REG-Invesco Perp Sel Tst: Half-year Report
07/02/2019 15:20
Invesco Perpetual Select Trust plc
LEI: 549300JZQ39WJPD7U596
HALF-YEARLY FINANCIAL REPORT
SIX MONTHS ENDED 30 NOVEMBER 2018
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FINANCIAL PERFORMANCE
CUMULATIVE TOTAL RETURNS((1)(2)) TO 30 NOVEMBER 2018
UK Equity Portfolio
SIX MONTHS ONE YEAR THREE YEARS FIVE YEARS
Net Asset Value –12.0% –8.7% 7.0% 34.2%
Share Price –10.3% –7.6% 7.1% 38.1%
FTSE All-Share Index –7.7% –1.5% 22.6% 29.2%
Global Equity Income Portfolio
SIX MONTHS ONE YEAR THREE YEARS FIVE YEARS
Net Asset Value –2.9% –1.1% 38.6% 60.1%
Share Price –2.0% –1.4% 34.6% 58.5%
MSCI World Index (£) 2.6% 6.2% 50.7% 77.3%
Balanced Risk Allocation Portfolio
SIX MONTHS ONE YEAR THREE YEARS FIVE YEARS
Net Asset Value –7.4% –5.0% 14.0% 17.4%
Share Price –5.4% –4.2% 12.8% 19.7%
Merrill Lynch 3 month LIBOR +5% pa 2.8% 5.6% 16.5% 27.6%
Managed Liquidity Portfolio
SIX MONTHS ONE YEAR THREE YEARS FIVE YEARS
Net Asset Value 0.2% 0.4% 0.6% 0.5%
Share Price -0.5% –0.5% –1.0% 0.7%
PERIOD END NET ASSET VALUE, SHARE PRICE AND DISCOUNT
SHARE CLASS NET ASSET VALUE (PENCE) SHARE PRICE (PENCE) DISCOUNT
UK Equity 163.5 164.0 (0.3%)
Global Equity Income 198.4 195.0 1.7%
Balanced Risk Allocation 132.8 132.0 0.6%
Managed Liquidity 103.7 101.5 2.1%
(1) Defined in the Glossary of Terms and Alternative Performance
Measure on pages 104 and 105 of the 2018 annual financial report.
(2) Source: Refinitiv (Thomson Reuters).
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INTERIM MANAGEMENT REPORT INCORPORATING THE CHAIRMAN’S STATEMENT
CHAIRMAN’S STATEMENT
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 Company enables shareholders to alter their asset allocation to reflect
their view of prevailing market conditions. Shareholders have the opportunity,
every three months, to convert between share classes, free of capital gains
tax and free of charges.
Performance
In NAV terms, with dividends reinvested, the UK Equity Portfolio returned
–12.0% over the six months to the end of November 2018 compared with its
benchmark, the FTSE All-Share Index’s total return of –7.7%. The share
price total return was –10.3%.
The Global Equity Income Portfolio returned –2.9% in NAV terms, and –2.0%
on the share price, compared with its benchmark, the MSCI World Index’s
total return over the period of 2.6%.
The Balanced Risk Allocation Portfolio returned –7.4% in NAV terms, and
–5.4% on the share price. The Portfolio’s benchmark, 3 month LIBOR plus 5%
per annum, returned 2.8%.
The Managed Liquidity Shares had a return of 0.2% based on the NAV and –0.5%
based on the share price.
Taken overall, this was clearly a difficult period for the Company and for
most markets in risk assets. The market environment has felt distinctly
bearish and the periods of falling prices have been more convincing than those
in which prices rose, even though the overall result wasn’t dramatic with
the MSCI World Index actually rising in sterling terms, though falling
slightly overall since the period end in much more volatile markets. Within
our two equity portfolios the causes of weak performance are similar. An
emphasis on undervalued UK domestically oriented companies has hurt, as has
exposure to similarly cheap European and UK financials. The period ended with
the divergence in valuation between these and higher-valued growth companies
at very wide levels by historical standards.
Under the political froth, macro-economic evolution was quite conventional.
The US has led a gentle process of monetary tightening worldwide as the
economy strengthened and capacity began to be stretched. This has weakened
demand for risk assets and also helped to strengthen the dollar, with
consequential falls in commodity prices. These particularly affected the
Balanced Risk Allocation portfolio which holds commodities to achieve the
required diversification. As a result, correlation between asset classes was
very high and performance suffered to an unusual extent.
Dividends
The Board has declared equal first, second and third quarterly dividends for
the current year for each of the equity share classes. For both the UK Equity
shares and the Global Equity Income shares each of these dividends was 1.5p,
making 4.5p declared to date.
We continue to target annual dividends of at least 6.45p for the UK Equity
shares and at least 6.7p for the Global Equity Income shares, these being the
levels declared last year. Achieving these targets may require a contribution
from capital, as was the case last year.
It continues to be the case that in order to maximise the capital return on
the Balanced Risk Allocation Shares, the Directors only intend to declare
dividends on the Balanced Risk Allocation Shares to the extent required,
having taken into account the dividends paid on the other Share classes, to
maintain the Company’s status as an investment trust. None have been
declared to date.
Although there has been some improvement, in consequence of the continuation
of very low interest rates, the cumulative retained net revenue of the Managed
Liquidity Portfolio continues to be minimal and the Directors have not
declared any dividends on the Managed Liquidity Shares.
Discount, Share Buy Backs and Share Issues
The Company has continued to operate a discount control policy for all four
share classes through the period and the discounts have remained within a
tight range throughout.
During the period the Company bought back 810,000 UK Equity shares at an
average price of 183.5p, 1,352,023 Global Equity Income shares at an average
price of 204.7p and 248,000 Balanced Risk Allocation shares at an average
price of 139.0p. No Managed Liquidity shares were bought back.
Outlook
From a market perspective it is comforting to note that equity valuations have
now fallen back to levels from which medium to long term returns have
generally been attractive. This has been accompanied by market sentiment
indicators giving out “Extreme Fear” signals in December, compared with
“Extreme Greed” a year ago, which gives a degree of technical support to
current market levels.
In my statement in the Annual Report I indicated that there might be more
impact on markets from political events. It is becoming clear that the
continued uncertainties about Brexit are hampering the UK economy with
weakness in consumption, linked to a very low savings rate, and corporate
investment. It is much less clear what will flow from the change of control of
the US House of Representatives or negotiations on trade. Globally, 2019 is
very likely to see slower economic expansion. The US economy is still
performing well by conventional standards, though it isn’t clear how it will
deal with the deficit caused by the sugar rush of tax cuts in 2018. Europe has
slowed down and earlier problems, such as the lack of Italian growth and the
economic disparities within the Eurozone have resurfaced. Meantime, China
continues to face the problem of a slowdown in investment as the economy
becomes more conventionally weighted towards consumption.
It is difficult to weigh up these different influences. The market indicators
are quite positive, but it still seems early in economic development to
believe the world economy is about to re-accelerate. Instead the macro
economic outliers seem much more likely to be harmful than positive. In the
meantime, our portfolio managers will continue to buy or hold cheap assets
with good prospects whose characteristics can mitigate some of the risks that
exist.
We remain convinced that the Company offers an attractive and unique mix of
strategies and its structure, with quarterly opportunities to convert between
share classes, makes it an ideal vehicle for DIY investors who want enhanced
control of their investments.
Balanced Risk Allocation Investment Policy
Since its adoption in 2011, the Portfolio’s investment policy has included a
limitation on the size of individual asset weightings, specifying that these
“… may occasionally exceed twice the neutral weight”. However, as the
strategy has matured the commodity portfolio has been diversified, with
individual positions therefore becoming smaller and, as a result, this limit
is no longer practical. The Board has consequently made a minor change to the
investment policy in respect of this limitation so that it again reflects the
original intent, being that the limit shall now apply not to individual
commodity exposures, but instead to each commodity complex: Agriculture,
Energy, Industrial Metals and Precious Metals. Accordingly, the investment
policy has been amended to say that individual asset weightings “… will
not exceed twice the neutral weight” and that “For the purposes of the
maximum weighting only, commodity exposures are aggregated and measured by
commodity complex rather than by individual assets.” This change has no
effect on how the Portfolio is managed or its risk profile.
Managed Liquidity Investment Policy
The investment policy and investments of the Managed Liquidity Portfolio would
have required it to be authorised as a money market fund under the new EU
Money Fund Regulation. This would have imposed quite onerous requirements on
the management and administration of the Portfolio and consequently the Board
decided that it would be in investors’ best interests if changes were made
to avoid this outcome whilst maintaining characteristics in line with the
original intent of the Portfolio. Accordingly, the Portfolio‘s Investment
Policy has been amended. The Company’s corporate broker, Canaccord Genuity,
has confirmed that, in their view, these changes are not material and
consequently do not require FCA or shareholder approval.
The full new investment policy, highlighting the changes, is set out below:
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.
Further, the Portfolio’s principal investment in the past has been the
Invesco Money Fund (UK). This Fund is a money market fund under the new
regulation and as such can no longer constitute a significant proportion of
the Managed Liquidity portfolio. Instead, with effect from 18 January 2019,
the Portfolio has invested principally in the PIMCO Sterling Short Maturity
Source UCITS ETF, which is not subject to the regulation but has risk
characteristics appropriate to the Portfolio. The ETF is managed by PIMCO and
Invesco acts as co-promoter. In consequence of these changes Stuart Edwards
has ceased to be the designated portfolio manager.
Managed Liquidity Fee Error Resolution
I referred in the last annual report to the historical error made in
calculating management fees on the Managed Liquidity portfolio. Invesco had
made a proposal to HMRC to pay an estimate of the tax due on the compensation
amount, so that investors receiving compensation would have no further
liability to taxation. I am pleased to report that this proposal was accepted
and that payments have now been made by Invesco, net of deemed tax, to
compensate those past and present shareholders who were disadvantaged by the
error.
Marketing Committee
In December, the Board decided to establish a Marketing Committee under the
chairmanship of Victoria Muir. It is intended that this Committee will oversee
investor relations and efforts to refresh and expand the Company’s
shareholder base. The Committee’s detailed terms of reference and membership
will be posted on the website for each Share class in due course.
Patrick Gifford
Chairman
7 February 2019
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Related Party Transactions
Under United Kingdom Generally Accepted Accounting Practice (UK Accounting
Standards and applicable law), the Company has identified the Directors as
related parties. No other related parties have been identified during the
period. No transactions with related parties have taken place which have
materially affected the financial position or the performance of the Company.
Principal Risks and Uncertainties
Explanations of the Company’s principal risks and uncertainties are set out
on pages 37 to 39 of the 2018 annual financial report, which is available on
the Manager’s website.
These are summarised as follows:
• Investment Objectives – the investment policies may not achieve the
published investment objectives;
• Market Movements and Portfolio Performance – falls in stock markets
will affect the performance of the individual Portfolios and securities held
within the Portfolios;
• Risks Applicable to the Company’s shares – the prices of shares in
the Company may not appreciate and the level of dividends may fluctuate;
• Viability and Compulsory Conversion of a Class of Share – lack of
demand for one of the Company’s share classes could result in the relevant
portfolio becoming too small to be viable. If ownership of a class of shares
becomes too concentrated the Directors may serve notice on holders of the
affected class requiring them to convert to another class;
• Liability of a Portfolio for the Liabilities of Another Portfolio –
in the event that any Portfolio was unable to meet its liabilities, the
shortfall would become a liability of the other Portfolios;
• Gearing – borrowing will amplify the effect on shareholders’ funds
of gains and losses on the underlying securities;
• Hedging – where hedging is used there is a risk that the hedge will
not be effective;
• Regulatory and Tax Related – whilst compliance with rules and
regulations is closely monitored, breaches could affect returns to
shareholders;
• Additional Risks Applicable to Balanced Risk Allocation Shares – the
use of financial derivative instruments, in particular futures, forms part of
the investment policy and strategy of the Balanced Risk Allocation Portfolio.
The degree of leverage inherent in futures trading potentially means that a
relatively small price movement in a futures contract may result in an
immediate and substantial loss to the Portfolio; and
• Reliance on Third Party Service Providers – the Company has no
employees, so is reliant upon the performance of third party service
providers, particularly the Manager, for it to function.
In the view of the Board these principal risks and uncertainties are as
equally applicable to the remaining six months of the financial year as they
were to the six months under review.
Going Concern
The financial statements have been prepared on a going concern basis. The
Directors consider this to be appropriate as the Company has adequate
resources to continue in operational existence for the foreseeable future,
being 12 months after approval of the financial statements. In reaching this
conclusion, the Directors took into account the value of net assets; the
Company’s Investment Policy; its risk management policies; the diversified
portfolio of readily realisable securities which can be used to meet funding
commitments; the credit facility and the overdraft which can be used for
short-term funding requirements; the liquidity of the investments which could
be used to repay the credit facility in the event that the facility could not
be renewed or replaced; its revenue; and the ability of the Company in the
light of these factors to meet all its liabilities and ongoing expenses.
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UK EQUITY SHARE PORTFOLIO
PERFORMANCE RECORD
Total Return
SIX MONTHS TO 30 NOV 2018 YEAR TO 31 MAY 2018 YEAR TO 31 MAY 2017 YEAR TO 31 MAY 2016 YEAR TO 31 MAY 2015
Net Asset Value –12.0% 1.1% 22.0% –1.4% 15.4%
Share Price –10.3% 0.3% 22.5% –2.2% 17.2%
FTSE All-Share Index –7.7% 6.5% 24.5% –6.3% 7.5%
Source: Refinitiv (Thomson Reuters).
Revenue return per share 2.79p 5.49p 5.38p 5.81p 6.38p
Dividends paid 3.00p 6.45p 6.25p 6.15p 6.15p
UK EQUITY SHARE PORTFOLIO
MANAGER’S REPORT
Investment Objective
The investment objective of the UK Equity Portfolio is to provide shareholders
with an attractive real long-term total return by investing primarily in UK
quoted equities.
Market Review
During the six month period to 30 November 2018 the FTSE All-Share Index fell
7.7%. The UK market ground lower for most of the period, but suffered notable
losses in October as part of a sell-off in global equity markets. Global trade
tensions, geopolitical uncertainty and oil price volatility were the main
drivers. In the first half of the period, threats and sanctions from the US
against China, Iran, and its western allies put pressure on commodity prices.
Meanwhile concerns around lower oil production from the Organisation for the
Petroleum Exporting Countries and looming US sanctions on Iran, compounded by
production shortfalls in Venezuela, saw the Brent Crude oil price rise to
US$86 per barrel at the start of October. However, the oil price fell sharply
to US$58 per barrel in the final two months of the period, as Saudi Arabia
pledged to meet any production shortfalls.
Economic data released during the period showed that the UK economy grew at
the fastest rate since 2016 during the third quarter of 2018, despite
continued uncertainty around the outcome of Brexit. Meanwhile, unemployment
fell to less than 4% during the period, the lowest level since 1975, whilst
vacancies reached an all-time high. Nevertheless, Sterling continued to act as
a barometer for the perceived progress in Brexit negotiations and the
likelihood of the UK making a ‘hard-exit’ from the European Union.
Prolonged uncertainty saw the pound fall to US$1.26 in August, the lowest
point in more than a year.
Against this backdrop the Bank of England’s Monetary Policy Committee voted
unanimously to raise interest rates by a further 0.25% to 0.75% at its August
meeting. The increase delivered the step towards policy normalisation that had
been widely anticipated in April, before unseasonably cold weather stayed the
Committee’s hand. It also affords the Committee greater flexibility to pare
back interest rates if deemed necessary following the final deal negotiated
for the UK’s exit from the European Union.
Portfolio Performance Review
The portfolio’s net asset value, including reinvested dividends, fell by
12.0% over the period under review, compared with a return of -7.7% by the
FTSE All-Share Index. In the light of a significant de-rating in the wake of
the EU referendum the portfolio had been moved to overweight shares in UK
domestically focused companies, especially financials. Although earnings
expectations have, on the whole, been met and although UK employment and real
wage growth continue to surprise to the upside, the persistent uncertainty
about the form Brexit will take has led to the underperformance of these
shares.
Barclays remained the portfolio’s largest holding and is a case in point. In
July the bank reported higher-than-expected net operating income for the first
half of 2018 and in October released third quarter results that were ahead of
consensus estimates. Despite these encouraging signals, worries about rising
impairments and declining net interest margins post-Brexit (as well as
long-standing scepticism about the investment bank) pushed the shares lower.
The portfolio’s significant weighting reflects continued conviction that the
return targets set by management are achievable, whilst that outcome is in no
way reflected by the valuation of the shares.
Other detractors with a UK domestic bias included Next, Tesco and easyJet. In
all cases I believe that these are long term structural winners with capital
allocation policies that will create value for shareholders and are priced at
extremely attractive levels as a result of widespread uncertainty around the
form Brexit will take in March 2019.
Some of the underperformance in the period can also be attributed to industry
and stock-specific issues.
The portfolio’s holding in Babcock International was a significant source of
underperformance. The shares started 2018 well, rallying almost 50% from their
February low. The company then reduced its full year revenue growth guidance
in July and the share price once again came under pressure. This persisted for
the rest of the review period as an anonymous piece of research was published
reigniting the debate on the sustainability of margins and recommending that
investors sell the shares. However, the current levels of profitability and
returns appear to be sustainable and, in light of the extreme reached in the
valuation (less than six times estimated 2019 earnings per share), the
position has been increased.
The share price of floorings manufacturer Victoria fell very sharply at the
end of October following the release of an unexpected trading update. The
company had sought to simplify and extend its debt finance arrangements, and
in so doing was obliged to release commentary on trading and near-term
strategy. The guidance for lower margins, but higher revenues, with the launch
of some cheaper ranges in pursuit of market share gains, was taken badly by
the market and the logic of the proposed bond issue was misunderstood. This
left the shares exposed to heavy short-selling. Having met with the
company’s management in the days following the share price fall, conviction
in the investment case was reaffirmed and the opportunity was taken to
increase the position.
British American Tobacco (BAT) was another significant detractor to
performance on concerns around the US regulatory environment. In August the
Food & Drug Administration (FDA) talked about the regulation of next
generation products and in November sought a ban on menthol cigarettes. Whilst
any menthol ban would have the potential to severely impact profits, it is by
no means certain that the FDA will meet the required evidential threshold and
in any case a ban would take a number of years to implement. Furthermore, the
impact is uncertain, as consumers may move to non-menthol tobacco
alternatives. This implies that the halving in the BAT share price is an
over-reaction. BAT’s focus on pricing power, cash generation, product
innovation and capital allocation should continue to provide a reliable source
of income, underpinning longer term returns to shareholders.
The use of gearing, which magnifies the effect on net asset value per share of
positive and negative portfolio performance, also weighed on relative
performance in the falling market.
During this challenging period for UK equity markets, a number of positions
made strong positive contributions to the portfolio’s performance. Bushveld
Minerals provided the standout return. Shares in this AIM-listed vanadium
producer rose steadily through much of the period, before rallying very
sharply in November. The shares were buoyed by rising vanadium prices and also
by news that the company had struck a deal to consolidate its ownership of
Strategic Minerals Corporation, the holding company of Vametco, Bushveld’s
South African vanadium asset.
Meanwhile, shares in Acacia Mining and Randgold Resources rose strongly from
September following news of a proposed merger between Barrick Gold (which owns
64% of Acacia Mining) and Randgold Resources. The combination should unlock
significant value and the holding has been maintained in the combined entity.
Acacia Mining’s shares reacted to the perception that under the leadership
of Mark Bristow, who has a decades-long track record of successful operations
in Africa, Barrick may now be more likely to resolve Acacia’s long-running
dispute with the Tanzanian authorities. The Acacia share price was given a
further boost by the release of strong production results for the third
quarter of 2018, which met the higher end of guidance.
The portfolio’s holdings in BT and SafeStyle UK also provided positive
contributions to returns. BT’s shares rose strongly throughout the period,
supported by better-than-expected results for the first half of the firm’s
financial year and a very depressed starting valuation. Meanwhile,
SafeStyle’s share price almost doubled at the end of October following news
that the company had agreed a five year non-compete deal with its founder, who
had launched a competitor that specifically targeted Safestyle’s staff,
customer base and brand. That business has since gone into administration,
which should help to reverse the market share losses that Safestyle has
suffered. More shares were acquired at the lower levels.
Other notable contributors to performance included Future, Whitbread, JD
Sports Fashion, Gamma Communications, BCA Marketplace and HomeServe.
After the period end, the IPO of A J Bell was completed. Through that process
45% of the portfolio’s holding was disposed at a premium to the carrying
value and, subsequent to the float, the shares have performed very strongly.
The portfolio retains significant exposure to what I believe will be a strong
performer in a very attractive space.
Strategy & Outlook
2018 finished on a very difficult note for markets globally, with the FTSE
All-Share Index falling 11% in the fourth quarter and the S&P500 Index
registering its biggest December decline since 1931. The sell-off was the
result of two factors: firstly, market concerns that the Fed would press ahead
with monetary tightening, just as it appeared that the US and global economy
may be weakening, and; secondly, the ratcheting up of trade tensions between
the US and China.
It remains to be seen whether recent dovish comments made by the Fed chairman,
echoed in the minutes of January’s meeting, will in fact be followed by a
more dovish policy. Importantly, however, the dollar has responded and at the
time of writing is down 3% from its December peak on a trade-weighted basis.
Along with a friendlier tone to Sino-US trade discussions this has
significantly soothed markets. Crucially, the latest US employment and wage
data imply that the engine of the economy, the consumer, remains in good
health. At the same time, whilst China credit remains a major concern in the
long run, both monetary policy (Reserve Requirement Ratio cut) and fiscal
policy in China (the government is planning for a 2.8% deficit in 2019) are
also improving sentiment. If Chinese authorities and a weaker US dollar
relieve pressure on emerging markets, if employment data remain strong and if
trade issues are contained, we could be facing a much more constructive 2019
than had been feared.
This would be a good outcome for emerging markets, for commodity prices and
therefore for the large international constituents of the UK market. Given
their weight in the index, it would likely prove beneficial for the market as
a whole (albeit the effect may be dampened by translation of those dollar
profits into sterling). Whilst the portfolio is underweight these areas, the
holdings within internationally exposed sectors such as oil & gas, mining and
industrials, would stand to benefit. It will be vital to monitor
macro-economic data carefully for any confirmation of a trend and to consider
the appropriate allocation to these areas of the market accordingly.
The portfolio remains overweight UK domestic cyclicals and, within that, very
overweight Financials. The spectre of Brexit is still of sufficient concern to
the market to leave valuations in these sectors at very modest levels in a
historical context. At the time of writing, the risk of an “accidental” no
deal appears to be receding. Parliament seems to be taking greater control of
the situation and it has been clear for some time that there is no majority in
parliament for a “hard Brexit”. The other key risk to the UK economy and
to UK domestically exposed companies, a Corbyn government, now also looks less
likely than ever. The Labour party has failed to gain traction in opinion
polls at a point in the electoral cycle and against the backdrop of a
government in chaos that really ought to have seen them ahead.
The outlook for the UK therefore looks brighter and so owning shares in
domestically orientated companies at, or close to, post-financial crisis
valuation lows (Barclays, Royal Bank of Scotland, Tesco, Next, easyJet) still
looks extremely attractive. In a number of cases I have taken the opportunity
of share price weakness to add to positions (Amigo, Babcock international,
CVS, Mears, Safestyle UK, Victoria, Whitbread).
That said, there are numerous sources of potential instability both at home
and abroad and so to mitigate the risks the wider market and the portfolio
face (a no-deal Brexit, US-China trade war, Chinese credit, Italy, Iran, US
fiscal weakness, the risk to the US dollar’s reserve currency status, to
name but a few) I have increased the weighting in gold equities, specifically
to companies with productive assets where their cash generative
characteristics and the valuation of those cash flows merit inclusion.
Whilst my investment process is heavily skewed to bottom-up, stock specific
considerations, my view is that after a year of Brexit-driven underperformance
versus other global indices and the weakness seen globally in the fourth
quarter of 2018, the valuation of the broad UK market now looks good. At
eleven times one year forward earnings the FTSE All-Share Index is currently
at a level that has historically been consistent with very attractive real
returns over the following ten years, as can be seen in the following chart.
I believe that the modest valuation of this diversified portfolio and the
defensive characteristics of gold will produce a portfolio with compelling
risk/reward characteristics in the forthcoming period.
James Goldstone
Portfolio Manager
7 February 2019
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UK EQUITY SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 30 NOVEMBER 2018
Ordinary shares listed in the UK unless stated otherwise
COMPANY SECTOR† MARKET VALUE £’000 % OF PORTFOLIO
Barclays Banks 3,099 4.6
BP Oil & Gas Producers 3,005 4.4
Coats General Industrials 2,305 3.4
Next General Retailers 2,047 3.0
Royal Dutch Shell – B Shares Oil & Gas Producers 1,988 2.9
Tesco Food & Drug Retailers 1,885 2.8
Royal Bank of Scotland Banks 1,592 2.3
British American Tobacco Tobacco 1,473 2.2
A J Bell – Unquoted Financial Services 1,408 2.1
JD Sports Fashion General Retailers 1,405 2.1
RELX Media 1,340 2.0
Babcock International Support Services 1,326 2.0
Legal & General Life Insurance 1,286 1.9
Imperial Brands Tobacco 1,261 1.9
Bushveld Minerals Mining 1,185 1.8
XPS Pensions Financial Services 1,169 1.7
Melrose Industries Construction & Materials 1,168 1.7
BCA Marketplace Financial Services 1,165 1.7
Ashtead Support Services 1,151 1.7
Rolls-Royce Aerospace & Defence 1,108 1.6
– C shares 6
McBride Household Goods & Home Construction 1,113 1.6
Summit Germany Real Estate Investment & Services 1,087 1.6
Amigo Financial Services 1,068 1.6
Derwent London Real Estate Investment Trusts 1,049 1.6
BT Fixed Line Telecommunications 1,041 1.5
Sigma Capital Financial Services 1,035 1.5
Phoenix Spree Deutschland Real Estate Investment & Services 1,027 1.5
Plus500 Financial Services 957 1.4
Johnson Service Support Services 955 1.4
PRS REIT Real Estate Investment Trusts 953 1.4
easyJet Travel & Leisure 922 1.4
Chesnara Life Insurance 900 1.3
Acacia Mining Mining 881 1.3
Aviva Life Insurance 853 1.3
MJ Gleeson Household Goods & Home Construction 792 1.2
Future Media 789 1.2
Howden Joinery Support Services 752 1.1
Hollywood Bowl Travel & Leisure 743 1.1
TP ICAP Financial Services 737 1.1
P2P Global Investments Equity Investment Instruments 727 1.1
Harworth Real Estate Investment & Services 703 1.0
Hibernia REIT – Irish common stock Real Estate Investment Trusts 702 1.0
Victoria Household Goods & Home Construction 697 1.0
Micro Focus Software & Computer Services 689 1.0
Mears Support Services 679 1.0
Endeavour Mining – Canadian common stock Mining 675 1.0
Newmont Mining – US common stock Mining 670 1.0
Randgold Resources Mining 663 1.0
HomeServe Support Services 620 0.9
N Brown General Retailers 619 0.9
Agnico Eagle Mines – Canadian common stock Mining 617 0.9
Ultra Electronics Aerospace & Defence 617 0.9
Provident Financial Financial Services 615 0.9
Secure Trust Bank Banks 609 0.9
On the Beach Travel & Leisure 607 0.9
Dairy Crest Food Producers 589 0.9
Balfour Beatty Construction & Materials 569 0.8
Hadrian's Wall Secured Investments Equity Investment Instruments 552 0.8
CVS General Retailers 551 0.8
Capita Support Services 526 0.8
Sherborne Investors (Guernsey) C Financial Services 515 0.8
Safestyle UK General Retailers 514 0.8
Cairn Homes Household Goods & Home Construction 509 0.7
Whitbread Travel & Leisure 489 0.7
Standard Life Aberdeen Financial Services 434 0.6
TruFin Financial Services 431 0.6
DS Smith General Industrials 423 0.6
Alfa Financial Software Software & Computer Services 418 0.6
Zegona Communications Non-equity Investment Instruments 367 0.5
Tungsten Financial Services 238 0.4
Debenhams General Retailers 101 0.1
Diurnal Pharmaceuticals & Biotechnology 66 0.1
Barclays Bank – Nuclear Power Notes 28 Feb 2019 Electricity 57 0.1
HaloSource Chemicals 1 –
– Regulation S 1
Total investments (74) 67,886 100.0
†FTSE Industry Classification Benchmark.
.
UK EQUITY SHARE PORTFOLIO
INCOME STATEMENT
SIX MONTHS ENDED 30 NOVEMBER 2018 SIX MONTHS ENDED 30 NOVEMBER 2017
REVENUE £’000 CAPITAL £’000 TOTAL £’000 REVENUE £’000 CAPITAL £’000 TOTAL £’000
Losses on investments at fair value – (8,630) (8,630) – (3,062) (3,062)
Foreign exchange losses – – – – (15) (15)
Income 1,169 5 1,174 1,155 427 1,582
Management fee - note 2 (50) (116) (166) (57) (132) (189)
Performance fee - note 2 – – – – 4 4
Other expenses (100) – (100) (97) – (97)
Net return before finance costs and taxation 1,019 (8,741) (7,722) 1,001 (2,778) (1,777)
Finance costs (31) (72) (103) (21) (48) (69)
Return on ordinary activities before taxation 988 (8,813) (7,825) 980 (2,826) (1,846)
Tax on ordinary activities – note 3 (6) – (6) (11) – (11)
Return on ordinary activities after taxation for the financial period 982 (8,813) (7,831) 969 (2,826) (1,857)
Basic return per ordinary share – note 4 2.79p (25.05)p (22.26)p 2.58p (7.52)p (4.94)p
SUMMARY OF NET ASSETS
AT 30 NOVEMBER 2018 £’000 AT 31 MAY 2018 £’000
Fixed assets 67,886 81,655
Current assets 968 687
Creditors falling due within one year, excluding borrowings (653) (684)
Bank loan (11,400) (13,650)
Net assets 56,801 68,008
Net asset value per share – note 5 163.5p 189.0p
Gearing:
– gross 20.1% 20.1%
– net 18.9% 19.6%
.
GLOBAL EQUITY INCOME SHARE PORTFOLIO
PERFORMANCE RECORD
Total Return
SIX MONTHS TO 30 NOV 2018 YEAR TO 31 MAY 2018 YEAR TO 31 MAY 2017 YEAR TO 31 MAY 2016 YEAR TO 31 MAY 2015
Net Asset Value –2.9% 7.8% 29.2% –0.2% 13.2%
Share Price –2.0% 5.7% 31.1% –2.8% 16.1%
MSCI World Index (£) 2.6% 8.2% 31.3% 0.7% 16.2%
Source: Refinitiv (Thomson Reuters).
Revenue return per share 2.38p 6.50p 5.62p 5.51p 4.68p
Dividends paid 3.00p 6.70p 6.40p 6.00p 4.60p
GLOBAL EQUITY INCOME SHARE PORTFOLIO
MANAGER’S REPORT
Investment Objective
The investment objective of the Global Equity Income Share Portfolio is to
provide an attractive and growing level of income return and capital
appreciation over the long term, predominantly through investment in a
diversified portfolio of equities worldwide.
Market and Economic Review
Global equity markets were weak throughout the review period, although
sterling-based investors were sheltered due to a fall in the value of sterling
meaning that the MSCI World Index rose 2.6% in sterling terms over the six
months. A key driver for this has been increased concern around whether the
positive economic progression that began in 2009 would continue. Factors such
as the flattening of the US government bond yield curve, reductions in
liquidity arising from the normalisation of US and European monetary policy,
and continued tensions on global trade, have made investors nervous. However,
throughout the period most sectors of the market delivered profit growth in
line with expectations. The US has continued to outperform other global
regions. However, leadership within the US equity market has rotated away from
previously favoured highly valued technology and e-commerce companies, towards
companies and sectors with more predictable earnings streams such as
pharmaceuticals and utilities.
In Europe, political risk continued to be a challenge as the Italian budgetary
crisis and Brexit rumbled on. Economic data from the region also cast a cloud
as evidence mounted of slower growth in the second half of 2018 and into 2019
compared to previous expectations.
Weakness in emerging equity markets was broad based. Emerging economies were
challenged by a strong US dollar and a perceived reduction in US dollar
liquidity arising from the normalisation of US monetary policy. Other issues
included threats to global trade, Turkey’s currency crisis, and political
uncertainties and currency depreciation in Brazil.
Portfolio Strategy and Review
On a total return basis, the Portfolio’s net asset value fell by 2.9% over
the six months to the end of November 2018, compared to a rise of 2.6% in the
MSCI World Index (£, total return, net of withholding tax).
Performance versus the benchmark index was affected by the portfolio’s
underweight position in the US and, conversely, its overweight position in the
UK, Europe and, to a lesser degree, Asia. Our underweight allocation to the US
market versus the reference index is due to a lack of stocks which in our view
are attractively valued. The US equity market looks expensive relative to
other regions and has done so for several years. However, we accept that US
companies have delivered stronger earnings growth than companies in other
regions. In 2018 much of this was driven by one-off benefits from tax cuts and
companies re-leveraging their balance sheets to buy back stock.
Our focus on companies trading at low valuations with good long-term prospects
has led us to be overweight the UK and Europe where we feel investors are
over-discounting the long-term impact of negative shorter-term political
issues. In terms of our UK exposure specifically, our portfolios are tilted
towards domestic stocks and Brexit uncertainty continues to weigh on UK
domestic equity valuations. The political uncertainty has been especially
damaging and has resulted in a wide degree of polarisation within the market.
Companies with substantial overseas revenues have benefitted from the
devaluation of sterling and, by contrast, UK domestic-facing stocks have
generally performed poorly and remain undervalued relative to the broader
market. The extent of this relative cheapness is substantial and, although the
overall market is not expensive at present, the most obvious opportunities, in
our view, rest within domestic sectors. Many are valued at multi-year lows,
both in absolute terms and relative to the wider market, and are being
discounted on fears of a sharp deterioration in profits and a slowdown in the
UK economy, both of which look overly pessimistic to us.
Our exposure to financials in Europe had a negative outcome in the period, in
large part due to the Italian political situation, which now seems to be
resolving. We would highlight the outstanding valuations we see in this sector
and significant (and growing) dividend yields. Headlines around Italian
politics, trade wars and immigration, as well as some softening in European
macro data, also weighed heavily on performance. However, we expect steady if
unspectacular economic growth into 2019. The outlook for domestic demand looks
good as Europe recovers from the various crises of the last decade. Corporates
are regaining their appetite to invest again whilst falling unemployment and
rising wages are supporting consumption. Our Asian stocks experienced some
weakness over the six months amid concerns surrounding trade tensions and
China’s economic growth.
From a sector perspective, weaker performance came from industrials, consumer
staples, and energy stocks. Industrials stocks were widely impacted by
concerns over trade wars. Our consumer staples exposure was impacted by more
stock-specific events. The share price gains from our European food retailers
Carrefour and Koninklijke Ahold Delhaize were outweighed by weakness in
British American Tobacco (BAT), which was a significant negative contributor.
That company’s shares fell following news reports that the US Food & Drug
Administration (FDA) is seeking a ban on menthol cigarettes. Ultimately we
remain of the view that the BAT’s focus on pricing power, cash conversion
and product innovation should continue to provide a reliable source of income,
underpinning longer-term returns to shareholders, while next generation
‘reduced harm’ products have the potential to deliver a significant new
revenue stream.
As to our energy exposure, the decline in the price of oil had a marked effect
in the period. The price of oil peaked in October at around $85 and then
started a rather rapid decline in November, ending the month down over 20%.
The weakness was driven by concern over risks to the demand outlook as global
growth concerns increased. Furthermore, investors fretted over increases in
supply as shale oil production in the US continued to grow rapidly and OPEC
seemed unwilling to cut production, which had a negative impact on a number of
the energy stocks held within the portfolio. Our positive view of the sector,
however, is not from the oil price being extremely strong, but rather from
operating cost reductions and cuts to capital expenditure, which we believe
are leading to extremely strong cash generation and will enable both rising
dividends and some share buybacks over coming years.
Health care delivered positive performance for the portfolio during the six
months as markets became more defensively positioned. The share prices of
Pfizer, Novartis, Roche, Amgen and Gilead Sciences all benefitted as a result.
Portfolio changes
Over the period new positions were established in Rolls Royce, Carrefour, and
CRH. In our view Rolls Royce is set to become a highly cash generative
business and it has a good self-help story arising from increased operating
efficiencies and new engine rollouts. The industry is highly regulated, with
cutting-edge engineering giving it strong barriers to entry and making
disruption hard. Carrefour is a well-known food retailer in France. We believe
that it has a strong balance sheet and an impressive new management team, who
we feel will be able to bring about change and improve margins in what remains
a strong franchise. CRH supplies a broad range of products to the construction
industry. We believe CRH to be a high quality business with a management team
who are very returns focused.
We sold out of two positions, Union Pacific and Hiscox, after strong share
price performance. We also sold our position in Airbus as we felt the share
price now reflects the positive outlook for the company. Lastly, we disposed
of Nielsen. The company reported a surprisingly weak set of results and
delivered a very negative outlook. This would not necessarily have catalysed a
sale of the position, but the lack of a credible strategy to improve and signs
of structural shifts in one of its key businesses, as well as the departure of
members of senior management, led us to the conclusion that the capital could
be better deployed elsewhere.
Outlook
We remain cautiously optimistic regarding the outlook for 2019 and feel the
market has too aggressively discounted a recession in recent months. Monetary
and fiscal conditions in all regions remain conducive for growth, and
inflation is subdued. We expect 2019 to deliver modest economic growth.
However the US will see a slowdown in earnings growth as the positive effects
of President Trump’s tax cuts are annualised and the rising interest rates
begin to manifest in increased interest charges.
There remain of course significant risks to our outlook, arising from
continued restrictions to global trade, further interest rises and monetary
policy normalisation, for example. However, on balance we believe the rewards
in equities outweigh the risks, particularly at the more attractive valuation
levels we currently see in the market.
We continue to favour Europe, the UK and Asia over the US, although we
acknowledge Europe and the UK will remain volatile until some conclusion is
reached over Brexit. We find the valuation on offer in both markets to be
outstanding at present.
Overall, our strategy remains consistent: to invest in high quality companies
at attractive valuations. We view such companies as those that can sustain
profit margins and deliver positive returns through the economic cycle. We see
growing and sustainable dividends as clear evidence of these sorts of
companies. In aggregate, therefore, we target companies that offer attractive
yields, a growing dividend stream and capital upside.
Nick Mustoe
Portfolio Manager
7 February 2019
.
GLOBAL EQUITY INCOME SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 30 NOVEMBER 2018
Ordinary shares unless stated otherwise
COMPANY INDUSTRY GROUP† COUNTRY MARKET VALUE £’000 % OF PORFOLIO
Orange Telecommunication Services France 2,264 3.3
Royal Dutch Shell – A shares Energy Netherlands 2,251 3.3
Chevron Energy US 2,213 3.2
Pfizer Pharmaceuticals, Biotechnology & Life Sciences US 2,171 3.2
Novartis Pharmaceuticals, Biotechnology & Life Sciences Switzerland 2,011 2.9
BP Energy UK 1,965 2.9
Total Energy France 1,928 2.8
Roche Pharmaceuticals, Biotechnology & Life Sciences Switzerland 1,867 2.7
Amgen Pharmaceuticals, Biotechnology & Life Sciences US 1,677 2.5
United Technologies Capital Goods US 1,670 2.4
Aon – A shares Insurance US 1,631 2.4
JPMorgan Chase Banks US 1,596 2.3
Wells Fargo Banks US 1,576 2.3
Caixabank Banks Spain 1,557 2.3
Taiwan Semiconductor Manufacturing Semiconductors & Semiconductor Equipment Taiwan 1,554 2.3
Citigroup Banks US 1,524 2.2
Nasdaq Diversified Financials US 1,496 2.2
Deutsche Post Transportation Germany 1,451 2.1
Gilead Sciences Pharmaceuticals, Biotechnology & Life Sciences US 1,437 2.1
Allianz Insurance Germany 1,437 2.1
Amcor Materials Australia 1,419 2.1
Toyota Motor Automobiles & Components Japan 1,402 2.1
Next Retailing UK 1,365 2.0
Carrefour Food & Staples Retailing France 1,363 2.0
ING Banks Netherlands 1,360 2.0
Rolls-Royce Capital Goods UK 1,319 1.9
– C shares 6
Williams-Sonoma Retailing US 1,299 1.9
BASF Materials Germany 1,298 1.9
Intesa Sanpaolo Banks Italy 1,291 1.9
Las Vegas Sands Consumer Services US 1,282 1.9
Canadian Natural Resources Energy Canada 1,279 1.9
Equinor Energy Norway 1,233 1.8
Tesco Food & Staples Retailing UK 1,175 1.7
Koninklijke Ahold Delhaize Food & Staples Retailing Netherlands 1,124 1.6
BNP Paribas Banks France 1,122 1.6
Royal Bank of Scotland Banks UK 1,107 1.6
British American Tobacco Food, Beverage & Tobacco UK 1,084 1.6
China Mobile – R Telecommunication Services Hong Kong 1,079 1.6
Broadcom Semiconductors & Semiconductor Equipment US 1,077 1.6
Microsoft Software & Services US 1,074 1.6
TE Connectivity Technology Hardware & Equipment Switzerland 1,065 1.6
Sumitomo Mitsui Financial Banks Japan 1,043 1.5
easyJet Transportation UK 990 1.5
BAE Systems Capital Goods UK 920 1.3
Adecco Commercial & Professional Services Switzerland 872 1.3
CRH Materials Ireland 832 1.2
Telefonica Brasil Telecommunication Services Brazil 686 1.0
Legal & General Insurance UK 655 1.0
Kangwon Land Consumer Services South Korea 578 0.8
Hyundai Motor – preference shares Automobiles & Components South Korea 398 0.6
Zhejiang Expressway – H Transportation Hong Kong 260 0.4
Total Investments (51) 68,333 100.0
†MSCI and Standard & Poor’s Global Industry Classification Standard.
H: H-Shares – shares issued by companies incorporated in the People’s
Republic of China (PRC) and listed on the Hong Kong Stock Exchange.
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.
.
GLOBAL EQUITY INCOME SHARE PORTFOLIO
INCOME STATEMENT
SIX MONTHS ENDED 30 NOVEMBER 2018 SIX MONTHS ENDED 30 NOVEMBER 2017
REVENUE £’000 CAPITAL £’000 TOTAL £’000 REVENUE £’000 CAPITAL £’000 TOTAL £’000
(Losses)/gains on investments at fair value – (2,538) (2,538) – 3,108 3,108
Foreign exchange losses – (4) (4) – (1) (1)
Income 1,054 – 1,054 1,083 – 1,083
Management fee – note 2 (55) (128) (183) (56) (131) (187)
Other expenses (106) (1) (107) (90) (1) (91)
Net return before finance costs and taxation 893 (2,671) (1,778) 937 2,975 3,912
Finance costs (11) (26) (37) (10) (23) (33)
Return on ordinary activities before taxation 882 (2,697) (1,815) 927 2,952 3,879
Tax on ordinary activities – note 3 (106) – (106) (93) – (93)
Return on ordinary activities after taxation for the financial period 776 (2,697) (1,921) 834 2,952 3,786
Basic return per ordinary share – note 4 2.38p (8.27)p (5.89)p 2.54p 9.00p 11.54p
SUMMARY OF NET ASSETS
AT 30 NOVEMBER 2018 £’000 AT 31 MAY 2018 £’000
Fixed assets 68,333 72,664
Current assets 701 569
Creditors falling due within one year, excluding borrowings (149) (336)
Bank overdraft – (1,140)
Bank loan (4,200) (2,700)
Net assets 64,685 69,057
Net asset value per share – note 5 198.4p 207.2p
Gearing:
– gross 6.5% 5.6%
– net 6.0% 5.6%
.
BALANCED RISK ALLOCATION SHARE PORTFOLIO
PERFORMANCE RECORD
Total Return
SIX MONTHS TO 30 NOV 2018 YEAR TO 31 MAY 2018 YEAR TO 31 MAY 2017 YEAR TO 31 MAY 2016 YEAR TO 31 MAY 2015
Net Asset Value –7.4% 6.4% 9.8% –0.3% 4.1%
Share Price –5.4% 4.5% 11.9% –2.1% 5.0%
3 month LIBOR +5% per annum 2.8% 5.4% 5.5% 5.6% 5.6%
Source: Refinitiv (Thomson Reuters).
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.
Market and Economic Review
Equities started the six month period with gains, but finished with negative
performance. Equity markets ran into headwinds in August from the Trump
Administration’s trade war, made back some of those losses in September, but
then experienced a sharp pullback in October.
Government bonds also started the period in positive territory as yields fell,
but pulled back in the third quarter of 2018 as safe-haven demand fell and
expectations for higher rates took hold. Bonds finished the period in slightly
positive territory, with gains posted in October and November.
Commodities suffered during the period, having started off with mixed
performance. Behaviour across commodity complexes varied widely in June, with
energy commodity prices generally higher, while prices for agricultural
(including livestock) and metals commodities suffered. Prices continued to
suffer through the third quarter of 2018 as a strong US dollar and concerns
over international trade caused most raw materials markets to decline. As
measured by the Bloomberg Commodity Index, three of the four major
sub-complexes made losses with only energy finishing the third quarter with
gains. Commodities saw a reversal in fortune from prior months in October as
energy commodities fell, while select agricultural commodities and gold prices
rose. Industrial metals continued to suffer from slowing growth and tariff
fears. Positive performance in October was not enough to outweigh losses in
the other months of the period.
Portfolio Strategy and Review
The Balanced Risk Allocation Portfolio underperformed the benchmark. The
Portfolio return for the six months was –7.4%, compared with the benchmark,
3 month LIBOR plus 5% per annum, return of 2.8%.
Strategic exposure to commodities was the top detractor for the period as all
assets had negative or flat performance, with the exception of natural gas.
Within commodities, agriculture had the most significant effect, primarily due
to exposure to soft commodities including cotton and sugar, as well as
exposure to the soy complex. The soy complex had been particularly affected by
the trade negotiations between the US and China and also by expectations for a
robust soybean harvest depressing prices. The prices of industrial metals
declined, led by copper, despite some easing of trade concerns – US dollar
strength and a softening Chinese economy were headwinds. Precious metals also
declined. Losses in silver were larger than for gold as silver traded in
sympathy with its crossover use as an industrial metal. Precious metals prices
were negatively impacted by real interest rates and the dollar tracking higher
as the US Federal Reserve (Fed) maintained its tightening course. Energy also
became a major detractor after starting the period on a strong note. The
complex was positive from June through to September, but experienced a sharp
pullback in October and November. Energy prices weakened on fears of the
impact on demand from slowing global growth and increasing stocks in the US.
This was especially pronounced in crudes. Unleaded gasoline prices fell, with
stocks for this time of year being high relative to history and with refinery
run rates also expected to pick up. Other distillates also seemed to be well
stocked and their prices also dropped. Natural gas was the only energy
commodity to post gains, with inventory levels below average heading into the
winter heating months. Tactical positioning in commodities contributed to
results as underweights to agriculture proved timely.
Strategic exposure to equities detracted for the reporting period. Like
commodities, equities posted positive results during the reporting period
through to September. However, the long bull market ran into significant
headwinds in October, with markets down 5% to 12% globally. While the
immediate trigger for the sell-off is debatable, some combination of
accumulating challenges to future growth almost certainly contributed to the
decline, including increases in Treasury yields, evidence of slowing growth in
several markets, trade conflicts, etc. Prices rebounded in November, but not
enough to outweigh the significant losses from October. Tactical overweights
to all six equity markets further detracted from results.
Strategic exposure to fixed income was slightly beneficial to performance over
the reporting period as five of the six markets in which the strategy invests
were positive. Australian bonds were the top contributor as weak performance
out of China created safe-haven demand. German government bonds also
contributed as the European Central Bank (ECB) held rates steady at 0%, as
expected, and reaffirmed that rates would be on hold at least through the
summer of 2019. Strategic exposure to US government bonds was the sole
detractor in the asset class as the Fed maintained a tightening bias on strong
economic data and tight labour markets. Negative performance from tactical
positioning within bonds outweighed the gains from strategic positioning as
underweights to UK and Canadian bonds did not prove timely.
Outlook
Risk assets have just completed one of the worst quarters (4th quarter 2018)
in recent memory as slowing manufacturing and economic data have taken a toll
on equity and economically sensitive commodity prices. The likely cause of the
slowdown is the combination of the ongoing trade rhetoric between the US and
China with the policy tightening by the Fed and quantitative tightening by the
Fed and ECB. Investors will be intently focused on the direction these events
take in 2019. Resolution of one or both of these issues could spark a powerful
relief rally for risk assets, while negative developments will favour safe
havens.
Scott Wolle
Portfolio Manager
7 February 2019
.
TARGET ANNUALISED RISK
The targeted annualised risk (volatility of monthly returns) for the portfolio
as listed overleaf is analysed as follows:
ASSET CLASS RISK CONTRIBUTION
Bonds 4.0% 50.0%
Equities 2.3% 27.9%
Commodities 1.8% 22.1%
8.1% 100.0%
Derivative instruments held in the Balanced Risk Allocation Share Portfolio
are shown on the next page. At the period end all derivative instruments held
in this Portfolio were exchange traded futures contracts. Holdings in futures
contracts that are not exchange traded are permitted as explained in the
investment policy which is disclosed in full on page 32 of the 2018 annual
financial report.
.
BALANCED RISK ALLOCATION SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 30 NOVEMBER 2018
YIELD % MARKET VALUE £’000 % OF PORTFOLIO
Short Term Investments
UK Treasury Bill 18 Feb 2019 0.63 2,596 29.5
UK Treasury Bill 3 Dec 2018 0.53 1,600 18.2
UK Treasury Bill 7 May 2019 0.69 1,595 18.1
UK Treasury Bill 13 May 2019 0.70 1,495 17.0
Short-Term Investments Company (Global Series) 0.79 945 10.8
UK Treasury Bill 11 Mar 2019 0.72 549 6.2
Total Short Term Investments 8,780 99.8
Hedge Funds(1)
Harbinger Class PE Holdings 15 0.2
Harbinger Class L Holdings 2 0.0
Total Hedge Funds 17 0.2
Total Fixed Asset Investments 8,797 100.0
(1) The hedge fund investments are residual holdings of the previous
investment strategy, which are awaiting realisation of underlying investments.
.
LIST OF DERIVATIVE INSTRUMENTS
AT 30 NOVEMBER 2018
NOTIONAL EXPOSURE £’000 NOTIONAL EXPOSURE AS % OF NET ASSETS
Government Bond Futures:
Australia 1,858 23.8
Canada 1,492 19.1
Germany 1,003 12.9
UK 981 12.6
US 766 9.8
Japan 417 5.3
Total Bond Futures (6) 6,517 83.5
Equity Futures:
Hong Kong 531 6.8
Japan 460 5.9
Germany 365 4.7
US small cap 359 4.6
UK 348 4.4
US large cap 322 4.1
Total Equity Futures (6) 2,385 30.5
Commodity Futures:
Agriculture
Soybean meal 195 2.5
Cotton 186 2.4
Soy bean 183 2.3
Sugar 179 2.3
Corn 46 0.6
Wheat 41 0.5
Soybean oil 40 0.5
Coffee 32 0.4
Energy
Gasoline 141 1.8
Natural gas 116 1.5
Brent crude 94 1.2
New York Harbor ultra-low sulphur diesel 60 0.8
Gas-oil (diesel) 44 0.6
WTI crude 41 0.5
Industrial Metals
Copper 243 3.1
Aluminium 114 1.5
Precious Metals
Gold 192 2.5
Silver 111 1.4
Total Commodity Futures (18) 2,058 26.4
Total Derivative Instruments (30) 10,960 140.4
.
BALANCED RISK ALLOCATION SHARE PORTFOLIO
INCOME STATEMENT
SIX MONTHS ENDED 30 NOVEMBER 2018 SIX MONTHS ENDED 30 NOVEMBER 2017
REVENUE £’000 CAPITAL £’000 TOTAL £’000 REVENUE £’000 CAPITAL £’000 TOTAL £’000
(Losses)/gains on investments at fair value – (3) (3) – 3 3
Gains/(losses) on derivative instruments 22 (670) (648) 23 400 423
Foreign exchange gains/(losses) – 18 18 – (23) (23)
Income 24 – 24 8 – 8
Management fee - note 2 (9) (21) (30) (11) (25) (36)
Other expenses (20) – (20) (19) – (19)
Return on ordinary activities before taxation 17 (676) (659) 1 355 356
Tax on ordinary activities – – – – – –
Return on ordinary activities after taxation for the financial period 17 (676) (659) 1 355 356
Basic return per ordinary share – note 4 0.28p (11.05)p (10.77)p 0.01p 5.07p 5.08p
SUMMARY OF NET ASSETS
AT 30 NOVEMBER 2018 £’000 AT 31 MAY 2018 £’000
Fixed assets 8,797 7,333
Derivative assets held at fair value through profit or loss 40 281
Current assets 805 1,868
Derivative liabilities held at fair value through profit or loss (221) (54)
Creditors falling due within one year, excluding borrowings (1,616) (55)
Bank overdraft – (86)
Net assets 7,805 9,287
Net asset value per share – note 5 132.8p 143.4p
Notional exposure of derivative instruments as % of net assets 140.4% 144.2%
.
MANAGED LIQUIDITY SHARE PORTFOLIO
PERFORMANCE RECORD
TOTAL RETURN
SIX MONTHS TO 30 NOV 2018 YEAR TO 31 MAY 2018 YEAR TO 31 MAY 2017 YEAR TO 31 MAY 2016 YEAR TO 31 MAY 2015
Net Asset Value 0.2% 0.3% 0.0% –0.1% –0.1%
Share Price –0.5% 0.5% 0.5% –0.9% 0.5%
Source: Refinitiv (Thomson Reuters).
Revenue return per share 0.19p 0.24p (0.04)p (0.14p) (0.12)p
Dividend nil nil nil nil nil
MANAGED LIQUIDITY SHARE PORTFOLIO
MANAGER’S REPORT
Investment Objective
The investment objective of the Managed Liquidity Share Portfolio is to
produce an appropriate level of income return combined with a high degree of
security.
Market and Economic Review
The period began with a degree of uncertainty about the timing of any increase
in UK interest rates. The market had effectively fully priced in a rise during
April, only for the Bank of England (BoE) to revise expectations amid a
weakening of economic data. The likelihood of a hike started to increase again
following the June Monetary Policy Committee (MPC) meeting in which three of
the nine members voted for a rise. Adding weight to expectations was the fact
that one of those voting for an increase was Chief Economist, Andy Haldane,
who had typically been viewed as one of the dovish members of the committee.
Subsequent statements by the Bank helped to reinforce expectations, so by the
end of July the market had fully priced in a hike and the unanimous decision
by the MPC in early August to raise the rate was therefore taken by the market
in its stride.
Since the August hike, short-term sterling interest rates have been relatively
stable. There has been more volatility in bonds that have longer until
maturity, with ongoing negotiations over the UK’s future relationship with
the European Union a key source of the uncertainty.
Portfolio Strategy and Review
Our investment strategy has been achieved by investing principally in the
Invesco Money Fund (UK) (“Money Fund”) and also in the Sterling Liquidity
Portfolio of Short-Term Investments Company (Global Series) plc (“STIC”),
each of which invests in a diversified portfolio of high quality sterling
denominated short-term money market instruments.
The Money Fund has had positions in a number of government, quasi-government
and corporate bonds. In order to limit the exposure to interest rate risk and
credit risk (the likelihood of an issuer defaulting), these bonds have been
both short dated and of high quality. The Fund has also held some floating
rate notes, debt instruments whose interest rates are reset at regular
intervals.
The Sterling Liquidity Portfolio of STIC invests in high quality sterling
denominated money market instruments such as commercial paper, certificates of
deposit, time deposits and floating rate notes. At 30 November 2018 the
Sterling Liquidity Portfolio was rated AAAm by Standard and Poor’s and
AAAmmf by Fitch Ratings.
Change of Investment Policy
As explained in the Chairman’s Statement on page 4, the Investment Policy
has now changed and, with effect from 18 January 2019, the Portfolio’s main
investment is now the PIMCO Sterling Short Maturity Source UCITS ETF, instead
of the Money Fund. This ETF, which is actively managed by PIMCO, seeks to
maximise current income consistent with the preservation of capital and a high
degree of liquidity but is not authorised as a money market fund. It invests
in investment grade fixed income securities, including government bonds,
corporate debt and mortgage or other asset-backed securities, denominated in
sterling and other G7 currencies. It may use forward exchange contracts or
other derivatives to achieve exposure.
Outlook
Looking ahead the macro-economic picture and therefore prospects for UK
interest rates is mixed. On the one hand, the UK labour market is tight with
unemployment at its lowest level since the 1970’s. Economic growth is also
positive with GDP slightly stronger in the 3rd quarter of 2018 than previously
thought. In part, this upturn in growth reflected a reversion of the weakness
earlier in the year. On the other hand, this relatively positive picture needs
to be weighed against the ongoing uncertainty from Brexit. Against this
uncertain backdrop our expectation is that the BoE will continue its very
gradual path of increasing interest rates while ensuring that any change is
communicated well in advance.
Stuart Edwards
Portfolio Manager
7 February 2019
.
MANAGED LIQUIDITY SHARE PORTFOLIO
LIST OF INVESTMENTS
AS AT 30 NOVEMBER 2018
MARKET VALUE £’000 % OF PORTFOLIO
Invesco Money Fund (UK)† 4,711 95.2
Short-Term Investments Company (Global Series) 240 4.8
4,951 100.0
†At the period end the Managed Liquidity Share Portfolio held 5.24% (May
2018: 4.69%) of the outstanding shares in the Invesco Money Fund (UK).
.
MANAGED LIQUIDITY SHARE PORTFOLIO
INCOME STATEMENT
SIX MONTHS ENDED 30 NOVEMBER 2018 SIX MONTHS ENDED 30 NOVEMBER 2017
REVENUE £’000 CAPITAL £’000 TOTAL £’000 REVENUE £’000 CAPITAL £’000 TOTAL £’000
Losses on investments at fair value – – – – (2) (2)
Income 19 – 19 13 – 13
Management fee – note 2 (3) – (3) (3) – (3)
Other expenses (7) – (7) (6) – (6)
Return on ordinary activities before taxation 9 – 9 4 (2) 2
Tax on ordinary activities – – – – – –
Return on ordinary activities after taxation for the financial period 9 – 9 4 (2) 2
Basic return per ordinary share – note 4 0.19p – 0.19p 0.08p (0.04)p 0.04p
SUMMARY OF NET ASSETS
AT 30 NOVEMBER 2018 £’000 AT 31 MAY 2018 £’000
Fixed assets 4,951 4,953
Current assets 53 54
Creditors falling due within one year, excluding borrowings (142) (143)
Net assets 4,862 4,864
Net asset value per share – note 5 103.7p 103.5p
CONDENSED INCOME STATEMENT
FOR THE SIX MONTHS ENDED 30 NOVEMBER
2018 2017
REVENUE £’000 CAPITAL £’000 TOTAL £’000 REVENUE £’000 CAPITAL £’000 TOTAL £’000
(Losses)/gains on investments at fair value – (11,171) (11,171) – 47 47
Gains/(losses) on derivative instruments 22 (670) (648) 23 400 423
Foreign exchange gains/(losses) – 14 14 – (39) (39)
Income 2,266 5 2,271 2,259 427 2,686
Management fees – note 2 (117) (265) (382) (127) (288) (415)
Performance fees – note 2 – – – – 4 4
Other expenses (233) (1) (234) (212) (1) (213)
Net return before finance costs and taxation 1,938 (12,088) (10,150) 1,943 550 2,493
Finance costs (42) (98) (140) (31) (71) (102)
Return on ordinary activities before taxation 1,896 (12,186) (10,290) 1,912 479 2,391
Tax on ordinary activities – note 3 (112) – (112) (104) – (104)
Return on ordinary activities after taxation for the financial period 1,784 (12,186) (10,402) 1,808 479 2,287
Basic return per ordinary share – note 4
UK Equity Share Portfolio 2.79p (25.05)p (22.26)p 2.58p (7.52)p (4.94)p
Global Equity Income Share Portfolio 2.38p (8.27)p (5.89)p 2.54p 9.00p 11.54p
Balanced Risk Allocation Share Portfolio 0.28p (11.05)p (10.77)p 0.01p 5.07p 5.08p
Managed Liquidity Share Portfolio 0.19p – 0.19p 0.08p (0.04)p 0.04p
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 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 period.
Income Statements for the different Share classes are shown on pages 13, 19,
24 and 27 for the UK Equity, Global Equity Income, Balanced Risk Allocation
and Managed Liquidity Share Portfolios respectively.
.
CONDENSED STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED 30 NOVEMBER
SHARE CAPITAL £’000 SHARE PREMIUM £’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 – – (4,629) – – – (4,629)
Share conversions (2) – 2 – – – –
Net return on ordinary activities – – – – (12,186) 1,784 (10,402)
Dividends paid – note 9 – – (72) – – (1,960) (2,032)
At 30 November 2018 1,055 1,290 71,893 353 59,438 124 134,153
At 31 May 2017 1,060 1,290 80,542 347 69,608 583 153,430
Cancellation of deferred shares – – (2) 2 – – –
Shares bought back and held in treasury – – (1,739) – – – (1,739)
Share conversions (1) – 1 – – – –
Net return on ordinary activities – – – – 479 1,808 2,287
Dividends paid – note 9 – – – – – (2,040) (2,040)
At 30 November 2017 1,059 1,290 78,802 349 70,087 351 151,938
.
CONDENSED BALANCE SHEET
AS AT 30 NOVEMBER 2018
REGISTERED NUMBER 5916642
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 67,886 68,333 8,797 4,951 149,967
Current assets
Derivative assets held at fair value through profit or loss – – 40 – 40
Debtors 310 382 528 4 1,224
Cash and cash equivalents 658 319 277 49 1,303
968 701 845 53 2,567
Creditors: amounts falling due within one year
Derivative liabilities held at fair value through profit or loss – – (221) – (221)
Other creditors (653) (149) (1,616) (142) (2,560)
Bank loan (11,400) (4,200) – – (15,600)
(12,053) (4,349) (1,837) (142) (18,381)
Net current liabilities (11,085) (3,648) (992) (89) (15,814)
Net assets 56,801 64,685 7,805 4,862 134,153
Capital and reserves
Share capital 438 388 109 120 1,055
Share premium – – 1,290 – 1,290
Special reserve 31,570 32,551 3,467 4,305 71,893
Capital redemption reserve 74 78 26 175 353
Capital reserve 24,719 31,499 2,977 243 59,438
Revenue reserve – 169 (64) 19 124
Shareholders’ funds 56,801 64,685 7,805 4,862 134,153
Net asset value per ordinary share
Basic – note 5 163.5p 198.4p 132.8p 103.7p
.
CONDENSED BALANCE SHEET
AS AT 31 MAY 2018
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 81,655 72,664 7,333 4,953 166,605
Current assets
Derivative assets held at fair value through profit or loss – – 281 – 281
Debtors 379 569 268 4 1,220
Cash and cash equivalents 308 – 1,600 50 1,958
687 569 2,149 54 3,459
Creditors: amounts falling due within one year
Derivative liabilities held at fair value through profit or loss – – (54) – (54)
Other creditors (684) (336) (55) (143) (1,218)
Bank overdraft – (1,140) (86) – (1,226)
Bank loan (13,650) (2,700) – – (16,350)
(14,334) (4,176) (195) (143) (18,848)
Net current (liabilities)/assets (13,647) (3,607) 1,954 (89) (15,389)
Net assets 68,008 69,057 9,287 4,864 151,216
Capital and reserves
Share capital 442 382 113 120 1,057
Share premium – – 1,290 – 1,290
Special reserve 33,960 34,030 4,287 4,317 76,594
Capital redemption reserve 74 78 25 174 351
Capital reserve 33,532 34,196 3,653 243 71,624
Revenue reserve – 371 (81) 10 300
Shareholders’ funds 68,008 69,057 9,287 4,864 151,216
Net asset value per ordinary share
Basic – note 5 189.0p 207.2p 143.4p 103.5p
.
CONDENSED CASH FLOW STATEMENT
SIX MONTHS ENDED 30 NOVEMBER 2018 £’000 SIX MONTHS ENDED 30 NOVEMBER 2017 £’000
Cash flow from operating activities
Net return before finance costs and taxation (10,150) 2,493
Tax on overseas income (114) (104)
Adjustments for:
Purchase of investments (29,076) (26,243)
Sale of investments 35,957 27,229
Sale of futures (240) 296
6,641 1,282
Scrip dividends (30) (73)
Losses/(gains) on investments 11,171 (47)
Losses/(gains) on derivatives 648 (423)
Decrease in debtors 26 24
Decrease in creditors and provision (70) (493)
Net cash inflow from operating activities 8,122 2,659
Cash flow from financing activities
Interest paid on loan (140) (105)
(Decrease)/increase in bank borrowing (750) 1,350
Share buy back costs (4,629) (1,739)
Equity dividends paid – note 9 (2,032) (2,040)
Net cash outflow from financing activities (7,551) (2,534)
Net increase in cash and cash equivalents 571 125
Cash and cash equivalents at the start of the period 732 992
Cash and cash equivalents at the end of the period 1,303 1,117
Reconciliation of cash and cash equivalents to
the Balance Sheet is as follows:
Cash held at custodian 1,303 1,117
Cash flow from operating activities includes:
Dividends received 2,351 2,673
Interest received 46 28
Changes in liabilities arising from financing activities:
Opening bank loan as at 31 May 16,350 15,200
(Decrease)/increase in bank loan (750) 1,350
Closing bank loan as at 30 November 15,600 16,550
.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. Accounting Policies
The condensed financial statements have been prepared in accordance with
applicable United Kingdom Accounting Standards and applicable law (UK
Generally Accepted Accounting Practice), including FRS 102 The Financial
Reporting Standard applicable in the UK and Republic of Ireland, FRS 104
Interim Financial Reporting and the Statement of Recommended Practice
Financial Statements of Investment Trust Companies and Venture Capital Trusts,
issued by the Association of Investment Companies in November 2014 and updated
in February 2018. The financial statements are issued on a going concern
basis.
The accounting policies applied to these condensed financial statements are
consistent with those applied in the financial statements for the year ended
31 May 2018.
2. Management Fees and Finance Costs
Basic management fees and finance costs are charged to the applicable
Portfolio as follows, in accordance with the Board’s expected split of
long-term income and capital returns:
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 the 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 directly attributable to the capital performance of the
investments in those Portfolios.
The Manager is entitled to a basic fee which is calculated and payable
quarterly. The fee is based on the net assets of each Portfolio, at the
following percentages:
– 0.55% per annum in the case of the UK Equity and Global Equity
Income Portfolios;
– 0.75% per annum for the Balanced Risk Allocation Portfolio; and
– 0.12% per annum for the Managed Liquidity Portfolio.
The Manager is also entitled to receive performance fees in respect of the UK
Equity and Global Equity Income Portfolios of 12.5% of the increase in net
assets per relevant Share in excess of a hurdle of the relevant benchmark
plus 1% per annum. From 1 June 2018, the amount of the performance fee that
can be earned in any one year is limited to 0.55% of the net assets of the
relevant Portfolio and payment is subject to a high water mark. Any
underperformance of the benchmark, or performance above the cap, is carried
forward to subsequent periods and any underperformance must be offset by
future overperformance before any performance fee can be paid.
No performance fee was earned by the UK Equity Portfolio during the six months
(30 November 2017: £nil). The performance fee accrued for past periods is
£531,000 and, as it cannot be reduced by future underperformance, remains an
obligation of the Company. No performance fee was earned for the Global Equity
Portfolio during the six months (30 November 2017: £27,000).
Underperformance movements in the six months to 30 November 2018 are shown
below:
UK EQUITY £’000 GLOBAL EQUITY INCOME £’000
Underperformance brought forward (540) (893)
Underperformance in the period (459) (520)
Underperformance carried forward (999) (1,413)
3. Investment Trust Status and Tax
It is the intention of the Directors to conduct the affairs of the Company so
that it satisfies the conditions for approval as an investment trust company.
Any company so approved is not liable for taxation on capital gains.
The tax charge represents withholding tax suffered on overseas income for the
period.
4. Basic Return per Ordinary Share
Basic revenue, capital and total return per ordinary share is based on each of
the returns on ordinary activities after taxation as shown by the income
statement for the applicable Share class and on the following number of shares
being the weighted average number of shares in issue throughout the period for
each applicable Share class:
WEIGHTED AVERAGE NUMBER OF SHARES
SIX MONTHS ENDED 30 NOVEMBER 2018 SIX MONTHS ENDED 30 NOVEMBER 2017
UK Equity 35,172,933 37,588,931
Global Equity Income 32,601,022 32,797,113
Balanced Risk Allocation 6,117,689 7,006,541
Managed Liquidity 4,703,864 5,136,972
5. Net Asset Values per Ordinary Share
The net asset values per ordinary share were based on the following
Shareholders' funds and shares (excluding treasury shares) in issue at the
period end:
AT 30 NOVEMBER 2018 £’000 AT 31 MAY 2018 £’000
PORTFOLIO SHAREHOLDERS’ FUNDS
UK Equity 56,801 68,008
Global Equity Income 64,685 69,057
Balanced Risk Allocation 7,805 9,287
Managed Liquidity 4,862 4,864
NUMBER OF SHARES
AT 30 NOVEMBER 2018 AT 31 MAY 2018
PORTFOLIO SHARES IN ISSUE
UK Equity 34,732,059 35,986,971
Global Equity Income 32,604,620 33,322,219
Balanced Risk Allocation 5,877,867 6,477,892
Managed Liquidity 4,688,722 4,700,708
6. Classification Under Fair Value Hierarchy
FRS 102 as amended for fair value hierarchy disclosures (March 2016) sets out
three fair value levels. These are:
Level 1 The unadjusted quoted price in an active market for
identical assets or liabilities that the entity can access at the measurement
date.
Level 2 Inputs other than quoted prices included within Level 1
that are observable (i.e. developed using market data) for the asset or
liability, either directly or indirectly.
Level 3 Inputs are unobservable (i.e. for which market data is
unavailable) for the asset or liability.
The fair value hierarchy analysis for investments held at fair value at the
period end is as follows:
UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000
AT 30 NOVEMBER 2018
Financial assets designated at fair value through profit or loss:
Level 1 66,478 68,333 8,780 –
Level 2 – – 40 4,951
Level 3 1,408 – 17 –
Total for financial assets 67,886 68,333 8,837 4,951
Financial liabilities:
Level 2 – Derivative instruments – – 221 –
AT 31 MAY 2018
Financial assets designated at fair value through profit or loss:
Level 1 80,244 72,664 5,040 –
Level 2 3 – 2,554 4,953
Level 3 1,408 – 20 –
Total financial assets 81,655 72,664 7,614 4,953
Financial liabilities:
Level 2 – Derivative instruments – – 54 –
Level 1 This is the majority of the Company’s investments and
comprises all quoted investments and Treasury bills.
Level 2 This comprises liquidity funds held in the Balanced Risk
Allocation and Managed Liquidity Portfolios, and any derivative instruments.
For the UK Equity Portfolio, Barclays Bank – Nuclear Power Notes 28 Feb
2019, was transferred to Level 1 (May 2018: Level 2) during the period
following increased market activity in this holding.
Level 3 This includes the UK Equity Portfolio’s holding of an
unquoted stock, A J Bell, and the remaining hedge fund investments of the
Balanced Risk Allocation Portfolio. Subsequent to the period end, A J Bell
underwent an initial public offering (IPO) and became quoted with effect from
7 December 2018.
7. Movements in Share Capital and Share Class Conversions
IN THE SIX MONTHS ENDED 30 NOVEMBER 2018
UK EQUITY GLOBAL EQUITY INCOME BALANCED RISK ALLOCATION MANAGED LIQUIDITY
Ordinary 1p shares (number)
At 31 May 2018 35,986,971 33,322,219 6,477,892 4,700,708
Shares bought back into treasury (810,000) (1,352,023) (248,000) –
Arising on share conversion:
– August 2018 (419,528) 440,471 (114,918) 9,109
– November 2018 (25,384) 193,953 (237,107) (21,095)
At 30 November 2018 34,732,059 32,604,620 5,877,867 4,688,722
UK EQUITY GLOBAL EQUITY INCOME BALANCED RISK ALLOCATION MANAGED LIQUIDITY
Treasury Shares (number)
At 31 May 2018 8,203,540 4,879,000 4,781,000 7,333,785
Shares bought back into treasury 810,000 1,352,023 248,000 –
At 30 November 2018 9,013,540 6,231,023 5,029,000 7,333,785
Total shares in issue at 30 November 2018 43,745,599 38,835,643 10,906,867 12,022,507
Average buy back price 183.5p 204.7p 139.0p 0.0p
As part of the conversion process, 152,953 deferred shares of 1p each were
created. All deferred shares are cancelled before the period end and so no
deferred shares are in issue at the start or end of the period.
8. Share Prices
PERIOD END UK EQUITY GLOBAL EQUITY INCOME BALANCED RISK ALLOCATION MANAGED LIQUIDITY
30 November 2017 184.0p 204.5p 137.8p 102.0p
31 May 2018 186.0p 202.0p 139.5p 102.0p
30 November 2018 164.0p 195.0p 132.0p 101.5p
9. Dividends on Ordinary Shares
The first and second interim dividends were paid on 17 August 2018 and 16
November 2018 respectively:
PORTFOLIO NUMBER OF SHARES DIVIDEND RATE TOTAL £’000
First interim 35,536,971 1.50p 533
Second interim 34,757,443 1.50p 521
3.00p 1,054
Global Equity Income
First interim 32,756,219 1.50p 492
Second interim 32,410,667 1.50p 486
3.00p 978
Dividends paid for the six months to 30 November 2018 totalled £2,032,000
(six months to 30 November 2017: £2,040,000).
10. The financial information contained in this half-yearly
financial report, which has not been reviewed or audited by the independent
auditor, does not constitute statutory accounts within the meaning of section
434 of the Companies Act 2006. The financial information for the half years
ended 30 November 2018 and 30 November 2017 has not been audited. The figures
and financial information for the year ended 31 May 2018 are extracted and
abridged from the latest audited accounts and do not constitute the statutory
accounts for that year. Those accounts have been delivered to the Registrar of
Companies and include the Independent Auditor’s Report, which was
unqualified and did not include a statement under section 498 of the Companies
Act 2006.
By order of the Board
Invesco Asset Management Limited
Company Secretary
7 February 2019
.
STATEMENT OF DIRECTORS’ RESPONSIBILITY
in respect of the preparation of the half-yearly financial report
The Directors are responsible for preparing the half-yearly financial report
using accounting policies consistent with applicable law and UK Accounting
Standards.
The Directors confirm that, to the best of their knowledge:
– the condensed set of financial statements contained within the
half-yearly financial report has been prepared in accordance with the FRC’s
FRS 104 Interim Financial Reporting;
– the interim management report includes a fair review of the
information required by DTR 4.2.7R and DTR 4.2.8R of the FCA’s Disclosure
Guidance and Transparency Rules; and
– the interim management report includes a fair review of the
information required on related party transactions.
The half-yearly financial report has not been audited or reviewed by the
Company’s auditor.
Signed on behalf of the Board of Directors.
Patrick Gifford
Chairman
7 February 2019
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