REG-Invesco Perp Sel Tst: Half-year Report
08/02/2021 07:05
Invesco Perpetual Select Trust plc
LEI: 549300JZQ39WJPD7U596
HALF-YEARLY FINANCIAL REPORT
SIX MONTHS ENDED 30 NOVEMBER 2020
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FINANCIAL PERFORMANCE
CUMULATIVE TOTAL RETURNS((1)(2)) TO 30 NOVEMBER 2020
UK Equity Share Portfolio
SIX MONTHS ONE YEAR THREE YEARS FIVE YEARS
Net Asset Value 10.9% –8.6% –4.1% 12.4%
Share Price 15.3% –7.5% –3.6% 11.8%
FTSE All-Share Index 6.9% –10.3% –1.9% 22.1%
Global Equity Income Share Portfolio
SIX MONTHS ONE YEAR THREE YEARS FIVE YEARS
Net Asset Value 16.1% –0.3% 9.2% 53.0%
Share Price 16.4% 0.4% 9.9% 50.1%
MSCI World Index (£) 12.2% 11.0% 33.2% 88.9%
Balanced Risk Allocation Share Portfolio
SIX MONTHS ONE YEAR THREE YEARS FIVE YEARS
Net Asset Value 14.1% 5.6% 10.2% 32.2%
Share Price 14.7% 2.8% 7.4% 26.5%
ICE BoA Merrill Lynch 3 month LIBOR plus 5%
per annum 2.6% 5.6% 17.0% 27.9%
Managed Liquidity Share Portfolio
SIX MONTHS ONE YEAR THREE YEARS FIVE YEARS
Net Asset Value 1.0% 1.0% 3.7% 3.8%
Share Price 0.5% 0.8% 1.6% 1.1%
PERIOD END NET ASSET VALUE, SHARE PRICE AND DISCOUNT
SHARE CLASS NET ASSET VALUE (PENCE) SHARE PRICE (PENCE) DISCOUNT
UK Equity 158.38 157.50 (0.6)%
Global Equity Income 203.82 202.00 (0.9)%
Balanced Risk Allocation 154.07 148.00 (3.9)%
Managed Liquidity 105.41 102.00 (3.2)%
((1)) Alternative Performance Measure (APM). See pages 38 to 40 for the
explanation and calculation of APMs. Further details are provided in the
Glossary of Terms and Alternative Performance Measures in the Company’s 2020
annual financial report.
((2)) Source: Refinitiv.
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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 views 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 net asset value (NAV) terms, with dividends reinvested, the UK Equity Share
Portfolio returned +10.9% over the six months to the end of November 2020, and
+15.3% on the share price, compared with its benchmark, the FTSE All-Share
Index total return of +6.9%.
The Global Equity Income Share Portfolio returned +16.1% in NAV terms, and
+16.4% on the share price, compared with its benchmark, the MSCI World Index
total return over the period of +12.2%.
The Balanced Risk Allocation Share Portfolio returned +14.1% in NAV terms, and
+14.7% on the share price. The Portfolio’s benchmark, ICE BoA Merrill Lynch
3 month LIBOR plus 5% per annum, returned +2.6%.
The Managed Liquidity Share Portfolio had a return of +1.0% based on NAV and
+0.5% based on the share price.
It is very pleasing to report that all three Portfolios based on risk assets
outperformed their benchmarks. In the period under review sentiment towards
financial markets, and equities in particular, fluctuated in response to the
news about the Covid-19 pandemic. Towards the end of the period, the
announcement of a number of successful vaccines led to a significant rise in
equities, with many markets having their greatest ever monthly return in
November. The Company’s Portfolios benefitted from being geared in the
period, as well as from positive stock and sector selection by the portfolio
managers. The UK Equity portfolio manager had a balanced approach, holding
both gold stocks as a defensive hedge, as well as more economically sensitive
stocks such as Barclays, Next and JD Sports Fashion. The latter were impacted
by the government lockdowns and restrictions in response to the pandemic, but
rallied during November on the vaccine news. The Global Equity Income
Portfolio also had a balanced construction, with pharmaceutical stocks such as
Novartis and Roche offering defensive characteristics, offset by economically
sensitive stocks such as Samsung Electronics, Taiwan Semiconductor
Manufacturing and JPMorgan Chase. The Global Equity Income Portfolio
outperformed its benchmark despite being underweight the US equity market,
which once again has been a very strong performer.
The Balanced Risk Allocation Portfolio by its very nature has a combination of
equities, bonds and commodities. During the period under review, the exposure
to risk assets such as equities and commodities proved beneficial, whilst
bonds had a small negative return. The portfolio manager also generated a
positive return during the period through tactical allocation between the
different asset classes.
Throughout the period interest rates around the globe remained at, or very
near, record lows. Nevertheless, the Managed Liquidity Portfolio generated a
positive return from the investment in short dated bonds. As announced at the
end of the half year, Derek Steeden has been appointed manager of this
Portfolio. The investment policy will remain unchanged, with the portfolio
manager targeting a positive return from investing in short dated bonds, with
particular attention given to yield, duration and credit risk. As has been
mentioned in the past, this Share class has a lower risk profile than the
Company’s other three Share classes. Nevertheless, it is not designed to be
a cash fund, and as such is not without risk to capital.
Proposed Combination with Invesco Income Growth Trust plc
On 1 December 2020 the Board announced the agreement of Heads of Terms with
the board of Invesco Income Growth Trust plc (IVI) in respect of a proposed
combination of IVI with the Company’s UK Equity Share class. It is intended
that this proposal, if approved by each company’s shareholders and subject
to regulatory and tax approvals, will be implemented through a scheme of
reconstruction pursuant to section 110 of the Insolvency Act 1986, resulting
in the voluntary liquidation of IVI and the rollover of its assets into the
Company in exchange for the issue of new UK Equity shares to IVI shareholders
and a partial cash exit. A circular and prospectus in relation to this
transaction will be posted to shareholders in due course.
If the proposal is approved by shareholders, Ciaran Mallon, who has managed
IVI’s portfolio since 2005, will become joint portfolio manager of the UK
Equity Share Portfolio, with James Goldstone, who has managed it since October
2016. The Boards of both this Company and IVI believe that the two managers’
combined and complementary skills, with a disciplined investment process, can
deliver attractive returns for shareholders. Ciaran and James jointly manage
Invesco’s largest open ended UK equity funds, which have outperformed their
benchmark since appointment. The Company’s smaller UK Equity portfolio will
give the managers freedom to invest across the size and liquidity spectrum and
to offer the prospect of a genuine best ideas portfolio, clearly distinguished
from their open-ended funds, where stock selection is limited to larger, more
liquid investments. The change will bring the benefits of increased scale,
including enhancing secondary market liquidity and the spreading of fixed
costs over a larger cost base. Additionally, the Board has negotiated improved
management fee arrangements to apply from when the scheme becomes effective.
The current flat annual management fee of 0.55% of net assets payable by the
UK Equity Share Portfolio will be reduced, with 0.55% payable on its net
assets up to £100 million and 0.50% over £100 million; and the performance
fee (being 12.5% of any increase in net assets above the benchmark plus 1.0%,
capped at 0.55% of net assets) will be removed. In the interests of alignment,
the 0.55% management fee on the Company’s Global Equity Income Share
Portfolio will be amended in the same way, and its performance fee removed.
Costs of the transaction will be significantly mitigated by Invesco waiving
its accrued performance fee of £531,000 in respect of the UK Equity Share
Portfolio.
The Company will retain its innovative capital structure, offering investors
the opportunity to switch (on a quarterly basis) between its UK Equity, Global
Equity Income, Balanced Risk Allocation and Managed Liquidity share classes to
react to changing investment conditions.
Dividends
The Board has declared equal first, second and third quarterly dividends for
the current year for each of the equity share classes. These were all at the
same level as last year. Accordingly, for the UK Equity shares each of these
dividends was 1.5p, making 4.5p declared for the financial year to date. For
the Global Equity Income shares each of these dividends was 1.55p, making
4.65p declared for the financial year to date.
With pressure on income streams from Covid-19 the Board has not set targets
for annual dividends for the current financial year. However, as in recent
years, the earnings of the UK Equity and Global Equity Income Portfolios will
be augmented with contributions from capital.
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.
No dividends have been declared in respect of the current financial year on
the Managed Liquidity Shares. Although improvements to revenue allowed small
dividends to be paid in the last two years, in this exceedingly low interest
rate environment it currently appears unlikely to be repeated this year.
Discount and Share Buy Backs
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
reasonably narrow range.
During the period the Company bought back 4,588,000 UK Equity shares at an
average price of 144.4p, 2,945,000 Global Equity Income shares at an average
price of 186.0p, 705,000 Balanced Risk Allocation shares at an average price
of 141.9p and 174,000 Managed Liquidity shares at an average price of 101.5p.
Outlook
As I noted in the last annual financial report, the impact of the Covid-19
pandemic on economies and societies has been profound. At the time of writing,
there are still very high infection rates in Europe and North America,
although the pandemic is much more contained in Asia. As a result, GDP growth
has resumed in Asia, whilst it is more subdued in those areas of the globe
still experiencing high infection rates. Nevertheless, equity markets have
rallied strongly in anticipation of economic recovery following the roll out
of vaccines. Equity markets have also been supported by government stimulus
packages throughout the world. The magnitude of these has been even greater
than during the financial crisis, and yet bond yields are at near record lows,
as inflation has remained subdued. Given the profound dislocation that has
occurred following the pandemic, it would be foolhardy to make bold
predictions for the second half of the Company’s year. Much will depend upon
the effectiveness of vaccines, and the speed and extent of the recovery in
GDP. Although equity markets are anticipating a recovery, there are still many
sectors trading at very low valuations which offer upside. Furthermore,
although it is difficult to anticipate government bond yields moving lower,
unless there is an upsurge in inflation, bond yields could remain low.
Undoubtedly financial markets will be volatile, but this should provide the
portfolio managers the opportunity to continue to build upon the strong
investment performance in the first half of the Company’s year.
We remain convinced that the Company offers an attractive and unique mix of
strategies, and its structure, with opportunities to convert between share
classes, makes it an ideal vehicle for self-managed investors who want
enhanced control of their investments – long-term investing with flexibility
to switch portfolios in response to market changes.
Graham Kitchen
Chairman
5 February 2021
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INTERIM MANAGEMENT REPORT INCORPORATING THE CHAIRMAN’S STATEMENT
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 39 to 42 of the Company’s 2020 annual financial report, which is
available on the Manager’s website.
These are summarised as follows:
• Investment Objectives and Attractiveness to Investors – 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.
Despite the disruption to markets and revenue streams from Covid-19, and the
impact on global economies, the Company continues to operate effectively and
to pursue its investment objectives. Resilience of the Company, its Board and
its service providers has been demonstrated throughout and the Directors
remain confident that the Company’s investment strategies will continue to
serve shareholders well over the longer term.
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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MARKET AND ECONOMIC BACKGROUND
The six months to the end of November 2020 saw global equity markets deliver
positive returns against a backdrop of the gradual and partial reopening of
the global economy from the Covid-19 induced restrictions imposed from March
onwards. Commodity markets saw energy and industrial metals make gains on
expectations of a return of demand from the increases in travel and economic
activity. However, given the strength in risk assets, bond prices retreated as
demand for safe havens diminished.
Despite some rebound in economic growth across each region of the world
throughout this period, the year 2020 will go on record as delivering the
sharpest decline in global GDP since World War 2.
In the UK it was a volatile six months for the equity market, largely
dominated by the impact of Covid-19, where the social and economic effect has
been devastating, and it will take years to recover. Additional ongoing issues
such as US-China trade relations, Brexit, UK domestic politics and the US
Presidential Election also added to the background noise in recent months.
The effect on equity markets could have been worse. Rapid and forceful action
by central banks and governments around the world to loosen monetary and
fiscal policy in order to cushion the economic shock to consumers has
prevented, so far at least, economic depression. The challenge for governments
is to provide a level of effective support, while at the same time recognising
the need to control levels of borrowing. Consumer spending power has largely
been maintained, and indeed is likely to be the driver of post-Covid economic
recovery in 2021.
Throughout the bulk of the period equity markets continued to be extremely
bifurcated, with a narrow range of e-commerce, technology and high growth
‘thematic’ stocks outperforming significantly, in addition to those
perceived winners from the changes in consumer behaviour brought about by
Covid-19. More traditional companies across a range of sectors, especially
those with more ‘value’ orientated characteristics and greater sensitivity
to the economic cycle, continued to underperform. Of course, travel and
leisure companies as well as energy stocks were in the eye of the storm as
restrictions severely curtailed business travel and holidays. Healthcare
stocks were also weak, despite their relatively secure short-term
profitability, as concerns around a Democrat sweep of the US Presidency and
Congress raised fears of more radical healthcare reform in the US.
In the UK, towards the end of the review period the FTSE All-Share Index
continued to trade below the pre Covid-19 levels of February, but above the
market low that was witnessed in March. Uncertainty around a national lockdown
as a result of a steep rise in Covid-19 infections weighed on share prices
into the autumn, along with concerns around progress in Brexit negotiations.
Whilst there remained uncertainty on some key issues, there appeared to be
room for cautious optimism that a negotiated settlement would be reached with
the EU before the end of the year, although there was some strong posturing
around a threat of a ‘No Deal’.
The beginning of November marked quite a radical rotation within the global
equity market. The catalyst was initially the US election result, delivering a
Democratic president, but with a gridlocked Congress. In the view of the
market, thus preventing radical shake ups of tax policy and the healthcare
sector, whilst allowing a more diplomatic approach to foreign relations and
policy making. A ‘Goldilocks’ scenario to many investors. This was rapidly
followed up by good news both from Pfizer and Moderna on vaccines. The
prospect of a rapid pick up in economic growth in 2021 was in sight and hence
selling expensive ‘winners’ and buying companies more exposed to a
‘return to normal’ became a popular strategy as we headed to the end of
the six months under review.
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UK EQUITY SHARE PORTFOLIO
PERFORMANCE RECORD
Total Return
SIX MONTHS TO 30 NOV 2020 YEAR TO 31 MAY 2020 YEAR TO 31 MAY 2019 YEAR TO 31 MAY 2018 YEAR TO 31 MAY 2017
Net Asset Value 10.9% –12.4% –4.9% 1.1% 22.0%
Share Price 15.3% –16.2% –3.1% 0.3% 22.5%
FTSE All-Share Index 6.9% –11.2% –3.2% 6.5% 24.5%
Source: Refinitiv.
Revenue return per share 1.50p 4.12p 5.73p 5.49p 5.38p
Dividend 3.00p 6.60p 6.60p 6.45p 6.25p
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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 Strategy and Review
The Portfolio outperformed its benchmark over the six months to 30 November
2020, with a net asset value total return of +10.9%, compared with +6.9% for
the FTSE All-Share Index.
At the sector level, the largest source of positive performance was the
exposure to general retailers, where the share prices of Next and JD Sports
Fashion made gains on the strength of their differentiated distribution
models. As consumption picked up, their already well-established online models
came to the fore. Next benefitted from an upgrade to annual profit
expectations as second quarter results in September beat analyst estimates. JD
Sports Fashion had resilient sales and very strong growth in its online
revenues. The switch to online came with additional costs, but the share price
rose on the news of reinstated guidance for strong full-year profits which,
whilst below last year’s, were impressive under the circumstances.
CVS, which is an integrated veterinary services provider, coped relatively
well with the crisis. Trading began to return to normal in the summer as
lockdown eased and it made a strong contribution to performance in the period.
Burford Capital, another positive contributor, released half-year results in
October, which were well received and helped to move the share price higher.
The company had been beleaguered by short selling activity for some time, but
said it had recovered US$820 million from litigations in the six months to the
end of June, which was an increase of 32% when compared with the same period
in 2019. It has now listed on the New York Stock Exchange, which has helped
address some of the company’s governance and liquidity questions.
The share price of flooring specialist Victoria was boosted by encouraging
signs in recent trading and its full year 2020 numbers showed solid recovery
from the previous year. The position has now been sold. Meanwhile media group
Future, which specialises in consumer websites, was a strong performer despite
being temporarily impacted by the market weakness mid-March. The company
released a trading statement in July indicating that the business had
continued to grow despite the crisis and a further trading statement at the
beginning of September prompted analysts to increase estimates.
Global speciality chemicals company Elementis released a trading statement in
October. Despite volumes being down approximately 13% on the prior year,
pricing remained resilient across most of the business and cost savings and
supply chain efficiencies left trading in line with expectations. This news
was well received by the market and buoyed the share price, making Elementis
one of the top contributors to performance on a relative basis.
Barclays was the largest position in the portfolio at the end of November and
reported better than expected quarterly profit on the back of lower provisions
for bad loans and a strong performance by the investment bank. Along with
other banks, Barclays ceased paying its dividend on the instruction of the
Prudential Regulation Authority (PRA), but the regulator has now judged
“that an extension of the exceptional and precautionary action” is no
longer necessary.
Travel and leisure sector businesses On the Beach and easyJet have been
severely impacted by travel restrictions, but both are well placed to benefit
from any pick up in travel. Following news of the successful development of a
vaccine, both shares recovered sharply.
Weaker performance over the six-month period was seen from the portfolio’s
overweight exposure to basic materials. This exposure is almost entirely
represented by holdings in four North American gold mining companies, namely
Barrick Gold, Newmont, Wheaton Precious Metals and Agnico Eagle Mines. After a
period of extremely strong performance the gold price weakened as promising
news of vaccine developments increased. Sentiment improved towards stocks that
had been hit hard by the pandemic and investors started to move from ‘risk
off’ to ‘risk on’, but the thesis underpinning these gold stocks’
position in the portfolio remains valid.
Aerospace and defence company Babcock International also detracted from
performance despite a strong rally during the last month of the period. Its
March and June dividends were cancelled in order to conserve cash until there
was greater certainty around the impact of the pandemic and the company has
stated that it intends to prioritise strengthening the balance sheet. A new
CEO and CFO, both with relevant experience, are now in place and we await
their strategic review at the time of full-year results.
The share price of British American Tobacco has been volatile over the
six-month period and ultimately detracted from relative performance. Just
after the end of the period the company released a trading statement stating
that despite the challenges posed by Covid-19 the business was performing
strongly. It is committed to its strategy of gaining new non-combustible
product customers, an area which continues to grow (currently approximately
10% of revenues), and has restated that it is committed to a 65% dividend
pay-out ratio.
Tesco is a significant overweight in the portfolio and whilst the share price
was virtually unchanged over the period the overweight meant that it detracted
from performance on a relative basis. Tesco is well capitalised, with around
£2 billion of cash on the balance sheet. The company had to employ extra
staff during lockdown, which added to the £725 million of Covid-19 costs, but
these were in part made up for by increased sales. Online orders have more
than doubled, with customers utilising ‘click and collect’ as well as
delivery. The business believes that the current crisis has accelerated the
shift to online. An agreement to sell its Asian business has been announced
and Tesco has said that part of the proceeds will be returned to shareholders
as a special dividend. The company has also said that it will repay the
business rates relief it received to cope with the pandemic.
The share prices of oil majors BP and Royal Dutch Shell both fell as the
pandemic unfurled and as market pessimism around oil demand and prices grew.
Both companies cut their dividends early in the crisis on concerns that it
would take a long time for demand and prices to recover and to fund expansion
in renewable energy. Their share prices remained depressed over the summer.
The holding of Royal Dutch Shell was sold in June, leaving a lower allocation
to the sector over the summer before the holding in BP was increased in
September. More recently, BP has risen in step with oil prices towards the end
of the period on expectation that demand for oil will recover sharply as the
vaccine is rolled out.
Performance relative to the benchmark was also assisted by a handful of stocks
that were not held, notably GlaxoSmithKline, AstraZeneca, Reckitt Benckiser
and Diageo, which are in the healthcare and consumer staples sectors. These
stocks had been trading on high valuations prior to the pandemic and, while
they still are, the premium has eroded as the market has rotated away from
these more ‘growth’ orientated stock towards ‘value’.
New holdings purchased over the period were Aviva, Chemring and Lancashire.
Disposals included Royal Dutch Shell, Compass, Pennon, NatWest, DS Smith, and
Experian.
The Portfolio has been geared from borrowings during the period, to positive
effect. Gearing going into the crisis in 2020 was around 6%, at the beginning
of the review period in June 2020 it was 10.3% and it was 18.6% at the end of
November 2020.
Outlook
While recent news of the successful development and distribution of a vaccine
for Covid-19 is very welcome, it will be some months before a sufficient
number of the UK population has been vaccinated for the economy to return to
normal. As part of its ongoing efforts to mitigate the impact of the Covid-19
outbreak, the UK government and central bank have continued to provide
substantial monetary and fiscal support to corporates and households. Bank of
England interest rates remain at historic lows and are further supported by
large scale asset purchases. The strength and depth of the UK’s fiscal
policy response offers us some reassurance.
Brexit has finally reached a conclusion, albeit with some major outstanding
issues (eg Services) to be addressed in the coming months. However, the
enormous disruption and consequent soured relations with the EU from a no-deal
Brexit has been avoided. The US Presidential Elections have reached their
conclusion and, whilst the demonstrations are concerning, were outcome is now
clear.
Although these headwinds look now to have an end in sight, I do expect markets
to continue to be volatile. We should expect further waves of optimism as the
vaccination programme rolls out but it is clear that the after-effects of
Covid-19 will have significant economic consequences for some time to come.
The restrictions put in place to limit the further spread of Covid-19 while
the vaccine is distributed will naturally have a large impact on a wide range
of economic indicators. With significant areas of private sector output
currently subject to severe disruption and the exit path from lockdown yet to
be determined, the range of possible outcomes for economic activity over 2021
are still much wider than normal. Company earnings estimates have been revised
down significantly since the start of the pandemic, but visibility still
remains low and guidance by companies has been in large part withdrawn.
The environment for gold remains supportive despite the gold price having
fallen from its recent high in the summer. The portfolio’s holdings in four
North American gold mining companies performed their protective role admirably
during the market volatility and now represent around 11% of the portfolio. At
the current gold price their valuations remain extremely attractive and if
things develop as I anticipate, gold should have further gains to make. I
believe that these four companies are best in class and have good
sustainability credentials which are increasingly being recognised. Barrick
Gold recently won the Capital Finance International award for Best Sustainable
Mining Strategy (Africa) as a result of its collaborative local partnerships
and shared stakeholder benefits. These stocks continue to play a critical role
in the portfolio and I intend to maintain the position at or around its
current weighting for the foreseeable future.
James Goldstone
Portfolio Manager
5 February 2021
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UK EQUITY SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 30 NOVEMBER 2020
Ordinary shares listed in the UK unless stated otherwise
COMPANY SECTOR† MARKET VALUE £’000 % OF PORTFOLIO
Barclays Banks 2,421 4.7
Tesco Food & Drug Retailers 2,360 4.5
BP Oil & Gas Producers 2,300 4.4
Barrick Gold – Canadian Listed Mining 2,171 4.2
British American Tobacco Tobacco 2,051 3.9
Babcock International Aerospace & Defence 1,653 3.2
Newmont – US Listed Mining 1,643 3.2
Next General Retailers 1,624 3.1
SSE Electricity 1,600 3.1
JD Sports Fashion General Retailers 1,479 2.8
Coats General Industrials 1,411 2.7
Ultra Electronics Aerospace & Defence 1,355 2.6
Agnico Eagle Mines – Canadian Listed Mining 1,279 2.5
PureTech Health Pharmaceuticals & Biotechnology 1,097 2.1
Pearson Media 1,091 2.1
Vodafone Mobile Telecommunications 1,081 2.1
RELX Media 1,050 2.0
Sigma Capital (AIM) Financial Services 953 1.8
Wheaton Precious Metals – Canadian Listed Mining 943 1.8
Phoenix Spree Deutschland Real Estate Investment & Services 927 1.8
Future Media 903 1.7
CVSAIM General Retailers 889 1.7
Johnson Service (AIM) Support Services 864 1.7
Fevertree Drinks (AIM) Beverages 859 1.7
Ashtead Support Services 826 1.6
Urban Logistics REIT Real Estate Investment Trusts 808 1.6
Chemring Aerospace & Defence 786 1.5
XPS Pensions Financial Services 785 1.5
Burford Capital Financial Services 778 1.5
PRS REIT Real Estate Investment Trusts 733 1.4
Aviva Life Insurance 728 1.4
Sirius Real Estate Real Estate Investment & Services 708 1.4
MJ Gleeson Household Goods & Home Construction 684 1.3
Chesnara Life Insurance 684 1.3
Hays Support Services 664 1.3
National Grid Gas, Water & Multiutilities 664 1.3
Barratt Developments Household Goods & Home Construction 659 1.3
Secure Trust Bank Banks 621 1.2
Essentra Support Services 621 1.2
DFS Furniture General Retailers 595 1.1
McBride Household Goods & Home Construction 561 1.1
Harworth Real Estate Investment & Services 543 1.0
Elementis Chemicals 520 1.0
easyJet Travel & Leisure 506 1.0
Lancashire Non-life Insurance 504 1.0
HomeServe General Retailers 499 1.0
Bushveld Minerals (AIM) Mining 494 1.0
On the Beach Travel & Leisure 477 0.9
United Utilities Gas, Water & Multiutilities 466 0.9
Countryside Household Goods & Home Construction 465 0.9
IAG Travel & Leisure 446 0.9
Safestyle UK (AIM) General Retailers 369 0.7
Sherborne Investors (Guernsey) C Financial Services 275 0.5
Tungsten (AIM) Financial Services 238 0.5
Distribution Finance Capital (AIM) Financial Services 178 0.3
Total Holdings (55) 51,889 100.0
(†) FTSE Industry Classification Benchmark.
(AIM) Investments quoted on AIM.
.
UK EQUITY SHARE PORTFOLIO
INCOME STATEMENT
SIX MONTHS ENDED 30 NOVEMBER 2020 SIX MONTHS ENDED 30 NOVEMBER 2019
REVENUE £’000 CAPITAL £’000 TOTAL £’000 REVENUE £’000 CAPITAL £’000 TOTAL £’000
Gains on investments held at fair value – 3,985 3,985 – 2,855 2,855
Income 592 – 592 959 48 1,007
Investment management fees – note 2 (36) (84) (120) (47) (110) (157)
Other expenses (92) (1) (93) (102) (2) (104)
Net return before finance costs and taxation 464 3,900 4,364 810 2,791 3,601
Finance costs – note 2 (9) (22) (31) (9) (21) (30)
Return before taxation 455 3,878 4,333 801 2,770 3,571
Tax – note 3 (7) – (7) (7) – (7)
Return after taxation for the financial period 448 3,878 4,326 794 2,770 3,564
Return per ordinary share – note 4 1.50p 12.97p 14.47p 2.42p 8.46p 10.88p
SUMMARY OF NET ASSETS
AT 30 NOVEMBER 2020 £’000 AT 31 MAY 2020 £’000
Fixed assets 51,889 52,121
Current assets 742 236
Creditors falling due within one year, excluding borrowings (674) (938)
Bank overdraft – (2)
Bank loan (8,700) (4,800)
Net assets 43,257 46,617
Net asset value per ordinary share – note 5 158.38p 145.78p
Gearing:
– gross 20.1% 10.3%
– net 18.6% 10.3%
SUMMARY OF CHANGES IN NET ASSETS
AT 30 NOVEMBER 2020 £’000 AT 31 MAY 2020 £’000
Net assets brought forward 46,617 57,286
Shares bought back and held in treasury (6,670) (2,463)
Share conversions (116) 651
Return after taxation for the financial period/year 4,326 (6,712)
Dividend paid – note 9 (900) (2,145)
Net assets at the period/year end 43,257 46,617
.
GLOBAL EQUITY INCOME SHARE PORTFOLIO
PERFORMANCE RECORD
Total Return
SIX MONTHS TO 30 NOV 2020 YEAR TO 31 MAY 2020 YEAR TO 31 MAY 2019 YEAR TO 31 MAY 2018 YEAR TO 31 MAY 2017
Net Asset Value 16.1% –6.4% –1.3% 7.8% 29.2%
Share Price 16.4% –6.1% –0.1% 5.7% 31.1%
MSCI World Index (£) 12.2% 8.9% 5.3% 8.2% 31.3%
Source: Refinitiv.
Revenue return per share 1.19p 5.39p 6.90p 6.50p 5.62p
Dividend 3.10p 7.05p 6.90p 6.70p 6.40p
.
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 Strategy and Review
The portfolio outperformed its reference benchmark in the six months to the
end of November 2020. On a total return basis, the Portfolio’s net asset
value rose by 16.1% over the six months, compared to a rise of 12.2% in the
MSCI World index (£, total return, net of withholding tax).
Throughout the period we maintained a significant exposure to the technology
sector; Taiwan Semiconductor Manufacturing, for example, is a clear technology
leader in a highly oligopolistic market, benefitting from diversified sources
of revenue growth. It has 15% of its market capitalisation on its balance
sheet as net cash and pays a 3% yield, growing at around 8% per annum. We
would also include companies such as Microsoft and Samsung Electronics in this
category, despite lower dividends. They all share similar attributes of market
leadership, strong balance sheets, and a continued runway for earnings and
dividend growth. Towards the end of the period, however, we had begun to
reduce exposure where we felt valuations were running too hot, such as
Microsoft and Mastercard, or where we had become less confident in the
management strategy, such as Analog Devices.
We added Coca-Cola to the portfolio during the summer. It has underperformed
other consumer staple stocks this year, mainly due to its over exposure to the
restaurant and bar market, which was significantly impacted globally by
Covid-19 restrictions. It was trading at a low level relative to its sector
and the US equity market. New management is reinvigorating the product range
and sales strategy. It has a growing, above average, dividend yield.
Another new holding was Progressive, a leading US automotive insurer which we
thought was attractively valued. It has an innovative business strategy and
brand, with the ability to grow market share and compound returns for many
years in what is a highly fragmented market.
Although travel and leisure related names have been costly for us throughout
the year, we felt it appropriate to maintain some exposure to good businesses,
on discounted valuations, which ought to be able to weather the storm. The
good news we saw on vaccines in November meant that companies such as Amadeus,
Rolls-Royce, American Express and Coca-Cola, outperformed significantly
towards the period end. Banking stocks also performed well as the period came
towards a close, due to an improved economic outlook for 2021.
Financials remain the least liked sector in the market (apart from energy) by
many investors. Whilst we acknowledge the challenges the sector faces, we
continue to believe banks, such as JPMorgan Chase and Standard Chartered,
offer massive recovery potential and low valuations by historic standards.
Also, we believe insurers such as AIA, Zurich Insurance and Progressive offer
some modest growth and significant secure income. Despite the strong recovery
in performance witnessed in November we continue to see further upside.
Amongst other portfolio changes, we disposed of our position in Bayer in
October after it issued another unexpected warning on profitability,
principally due to challenges in their crop business. This was the latest in a
series of disappointing updates from the company and caused us to re-evaluate
our position as we do not have confidence that it can begin to reach the
levels of profitability we envisaged at the time of purchase. We felt it was
right to move on and invest in a company where we have higher conviction.
Outlook
Markets feel to be in a very different place in 2021 from that of only a few
months ago. Optimism has replaced fear as equity prices have rebounded.
Certainly, it is understandable that markets have rallied with the resolution
of Brexit, the US election and vaccine approvals, but it does leave us
questioning, what next? There has been a good deal of good news, but much of
this now feels ‘in the price’, certainly at an aggregate market level.
With news of further virus spread, any negative issues surrounding vaccine
roll out and return to normal could undermine this bullish sentiment, at least
for the first half of 2021.
However, our central case remains that vaccines roll out broadly as planned,
and governments and central banks continue to adhere to more growth friendly
monetary and fiscal policies. Earnings and dividend growth should recover
rapidly, but global equity markets’ returns are likely to lag the growth in
corporate earnings.
Stephen Anness
Portfolio Manager
5 February 2021
.
GLOBAL EQUITY INCOME SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 30 November 2020
Ordinary shares unless stated otherwise
COMPANY INDUSTRY GROUP† COUNTRY MARKET VALUE £’000 % OF PORFOLIO
Samsung Electronics – preference shares Technology Hardware & Equipment South Korea 3,221 5.4
Taiwan Semiconductor Manufacturing Semiconductors & Semiconductor Equipment Taiwan 3,109 5.2
JPMorgan Chase Banks United States 3,029 5.1
Novartis Pharmaceuticals, Biotechnology & Life Sciences Switzerland 2,497 4.2
Coca-Cola Food, Beverage & Tobacco United States 2,338 3.9
Zurich Insurance Insurance Switzerland 2,267 3.8
Microsoft Software & Services United States 2,266 3.8
Texas Instruments Semiconductors & Semiconductor Equipment United States 2,172 3.7
Progressive Insurance United States 2,131 3.6
Alphabet Media & Entertainment United States 1,968 3.3
Roche Pharmaceuticals, Biotechnology & Life Sciences Switzerland 1,789 3.0
TencentR Media & Entertainment China 1,731 2.9
AIA Insurance Hong Kong 1,659 2.8
3i Diversified Financials United Kingdom 1,558 2.6
Alimentation Couche-Tard – Class B Food & Staples Retailing Canada 1,489 2.5
TJX Companies Retailing United States 1,403 2.4
Standard Chartered Banks United Kingdom 1,337 2.3
Ashtead Capital Goods United Kingdom 1,306 2.2
Lundin Energy Energy Sweden 1,306 2.2
Bristol-Myers Squibb Pharmaceuticals, Biotechnology & Life Sciences United States 1,244 2.1
American Express Diversified Financials United States 1,233 2.1
Amadeus Software & Services Spain 1,203 2.0
Home Depot Retailing United States 1,200 2.0
PepsiCo Food, Beverage & Tobacco United States 1,191 2.0
Diageo Food, Beverage & Tobacco United Kingdom 1,134 1.9
RELX Commercial & Professional Services United Kingdom 1,079 1.8
Melrose Industries Capital Goods United Kingdom 1,071 1.8
Berkeley Consumer Durables & Apparel United Kingdom 1,064 1.8
Rolls-Royce Capital Goods United Kingdom 1,030 1.7
Next Retailing United Kingdom 939 1.6
Accenture – A shares Software & Services United States 926 1.6
Total Energy France 872 1.5
Volkswagen – preference shares Automobiles & Components Germany 821 1.4
NetEase – ADR Media & Entertainment China 811 1.4
Colgate-Palmolive Household & Personal Products United States 802 1.4
Inditex Retailing Spain 775 1.3
Sony Consumer Durables & Apparel Japan 746 1.3
Automatic Data Processing Software & Services United States 741 1.2
Wells Fargo Banks United States 719 1.2
Sberbank – ADR Banks Russia 583 1.0
Installed Building Products Consumer Durables & Apparel United States 574 1.0
Total Holdings (41) 59,334 100.0
(ADR:) American Depositary Receipts – are certificates
that represent shares in the relevant stock and are issued by a US bank. They
are denominated and pay dividends in US dollars.
(R:) Red Chip Holdings – holdings in companies incorporated outside
the PRC, listed on the Hong Kong Stock Exchange, and controlled by PRC
entities by way of direct or indirect shareholding and/or representation on
the board.
(†) MSCI and Standard & Poor’s Global Industry Classification Standard.
.
GLOBAL EQUITY INCOME SHARE PORTFOLIO
INCOME STATEMENT
SIX MONTHS ENDED 30 NOVEMBER 2020 SIX MONTHS ENDED 30 NOVEMBER 2019
REVENUE £’000 CAPITAL £’000 TOTAL £’000 REVENUE £’000 CAPITAL £’000 TOTAL £’000
Gains on investments held at fair value – 7,442 7,442 – 4,869 4,869
Gains/(losses) on foreign exchange – 1 1 – (6) (6)
Income 540 – 540 1,079 32 1,111
Investment management fees – note 2 (43) (99) (142) (53) (123) (176)
Other expenses (99) (2) (101) (113) (2) (115)
Net return before finance costs and taxation 398 7,342 7,740 913 4,770 5,683
Finance costs – note 2 (9) (22) (31) (10) (22) (32)
Return before taxation 389 7,320 7,709 903 4,748 5,651
Tax – note 3 (66) – (66) (105) – (105)
Return after taxation for the financial period 323 7,320 7,643 798 4,748 5,546
Return per ordinary share – note 4 1.19p 27.05p 28.24p 2.56p 15.21p 17.77p
SUMMARY OF NET ASSETS
AT 30 NOVEMBER 2020 £’000 AT 31 MAY 2020 £’000
Fixed assets 59,334 55,778
Current assets 521 2,753
Creditors falling due within one year, excluding borrowings (518) (2,179)
Bank loan (6,880) (4,980)
Net assets 52,457 51,372
Net asset value per ordinary share – note 5 203.82p 178.46p
Gearing:
– gross 13.1% 9.7%
– net 12.8% 9.4%
SUMMARY OF CHANGES IN NET ASSETS
AT 30 NOVEMBER 2020 £’000 AT 31 MAY 2020 £’000
Net assets brought forward 51,372 62,589
Shares bought back and held in treasury (5,515) (6,402)
Share conversions (206) 724
Return after taxation for the financial period/year 7,643 (3,401)
Dividend paid – note 9 (837) (2,138)
Net assets at the period/year end 52,457 51,372
.
BALANCED RISK ALLOCATION SHARE PORTFOLIO
PERFORMANCE RECORD
Total Return
SIX MONTHS TO 30 NOV 2020 YEAR TO 31 MAY 2020 YEAR TO 31 MAY 2019 YEAR TO 31 MAY 2018 YEAR TO 31 MAY 2017
Net Asset Value 14.1% –3.1% –2.7% 6.4% 9.8%
Share Price 14.7% –6.9% –0.7% 4.5% 11.9%
ICE BoA Merrill Lynch 3 month LIBOR plus 5% per annum 2.6% 5.9% 5.8% 5.4% 5.5%
Source: Refinitiv.
.
BALANCED RISK ALLOCATION SHARE PORTFOLIO
MANAGER’S REPORT
Investment Objective
The investment objective of the Balanced Risk Allocation Portfolio is to
provide shareholders with an attractive total return in differing economic 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 Strategy and Review
For the half year to 30 November 2020 the Balanced Risk Allocation Portfolio
posted a positive return of 14.1%. Two of the three asset classes in which the
portfolio invests generated positive results over the period, with bonds
posting negative results.
Strategic exposure to commodities was the top contributor to performance with
all four commodity complexes posting gains. Agricultural commodities led
results, headed by grains, specifically soymeal and soybeans. Demand for feed
increased as meat processing plants reopened and as hog herds in China started
to recover from swine flu. Weather in the Midwest also supported higher grain
prices as windstorms followed by low rainfall and an extended heatwave in
August reduced crop sizes. Industrial metals rose with the increase in Chinese
manufacturing and infrastructure spending, while production constraints also
impacted copper supply. Energy prices advanced as news on the Covid-19 vaccine
sparked hopes for higher demand. Precious metals posted subdued gains after
strong performance early in the period, when they had been supported a decline
in the US dollar, low real yields and demand for safe-haven exposure.
Safe-haven demand decreased as optimism over the Covid-19 vaccine increased.
Strategic exposure to equities also contributed positively to results with all
six markets invested in posting positive results. US small caps were the top
contributor and outpaced US large caps as optimism around the recovery
increased risk appetite. Hong Kong equities also contributed due to increased
manufacturing and economic activity in China. Japanese equities rose on the
recovery from the Covid-19 bottom as well as the election of Yoshihide Suga to
replace Shinzo Abe. European equities rose despite a resurgence of Covid-19
cases. UK equities advanced too, but were subdued compared to other markets as
increased Covid-19 cases led officials to reimpose lockdowns and as the UK
dealt with renewed Brexit uncertainty.
Strategic exposure to government bonds detracted from results as the
safe-haven demand that bonds had enjoyed dissipated with the rise of risk
assets. Enthusiasm for bonds was further dampened by the unified call from
central banks for higher levels of inflation. Australian bonds led results as
the Reserve Bank of Australia expanded its term funding facility to ensure the
smooth provision of credit and indicated they would increase bond buying
through quantitative easing. Japanese bond performance was flat for the
period. North American bond markets produced losses as US equity markets
generally fared well, dampening enthusiasm for safe havens. Canadian bonds saw
yields rise despite the Bank of Canada communicating that it had recalibrated
its quantitative easing program to focus on the longer end of the curve.
Returns were relatively muted, with central banks having begun to point out
the limits to monetary policy and the need for additional fiscal stimulus to
support the recovery from the Covid-19 lows. Average inflation targeting
introduced by the US Federal Reserve (Fed) during the period, and anticipation
that other central banks are likely to follow the Fed’s lead, could be
further impeding a move lower in yields.
Tactical positioning delivered additional gains as overweights to equities,
industrial metals and agriculture proved timely.
Outlook
Over the near term, the success in stopping the spread of Covid-19 infections
will likely be the primary driver of asset class returns. Now
that several vaccines are available and are being administered, we should see
the extent to which they are able to reduce the spread and,
by extension, the need for lockdowns. Given the degree of stimulus present in
the system, any sign of effectiveness could extend the
powerful rally across risk assets.
Scott Wolle
Portfolio Manager
5 February 2021
.
BALANCED RISK ALLOCATION SHARE PORTFOLIO
MANAGER’S REPORT
TARGET ANNUALISED RISK
The targeted annualised risk (volatility of monthly returns) for the Portfolio
as listed below is analysed as follows:
ASSET CLASS RISK CONTRIBUTION
Equities 4.5% 48.2%
Commodities 3.1% 33.0%
Fixed Income 1.7% 18.8%
9.3% 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 34 of the Company’s
2020 annual financial report.
.
BALANCED RISK ALLOCATION SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 30 NOVEMBER 2020
YIELD % MARKET VALUE £’000 % OF PORTFOLIO
Short Term Investments
Invesco Liquidity Funds plc – Sterling 0.05 2,175 35.2
UK Treasury Bill – 0% 17 May 2021 (0.06) 751 12.2
UK Treasury Bill – 0% 10 May 2021 (0.08) 750 12.2
UK Treasury Bill – 0% 22 Mar 2021 (0.13) 750 12.2
UK Treasury Bill – 0% 01 Feb 2021 0.03 550 8.9
UK Treasury Bill – 0% 04 Jan 2021 0.02 450 7.3
UK Treasury Bill – 0% 04 May 2021 (0.05) 300 4.9
UK Treasury Bill – 0% 15 Feb 2021 0.03 279 4.5
UK Treasury Bill – 0% 26 Apr 2021 (0.05) 150 2.4
Total Short Term Investments 6,155 99.8
Hedge Funds ((1))
Harbinger Class PE Holdings 13 0.2
Harbinger Class L Holdings 3 –
Total Hedge Funds 16 0.2
Total Fixed Asset Investments 6,171 100.0
((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 2020
NOTIONAL EXPOSURE £’000 NOTIONAL EXPOSURE AS % OF NET ASSETS
Government Bond Futures:
Australia 2,049 29.8
Canada 1,718 24.9
US 655 9.5
UK 537 7.8
Total Bond Futures (4) 4,959 72.0
Equity Futures:
Japan 757 11.0
Hong Kong 639 9.3
UK 566 8.2
US small cap 548 7.9
Europe 469 6.8
US large cap 405 5.9
Total Equity Futures (6) 3,384 49.1
Commodity Futures:
Agriculture
Soybean 263 3.8
Cotton 244 3.6
Soybean meal 236 3.4
Sugar 73 1.1
Coffee 69 1.0
Wheat 67 1.0
Corn 65 0.9
Soybean oil 51 0.7
Industrial Metals
Copper 422 6.1
Aluminium 299 4.4
Precious Metals
Gold 401 5.8
Silver 255 3.7
Energy
Gasoline 195 2.8
Brent crude 180 2.6
WTI crude 102 1.5
Low sulphur gasoline 58 0.9
Natural gas 46 0.7
New York Harbor ultra-low sulphur diesel 43 0.6
Total Commodity Futures (18) 3,069 44.6
Total Derivative Instruments (28) 11,412 165.7
.
BALANCED RISK ALLOCATION SHARE PORTFOLIO
INCOME STATEMENT
SIX MONTHS ENDED 30 NOVEMBER 2020 SIX MONTHS ENDED 30 NOVEMBER 2019
REVENUE £’000 CAPITAL £’000 TOTAL £’000 REVENUE £’000 CAPITAL £’000 TOTAL £’000
Losses on investments held at fair value – (4) (4) – (7) (7)
Gains on derivative instruments 14 992 1,006 (3) 400 397
Losses on foreign exchange – (40) (40) – (11) (11)
Income 4 – 4 30 – 30
Investment management fees – note 2 (8) (19) (27) (9) (21) (30)
Other expenses (23) (1) (24) (21) – (21)
Return before taxation (13) 928 915 (3) 361 358
Tax – – – – – –
Return after taxation for the financial period (13) 928 915 (3) 361 358
Return per ordinary share – note 4 (0.25)p 17.83p 17.58p (0.05)p 6.47p 6.42p
SUMMARY OF NET ASSETS
AT 30 NOVEMBER 2020 £’000 AT 31 MAY 2020 £’000
Fixed assets 6,171 6,347
Derivative assets held at fair value through profit or loss 440 401
Current assets 338 499
Derivative liabilities held at fair value through profit or loss (36) (151)
Creditors falling due within one year, excluding borrowings (27) (23)
Net assets 6,886 7,073
Net asset value per ordinary share – note 5 154.07p 135.06p
Notional exposure of derivative instruments as % of net assets 165.7% 125.4%
SUMMARY OF CHANGES IN NET ASSETS
AT 30 NOVEMBER 2020 £’000 AT 31 MAY 2020 £’000
Net assets brought forward 7,073 7,837
Shares bought back and held in treasury (1,008) (228)
Share conversions (94) (323)
Return after taxation for the financial period/year 915 (213)
Net assets at the period/year end 6,886 7,073
.
MANAGED LIQUIDITY SHARE PORTFOLIO
PERFORMANCE RECORD
Total Return
SIX MONTHS TO 30 NOV 2020 YEAR TO 31 MAY 2020 YEAR TO 31 MAY 2019 YEAR TO 31 MAY 2018 YEAR TO 31 MAY 2017
Net Asset Value 1.0% 1.1% 1.3% 0.3% 0.0%
Share Price 0.5% 1.6% –0.5% 0.5% 0.5%
Source: Refinitiv.
Revenue return per share 0.04p 0.65p 0.59p 0.24p (0.04)p
Dividend nil 0.80p 0.80p 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.
Portfolio Strategy and Review
The investment strategy followed for this Portfolio in the six months ended 30
November 2020 was to invest 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 was
invested in the Sterling Liquidity Portfolio of Invesco Liquidity Funds 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 provide capital
preservation, liquidity and stronger return potential relative to traditional
cash investments, in exchange for a modest increase in risk. The fund is
actively managed by PIMCO and invests predominantly in sterling denominated
short-term investment grade debt (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 managed by
Invesco in a laddered maturity structure, investing in repurchase agreements,
time deposits, commercial paper, certificates of deposit, medium-term notes
and floating rate notes rated A-1/P-1 or better.
The Bank of England base rate of interest remained at only 0.1% throughout the
period.
Outlook
The Board announced on 30 November 2020 the appointment of Derek Steeden to
manage the Company’s Managed Liquidity portfolio. Based in London, Mr
Steeden is a Portfolio Manager for the Invesco Investment Solutions team,
which provides customised, multi-asset investment strategies for clients. He
joined Invesco in 2019, having begun his investment career in 2005. There will
be no change to the investment objective and policy of the portfolio.
Following his appointment, Mr Steeden, together with Invesco Investment
Solutions, has undertaken a review of the Portfolio’s holdings and
identified the benefit of switching holdings in the PIMCO Sterling Short
Maturity Source UCITS ETF to the iShares Sterling Ultrashort Bond UCITS ETF.
This fund offers diversified exposure to investment grade very short maturity
sterling denominated fixed and floating rate bonds, including direct
investment in corporate bonds across sectors (industrials, utilities and
financial companies) with improved yield, liquidity and charges. The switch
was completed on 19 January 2021.
Invesco
5 February 2021
.
MANAGED LIQUIDITY SHARE PORTFOLIO
LIST OF INVESTMENTS
AS AT 30 November 2020
MARKET VALUE £’000 % OF PORTFOLIO
PIMCO Sterling Short Maturity Source UCITS ETF 2,664 91.1
Invesco Liquidity Funds plc – Sterling 260 8.9
2,924 100.0
MANAGED LIQUIDITY SHARE PORTFOLIO
INCOME STATEMENT
SIX MONTHS ENDED 30 NOVEMBER 2020 SIX MONTHS ENDED 30 NOVEMBER 2019
REVENUE £’000 CAPITAL £’000 TOTAL £’000 REVENUE £’000 CAPITAL £’000 TOTAL £’000
Gains on investments held at fair value – 22 22 – 11 11
Income 7 – 7 23 – 23
Investment management fees – note 2 (2) – (2) (2) – (2)
Other expenses (4) – (4) (6) – (6)
Return before taxation 1 22 23 15 11 26
Tax – – – – – –
Return after taxation for the financial period 1 22 23 15 11 26
Return per ordinary share – note 4 0.04p 0.77p 0.81p 0.36p 0.26p 0.62p
.
SUMMARY OF NET ASSETS
AT 30 NOVEMBER 2020 £’000 AT 31 MAY 2020 £’000
Fixed assets 2,924 2,682
Current assets 84 65
Creditors falling due within one year, excluding borrowings (140) (140)
Net assets 2,868 2,607
Net asset value per ordinary share – note 5 105.41p 104.40p
SUMMARY OF CHANGES IN NET ASSETS
AT 30 NOVEMBER 2020 £’000 AT 31 MAY 2020 £’000
Net assets brought forward 2,607 4,583
Shares bought back and held in treasury (178) (893)
Share conversions 416 (1,052)
Return after taxation for the financial period/year 23 24
Dividend paid – note 9 – (55)
Net assets at the period/year end 2,868 2,607
.
CONDENSED INCOME STATEMENT
FOR THE SIX MONTHS ENDED 30 NOVEMBER
2020 2019
REVENUE £’000 CAPITAL £’000 TOTAL £’000 REVENUE £’000 CAPITAL £’000 TOTAL £’000
Gains on investments held at fair value – 11,445 11,445 – 7,728 7,728
Gains on derivative instruments 14 992 1,006 (3) 400 397
Losses on foreign exchange – (39) (39) – (17) (17)
Income 1,143 – 1,143 2,091 80 2,171
Investment management fees – note 2 (89) (202) (291) (111) (254) (365)
Other expenses (218) (4) (222) (242) (4) (246)
Net return before finance costs and taxation 850 12,192 13,042 1,735 7,933 9,668
Finance costs – note 2 (18) (44) (62) (19) (43) (62)
Return before taxation 832 12,148 12,980 1,716 7,890 9,606
Tax – note 3 (73) – (73) (112) – (112)
Return after taxation for the financial period 759 12,148 12,907 1,604 7,890 9,494
Return per ordinary share – note 4
UK Equity Share Portfolio 1.50p 12.97p 14.47p 2.42p 8.46p 10.88p
Global Equity Income Share Portfolio 1.19p 27.05p 28.24p 2.56p 15.21p 17.77p
Balanced Risk Allocation Share Portfolio (0.25)p 17.83p 17.58p (0.05)p 6.47p 6.42p
Managed Liquidity Share Portfolio 0.04p 0.77p 0.81p 0.36p 0.26p 0.62p
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 for the financial period 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 period. Income Statements for the different
Share classes are shown on pages 13, 18, 23 and 26 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 2020 1,050 1,290 55,454 359 49,568 (52) 107,669
Cancellation of deferred shares – – (2) 2 – – –
Shares bought back and held in treasury – – (13,371) – – – (13,371)
Share conversions 1 – (1) – – – –
Return after taxation per the income statement – – – – 12,148 759 12,907
Dividends paid – note 9 – – (966) – – (771) (1,737)
At 30 November 2020 1,051 1,290 41,114 361 61,716 (64) 105,468
At 31 May 2019 1,055 1,290 66,372 353 62,871 354 132,295
Shares bought back and held in treasury – – (5,063) – – – (5,063)
Return after taxation – – – – 7,890 1,604 9,494
Dividends paid – note 9 – – (190) – – (1,800) (1,990)
At 30 November 2019 1,055 1,290 61,119 353 70,761 158 134,736
CONDENSED BALANCE SHEET
AS AT 30 NOVEMBER 2020
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 51,889 59,334 6,171 2,924 120,318
Current assets
Derivative assets held at fair value through profit or loss – – 440 – 440
Debtors 78 336 148 6 568
Cash and cash equivalents 664 185 190 78 1,117
742 521 778 84 2,125
Creditors: amounts falling due within one year
Derivative liabilities held at fair value through profit or loss – – (36) – (36)
Other creditors (674) (518) (27) (140) (1,359)
Bank loan (8,700) (6,880) – – (15,580)
(9,374) (7,398) (63) (140) (16,975)
Net current (liabilities)/assets (8,632) (6,877) 715 (56) (14,850)
Net assets 43,257 52,457 6,886 2,868 105,468
Capital and reserves
Share capital 438 392 105 116 1,051
Share premium – – 1,290 – 1,290
Special reserve 18,694 18,692 1,455 2,273 41,114
Capital redemption reserve 74 78 27 182 361
Capital reserve 24,051 33,295 4,079 291 61,716
Revenue reserve – – (70) 6 (64)
Shareholders’ funds 43,257 52,457 6,886 2,868 105,468
Net asset value per ordinary share
Basic – note 5 158.38p 203.82p 154.07p 105.41p
CONDENSED BALANCE SHEET
AS AT 31 MAY 2020
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 52,121 55,778 6,347 2,682 116,928
Current assets
Derivative assets held at fair value through profit or loss – – 401 – 401
Debtors 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 – – (151) – (151)
Other creditors (938) (2,179) (23) (140) (3,280)
Bank overdraft (2) – – – (2)
Bank loan (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 439 393 106 112 1,050
Share premium – – 1,290 – 1,290
Special reserve 25,931 24,926 2,556 2,041 55,454
Capital redemption reserve 74 78 27 180 359
Capital reserve 20,173 25,975 3,151 269 49,568
Revenue reserve – – (57) 5 (52)
Shareholders’ funds 46,617 51,372 7,073 2,607 107,669
Net asset value per ordinary share
Basic – note 5 145.78p 178.46p 135.06p 104.40p
.
CONDENSED CASH FLOW STATEMENT
SIX MONTHS ENDED 30 NOVEMBER 2020 £’000 SIX MONTHS ENDED 30 NOVEMBER 2019 £’000
Cash flows from operating activities
Net return before finance costs and taxation 13,042 9,668
Tax on overseas income (73) (112)
Adjustments for:
Purchase of investments (41,226) (21,408)
Sale of investments 49,945 33,393
Sale of futures 852 208
9,571 12,193
Scrip dividends (9) (26)
Gains on investments (11,445) (7,728)
Gains on derivatives (1,006) (397)
Decrease in debtors 340 443
Increase/(decrease) in creditors 23 (59)
Net cash inflow from operating activities 10,443 13,982
Cash flows from financing activities
Interest paid on bank borrowings (53) (63)
Increase/(decrease) in bank borrowings 5,798 (6,950)
Share buy back costs (13,781) (5,228)
Equity dividends paid – note 9 (1,737) (1,990)
Net cash outflow from financing activities (9,773) (14,231)
Net increase/(decrease) in cash and cash equivalents 670 (249)
Cash and cash equivalents at the start of the period 447 884
Cash and cash equivalents at the end of the period 1,117 635
Reconciliation of cash and cash equivalents to the Balance Sheet is as follows:
Cash held at custodian 547 635
Cash held on the Invesco Liquidity Funds plc – Sterling 570 –
Cash and cash equivalents 1,117 635
Cash flow from operating activities includes:
Interest received – 23
Dividends received 1,250 2,220
AT 1 JUNE 2020 £’000 CASH FLOWS £’000 AT 30 NOVEMBER 2020 £’000
Analysis of changes in net debt
Cash and cash equivalents 447 670 1,117
Bank overdraft (2) 2 –
Bank loans (9,780) (5,800) (15,580)
Total (9,335) (5,128) (14,463)
.
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 October 2019. 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 2020.
2. Management Fees and Finance Costs
Investment 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 principally 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. The amount of the performance fee that can be paid in any one
year has been capped at 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.
Due to underperformance brought forward, no performance fee was earned by the
UK Equity Portfolio during the six months (30 November 2019: £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.
Similarly, no performance fee was earned for the Global Equity Portfolio
during the six months (30 November 2019: £nil).
Underperformance movements in the six months to 30 November 2020 are shown
below:
UK EQUITY £’000 GLOBAL EQUITY INCOME £’000
Underperformance brought forward (910) (2,587)
Performance in the period 136 145
Underperformance carried forward (774) (2,442)
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 2020 SIX MONTHS ENDED 30 NOVEMBER 2019
UK Equity 29,891,243 32,758,348
Global Equity Income 27,063,818 31,216,223
Balanced Risk Allocation 5,205,603 5,580,509
Managed Liquidity 2,840,113 4,189,561
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 2020 £’000 AT 31 MAY 2020 £’000
PORTFOLIO SHAREHOLDERS’ FUNDS
UK Equity 43,257 46,617
Global Equity Income 52,457 51,372
Balanced Risk Allocation 6,886 7,073
Managed Liquidity 2,868 2,607
NUMBER OF SHARES
AT 30 NOVEMBER 2020 £’000 AT 31 MAY 2020 £’000
PORTFOLIO SHARES IN ISSUE
UK Equity 27,311,720 31,977,941
Global Equity Income 25,737,022 28,786,800
Balanced Risk Allocation 4,469,506 5,236,886
Managed Liquidity 2,720,683 2,497,032
6. Classification Under Fair Value Hierarchy
FRS 102 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 2020
Financial assets at fair value
through profit or loss:
Level 1 51,889 59,334 3,980 2,664
Level 2 – – 2,615 260
Level 3 – – 16 –
Total financial assets 51,889 59,334 6,611 2,924
Financial liabilities:
Level 2 – Derivative instruments – – 36 –
AT 31 MAY 2020
Financial assets at fair value
through profit or loss:
Level 1 52,121 55,778 3,999 2,642
Level 2 – – 2,731 40
Level 3 – – 18 –
Total financial assets 52,121 55,778 6,748 2,682
Financial liabilities:
Level 2 – Derivative instruments – – 151 –
Level 1 This is the majority of the Company’s investments and
comprises all quoted investments and Treasury bills.
Level 2 This includes liquidity funds held in the Balanced Risk
Allocation and Managed Liquidity Portfolios, and any derivative instruments.
Level 3 This includes the remaining legacy hedge fund investments of
the Balanced Risk Allocation Portfolio.
7. Movements in Share Capital and Share Class Conversions
IN THE SIX MONTHS ENDED 30 NOVEMBER 2020
UK EQUITY GLOBAL EQUITY INCOME BALANCED RISK ALLOCATION MANAGED LIQUIDITY
Ordinary 1p shares (number)
At 31 May 2020 31,977,941 28,786,800 5,236,886 2,497,032
Shares bought back into treasury (4,588,000) (2,945,000) (705,000) (174,000)
Arising on share conversion:
– August 2020 (200,692) (315,682) 84,642 738,300
– November 2020 122,471 210,904 (147,022) (340,649)
At 30 November 2020 27,311,720 25,737,022 4,469,506 2,720,683
UK EQUITY GLOBAL EQUITY INCOME BALANCED RISK ALLOCATION MANAGED LIQUIDITY
Treasury Shares (number)
At 31 May 2020 11,977,812 10,514,159 5,321,218 8,681,678
Shares bought back into treasury 4,588,000 2,945,000 705,000 174,000
At 30 November 2020 16,565,812 13,459,159 6,026,218 8,855,678
Total shares in issue at 30 November 2020 43,877,532 39,196,181 10,495,724 11,576,361
Average buy back price 144.4p 186.0p 141.9p 101.5p
As part of the conversion process, 194,710 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 2019 178.00p 209.00p 144.00p 102.00p
31 May 2020 139.50p 176.50p 129.00p 101.50p
30 November 2020 157.50p 202.00p 148.00p 102.00p
9. Dividends on Ordinary Shares
First interim dividends for UK Equity and Global Equity Income were paid on 17
August 2020. Second interim dividends for UK Equity and Global Equity Income
were paid on 16 November 2020:
PORTFOLIO NUMBER OF SHARES DIVIDEND RATE (PENCE) TOTAL £’000
UK Equity
First interim 30,584,941 1.50 459
Second interim 29,379,249 1.50 441
3.00 900
Global Equity Income
First interim 27,605,800 1.55 428
Second interim 26,376,118 1.55 409
3.10 837
Dividends paid for the six months to 30 November 2020 totalled £1,737,000
(six months to 30 November 2019: £1,955,000). No dividend was paid in the
period to the holders of Managed Liquidity shares (six months to 30 November
2019: £35,000, in respect of the year ended 31 May 2019).
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 2020 and 30 November 2019 has not been audited. The figures
and financial information for the year ended 31 May 2020 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
5 February 2021
.
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.
Graham Kitchen
Chairman
5 February 2021
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