect of the UK Equity Portfolio were recognised in capital
during the year (2019: £21,000 in respect of the UK Equity 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.
2020 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Investment management fee:
– charged to revenue 88 97 17 4 206
– charged to capital 206 227 40 – 473
Total investment management fee 294 324 57 4 679
2019
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
Details of the investment management agreement are given on page 56 in the
Directors’ Report.
No performance fee was earned on the UK Equity and Global Equity Income
Portfolios for the current or previous year and therefore no performance fee
provision has been made in either year. Any under-performance must be fully
offset by over-performance before any performance fee can be paid. Movements
on the UK Equity and Global Equity Income Portfolios’ under-performance
carried forward follow:
UK EQUITY 2020 £’000 GLOBAL EQUITY INCOME 2020 £’000 UK EQUITY 2019 £’000 GLOBAL EQUITY INCOME 2019 £’000
Under-performance brought forward (768) (1,491) (540) (893)
Under-performance in the year (142) (1,096) (228) (598)
Under-performance carried forward (910) (2,587) (768) (1,491)
4. Other expenses
The other expenses of the Company, including those paid to Directors and the
auditor, are presented below; those paid to the Directors and the auditor are
separately identified.
2020 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Charged to revenue:
Directors’ remuneration (i) 58 64 8 3 133
Auditor’s fees (ii):
– for the audit of the Company’s financial statements 17 20 3 1 41
Other expenses (iii) 122 133 29 5 289
197 217 40 9 463
Charged to capital:
Custodian transaction charges 3 5 1 – 9
Total 200 222 41 9 472
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
(i) The Director's Remuneration Report provides information on
Directors’ fees. Included within other expenses is £12,000 (2019: £14,000)
of employer’s national insurance payable on Directors’ remuneration. As at
31 May 2020, the amounts outstanding on Directors' fees and employer's
national insurance was £22,000 (2019: £27,000).
(ii) The Auditor’s fees shown include out of pocket expenses, but exclude
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 arise on any borrowing the Company has utilised in the year. The
Company has a committed £20 million revolving credit facility (see note 12(b)
for further details).
2020 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 16 21 – – 37
Charged to capital 40 48 – – 88
Total 56 69 – – 125
2019
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
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
2020 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Overseas tax 15 230 – – 245
2019
Overseas tax 9 237 – – 246
The accounting policy for taxation is disclosed in note 1(h).
(b) Reconciliation of tax charge
2020 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Return before taxation (6,697) (3,171) (213) 24 (10,057)
Theoretical tax at the current
UK Corporation Tax rate of 19.00% (2019: 19.00%) (1,273) (602) (41) 5 (1,911)
Effect of:
– Non-taxable losses on investments and derivatives 1,491 909 31 – 2,431
– Non-taxable losses on foreign exchange 1 1 2 – 4
– Non-taxable scrip dividends (19) (1) – – (20)
– Non-taxable UK dividends (265) (69) – – (334)
– Non-taxable UK special dividends (12) (16) – – (28)
– Non-taxable overseas dividends (25) (335) – – (360)
– Overseas tax 15 230 – – 245
– Disallowable expenses 1 1 – – 2
– Accrued income taxable on receipt – 7 – – 7
– Excess of allowable expenses over taxable income 101 105 8 (5) 209
Tax charge for the year 15 230 – – 245
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
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 £14,735,000 (2019: £13,595,000) that are available
to offset future taxable revenue. A deferred tax asset of £2,800,000 (2019:
£2,311,000), measured at the standard corporation tax substantively enacted
rate of 19% (2019: 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.
On 11 March 2020 it was announced (and substantively
enacted on 17 March 2020) that the UK corporation tax rate would remain at 19%
and not reduce to 17% (the previously enacted rate) from 1 April 2020.
7. Return per Ordinary Share
Return per share is the amount of profit (or loss) generated for each share
class in the financial year divided by the weighted average number of the
shares in issue.
Revenue, capital and total return per ordinary share is based on each of the
returns after taxation shown by the income statement for the applicable Share
class and on the following numbers of Shares being the weighted average number
of Shares in issue throughout the year for each Share class:
AVERAGE
NUMBER OF SHARES
SHARE 2020 2019
UK Equity 32,530,315 34,607,613
Global Equity Income 30,394,232 32,378,620
Balanced Risk Allocation 5,465,560 5,966,462
Managed Liquidity 3,551,612 4,597,944
8. Dividends
Dividends are distributions of Portfolio returns to shareholders. These are
determined by the Directors and paid four times a year.
Dividends paid for each applicable Share class, which represent distributions
for the purpose of s1159 of the Corporation Tax Act 2010, follows:
2020 2019
NUMBER OF SHARES DIVIDEND RATE (PENCE) TOTAL £’000 NUMBER OF SHARES DIVIDEND RATE (PENCE) TOTAL £’000
UK Equity
First interim 33,048,823 1.50 496 35,536,971 1.50 534
Second interim 32,549,709 1.50 488 34,757,443 1.50 521
Third interim 32,334,465 1.50 485 34,732,059 1.50 521
Fourth interim 32,203,602 2.10 676 33,490,968 2.10 703
6.60 2,145 6.60 2,279
Global Equity Income
First interim 31,466,468 1.55 488 32,756,219 1.50 492
Second interim 31,189,234 1.55 483 32,410,667 1.50 486
Third interim 29,900,843 1.55 463 32,604,620 1.50 489
Fourth interim 29,334,234 2.40 704 31,888,951 2.40 765
7.05 2,138 6.90 2,232
Managed Liquidity
Prior year interim 4,370,361 0.80 35 – – –
Current year interim 2,492,814 0.80 20 – – –
1.60 55 – –
Total paid in the year 4,338 4,511
No dividends have been paid to Balanced Risk Allocation shareholders during
the year (2019: 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 the year from revenue and capital follows.
2020 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Dividends paid in the year:
From revenue – current year 1,340 1,639 23 3,002
From revenue – reserves brought forward – 373 32 405
From revenue 1,340 2,012 55 3,407
From capital 805 126 – 931
2,145 2,138 55 4,338
2019 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Dividends paid in the year:
From revenue 1,982 2,232 – 4,214
From capital 297 – – 297
2,279 2,232 – 4,511
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
2020 2019
£’000 £’000
UK listed investments 58,159 68,122
Overseas listed investments ((i)) 58,751 72,248
Unquoted hedge fund investments 18 15
116,928 140,385
((i)) Includes the Invesco Liquidity Funds plc – Sterling, money
market fund (formerly Short-Term Investments Company (Global Series) plc)
positions held by the Balanced Risk Allocation Portfolio of £2,330,000 (2019:
£1,735,000) and Managed Liquidity Portfolio of £40,000 (2019: £220,000).
(b) Analysis of investment gains
2020 2019
£’000 £’000
Opening valuation 140,385 166,605
Movements in year:
Purchases at cost 99,149 48,735
Sales proceeds (109,974) (67,141)
Losses on investments in the year (12,632) (7,814)*
Closing valuation 116,928 140,385
Closing book cost 123,110 129,931
Closing investment holding (losses)/gains (6,182) 10,454
Closing valuation 116,928 140,385
The Company received £109,974,000 (2019: £67,141,000) from investments sold
in the year. The book cost of these investments when they were purchased was
£105,970,000 (2019: £64,033,000) realising a profit of £4,004,000 (2019:
£3,108,000). These investments have been revalued over time and until they
were sold any unrealised profits/losses were included in the fair value of the
investments.
* Due to adoption of the revised SORP issued in October 2019 (see Note
1(a)(i)). The losses on investments figure of £7,814,000 for the year ended
31 May 2019 is as follows:
2019
£’000
Net realised profit on sales 3,108
Investment holding losses in the year (10,922)
Losses on investments (7,814)
(c) Transaction costs
Transaction costs were £158,000 (2019: £88,000) on purchases and £49,000
(2019: £42,000) 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.
2020 2019
£’000 £’000
Opening derivative assets held at fair value through profit or loss 175 281
Opening derivative liabilities held at fair value through profit or loss (223) (54)
Opening net derivative (liabilities)/assets held at fair value shown in the balance sheet (48) 227
Closing derivative assets held at fair value through profit or loss 401 175
Closing derivative liabilities held at fair value through profit or loss (151) (223)
Closing net derivative assets/(liabilities) held at fair value shown in balance sheet 250 (48)
Movement in derivative holding assets/liabilities 298 (275)
Net realised (losses)/gains on derivative instruments (457) 7
Net capital losses on derivative instruments as shown in the income statement (159) (268)
Net income arising on derivatives 2 28
Total losses on derivative instruments (157) (240)
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 25.
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.
2020 2019
£’000 £’000
Amounts due from brokers 2,300 3,246
Collateral pledged for futures contracts 244 398
Tax recoverable 223 271
Prepayments and accrued income 339 601
3,106 4,516
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.
2020 2019
£’000 £’000
Shares bought back 653 218
Tax payable 137 137
Amounts due to brokers 1,653 –
Performance fee accrued 531 531
Accruals 306 326
Other payables 3,280 1,212
12(b). Bank overdraft and loans
At the year end the Company had a £20 million (2019: £25 million) committed
364 day multicurrency revolving credit facility, which is due for renewal on
14 May 2021 (2019: 15 May 2020). 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. For amounts drawn on the credit facility interest
is payable based on LIBOR plus a margin. Additionally, there is a 0.15%
commitment fee on the facility amount not utilised.
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 £60 million (2019: £75
million).
13. Share capital
Share capital represents the total number of shares in issue, including
treasury shares.
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 2019 33,088,595 31,668,234 5,618,428 4,370,361 74,745,618
Shares bought back into treasury (1,460,772) (3,213,136) (164,000) (875,893) (5,713,801)
Arising on share conversion:
– August 2019 886 (234) (578) (240) (166)
– November 2019 62,756 (61,021) 6,067 6,238 14,040
– February 2020 279,137 403,391 (225,335) (1,007,652) (550,459)
– May 2020 7,339 (10,434) 2,304 4,218 3,427
At 31 May 2020 31,977,941 28,786,800 5,236,886 2,497,032 68,498,659
TREASURY SHARES (NUMBER)
At 31 May 2019 10,517,040 7,301,023 5,157,218 7,805,785 30,781,066
Shares bought back into treasury 1,460,772 3,213,136 164,000 875,893 5,713,801
At 31 May 2020 11,977,812 10,514,159 5,321,218 8,681,678 36,494,867
UK EQUITY GLOBAL EQUITY INCOME BALANCED RISK ALLOCATION MANAGED LIQUIDITY TOTAL SHARE CAPITAL
ORDINARY SHARES OF 1 PENNY EACH (£’000)
At 31 May 2019 331 316 56 44 747
Shares bought back into treasury (15) (32) (2) (9) (58)
Arising on share conversion:
– November 2019 1 (1) – – –
– February 2020 2 5 (2) (10) (5)
At 31 May 2020 319 288 52 25 684
TREASURY SHARES OF 1 PENNY EACH (£’000)
At 31 May 2019 105 73 52 78 308
Shares bought back into treasury 15 32 2 9 58
At 31 May 2020 120 105 54 87 366
TOTAL SHARE CAPITAL (£’000)
Ordinary share capital 319 288 52 25 684
Treasury share capital 120 105 54 87 366
At 31 May 2020 439 393 106 112 1,050
Average buy back price 167.4p 197.8p 138.2p 101.3p
The total cost of share buy backs was £9,986,000 (2019: £9,925,000). As part
of the conversion process 614,700 (2019: 238,918) 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 (2019: nil).
(b) Movements in Share Capital after the Year End
Since the year end, 1,698,000 UK Equity and 1,311,000 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 57 and 58.
(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 110.
14. 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.
15. 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 2020 2019
NET ASSET VALUE PER SHARE PENCE NET ASSETS ATTRIBUTABLE £’000 NET ASSET VALUE PER SHARE PENCE NET ASSETS ATTRIBUTABLE £’000
UK Equity 145.8 46,617 173.1 57,286
Global Equity Income 178.5 51,372 197.6 62,589
Balanced Risk Allocation 135.1 7,073 139.5 7,837
Managed Liquidity 104.4 2,607 104.9 4,583
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.
16. 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 12, 19, 25, 26 and 31.
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 39 to 42. 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 32 to 35. The management process is subject to risk
controls, which the Audit Committee reviews on behalf of the Board, as
described on pages 50 and 51.
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.
16.1 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 (16.1.1), interest rate risk
(16.1.2) and other price risk (16.1.3).
The Company’s portfolio managers assess the individual investment portfolio
exposures when making each investment decision for their Portfolios, and
monitor the overall level of market risk on the whole of their investment
portfolio on an ongoing basis. The Board meets at least quarterly to assess
risk and review investment performance for the four Portfolios and the
Company, as disclosed in the Board Responsibilities section of the
Directors’ Report on page 52. 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.
16.1.1 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 2020
Canadian Dollar – – – – 2,852 2,852
Euro 2 – – 2 – 2
US Dollar 24 – – 24 4,454 4,478
26 – – 26 7,306 7,332
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
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 2020
Brazilian Real 7 – – 7 – 7
Canadian Dollar – 1 – 1 – 1
Euro 256 – – 256 7,071 7,327
Hong Kong Dollar 527 – (527) – 1,650 1,650
Japanese Yen 3 – – 3 952 955
Korean Won – – – – 1,911 1,911
Norwegian Krone 6 – – 6 – 6
Swedish Krona 4 – – 4 1,395 1,399
Swiss Franc 438 – (835) (397) 5,066 4,669
Taiwanese Dollar – – – – 2,372 2,372
US Dollar 826 – (159) 667 26,016 26,683
2,067 1 (1,521) 547 46,433 46,980
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
BALANCED RISK ALLOCATION PORTFOLIO:
CURRENCY DERIVATIVE ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS £’000 DEBTORS DUE FROM/ (CREDITORS DUE TO) BROKERS & DIVIDENDS/ ACCRUALS)* £’000 CASH/ (OVERDRAFT) AT BANK £’000 DERIVATIVE LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS £’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 2020
Australian Dollar – 80 32 (29) 83 – 83
Canadian Dollar – 20 19 (1) 38 – 38
Euro 76 (12) 53 – 117 – 117
Hong Kong Dollar – 42 25 (4) 63 – 63
Japanese Yen 57 (36) 23 – 44 – 44
US Dollar 207 170 70 (117) 330 18 348
340 264 222 (151) 675 18 693
YEAR ENDED 31 MAY 2019
Australian Dollar 98 (52) 35 – 81 – 81
Canadian Dollar 19 20 32 – 71 – 71
Euro 12 29 – – 41 – 41
Hong Kong Dollar – 35 2 (6) 31 – 31
Japanese Yen – 69 5 (58) 16 – 16
US Dollar 31 270 29 (159) 171 15 186
160 371 103 (223) 411 15 426
* 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:
2020 2019
£/Australian Dollar +/– 3.6% +/– 2.0%
£/Brazilian Real +/– 12.3% +/– 3.4%
£/Canadian Dollar +/– 2.6% +/– 1.6%
£/Euro +/– 2.7% +/– 1.6%
£/Hong Kong Dollar +/– 2.9% +/– 1.6%
£/Japanese Yen +/– 3.5% +/– 1.9%
£/Norwegian Krone +/– 6.1% +/– 2.1%
£/South Korean Won +/– 2.0% +/– 1.9%
£/Swedish Krona +/– 2.5% +/– 2.5%
£/Swiss Franc +/– 3.1% +/– 1.9%
£/Taiwan Dollar +/– 2.7% +/– 1.2%
£/US Dollar +/– 2.8% +/– 1.5%
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:
2020 2019
REVENUE RETURN £’000 CAPITAL RETURN £’000 TOTAL RETURN £’000 REVENUE RETURN £’000 CAPITAL RETURN £’000 TOTAL RETURN £’000
Canadian Dollar – (74) (74) – (25) (25)
Euro (1) – (1) – (36) (36)
US Dollar (5) (125) (130) – (27) (27)
(6) (199) (205) – (88) (88)
GLOBAL EQUITY INCOME PORTFOLIO:
2020 2019
REVENUE RETURN £’000 CAPITAL RETURN £’000 TOTAL RETURN £’000 REVENUE RETURN £’000 CAPITAL RETURN £’000 TOTAL RETURN £’000
Australian Dollar (1) – (1) (1) (30) (31)
Brazilian Real – – – (2) (15) (17)
Canadian Dollar (1) – (1) (1) (22) (23)
Euro (12) (195) (207) (15) (298) (313)
Hong Kong Dollar (15) (33) (48) (1) – (1)
Japanese Yen (2) (33) (35) (2) (45) (47)
Norwegian Krone (2) – (2) (1) (19) (20)
South Korean Won (1) (38) (39) (1) (36) (37)
Swedish Krona – (35) (35) – – –
Swiss Franc (15) (131) (146) (3) (81) (84)
Taiwan Dollar (2) (64) (66) (1) (19) (20)
US Dollar 10 (775) (765) (9) (352) (361)
(41) (1,304) (1,345) (37) (917) (954)
BALANCED RISK ALLOCATION PORTFOLIO:
2020 2019
REVENUE RETURN £’000 CAPITAL RETURN £’000 TOTAL RETURN £’000 REVENUE RETURN £’000 CAPITAL RETURN £’000 TOTAL RETURN £’000
Australian Dollar – (3) (3) – (2) (2)
Canadian Dollar – (1) (1) – (1) (1)
Euro – (3) (3) – (1) (1)
Hong Kong Dollar – (2) (2) – – –
Japanese Yen – (2) (2) – – –
US Dollar – (10) (10) – (3) (3)
– (21) (21) – (7) (7)
If sterling had weakened to the same extent as the currencies above, the
effect would have been the exact opposite.
16.1.2 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 £20 million (2019: £25
million), 364 day multicurrency revolving credit facility which is due for
renewal on 14 May 2021. 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:
UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
2020
Exposure to floating interest rates:
Investments held at fair value through profit or loss ((1)) – – 2,330 2,682 5,012
Cash and cash equivalents – 146 251 50 447
Bank loans (4,800) (4,980) – – (9,780)
Overdraft (2) – – – (2)
(4,802) (4,834) 2,581 2,732 (4,323)
Exposure to fixed interest rates:
Investments held at fair value through profit or loss including
UK Treasury Bills – – 3,999 – 3,999
Net exposure to interest rates (4,802) (4,834) 6,580 2,732 (324)
UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
2019
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 loans (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
((1)) Comprises holdings in PIMCO Sterling Short Maturity Source UCITS
ETF and Invesco Liquidity Funds plc – Sterling (formerly Short Term
Investment Companies (Global Series) plc).
The income on the PIMCO Sterling Short Maturity Source UCITS ETF
and Invesco Liquidity Funds plc – Sterling (formerly Short Term Investment
Companies (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 level of £20 million (2019: £25 million),
the maximum effect over one year of a 0.5% movement in interest rates would
be a £100,000 (2019: £125,000) movement in the Company’s income and net
assets.
The maximum effect of a 1% movement in the interest rates on investments held
at fair value through profit and loss would be a £12,000 (2019: £16,000)
movement in the Company’s income 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.
16.1.3 Other Price Risk
Management of Other Price Risk
The Directors monitor the market price risks inherent in the investment
portfolios by meeting regularly to review performance.
The Company’s investment portfolios are the product of the Manager’s
investment processes and the application of the Portfolios' investment
policies. Their value will move according to the performance of the shares
held within them. However, the Portfolios do not replicate their respective
benchmarks or the markets in which the Portfolios invest, so their performance
may not correlate with them.
Notwithstanding the issue of correlation, if the fixed asset value of an
investment portfolio moved by 10% at the balance sheet date, the profit after
tax and net assets for the year would increase/decrease by the following
amounts:
UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000
2020
Profit after tax increase/decrease due to rise/fall of 10% 5,212 5,578 635 268
2019
Profit after tax increase/decrease due to rise/fall of 10% 6,125 6,704 739 471
16.2 Liquidity Risk
Management of liquidity risk
Liquidity risk is mitigated by the investments held by the Company’s four
portfolios being diversified and the majority being readily realisable
securities which can be sold to meet funding commitments. If required, the
Company’s borrowing facilities provide additional long-term and short-term
flexibility.
The Directors' policy is that in normal market conditions short-term
borrowings be used to manage short term liabilities and working capital
requirements rather than realising investments.
Liquidity risk
The contractual maturities of financial liabilities at the year end, based on
the earliest date on which payment can be required, are as follows:
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
2020
Overdraft 2 – – – – – 2
Bank loans 4,800 – 4,980 – – – 9,780
Amounts due to brokers 132 – 1,521 – – – 1,653
Other creditors and accruals 275 – 658 23 – 140 1,096
Performance fee accrued – 531 – – – – 531
Derivative financial instruments – – – 95 56 – 151
5,209 531 7,159 118 56 140 13,213
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
2019
Bank loans 7,350 – 4,880 – – – 12,230
Other creditors and accruals 139 – 334 65 – 143 681
Performance fee accrued – 531 – – – – 531
Derivative financial instruments – – – 161 62 – 223
7,489 531 5,214 226 62 143 13,665
16.3 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:
UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
2020
Bonds (UK Treasury bills) – – 3,999 – 3,999
Cash held as short-term investment ((1)) – – 2,330 40 2,370
Unquoted securities – – 18 – 18
Derivative financial instruments – – 250 – 250
Debtors ((2)) 236 2,607 248 15 3,106
Cash and cash equivalents – 146 251 50 447
236 2,753 7,096 105 10,190
UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
2019
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
((1)) Invesco Liquidity Funds plc, money market fund (formerly
Short-Term Investments Company (Global Series) plc.)
((2)) Cash collateral pledged for futures contracts of £244,000 is
included in debtors (2019: £398,000).
17. Fair Values of Financial Assets and Financial Liabilities
‘Fair value’ in accounting terms is the amount at which an asset can be
bought or sold in a transaction between willing parties, i.e. a market-based,
independent measure of value. This note sets out the fair value hierarchy
comprising three ‘levels’ and the aggregate amount of investments in each
level.
The financial assets and financial liabilities are either carried in the
balance sheet at their fair value (investments and derivative instruments), or
the balance sheet amount is a reasonable approximation of fair value.
FRS 102 as amended for fair value hierarchy disclosures sets out three fair
value levels. These are:
Level 1 – 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.
UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
2020
Financial assets at fair value through profit or loss:
Level 1 52,121 55,778 3,999 2,642 114,540
Level 2 – – 2,731 40 2,771
Level 3 – – 18 – 18
Total for financial assets 52,121 55,778 6,748 2,682 117,329
Financial liabilities:
Level 2 – Derivative instruments – – 151 – 151
UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
2019
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
18. 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 2020 was £117,449,000 (2019:
£144,525,000) comprising borrowings of £9,780,000 (2019: £12,230,000) and
equity share capital and other reserves of £107,669,000 (2019:
£132,295,000).
The Company’s total capital employed is managed to achieve the Company’s
investment objective and policy as set out on pages 32 to 35, 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 possible gross gearing was 18.6%
(2019: 18.9%). 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 39
to 42. 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.
19. 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 (2019: £nil).
20. 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 63 to
65 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 page 56 and note 3.
21. 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.
However, there continues to be potential for economic and market impacts from
Covid-19, which may affect the Company’s investment portfolio. As at close
of business on 30 July 2020 the NAV, price and discount of each class of the
Company’s Shares were as follows:
SHARE CLASS NET ASSET VALUE (PENCE) SHARE PRICE (PENCE) DISCOUNT
UK Equity 143.2 142.0 (0.8)%
Global Equity Income 183.1 181.5 (0.9)%
Balanced Risk Allocation 141.4 133.5 (5.6)%
Managed Liquidity 105.0 101.5 (3.3)%
.
The financial information set out above does not constitute the Company’s
statutory accounts for the year ended 31 May 2020. The financial information
for 2019 is derived from the statutory accounts for the year ended 31 May
2019, which have been delivered to the Registrar of Companies. The auditor
has reported on the 2019 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 2020 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 6 October 2020 at 11.30am at 43-45
Portman Square, London W1H 6LY.
By order of the Board
Invesco Asset Management Limited
31 July 2020
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 6 October 2020 for the following purposes:
Ordinary Business of the Company
1. To receive the Annual Financial Report for the year ended 31
May 2020.
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 £30,279 of UK Equity
Shares, £27,475 of Global Equity Income Shares, £5,236 of Balanced Risk
Allocation Shares and £2,497 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 6 October
2020, the date of the Annual General Meeting (equivalent, at 30 July 2020, to
4,538,963 UK Equity Shares, 4,118,622 Global Equity Income Shares, 785,009
Balanced Risk Allocation Shares and 374,305 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 36 of the 2020 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 36 of the 2020 annual financial report.
All Resolutions are explained further in the Directors’ Report on pages 59
to 61.
Dated 31(st) July 2020
By order of the Board
Invesco Asset Management Limited
Company Secretary
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