Final Results
29/03/2023 07:00
Menhaden Resource Efficiency PLC
(the “Company”)
Final Results for the Year Ended 31 December 2022
The Company’s Annual Report for the year ended 31 December 2022, which
includes the notice of the Company’s forthcoming annual general meeting,
will be posted to shareholders on 5 April 2023.
Copies may be obtained by writing to the Company Secretary, Frostrow Capital
LLP at 25 Southampton Buildings, London WC2A 1AL, or from the Company’s
website – www.menhaden.com – where up to date information on the Company,
including daily NAVs, share prices and fact sheets, can also be found.
A copy of the Annual Report has been submitted to the National Storage
Mechanism and will shortly be available in full, unedited text for inspection
at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
Frostrow Capital LLP
Company Secretary
020 3709 8733
29 March 2023
Strategic Report
Company Performance
As at For the year ended
31 December 2022 31 December 2022
129.8p (16.5)%
NAV per share NAV per share (total return)*
(2021: 155.7p) (2021: 17.3%)
89.0p (20.3)%
Share price Share price (total return)*
(2021: 112.0p) (2021: 13.1%)
31.4% 1.8%
Share price discount to NAV per share* Total ongoing charges*
(2021: 28.1%) (2021: 1.8%)
This report contains terminology that may be unfamiliar to some readers. The
Glossary provides definitions for frequently used terms.
*Alternative performance measures (“APMs”)
Chairman’s Statement
Introduction
This is our eighth annual report since the launch of the Company in July 2015.
It covers the year ended 31 December 2022. With the Russian invasion of
Ukraine and lingering global economic impacts from the pandemic, this year has
been especially challenging. It saw very significant market volatility,
including in the UK, and a marked rotation away from risk assets into more
defensive areas.
The year started with a backdrop of increasing inflation stemming from
governments’ and central banks’ responses to Covid-19 on top of past
quantitative easing (“QE”). This was subsequently amplified by global
supply chain disruption, oil and gas price rises and the dislocations
associated with the introduction of sanctions on Russia. This inevitably led
to central banks trying to tame inflation with interest rate increases and
reductions in QE and was accompanied by a switch in market sentiment away from
tech and growth stocks.
In 2022 world equity markets lost almost 20% in US dollar terms. Virtually all
UK listed investment trusts’ share price discounts to NAV widened over the
year and closed-ended investment vehicles collectively recorded their worst
calendar year performance since 2008.
Financial Performance
The Company’s net asset value (“NAV”) per share total return* for the
year was -16.5% (2021: +17.3%). This compares to the Company’s longer-term
performance benchmark, RPI+3%, which returned 13.7% (2021: 10.5%). The share
price discount* to the NAV per share widened to 31.4% (2021: 28.1%) resulting
in the share price total return* for the year being -20.3% (2021: +13.1%).
*Alternative Performance Measure (see Glossary)
The Company has a sizable allocation to the digitisation (decarbonisation)
theme and hence a large exposure to tech stocks, which were particularly hard
hit by the global economic headwinds. The principal contributor to the
Company’s negative return was the underperformance of Alphabet, which was
the largest position in the portfolio. Other negative contributors were
Charter Communications, which was sold during the year, Amazon and Microsoft.
Shareholders will be aware that the Portfolio Manager may use currency forward
contracts to reduce the volatility in returns related to currency movements
arising from the portfolio’s non-sterling denominated investments. As
explained in the Portfolio Manager’s review, for much of the year, the
Company hedged approximately 50% of the Company’s US dollar and euro
exposures. As sterling weakened against the dollar and euro during the year,
these hedges produced losses which partially offset the currency gains seen in
the Company’s non-sterling investments.
Positive performance came from the portfolio constituents in more defensive
areas, such as infrastructure: Canadian National and Canadian Pacific
Railways, and private investments John Laing and TCI Real Estate performed
well. The largest positive contributor was X-ELIO, the Spanish solar energy
developer.
Looking over a longer period, the Company’s compound NAV performance over
the last five years was +7.3% per annum (2021: +12.9% per annum), compared
with 5.3% per annum (2021: 3.5% per annum) compound return on our benchmark
of RPI+3%. Exceeding our benchmark is our long-term goal and we expect the
Company to lead or lag it during shorter timeframes. Notwithstanding this, our
2022 performance is disappointing.
Our Portfolio Manager remains upbeat about the portfolio’s quality and
prospects and we are hopeful that by continuing to focus on business quality
and maintaining a consistent risk profile, over the long term we will return
to the benchmark beating trajectory we previously delivered.
Our Portfolio Manager has provided a full description of the development and
financial performance of the portfolio over the year in their review.
Environmental Performance
As in past years, we have integrated the Company’s Environmental Impact
Report within the annual report.
This year, disclosures from eight of the companies held in the portfolio
showed, for the Company’s share of these companies, a 21.2% uplift from 2021
in renewable energy generation with 146 MWh generated.
Our Portfolio Manager continued its engagement programme during the year,
seeking to move portfolio companies forward on environmental reporting and
target setting. It identified where improvements should be encouraged using
platforms such as the Climate Disclosure Project (“CDP”), Science Based
Targets initiative (“SBTi”) and MSCI. The Board is pleased to see that
over half of the portfolio’s listed holdings now have near-term emissions
reduction targets independently validated by SBTi, meaning they have a clearly
defined pathway to reduce their greenhouse gas (“GHG”) emissions in line
with the goals of the Paris Agreement.
Whilst some sectors in which the Company’s portfolio is invested, such as
transport and infrastructure, are associated with high emissions, our
Portfolio Manager chooses to invest in certain companies therein that are
using innovative, best practice solutions to become more climate friendly. For
instance, rail transportation is the most energy efficient method for moving
freight and in 2022 our Portfolio Manager added to the Company’s existing
portfolio holdings in Canadian Pacific Railway and Canadian National Railway,
and reinvested in Union Pacific, one of America’s largest rail freight
providers and a leader in sustainable transportation.
E-commerce has been a key driver of decarbonisation and our Portfolio Manager
initiated a new position in Amazon during the year. Amazon has become viewed
as an essential utility for consumers and businesses. Importantly, the
company’s e-commerce and cloud computing businesses both generate
significantly fewer carbon emissions than their legacy predecessors. Amazon
has an ambition to reach 100% renewable energy usage across its business by
2025 and by the end of 2021 used 85% renewable energy. However, we recognise
that Amazon needs to improve transparency and disclosures and that packaging
waste is an issue. Our Portfolio Manager will engage on these matters.
The Company’s Environmental Impact Report is also made available as a
separate document on our website www.menhaden.com, which version includes
methodological detail that is not included within this annual report.
Board Developments
The Board announced in January 2023 the appointment of Soraya Chabarek as a
non-executive Director, with effect from 1 March 2023. She brings leadership
experience in asset management and broad exposure to fund strategies including
global macro, equities, emerging markets, credit and convertibles. I am
confident she will be an asset to the Board and that with her experience she
will greatly assist the Board’s engagement with the Portfolio Manager on
their investment strategy. In making this appointment the Board took due
consideration of its balance of skills, experience, knowledge and diversity
and we recommend that shareholders support her election at the forthcoming
Annual General Meeting (“AGM”).
At the same time as the Board announced Soraya’s appointment it was also
announced that I would be stepping aside from the role of Chairman of the
Board in May, although I will continue to serve as a non-executive Director
for the time being. I am pleased to announce that Howard Pearce will succeed
me as Chairman and that Barbara Donoghue will become Chair of the Audit
Committee, with effect from 16 May 2023.
Duncan Budge will retire from the Board at the conclusion of this year’s
AGM. I would like to take this opportunity to thank him for his invaluable
contribution to the Board since the Company’s launch.
The Board’s planned refreshment process will continue and we anticipate the
next rotation will occur in 2024. Establishing an annual cycle in this way
should ensure an orderly Board succession in the future.
Share Price Discount to NAV
The Company’s share price discount continues to be a matter that the Board
monitors closely. As noted above, at the year-end, the discount to the NAV
per share at which the Company’s shares trade had widened to 31.4% (2021:
28.1%) and it widened further subsequently.
The Board’s aim is for the Company to eventually be in a position to grow
through the issuance of new shares and the Board is, accordingly, asking
shareholders to renew the Directors’ share issuance authorities at this
year’s AGM. Enlarging the capital base would reduce the annual ongoing
charges and enhance the secondary market liquidity of the Company’s shares,
which the Board believes is in the interests of all shareholders. However, the
Company can only issue new shares at a price representing a premium to the NAV
per share and therefore the Board remains focused on improving the Company’s
share rating through investment performance and an effective marketing
strategy.
Share Buybacks
Subsequent to the year end, with the discount widening further, the Board
decided it would be in shareholders’ interest to instigate a modest
programme of share buy backs. Doing so signals to the market the Board’s
confidence in the value of the Company’s portfolio and also takes advantage
of the accretion to NAV that buying back shares at a discount achieves. It is
hoped that, together with the ongoing marketing strategy and the efforts of
the Portfolio Manager to generate strong portfolio performance, this will
influence investor sentiment and help to reduce the discount to the NAV per
share at which the shares trade. To the date of this annual report 825,000
shares have been bought back at an average price of 94.25 pence per share.
The Board has not previously favoured share buy backs as a solution to the
wide discount. The early indications are that the buybacks to date have
provided some additional liquidity in the recent volatile market conditions.
However, the Board will continue to monitor closely the impact of any future
action bearing in mind market conditions, the Company’s available liquid
resources and the potential conflict between value additive share buybacks and
the availability of attractive portfolio investment opportunities. Buybacks
will remain at the discretion of the Board.
The Board is asking shareholders to renew the authority to repurchase the
Company’s shares in the market at the forthcoming AGM.
Annual General Meeting
The Company’s eighth AGM will be held at the offices of Frostrow Capital
LLP, 25 Southampton Buildings, London WC2A 1AL on Wednesday, 21 June 2023 at
12 noon. The Notice convening the AGM together with explanations of the
proposed resolutions can be found on pages 91 to 97 of the Annual Report.
The Board strongly encourages shareholders to register their votes online in
advance of the meeting by visiting www.signalshares.com and following the
instructions on the site. Appointing a proxy online will not restrict
shareholders from attending the meeting in person should they wish to do so
and will ensure their votes are counted if they are not able to attend.
Shareholders are encouraged to consult the Company’s website at
www.menhaden.com for any late changes to the arrangements. Shareholders are
invited to send any questions they may have to the Company Secretary by email
to info@frostrow.com ahead of the meeting.
Dividend
The Company’s dividend policy is that the Company will only pay dividends
sufficient for it to maintain investment trust status. The revenue return for
the year to 31 December 2022 means that a dividend must be paid to meet this
requirement. Consequently, the Board is recommending to shareholders that a
final dividend of 0.4p per share be declared in respect of the year ended
31 December 2022 and a corresponding resolution has been included in the
Notice of Meeting for the AGM. If this resolution is passed, the dividend will
be paid on 30 June 2023 to shareholders on the register on 2 June 2023. The
shares will be marked ex-dividend on 1 June 2023.
Outlook
With no end in sight for the war in Ukraine and continued inflation, high
interest rates and global supply chain disruption, there will likely be
further market volatility in 2023.
Alphabet, Microsoft and Amazon have all announced cost cutting moves and we
believe there is further scope for efficiency savings. With respect to
inflation, pricing power is a key attribute that our Portfolio Manager looks
for in investment propositions and our infrastructure investments, which make
up some 37% of the portfolio, have natural defensive characteristics. In
addition, our current share price discount provides an attractive entry point
for new investors.
The Board continues to believe in the validity of the premise that the world
and all businesses need to be more resource efficient, and so the Company’s
resource efficiency theme ought to provide long-term benefits for the
portfolio and the Company.
Sir Ian Cheshire
Chairman
28 March 2023
Portfolio
Investments held as at 31 December 2022
Fair % of
Investment Country Value £’000 Total Net Assets
Alphabet United States 22,369 21.5
Microsoft United States 11,563 11.1
X-ELIO* (1) Spain 10,672 10.3
Canadian Pacific Railway Canada 10,045 9.7
Safran France 8,921 8.6
Canadian National Railway Canada 7,308 7.0
VINCI France 6,617 6.4
John Laing Group* (2) UK 4,646 4.5
Amazon United States 3,979 3.8
Ocean Wilsons Holdings Bermuda 3,204 3.1
Ten Largest Investments 89,324 86.0
TCI Real Estate* United States 1,546 1.5
Union Pacific United States 929 0.9
Waste Management United States 822 0.8
ASML Holding Netherlands 536 0.5
KLA United States 407 0.4
Lam Research United States 245 0.2
Total Investments 93,809 90.3
Net Current Assets (including cash) 10,022 9.7
Total Net Assets 103,831 100.0
(1) Investment made through Helios Co-Invest L.P.
(2) Investment made through KKR Aqueduct Co-Invest L.P.
(*) Unquoted
Business Description Investment Theme
Delivers a range of internet-based products and services for users and advertisers, powered by renewable energy, with the group being the largest corporate buyer of renewable power worldwide Digitisation
Provides cloud infrastructure and software services which deliver energy efficiency savings for customers versus legacy solutions Digitisation
Develops and operates solar energy assets Clean energy
Owns and operates fuel-efficient freight railways in Canada and the USA Sustainable infrastructure and transportation
Designs, manufactures and services next generation aircraft engines which offer significant fuel efficiency savings Industrial emissions reduction
Operates rail freight services across North America, which represent the most environmentally friendly way to transport freight over land Sustainable infrastructure and transportation
Builds and operates energy efficient critical infrastructure assets Sustainable infrastructure and transportation
Portfolio of mostly renewable rail and social infrastructure assets Sustainable infrastructure and transportation
An energy efficient ecommerce and cloud computing business aiming to use only renewable energy by 2030 Digitisation
Operates ports and provides (lower climate impact) maritime services in Brazil Sustainable infrastructure and transportation
Invests in energy-efficient real estate projects Sustainable infrastructure and transportation
Provides fuel-efficient rail freight services across the USA Sustainable infrastructure and transportation
Provides waste management and environmental services in North America Water and waste management
Develops, manufactures and services advanced lithography systems used to produce more energy efficient semiconductor chips Digitisation
Develops, manufactures and services inspection and metrology equipment used to increase the efficiency of semiconductor manufacturing Digitisation
Develops, manufactures and services etching and deposition equipment used to produce more energy efficient semiconductor chips Digitisation
Portfolio Manager’s Review
During 2022, the Company’s NAV per share decreased from 155.7p to 129.8p.
This represents a total return of -16.5% and compares to the benchmark return
of 13.7%. The Company’s share price traded at a 31.4% discount to NAV as at
31 December 2022, having widened from 28.1% at the end of 2021. The
contributions to the -16.5% NAV per share total return over the period are
summarised below:
31 December 2022 Contribution
Asset Category % of NAV %
Public Equities 74.1 (12.9)
Private Investments 16.2 3.4
Cash 5.9 –
Foreign Exchange Forwards 4.0 (6.4)
Performance Fee and Other Debtors and Creditors (0.2) 1.2
Dividend Paid (0.1)
Expenses (1.8)
Net Assets 100.0
Net Return (16.6)
Reinvested Dividend 0.1
Total Return (16.5)
The spectre of inflation dominated the narrative throughout the year, with the
Federal Reserve and other central banks progressively tightening financial
conditions. Rising interest rates and higher prices result in a decline in
consumers’ discretionary incomes, raising fears that the global economy may
be on its way into a recession. Equity markets anticipated this slowdown and
declined significantly, with major indices trading around bear market
territory.
The portfolio continues to have a high weighting in quoted equities, with
Alphabet and Microsoft remaining the largest positions. The publicly listed
infrastructure holdings (including the North American railroads, Ocean Wilsons
and VINCI) performed relatively well in the period. The essential nature of
their services, combined with a lack of alternatives and the relevant
regulatory frameworks, enable these companies to raise prices with inflation.
Within the private portfolio, the value of John Laing was marked up in line
with the latest manager’s valuation, TCI Real Estate Partners Fund III
returned the capital from two loans, which were repaid, and a £2 million
distribution was received from X?ELIO.
Investment performance benefited from the depreciation of sterling, although
this was partly offset by our currency forward contract hedges. Performance
suffered from short lived sterling volatility in late September when two
currency forward contracts matured, realising a significant loss.
Subsequently, there were significant unrealised gains on the hedging program
at the year end.
Key investment decisions during the period included the exit from Charter
Communications and redeploying most of the proceeds by adding to Canadian
National Railway, reopening a position in Union Pacific and initiating a new
position in Amazon. After the year end, we opted to reduce our position in
Alphabet and reinitiate a position in European aircraft manufacturer, Airbus,
which we have owned previously.
Our private investment activity was limited, with no new transactions in the
period. However, we were pleased to make a new commitment to the next vintage
of the TCI Real Estate Partners strategy in March, following the year end.
Quoted Equities
The portfolio of quoted equities represented 74.1% of NAV at 31 December 2022,
and delivered a total return of -17.3% over the period, detracting 12.9% from
the NAV.
Contribution
Investment Returns % to NAV %
Canadian Pacific 4.1 1.3
Safran 8.5 0.9
Canadian National (3.6) 0.6
VINCI SA 3.1 0.5
Waste Management Inc (8.1) –
Ocean Wilsons Holdings 1.4 –
KLA Corp (24.8) –
Union Pacific (22.0) (0.1)
LAM Research Corp (55.2) (0.2)
ASML Holding (38.1) (0.2)
Microsoft Corp (29.6) (2.3)
Charter Communications (16.4) (2.4)
Amazon (49.8) (2.6)
Alphabet (40.4) (8.5)
Note: Percentage increase/decrease for individual holdings is calculated on
their local currency and based over the holding period if bought or sold
during the year.
The Canadian railroads, Canadian Pacific Railway and Canadian National
Railway, were two of the portfolio’s best performers, with both companies’
strong competitive positions enabling them to raise prices in order to counter
significant inflationary cost pressures. We also opted to reopen a small
position in US freight railroad peer, Union Pacific, in April. Rail remains
the most environmentally friendly way of transporting freight over land, with
current locomotives four times more fuel efficient than trucking on a per unit
basis.
Canadian Pacific Railway expects to complete its acquisition of Kansas City
Southern in the first quarter of 2023. CEO Keith Creel and the management team
appear to be increasingly confident about their ability to drive meaningful
synergies from the combined entity, with significant opportunities to grow
volumes by converting road freight to new rail services between Mexico, Texas
and the Upper Midwest. Once the transaction is completed, we expect Canadian
Pacific Railway to be the fastest growing of all the North American railroads.
Canadian National Railway CEO, Tracy Robinson, has been at the helm for over
one year now and appears to be making progress in her turnaround efforts. She
is focused on improving profitability by raising asset utilisation through
improving the velocity of containers on the company’s network. We continue
to believe that her frequently repeated commitment to capital efficient growth
should help to drive good returns for shareholders in the coming years.
French aircraft engine manufacturer, Safran, continues to lead the way towards
the decarbonisation of the aviation sector and recently had its emission
reduction targets independently approved by the Science Based Targets
initiative (SBTi). These include targets to reduce Scope 1 and 2 emissions by
50% by 2030 and reduce Scope 3 emissions by 42.5% by 2035 (vs 2018). Scope 1
emissions are released directly by a business, Scope 2 emissions are
indirectly released from energy purchased by a business and Scope 3 are a
consequence of the business’ activities, including the use of its products
by customers. Safran benefited from the commercial aviation industry’s
accelerating recovery through the year, with China’s reopening in January
2023 set to provide a further boost. Flight cycles are the key driver of the
company’s financial performance, with most of its profits coming from
aftermarket sales of spare parts.
French infrastructure group, VINCI, proved resilient. The company has a strong
track record of building and operating critical infrastructure assets around
the world and is currently transforming its business, with the aim of
achieving a 40% reduction in carbon emissions by 2030. We believe the company
is extremely well placed for an inflationary environment, with its
infrastructure concessions being government authorised monopolies, which
benefit from inflation-linked pricing power. The management team continues to
deploy capital in a measured way, with an increasing focus on share
repurchases. Recent investments include bolt on acquisitions to the
company’s Energies business and stakes in airport concessions in Mexico and
Cape Verde.
We believe Waste Management possesses many of the same characteristics as the
Company’s listed infrastructure holdings, with the shares performing
similarly. The company provides an essential service and benefits from a high
proportion of annuity-like revenue streams, with the cost of its services
representing a very small portion (circa 0.5%) of customers’ total expenses.
Whilst the management team has used pricing to mitigate inflationary pressures
on costs, it is increasingly focused on leveraging automation in order to
manage operating expenses. The company is currently aiming to reduce its
labour requirements by 5,000-7,000 roles, equivalent to more than 10% of
headcount, over the coming years. The company is also continuing its strategy
of increasingly harnessing the methane gas emitted from its landfill
facilities by transforming it into renewable natural gas, with 11 of 17
planned new facilities expected to be onstream in 2024.
Holding company, Ocean Wilsons, held its value in difficult markets. The
company comprises of a controlling interest in Brazilian port operator, Wilson
Sons, and a diversified investment portfolio. Wilson Sons’ asset base enjoys
high barriers to entry and substantial operating leverage to growth in
Brazil’s international trade shipping sector. Shipping has the lowest
climate impact of any freight method, on a per unit basis, producing between
10-40 grams of CO(2) per metric ton of freight per km of transportation, which
is around half that even of rail freight. We were pleased to see Wilson Sons
update its capital allocation strategy, with the announcement of a new share
repurchase facility, which should be fully used by mid-2023. Ocean Wilsons
enables us to obtain exposure to Wilson Sons at a discount of approximately
80%, based on the current investment portfolio valuation. This represents a
markedly asymmetric risk-reward profile, whilst providing a dividend yield of
circa 6%.
Semiconductor capital equipment companies, ASML, Lam Research and KLA,
struggled due to fears of the full impact of an economic slowdown and
potential industry overcapacity. Whilst it is very difficult to accurately
predict the short term, we believe the fundamental drivers of semiconductor
demand are very clear: cloud computing, artificial intelligence, 5G, the
Internet of Things (“IoT”) and the digitisation of the automotive
industry. Each company dominates its respective niche in the value chain and
plays a critical role in helping the wider industry both maximise
semiconductor production from finite resources and develop and produce more
advanced and energy efficient chips. We still expect them all to have very
bright futures and have been pleased to see their management teams taking
advantage of the lower share prices by accelerating their respective share
buyback programs.
Shares in Microsoft fell significantly over the year, with the company
navigating a weak PC market and Cloud growth expected to slow in 2023. Despite
the negative share price performance, we remain optimistic about the
company’s prospects. The group remains the key technology partner for all
enterprises and its software products are ubiquitous. The company still
expects to grow revenues at a double digit rate in its 2023 financial year,
driven by its Azure Cloud business and Office 365, which now has approximately
350 million paying users. The management team is also seeking to improve
future profitability with workforce reductions of 10,000 employees (circa 5%
of total). Longer term, CEO Satya Nadella expects IT spending to increase from
5% to 10% of GDP over the current decade, which we believe will enable the
company to generate robust earnings growth going forwards. Importantly,
Microsoft aims to operate on carbon-free energy everywhere, at all times,
by 2030. Furthermore, the company wants to be carbon negative in the same
timeframe and to have removed all carbon dioxide it has emitted since its
founding by 2050.
Alphabet remains the Company’s largest holding and was the most significant
detractor to investment performance. We continue to believe the shares offer
exceptional value relative to the company’s core earnings power for a
business of such quality. In our view the shares fell during the year
primarily on weaker consumer discretionary spending, which negatively affected
both the company and the wider digital advertising industry. Fundamentally,
advertising remains a cyclical industry and Google is now so large that it
cannot offset slower market growth through market share gains. We believe that
growth rates will reaccelerate once we exit this economic slowdown. We also
believe that the company has significant scope to improve profitability, with
headcount more than doubling to circa 187,000 over the last five years and an
average employee salary significantly above peers. In our view the recent
decision to cut 12,000 jobs is the right way forward, but more can and should
be done.
We continue to believe that the ongoing growth of digital advertising,
successful scaling of the Google Cloud business and improving capital
allocation will continue to drive significant earnings growth in the years
ahead. Importantly, Alphabet continues to work towards its sustainability
targets. The company has pledged to operate on carbon-free energy everywhere,
at all times, by 2030 and to replenish 120% of the water it consumes across
its datacentres and offices.
After the year end, we opted to reduce our position in Alphabet in February.
Whilst we believe that Alphabet is well positioned to counter the rising
competition in Search, following Microsoft’s launch of its new Bing search
engine, we realise that the range of outcomes has widened. We opted to realise
some profit on our original position, thereby resulting in a reduction in the
overall investment position by approximately one half.
We fully exited our position in Charter Communications in April before the
company reported its first quarter results, with most of the sales executed at
the start of that month. We had thought that the company’s aggressively
priced bundled broadband and mobile product would help it to continue to raise
penetration across its footprint. Whilst this may prove correct in time, the
company is undeniably facing increasing competition from new fibre rollouts
and wireless carriers have enjoyed notable early success in their fixed
wireless efforts. Consequently, we believed the range of outcomes had widened
and decided to pursue other opportunities that we believed offered a better
balance of risk and reward. The shares declined by 27% from the date of our
exit to year end.
We chose to redeploy most of the proceeds by incrementally adding to our
holding in Canadian National Railway, reopening a small position in US freight
railroad, Union Pacific, as mentioned above, and initiating a new position in
Amazon. In our view Amazon has effectively become an essential utility, on
which consumers and businesses are increasingly dependent. Importantly, the
company’s ecommerce and cloud computing businesses both generate
significantly fewer carbon emissions than their legacy predecessors. A recent
Oliver Wyman led study concluded that ecommerce generated 40-65% fewer
emissions than physical retail stores and a study by 451 Research showed that
AWS’s infrastructure was 3.6 times more energy efficient than the median
enterprise data centre in the United States. Furthermore, Amazon is aiming to
only use renewable energy by 2030 and then operate on a net zero carbon basis
by 2040.
With the benefit of hindsight, we could have chosen a better moment to
initiate our position. The company was facing a softening ecommerce outlook
and higher costs (including labour, fuel and freight). These cost pressures
appear to be easing and Amazon also recently announced plans to reduce its
corporate headcount by 18,000 (circa 6% of the corporate total). We believe
these measures should help the retail business’ operating margin to recover.
This, combined with Amazon Web Services growth and falling capital intensity
should underpin strong free cash flow growth and hopefully good returns going
forwards. Fortunately, the size of the position means that the decline in NAV
was limited to 2.6% in the period.
Following the year end and the reduction of our Alphabet holding, we chose to
start a new position in Airbus, the European aircraft manufacturer. Whilst
China’s reopening removed the last hurdle to air travel’s full recovery,
the industry’s need to decarbonise and airlines’ fleet renewal
requirements remain unchanged. By upgrading the global fleet to Airbus’
latest generation aircraft offer, the industry could reduce carbon emissions
by 20-30%. Furthermore, Airbus’ aircraft are currently certified to operate
on 50% sustainable aviation fuel (“SAF”), with a target to reach 100% by
the end of the decade. SAF offers the opportunity to reduce emissions by up to
85%, according to the company. Airbus recently received approval from the
Science Based Targets initiative (SBTi) for its greenhouse gas emissions
near-term reduction targets, which include plans to reduce Scope 1 & 2
emissions by 63% by 2030 and reduce Scope 3 emissions by 46% by 2035. We
previously held the company’s shares but exited in April 2021, believing
that the post Covid recovery would take significantly longer than implied by
the price.
Private Investments
The portfolio of private investments represented 16.2% of the Company’s
total NAV as at 31 December 2022, and delivered total return of +33.2% over
the period, adding 3.4% to our NAV.
Contribution
Investment Returns % to NAV %
X-ELIO 12.9 2.0
John Laing 26.5 0.8
TCI Real Estate 17.6 0.4
CGE Investments – 0.2
Note: Percentage increase/decrease for individual holdings is calculated on
their local currency and based over the holding period if bought or sold
during the year.
Spanish solar developer, X-ELIO, continues to execute on its development
pipeline with several notable milestones this year. The company completed the
Blue Grass Solar Farm development in Australia, started several new projects
in Spain and was awarded 15MW in Japan’s first feed-in-premium auction
(renewable energy source producers receive a premium on top of the market
price of their electricity production). We also received a £2 million cash
distribution from the company at the end of the year, which reduced the value
of our holding to 10.3% of our NAV at the year end.
John Laing continues to operate its portfolio of infrastructure assets and
deploy capital in a conservative fashion. The company works to mitigate the
environmental impact of its operations on an asset by asset basis and is
seeking to achieve a net zero transition for its direct operations by 2050 or
before. The valuation was marked up in line with the manager’s latest
valuation, with the uplift being primarily driven by gains on currency
translation. KKR continues to overhaul the company’s management team, with a
search currently underway for a new CEO. New investments included follow on
deals in Brigid (UK retirement accommodation) and two electric bus concessions
in Bogotá, Colombia. John Laing raised an additional £1.1 billion of equity
towards the end of the year in order to fund the purchase of three Irish
infrastructure assets from AMP Capital. We opted to not participate because we
believed other opportunities offered a better balance between risk and reward.
TCI Real Estate Partners Fund III currently comprises three loans to separate
real estate developments in the United States that possess strong resource
efficiency credentials. They are first mortgages and have low loan-to-value
ratios (<60%). Whilst the fund did not manage to commit the level of capital
we originally hoped, investment returns have remained in line with
expectations. During the year two outstanding loans (Four Seasons, New Orleans
and Four Seasons, Nashville) were fully repaid. The Fund has continued to draw
down from its remaining commitment (circa US$4.5 million) in line with the
schedules of its existing loans. We expect the last loan to be repaid in 2026.
Foreign Exchange (“FX”) Hedges
The sole aim of using currency forward contracts is to reduce the volatility
in returns arising from currency movements associated with the portfolio’s
non-sterling denominated investments. We typically use simple currency
forward contracts with three to six month terms to hedge approximately one
half of the Company’s US dollar and euro exposures. These instruments are
rolled on maturity and the nominal value of the hedging program may be
adjusted as required.
Whilst our portfolio benefitted from sterling depreciation over the year, as
our euro and US dollar assets increased in sterling terms, the impact was
partly offset by our currency forward hedges. The Company suffered from
sterling volatility in late September, following the new UK government’s
mini-budget, when we had to settle two maturing currency forward contracts at
a significant loss of £8.7 million. In total, the Company paid £12.5 million
on currency forward contracts during the year. With the nominal value of the
currency forward contracts having increased to over 50% of euro and US dollar
exposures, given the fall in the portfolio value, we opted to reduce the
nominal amount of the new currency forward contracts in order to revert to
hedging approximately half of the currency exposure. Following the rally in
sterling, the current currency forward contracts had an unrealised gain of
£4.2 million at the year end and this, further improved to £4.8 million as
at the approval date of this Annual Report. The next settlement date for the
current currency forward contracts is 31 March 2023.
Outlook
The Federal Reserve appears committed to tighter financial conditions and
higher interest rates in order to curb inflation, although the pace of hikes
has slowed markedly. Demand appears to be weakening, with corporates
attempting to right size their businesses and announcing layoffs. We do not
attempt to try and forecast the depth of any possible recession. We focus on
investments which require us to make as few predictions as possible. We
believe our criteria of resource efficiency, quality and value should leave
the portfolio well placed to generate persistently superior returns for the
consistent risk profile we have adopted and which is set out in this report.
The presence of better opportunities within public markets has limited our
private investment activity over the past few years. We believe that the
change in financial conditions may be starting to change this situation and we
continue to search diligently for suitable private investments. We will only
make private investments when they offer a more attractive balance between
risk and reward compared to public markets. In this vein, we were pleased to
make a new commitment (US$25 million) to the TCI Real Estate Partners (TCI
REP) Fund IV in March, after the year end. This fund will follow the same
strategy as TCI REP Fund III, which we previously invested in, and we would
expect our maximum cash exposure to be around 70% of the commitment.
Following this year’s negative returns, the Company’s net asset value has
now compounded at 7.3% annually, after fees, over the last five years. Whilst
we are not satisfied with this level of performance, we are optimistic that
the current valuations within the portfolio offer the opportunity for improved
returns going forwards. We expect the elevated cash balance, following the
reduction of our position in Alphabet, to reduce as we gradually deploy it
into investments in the coming months.
NAV
per share
pence
31 December 2017 92.1
31 December 2022 131.1*
Annualised Net Return 7.3%
* adjusted for cumulative dividend reinvestments.
Menhaden Capital Management LLP
Portfolio Manager
28 March 2023
Business Review
The Strategic Report has been prepared to provide information to enable
shareholders to assess how the Directors have performed their duty to promote
the success of the Company.
The Strategic Report contains certain forward-looking statements. These
statements are made by the Directors in good faith based on the information
available to them up to the date of this report and such statements should be
treated with caution due to the inherent uncertainties, including both
economic and business risk factors, underlying any such forward-looking
information.
Business Model
The Company is an externally managed investment trust and its shares are
listed on the premium segment of the Official List and traded on the main
market of the London Stock Exchange.
The purpose of the Company is to provide a vehicle for investors to gain
exposure to a portfolio of companies that are demonstrably delivering or
benefiting significantly from the efficient use of energy or resources
irrespective of their size, location or stage of development, through a single
investment.
The Company is an Alternative Investment Fund (“AIF”) under the UK’s
Alternative Investment Fund Managers Regulations (“UK AIFMD”) and Frostrow
Capital LLP (“Frostrow”) is the appointed Alternative Investment Fund
Manager (“AIFM”).
As an externally managed investment trust, all of the Company’s day-to-day
management and administrative functions are outsourced to third party service
providers. As a result, the Company has no executive directors, employees or
internal operations.
The Board is responsible for all aspects of the Company’s affairs, including
setting the parameters for asset allocation, monitoring the investment
strategy and the review of investment performance and policy. It also has
responsibility for all strategic policy issues, including share issuance and
buy backs, share price and discount/premium monitoring, corporate governance
matters, investor relations, dividends and gearing.
Further information on the Board’s role and the topics it discusses with the
AIFM and the Portfolio Manager is provided in the Corporate Governance
Statement beginning on page 43 of the Annual Report.
Investment Strategy
The implementation of the Company’s investment objective has been delegated
to Frostrow by the Board. Frostrow has, in turn and jointly with the Company,
appointed Menhaden Capital Management LLP as the Portfolio Manager.
Details of the Portfolio Manager’s approach are set out in the Investment
Process section on page 11 and in their review beginning on page 14 of the
Annual Report.
While the Board’s strategy is to allow flexibility in managing the
investments, in order to manage investment risk it has imposed various
investment, gearing and derivative guidelines and limits, within which
Frostrow and the Portfolio Manager are required to manage the investments.
Any material changes to the investment objective or policy require approval
from shareholders.
Dividend Policy
The Company complies with the United Kingdom’s investment trust rules
regarding distributable income which require investment trusts to retain no
more than 15% of their income from shares and securities each year. The
Company’s dividend policy is that the Company will only pay dividends
sufficient for it to maintain investment trust status.
The Board
Biographical details of the Directors are set out on pages 36 and 37 of the
Annual Report and information on the workings of the Board and its Committees
is set out in the Corporate Governance Statement.
Duncan Budge will step down from the Board and all other Directors will seek
re-election by shareholders at the Annual General Meeting to be held on 21
June 2023.
Principal Service Providers
The principal service providers to the Company are Frostrow, Menhaden Capital
Management LLP (“MCM” or the “Portfolio Manager”) and J.P. Morgan
Europe Limited (the “Depositary”). Details of their key responsibilities
and their contractual arrangements with the Company follow.
AIFM
The Board has appointed Frostrow as the designated AIFM of the Company on the
terms and subject to the conditions of the alternative investment fund
management agreement between the Company and Frostrow (the “AIFM
Agreement”). The AIFM Agreement assigns to Frostrow overall responsibility
to manage the Company, subject to the supervision, review and control of the
Board, and ensures that the relationship between the Company and Frostrow is
compliant with the requirements of UK AIFMD. Frostrow, under the terms of the
AIFM Agreement provides, inter alia, the following services:
• risk management services;
• marketing and shareholder services;
• administrative and secretarial services;
• advice and guidance in respect of corporate
governance requirements;
• maintenance of the Company’s accounting records;
• preparation and dispatch of the annual and half
yearly reports and monthly factsheets; and
• ensuring compliance with applicable tax, legal and
regulatory requirements.
AIFM Fee
Under the terms of the AIFM Agreement, Frostrow receives a periodic fee equal
to 0.225% per annum of the Company’s net assets up to £100 million, 0.20%
per annum of the net assets in excess of £100 million and up to £500
million, and 0.175% per annum of the net assets in excess of £500 million.
The AIFM Agreement is terminable on six months’ notice given by either
party.
Portfolio Manager
MCM is responsible for the management of the Company’s portfolio of
investments under a delegation agreement between MCM, the Company and Frostrow
(the “Portfolio Management Agreement”). Under the terms of the Portfolio
Management Agreement, MCM provides, inter alia, the following services:
• seeking out and evaluating investment
opportunities;
• recommending the manner by which cash should be
invested, divested, retained or realised;
• advising on how rights conferred by the
investments should be exercised;
• analysing the performance of investments made; and
• advising the Company in relation to trends, market
movements and other matters which may affect the investment objective and
policy of the Company.
Portfolio Management Fee
MCM receives a periodic fee equal to 1.25% per annum of the Company’s net
assets up to £100 million and 1.00% of the Company’s net assets in excess
of £100 million.
The Portfolio Management Agreement is terminable on six months’ notice given
by any of the three parties.
Performance Fee
MCM is also entitled to a performance fee which is dependent on the level of
the long-term performance of the Company.
The performance fee is calculated for discrete three year performance periods.
In respect of a given performance period, a performance fee may be payable
equal to 10% of the amount, if any, by which the Company’s adjusted NAV at
the end of that performance period exceeds the higher of (a) a compounding
hurdle (an annualised compound return)* on the gross proceeds of the IPO
(adjusted for any subsequent share issues and repurchases) of 5% per annum;
and (b) a high-water mark (the highest net asset value that the Company has
reached on which a performance fee has been paid)*. The performance fee is
subject to a cap in each performance period of an amount equal to the
aggregate of 1.5% of the weighted average NAV in each year (or part year, as
applicable) of that performance period.
*see Glossary for further details
Depositary
The Company has appointed J.P. Morgan Europe Limited as its Depositary in
accordance with UK AIFMD on the terms and subject to the conditions of an
agreement between the Company, Frostrow and the Depositary (the “Depositary
Agreement”). The Depositary provides the following services, inter alia,
under its agreement with the Company:
• safekeeping and custody of the Company’s
custodial investments and cash;
• processing of transactions; and
• foreign exchange services.
The Depositary must take reasonable care to ensure that the Company is managed
in accordance with the Financial Conduct Authority’s Investment Funds
Sourcebook, UK AIFMD and the Company’s Articles of Association.
Under the terms of the Depositary Agreement, the Depositary is entitled to
receive an annual fee of the higher of £40,000 or 0.0175% of the net assets
of the Company up to £150 million, 0.015% of the net assets in excess of
£150 million and up to £300 million, 0.01% of the net assets in excess of
£300 million and up to £500 million and 0.005% of the net assets in excess
of £500 million. In addition, the Depositary is entitled to a variable
custody fee which depends on the type and location of the custodial assets of
the Company.
The Depositary has delegated the custody and safekeeping of the Company’s
assets to JPMorgan Chase Bank N.A., London branch (the “Custodian”).
The notice period on the Depositary Agreement is 90 days if terminated by the
Company and 120 days if terminated by the Depositary.
Evaluation of the AIFM and the Portfolio Manager
The performance of the AIFM and the Portfolio Manager is reviewed continuously
by the Board and the Company’s Management Engagement Committee (the
“MEC”), with a formal evaluation process being undertaken each year. As
part of this process, the Board monitors the services provided by the AIFM and
the Portfolio Manager and receives regular reports from them. The MEC reviewed
the appropriateness of the appointment of the AIFM and the Portfolio Manager
in December 2022, following which it made a recommendation for continuation to
the Board.
The Board believes the continuing appointment of the AIFM and the Portfolio
Manager, under the terms described above, is in the interests of shareholders
as a whole. In coming to this decision, the MEC and the Board took into
consideration, inter alia, the following:
• the terms of the AIFM Agreement and the Portfolio
Management Agreement, in particular the level and method of remuneration, the
notice period and the comparable arrangements of a group of the Company’s
peers;
• the quality of the service provided and the quality and
depth of experience of the company management, company secretarial,
administrative and marketing teams that the AIFM allocates to the management
of the Company; and
• the quality of service provided by the Portfolio Manager
in the management of the portfolio; and the level of performance of the
portfolio in absolute terms and by reference to RPI+3% and other relevant
indices.
Position, Performance and Future Developments
The Statement of Financial Position shows the Company’s financial position
at the year end. Performance in the year relative to the Company’s key
performance indicators is set out below and further outlined, together with
investment activity and strategy, market background and the future outlook, in
the Chairman’s Statement and the Portfolio Manager’s Review.
The Portfolio Manager believes that companies which supply products and
services that help to conserve scarce resources, reduce negative environmental
impacts and improve resource efficiency are likely to enjoy faster growing end
markets. The Directors continue to believe that environmental and
resource-efficiency solutions, together with the Portfolio Manager’s
investment strategy, should provide good returns for the long-term investor.
It is expected that the Company’s investment strategy in the coming year
will remain largely unchanged.
Key Performance Indicators (“KPIs”)
The Board of Directors reviews performance against the following KPIs. They
comprise both specific financial and shareholder-related measures. The results
for the year are summarised in the Chairman’s Statement.
The KPIs for the Company are:
• Net asset value (“NAV”) per share total
return;
• Share price total return;
• Discount/premium of the share price to the NAV per
share; and
• Ongoing charges ratio.
These are all Alternative Performance Measures. Please refer to the Glossary
for definitions of these terms and an explanation of how they are calculated.
NAV per share total return
The Directors regard the Company’s NAV per share total return as being the
overall measure of value delivered to shareholders over the long term. This
reflects both the net asset value growth of the Company and any dividends paid
to shareholders. The Board monitors the Company’s NAV total return against
its benchmark and peers in the AIC Global Sector and the AIC Environmental
Sector. The Company’s NAV per share total return over the year to 31
December 2022 was -16.5% (2021: +17.3%). To reflect the Company’s total
return investment strategy, the Board uses RPI+3% as its primary long-term
financial performance benchmark. RPI+3% over the year was 13.7% (2021: 10.5%).
A full description of the portfolio and performance during the year under
review is contained in the Portfolio Manager’s Review.
Share price total return
The Directors regard the Company’s share price total return to be a key
indicator of performance and monitor this closely. This measure reflects the
return to the investor on last traded market prices, assuming any dividends
paid are reinvested. The Company’s share price total return over the year to
31 December 2022 was -20.3% (2021: +13.1%).
Share price discount/premium to NAV per share
The share price discount/premium to the NAV per share is considered a key
indicator of performance as it impacts the share price total return and can
provide an indication of how investors view the Company’s performance and
its investment objective. At 31 December 2022 the discount stood at 31.4%
(2021: 28.1%). The Chairman’s Statement addresses the discount and the
approach of the Board. The discount remained stubbornly wide throughout the
year.
Ongoing charges ratio
Ongoing charges represent the costs that shareholders can reasonably expect to
pay from one year to the next, under normal circumstances. The Board continues
to be conscious of expenses and works hard to maintain a sensible balance
between good quality services and costs. The Board therefore considers the
ongoing charges ratio to be a KPI and reviews the figure both in absolute
terms and in comparison to the Company’s peers. The ongoing charges ratio
for the year to 31 December 2022 was 1.8% (2021: 1.8%).
Risk Management
In fulfilling its oversight and risk management responsibilities, the Board
maintains a framework of the key risks that may affect the Company and the
related internal controls designed to enable the Directors to manage/mitigate
these risks as appropriate. The Directors have carried out a robust assessment
of the emerging and principal risks facing the Company, including those that
would threaten its business model, future performance, solvency or liquidity.
The principal risks can be categorised under the following broad headings:
• Corporate Risks
• Investment Risks
• Operational Risks
• Financial Risks
• Legal and Regulatory Risks
• Geopolitical and other Macro Risks
The following sections detail the risks the Board considers to be the most
significant to the Company under these headings. Geopolitical and other Macro
Risk is a new addition to the principal risk headings this year, although
elements of it were previously recognised. The other risks are broadly
unchanged from the prior year. The risks from climate change and Paris Accord
undertakings are taken into consideration but are not considered to be key
risks, tending to be offset by the Company’s positioning as a beneficiary of
related resource efficiency policies.
Principal Risks and Uncertainties Management and Mitigation
Corporate Risks The share price may differ materially from the NAV per share i.e. the shares may trade at a material discount to the NAV per share. A widening discount affects shareholder returns and satisfaction and, as such, could influence the outcome of the next continuation vote or, in extremis, precipitate the requisitioning of a general meeting to wind-up the Company. At each meeting, the Board: • reviews the Company’s investment objective in relation to the market, economic conditions and the operation of the Company’s peers; • discusses the Company’s future development and strategy; • reviews an analysis of the
shareholder register and reports on investor sentiment from the Company’s corporate stockbroker and AIFM; • reviews the level of the share price discount to the NAV per share and, in consultation with its advisers, considers ways in which share price
performance may be enhanced; and • reviews the Company’s promotional activities and distribution strategy, which have been delegated to Frostrow, to ensure the Company is promoted to current and potential investors.
Investment Risks The implementation of the investment strategy adopted by the Portfolio Manager may be unsuccessful and result in underperformance against the Company’s principal performance comparators and peer companies. The portfolio may be affected by market risk, that is volatile market movements (in both equity and foreign exchange markets) in the sectors and regions in which it invests. The Company is also exposed to concentration risk, which is the potentially higher volatility arising from its relatively concentrated portfolio, and sector-specific risks such as global energy and commodity prices or withdrawal of government subsidies for renewable energy. The departure of a key member of the portfolio management team may affect the Company’s performance. The Board regularly reviews the Company’s investment mandate and MCM’s long-term investment strategy in relation to market and economic conditions, and the performance of the Company’s peers. The Portfolio Manager provides an explanation of stock selection
decisions and an overall rationale for the make?up of the portfolio, including the resource-efficiency credentials of the portfolio holdings. MCM discuss current and potential investment holdings with the Board on a regular basis. As part of its review of
the going concern and longer-term viability of the Company, the Board also considers the sensitivity of the Company to changes in market prices and foreign exchange rates (see note 17 to the financial statements), an analysis of how the portfolio would
perform during a market crisis, and the ability of the Company to liquidate its portfolio if the need arose. Further details are included in the Going Concern and Viability Statements. Whilst market risk can be reduced through diversification, prospects
for this are limited by the requirement to comply with the Company’s resource efficiency theme and its concentrated portfolio strategy. To manage concentration risk, the Board has appointed the AIFM and the Portfolio Manager to manage the portfolio within
the remit of the investment objective and policy. The investment policy limits ensure a reasonable amount of portfolio diversification, reducing the risks associated with individual stocks and markets. The Portfolio Manager’s approach to investment risk is
set out on page 11 of the Annual Report. Compliance with the investment restrictions is monitored daily by the AIFM and reported to the Board on a monthly basis. While market risk cannot be eliminated through diversification, it can be potentially reduced
through hedging. The Board sets the Company’s policy on hedging, which is detailed within the Investment Objective and Policy. The Company does not speculatively seek to manage currency, but during the year under review hedged approximately 50% of the
portfolio’s US dollar and euro exposures. Details of the foreign exchange forwards used for this purpose are set out in the Portfolio Manager’s Review. The Portfolio Manager reports to the Board on developments at MCM at each Board meeting. All investment
decisions are made by an Investment Committee, reducing reliance on a single individual.
Operational Risks As an externally managed investment trust, the Company is reliant on the systems of its service providers for dealing, trade processing, administrative services, financial and other functions. If such systems were to fail or be disrupted (including as a result of cyber crime or a pandemic) this could lead to a failure to comply with applicable laws, regulations and governance requirements and/or to a financial loss. The Board continuously monitors the performance of all the principal service providers with a formal evaluation process being undertaken each year. The Audit Committee reviews internal controls reports and key policies put in place by its principal service
providers. This includes reports on service providers’ cyber security measures and disaster recovery procedures. Both Frostrow and MCM provide a quarterly compliance report to the Audit Committee, which details their compliance with applicable laws and
regulations. The Audit Committee maintains the Company’s risk matrix which details the risks to which the Company is exposed, the approach to managing those risks, the key controls relied upon and the frequency of their operation. Further details are set
out in the Audit Committee Report.
Financial Risks The Company is exposed to liquidity risk and credit risk arising from the use of counterparties. If a counterparty were to fail it could adversely affect the Company through either delay in settlement or loss of assets. The most significant counterparty to which the Company is exposed is the Depositary, which is responsible for the safekeeping of the Company’s custodial assets. The Company’s assets include liquid securities which can be sold to meet funding requirements, if necessary. Further information on financial instruments and risk can be found in note 17 to the financial statements. The Board reviews the services provided
by the Depositary and the internal controls report of the Custodian to ensure that the security of the Company’s custodial assets is maintained. The Portfolio Manager is responsible for undertaking reviews of the credit worthiness of the counterparties
that it uses. The Board reviews the Portfolio Manager’s approved list of counterparties and the Company’s use of those counterparties. Appropriate due diligence is undertaken to verify the existence and ownership of unquoted (non-custodial) assets.
Legal and Regulatory Risks The regulatory or political environment in which the Company operates could change to the extent that it affects the Company’s viability. The Board monitors regulatory developments but relies on the services of its external advisers to ensure compliance with applicable law and regulations. The Board has appointed a specialist investment trust company secretary who provides industry and
regulatory updates at each Board meeting.
Geopolitical and other Macro Risks Portfolio constituents may be affected by regional events or politics. The most prominent recent example is the war in Ukraine and related sanctions. The Board has no control over such macro events. The vast majority of the Company’s investments, both quoted and unquoted, are in developed markets which are expected to be more stable. The Company has no investments located in or significantly exposed to
Russia or Ukraine, but the Board will continue to monitor developments closely.
Longer Term Viability Statement
In accordance with the UK Corporate Governance Code, the Directors have
carefully assessed the Company’s position and prospects as well as the
principal risks and have formed a reasonable expectation that the Company will
be able to continue in operation and meet its liabilities as they fall due
over the next five financial years. The Board has chosen a five year horizon
in view of the long?term outlook adopted by the Portfolio Manager when making
investment decisions.
To make this assessment and in reaching this conclusion, the Audit Committee
has considered the Company’s financial position and its ability to liquidate
its portfolio and meet its liabilities as they fall due:
• The portfolio is principally comprised of investments
traded on major international stock exchanges. Based on the Company’s latest
available financial positions, it is estimated that 78.1% of the current
portfolio could be liquidated within seven days and there is no expectation
that the nature of the investments held within the portfolio will be
materially different in future;
• The expenses of the Company are predictable and modest in
comparison with the assets and there are no capital commitments foreseen which
would alter that position; and
• The Company has no employees, only its non-executive
Directors. Consequently it does not have redundancy or other employment
related liabilities or responsibilities.
The Audit Committee, as well as considering the potential impact of the
Company’s principal risks and various severe but plausible downside
scenarios, has also made the following assumptions in assessing the
Company’s longer-term viability:
• There will continue to be demand for investment trusts;
• The Board and the Portfolio Manager will continue to adopt
a long-term view when making investments, and anticipated holding periods will
be at least five years;
• The Company invests principally in the securities of
listed companies traded on major international stock exchanges to which
investors will wish to continue to have exposure;
• The closed ended nature of the Company means that, unlike
open ended funds, it does not need to realise investments when shareholders
wish to sell their shares;
• Regulation will not increase to a level that makes running
the Company uneconomical; and
• The performance of the Company will be satisfactory.
As part of its review the Board considered the impact of a significant and
prolonged decline in the Company’s performance and prospects. This included
a range of plausible downside scenarios such as reviewing the effects of
substantial falls in investment values and the impact on the Company’s
ongoing charges.
Company Promotion
The Company has appointed Frostrow to promote the Company’s shares to
professional investors in the UK and Ireland. As investment company
specialists, the Frostrow team provides a continuous, proactive marketing,
distribution and investor relations service that aims to grow the Company by
encouraging demand for the shares.
Frostrow actively engages with professional investors, typically discretionary
wealth managers, some institutions and a range of execution-only platforms.
Regular engagement helps to attract new investors and retain existing
shareholders, and over time results in a stable share register made up of
diverse, long-term holders. Frostrow, in turn, provides the Board with
up-to-date and accurate information on the latest shareholder and market
developments.
Frostrow arranges and manages a continuous programme of one-to-one meetings
with professional investors around the UK. These include regular meetings with
‘gate keepers’, the senior points of contact responsible for their
respective organisations’ research output and recommended lists. The
programme of regular meetings also includes autonomous decision makers within
large multi-office groups, as well as small independent organisations. Some of
these meetings involve MCM, but most of the meetings do not, which means the
Company is being actively promoted while MCM focuses on managing the
portfolio. The Chairman is also available to engage with shareholders.
The Company also benefits from involvement in the regular professional
investor seminars run by Frostrow in major centres, notably London and
Edinburgh, which are focused on buyers of investment companies.
The creation and dissemination of information on the Company is also overseen
by Frostrow. Frostrow produces all key corporate documents, monthly
factsheets, annual reports and manages the Company’s website
www.menhaden.com. All Company information and invitations to investor events,
including updates from MCM on the portfolio and market developments, are
regularly emailed to a growing database, overseen by Frostrow, consisting of
professional investors across the UK and Ireland.
Frostrow maintains close contact with all the relevant investment trust broker
analysts, particularly those from Numis Securities Limited, the Company’s
corporate broker, but also others who publish and distribute research on the
Company to their respective professional investor clients.
Board’s Duty to Promote the Success of the Company (s172)
The Directors have a statutory duty to promote the success of the Company for
the benefit of its members as a whole, whilst also having regard to certain
broader matters. These include taking into consideration the likely
consequences of any decision in the long-term; the need to foster the
Company’s business relationships with its Portfolio Manager and other
service providers; the impact of the Company’s operations on the community
and the environment; the desire for the Company to maintain a reputation for
high standards of business conduct; and the need to act fairly between members
of the Company (s172 Companies Act 2006).
Stakeholder group How the Board engaged with the Company’s stakeholders
Investors The Board’s key mechanisms of engagement with investors include:
The AIFM and the Portfolio Manager, on behalf of the Board, complete a programme of investor relations throughout the year, reporting to the Board on the feedback received. The Company’s broker also reports to the Board on investor sentiment and industry
issues. In addition, the Chairman has been available to engage with the Company’s shareholders where required.
Portfolio Manager The Board met regularly with the Portfolio Manager throughout the year, both formally at quarterly Board meetings and informally, as needed. The Board discussed the Company’s overall performance, including against the benchmark and the KPIs, as well as
developments in individual portfolio companies and wider macroeconomic developments. The Board also received monthly performance and compliance reports.
Service Providers The Board met regularly with the AIFM, representatives of which attend every quarterly Board meeting to provide updates on risk management, accounting, administration and corporate governance matters. The Management Engagement Committee reviewed the
performance of all the Company’s service providers, receiving feedback from Frostrow in their capacity as AIFM and Company Secretary. The AIFM, which is responsible for the day-to-day operational management of the Company, meets and interacts with the
other service providers including the Depositary, Custodian, and Registrar, on behalf of the Board, on a daily basis. This can be through email, one-to-one meetings and/or regular written reporting. The Audit Committee met with Mazars LLP to review the
audit plan, the outcome of the annual audit and to assess the quality and effectiveness of the audit process.
Portfolio companies The Portfolio Manager, on behalf of the Board, engaged with a number of portfolio companies on a range of issues. Environmental issues were a key topic of engagement. The Board received a quarterly update on the Portfolio Manager’s engagement activities.
The Board seeks to comply with these and the following table sets out how the
Directors have had regard to the views of the Company’s stakeholders in
their decision-making.
Key areas of engagement Main decisions and actions taken
The Board and the Portfolio Manager provided updates via RNS, the Company’s website and the usual financial reports and monthly fact sheets. The Board continued to monitor share price movements closely, both in absolute terms and in relation to the Company’s peer group. The actions the Board has taken to address the share price discount to the NAV per share are described in the Chairman’s Statement.
The Board concluded that it was in the interests of shareholders for MCM to continue in their role as Portfolio Manager on the same terms and conditions. Further information is provided under Evaluation of the AIFM and the Portfolio Manager. The Audit Committee concluded that the Portfolio Manager’s internal controls were satisfactory. See the Audit Committee Report for further information.
The Board concluded that it was in the interests of shareholders for Frostrow to continue in their role as AIFM on the same terms and conditions. See Evaluation of the AIFM and the Portfolio Manager for further details. The Board approved the Audit Committee’s recommendation that it would be in the interests of shareholders for Mazars to be re-appointed as the Company’s auditor for a further year. See the Audit Committee Report and the Notice of AGM for further
information.
* Environmental reporting and target setting. The Board worked with the Portfolio Manager to produce the Company’s annual environmental impact statement, which outlines the impact the Company’s investments have delivered, or intend to deliver. The report outlines the subjects on which the Portfolio Manager, with the support of the Board, engaged with portfolio companies. The report is contained within the Strategic Report and is published as a separate document on www.menhaden.com
Social, Human Rights and Environmental Matters
The Company is an externally managed investment trust within the AIC
Environmental Sector and invests in companies and markets that are
demonstrably delivering or benefiting significantly from the efficient use of
energy or resources. The Board is responsible for oversight of the Portfolio
Manager and consequently for the risks and opportunities that derive from
their management of the Company’s portfolio, including any considered to be
climate related. The Company’s resource efficiency mandate is consistent
with the drive towards net zero so the Company is well placed to benefit as
investor focus evolves. The Company does not have any employees or premises,
nor does it undertake any manufacturing or other operations. All its functions
are outsourced to third party service providers and therefore the Company
itself does not have any employee or direct human rights issues, nor does it
have any direct, material environmental impact. The Company therefore has no
environmental, human rights, social or community policies.
The Company notes the Task Force on Climate-Related Financial Disclosures
(“TCFD”) recommendations. As noted above, the Company is an investment
trust with no employees, internal operations or property and, as such, it is
exempt from the Listing Rules requirement to report against the TCFD
framework. The Company recognises risks from climate change regulation, such
as potential impacts on investee companies, portfolio construction, marketing
and reputation. It also recognises the opportunity provided by the alignment
of its investment objective and policy with the net zero agenda.
The Board believes that the integration of financially material environmental,
social and governance (“ESG”) factors into investment decision-making can
reduce risk and enhance returns. The Portfolio Manager uses CDP ratings data
as a basis for engagement with investee companies on ESG issues, including any
considered to be climate related. More detail is included in the Company’s
Environmental Impact Statement.
The ongoing engagement and dialogue with investee companies, including through
proxy voting, are key parts of an asset stewardship role.
The Directors encourage the Portfolio Manager to ensure the Company’s
investments adhere to best practice in the management of ESG issues and
encourage them to have due regard to the UN Global Compact and UN Principles
of Responsible Investment. The Portfolio Manager was a signatory to the
Financial Reporting Council 2012 UK Stewardship Code. Whilst MCM is not a
formal signatory to the 2020 Stewardship Code, it adheres to the 12 principles
as closely as possible.
As an investment trust, the Company does not provide goods or services in the
normal course of business and does not have customers. Accordingly, the
Company falls outside the scope of the Modern Slavery Act 2015. The
Company’s suppliers are typically professional advisers and the Company’s
supply chains are considered to be low risk in this regard.
Anti-Bribery and Corruption Policy
The Board has adopted a zero-tolerance approach to instances of bribery and
corruption. Accordingly it expressly prohibits anyone performing services or
acting on behalf of the Company from accepting, soliciting, paying, offering
or promising to pay or authorise any payment, public or private, in the United
Kingdom or abroad, to secure any improper benefit for themselves or for the
Company.
A copy of the Company’s Anti Bribery and Corruption Policy can be found on
its website at www.menhaden.com. The policy is reviewed regularly by the Audit
Committee.
Prevention of the Facilitation of Tax Evasion
In response to the implementation of the Criminal Finances Act 2017, the Board
has adopted a zero?tolerance approach to the criminal facilitation of tax
evasion. A copy of the Company’s policy on preventing the facilitation of
tax evasion can be found on the Company’s website www.menhaden.com. The
policy is reviewed annually by the Audit Committee.
This Strategic Report has been approved by the Board.
Sir Ian Cheshire
Chairman
28 March 2023
Governance
Statement of Directors’ Responsibilities
Company law in the United Kingdom requires the Directors to prepare financial
statements for each financial year. The Directors are responsible for
preparing the financial statements in accordance with applicable law and
regulations. In preparing these financial statements, the Directors have:
• selected suitable accounting policies and applied
them consistently;
• made judgements and estimates that are reasonable
and prudent;
• followed applicable UK accounting standards; and
• prepared the financial statements on a going
concern basis.
The Directors are responsible for keeping adequate accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that the financial statements comply with
the Companies Act 2006. They are also responsible for safeguarding the assets
of the Company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
The Directors are responsible for ensuring that the Directors’ Report and
other information included in the Annual Report is prepared in accordance with
company law in the United Kingdom. They are also responsible for ensuring that
the Annual Report includes information required by the Listing Rules of the
FCA.
The financial statements are published on the Company’s website
www.menhaden.com. The maintenance and integrity of this website, is the
responsibility of Frostrow. The work carried out by the Auditor does not
involve consideration of the maintenance and integrity of this website and,
accordingly, the Auditor accepts no responsibility for any changes that have
occurred to the financial statements since they were initially presented on
the website. Visitors to the website need to be aware that legislation in the
United Kingdom governing the preparation and dissemination of the financial
statements may differ from legislation in their jurisdiction.
Responsibility Statement of the Directors in respect of the Annual Report
The Directors, whose details can be found above, confirm to the best of their
knowledge that:
* the financial statements within this Annual Report, prepared in accordance
with applicable accounting standards, give a true and fair view of the assets,
liabilities, financial position and the return for the year ended 31 December
2022; and
• the Chairman’s Statement, Strategic Report and the
Directors’ Report include a fair review of the information required by
4.1.8R to 4.1.11R of the FCA’s Disclosure Guidance and Transparency Rules.
The Directors consider that the Annual Report taken as a whole is fair,
balanced and understandable and provides the information necessary to assess
the Company’s position, performance, business model and strategy.
On behalf of the Board
Sir Ian Cheshire
Chairman
28 March 2023
Financial Statements
Income Statement
For the year ended 31 December 2022 For the year ended 31 December 2021
Notes Revenue £’000 Capital £’000 Total £’000 Revenue £’000 Capital £’000 Total £’000
(Losses)/gains on investments held at fair value through profit or loss 8 – (21,413) (21,413) – 21,124 21,124
Income from investments held at fair value through profit or loss 2 1,309 – 1,309 1,156 – 1,156
Investment management fees and performance fee provisions 3 (323) 387 64 (338) (3,028) (3,366)
Other expenses 4 (404) – (404) (450) – (450)
Net income/(loss) before taxation 582 (21,026) (20,444) 368 18,096 18,464
Taxation 5 (96) – (96) (65) – (65)
Net income/(loss) after taxation 486 (21,026) (20,540) 303 18,096 18,399
Income/(loss) per ordinary share – basic and diluted (pence) 6 0.6 (26.3) (25.7) 0.4 22.6 23.0
The “Total” column of this statement is the Income Statement of the
Company. The “Revenue” and “Capital” columns are supplementary to this
and are prepared under guidance published by the AIC.
All revenue and capital items in the above statement derive from continuing
operations.
The Company has no recognised gains and losses other than those shown above
and therefore no separate Statement of Total Comprehensive Income has been
presented.
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Equity
For the year ended 31 December 2022
Ordinary
share Special Capital Revenue
capital reserve reserve reserve Total
Notes £’000 £’000 £’000 £’000 £’000
At 31 December 2021 800 77,371 45,996 364 124,531
Net (loss)/income after taxation – – (21,026) 486 (20,540)
Dividends paid 7 – – (160) (160)
At 31 December 2022 800 77,371 24,970 690 103,831
For the year ended 31 December 2021
Ordinary
share Special Capital Revenue
capital reserve reserve reserve Total
Notes £’000 £’000 £’000 £’000 £’000
At 31 December 2020 800 77,371 27,900 61 106,132
Net income after taxation – – 18,096 303 18,399
At 31 December 2021 800 77,371 45,996 364 124,531
The accompanying notes are an integral part of these financial statements.
Statement of Financial Position
As at As at
31 December 31 December
2022 2021
Notes £’000 £’000
Fixed assets
Investments 8 93,809 125,615
Current assets
Debtors 10 104 218
Derivative financial instruments 9 4,200 –
Cash 6,061 878
10,365 1,096
Current liabilities
Creditors 11 (343) (404)
Derivative financial instruments 9 – (99)
Net current assets 10,022 593
Non-current liabilities
Performance fee provisions 12 – (1,677)
Net assets 103,831 124,531
Capital and reserves
Ordinary share capital 13 800 800
Special reserve 77,371 77,371
Capital reserve 18 24,970 45,996
Revenue reserve 690 364
Total shareholders’ funds 103,831 124,531
Net asset value per share – basic and diluted (pence) 14 129.8 155.7
The financial statements were approved by the Board of Directors and
authorised for issue on 28 March 2023 and were signed on its behalf by:
Sir Ian Cheshire
Chairman
The accompanying notes are an integral part of these financial statements.
Menhaden Resource Efficiency PLC – Company Registration Number 09242421
(Registered in England and Wales)
Statement of Cash Flows
For the For the
year ended year ended
31 December 31 December
2022 2021
Notes £’000 £’000
Net cash outflow from operating activities 15 (751) (1,108)
Cash flows from investing activities
Purchases of investments (10,321) (20,492)
Sales of investments 28,903 20,163
Settlement of derivatives 9 (12,488) 902
Net cash inflow from investing activities 6,094 573
Cash flows from financing activities
Dividends paid 7 (160) –
Net cash outflow from financing activities (160) –
Increase/(decrease) in cash and cash equivalents 5,183 (535)
Cash and cash equivalents at start of the year 878 1,413
Cash and cash equivalents at the end of the year 6,061 878
The accompanying notes are an integral part of these financial statements.
Notes to the Financial Statements
1. ACCOUNTING POLICIES
The principal accounting policies, all of which have been applied consistently
throughout the year in the preparation of these financial statements, are set
out below:
(a) Basis of Preparation
The financial statements have been prepared in accordance with United Kingdom
company law, FRS 102 ‘The Financial Reporting Standard applicable in the UK
and Ireland’, the Statement of Recommended Practice “Financial Statements
of Investment Trust Companies and Venture Capital Trusts” (the “SORP”),
and the historical cost convention, as modified by the valuation of
investments at fair value through profit or loss. The Board has considered a
detailed assessment of the Company’s ability to meet its liabilities as they
fall due, including stress and liquidity tests which modelled the effects of
substantial falls in markets and significant reductions in market liquidity,
on the Company’s financial position and cash flows. Further information on
the assumptions used in the stress scenarios is provided in the Audit
Committee report. The results of the tests showed that the Company would have
sufficient cash, or the ability to liquidate a sufficient proportion of its
listed holdings, to meet its liabilities as they fall due. Based on the
information available to the Directors at the time of this report, including
the results of the stress tests, the Company’s cash balances, and the
liquidity of the Company’s listed investments, the Directors are satisfied
that the Company has adequate financial resources to continue in operation for
at least the next 12 months and that, accordingly, it is appropriate to adopt
the going concern basis in preparing these financial statements.
The Company’s financial statements are presented in sterling, being the
functional and presentational currency of the Company. All values are rounded
to the nearest thousand pounds (£’000) except where otherwise indicated.
Fair value measurements are categorised into a fair value hierarchy based on
the degree to which the inputs to the fair value measurements are observable
and the significance of the inputs to the fair value measurement in its
entirety, which are described as follows:
• Level 1 – fair values measured using quoted prices
(unadjusted) in active markets for identical assets or liabilities;
• Level 2 – fair values measured using valuation
techniques for all inputs significant to the measurement other than quoted
prices included within Level 1 that are observable for the asset or liability,
either directly (i.e. as prices) or indirectly (i.e. derived from prices);
• Level 3 – fair values measured using valuation
techniques for which any significant input to the valuation is not based on
observable market data (unobservable inputs).
Details in respect of the fair value of the Company’s financial assets and
liabilities are disclosed in note 17 to the Financial Statements.
Presentation of the Income Statement
In order to reflect better the activities of an investment trust company and
in accordance with the SORP, supplementary information which analyses the
Income Statement between items of a revenue and capital nature has been
presented alongside the Income Statement. The net revenue return is the
measure the Directors believe appropriate in assessing the Company’s
compliance with certain requirements set out in Sections 1158 and 1159 of the
Corporation Tax Act 2010. Refer to 1(d) for details on how expenses are
allocated to revenue and capital.
Critical Accounting Judgements and Key Sources of Estimation Uncertainty
Critical accounting judgements and key sources of estimation uncertainty used
in preparing the financial information are continually evaluated and are based
on historical experience and other factors, including expectations of future
events that are believed to be reasonable. The resulting estimates will, by
definition, seldom equal the related actual results.
The key estimates and assumptions that have a significant risk of causing a
material adjustment to the carrying amounts of assets and liabilities relate
to the valuation of the Company’s unquoted (Level 3) investments.
£16,864,000 or 18.0% (2021: £15,776,000 or 12.6%) of the Company’s
portfolio is comprised of unquoted investments. These are all valued in line
with accounting policy 1(b) below. Under the accounting policy the reported
net asset value or price of recent transactions methodologies have been
adopted in valuing those investments, as set out in Note 17.
As the Company has judged that it is appropriate to use reported NAVs in
valuing unquoted investments as set out in note 17 (vi), the Company does not
have any key assumptions concerning the future, or other key sources of
estimation uncertainty in the reporting period, which may have a significant
risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year.
Whilst the Board considers the methodologies and assumptions adopted in the
valuation of unquoted investments to be supportable, reasonable and robust,
because of the inherent uncertainty of valuation, the values used may differ
significantly from the values that would have been used had a ready market for
the investment existed. These values may need to be revised as circumstances
change and material adjustments may still arise as a result of a reappraisal
of the unquoted investments’ fair value within the next year.
In using a figure of 25% in the disclosures, set out in Note 17, in relation
to unquoted investments the Directors had regard to the nature of the
investments, the wide range of possible outcomes, and public information on
secondary market transactions in private equity funds.
Segmental Analysis
The Board is of the opinion that the Company is engaged in a single segment of
business, namely investing in accordance with the Company’s Investment
Objective, and consequently no segmental analysis is provided.
(b) Financial Instruments
The Company has chosen to adopt Sections 11 and 12 of FRS 102 in respect of
financial instruments.
Basic financial assets:
The Company’s basic financial assets include cash at bank and debtors. These
financial assets are initially recognised at fair value and subsequently
measured at amortised costs using the effective interest method.
Investment held at fair value through profit or loss:
Investments are initially measured at fair value, being the transaction price
less associated transaction costs, and are subsequently remeasured at fair
value as at the reporting dates.
Purchases and sales of quoted investments are recognised on the trade date
where a contract exists whose terms require delivery within a time frame
determined by the relevant market. Purchases and sales of unlisted investments
are recognised when the contract for acquisition or sale becomes
unconditional.
Changes in the fair value of investments and gains and losses on disposal are
recognised under the capital column in the Income Statement as ‘gains or
losses on investments’. The fair value of the different types of investment
held by the Company is determined as follows:
• Quoted Investments
Fair value is deemed to be bid or last trade price depending on the convention
of the exchange on which it is quoted.
• Unquoted Investments
Fair value is determined using recognised valuation methodologies in
accordance with the International Private Equity and Venture Capital
Association valuation guidelines (“IPEVCA Guidelines”).
Where an investment has been made recently, or there has been a transaction in
an investment, the Company may use the transaction price as the best indicator
of fair value. In such a case changes or events subsequent to the relevant
transaction date would be assessed to ascertain if they imply a change in the
investment’s fair value.
The Company’s unquoted investments comprise of limited partnerships or other
entities set up by third parties to invest in a wider range of investments, or
to participate in a larger investment opportunity than would be feasible for
an individual investor, and to share the costs and benefits of such
investment.
For these investments, in line with the IPEVCA Guidelines, and in the absence
of transactions in the investments, the fair value estimate is based on the
attributable proportion of the reported net asset value of the unquoted
investment derived from the fair value of underlying investments. Valuation
reports provided by the manager or general partner of the unquoted investments
are used to calculate fair value where there is evidence that the valuation is
derived using fair value principles that are consistent with the Company’s
accounting policies and valuation methods. Such valuation reports may be
adjusted to take account of changes or events to the reporting date, or other
facts and circumstances which might impact the underlying value.
If a decision to sell an unquoted investment or portion thereof has been made
then the fair value would be the expected sales price where this is known or
can be reliably estimated.
Where a portion of an unquoted investment has been sold the level of any
discount implicit in the sale price will be reviewed at each measurement date
for that unquoted investment, taking account of the performance of the
unquoted investment and any other factors relevant to the value of the
unquoted investment.
Derivatives
Derivatives comprise foreign currency forwards used to hedge the Company’s
foreign currency exposure. The forwards comprise sterling receivable and a
foreign currency deliverable. Derivatives are classified as financial assets
or financial liabilities at fair value through profit or loss, initially
recognised at fair value on the date derivative contracts are entered into and
are subsequently remeasured at their fair value as at the reporting date.
Changes in the fair value of derivative contracts are recognised as capital
income or expense in the Income Statement.
(c) Investment Income
Dividends receivable are recognised on the ex-dividend date. Where no
ex-dividend date is quoted, dividends are recognised when the Company’s
right to receive payment is established. UK dividends are shown net of tax
credits and foreign dividends are gross of the appropriate rate of withholding
tax.
Fixed returns on non-equity shares and debt securities are recognised on a
time apportionment basis so as to reflect the effective yield when it is
probable that economic benefit will flow to the Company. Where income accruals
previously recognised, but not received, are no longer considered to be
reasonably expected to be received, due to doubt over their receipt, then
these amounts are reversed through expenses.
Income distributions from limited partnership funds are recognised when the
right to the distribution is established.
(d) Expenses
All expenses are accounted for on an accruals basis. Expenses are charged
through the revenue column of the Income Statement except as follows:
• expenses which are incidental to the acquisition or
disposal of an investment are charged to the capital column of the Income
Statement; and
• expenses are charged to the capital column of the Income
Statement where a connection with the maintenance or enhancement of the value
of the investments can be demonstrated. In this respect the portfolio
management and AIFM fees have been charged to the Income Statement in line
with the Board’s expected long-term split of returns, in the form of capital
gains and income, from the Company’s portfolio. As a result 20% of the
portfolio management and AIFM fees are charged to the revenue column of the
Income Statement and 80% are charged to the capital column of the Income
Statement.
Any performance fee accrued or paid is charged in full to the capital column
of the Income Statement.
(e) Taxation
The tax effect of different items of expenditure is allocated between capital
and revenue using the marginal basis. Deferred taxation is provided on all
timing differences that have originated but not been reversed by the Statement
of Financial Position date other than those differences regarded as permanent.
This is subject to deferred tax assets only being recognised if it is
considered more likely than not that there will be suitable profits from which
the reversal of timing differences can be deducted. Any liability to deferred
tax is provided for at the rate of tax enacted or substantively enacted.
(f) Foreign Currency
Transactions recorded in overseas currencies during the year are translated
into sterling at the exchange rate ruling on the date of the transaction.
Assets and liabilities denominated in overseas currencies are translated into
sterling at the exchange rates ruling at the date of the Statement of
Financial Position.
Any gains or losses on the translation of foreign currency balances, whether
realised or unrealised, are taken to the capital or the revenue column of the
Income Statement, depending on whether the gain or loss is of a capital or
revenue nature.
(g) Cash and Cash Equivalents
Cash and cash equivalents are defined as cash and demand deposits readily
convertible to known amounts of cash and subject to insignificant risk of
changes in value.
(h) Share Capital
Ordinary shares issued by the Company are recognised at the proceeds or fair
value received with the excess of the amount received over nominal value being
credited to the share premium account. Direct issue costs net of tax are
deducted from equity.
(i) Capital Reserves
The following are transferred to this reserve: gains and losses on the
realisation of investments; changes in the fair values of investments; and
expenses, together with the related taxation effect, charged to capital in
accordance with the Company’s accounting policy on expenses in 1(d).
Any gains in the fair value of investments that are not readily convertible to
cash are treated as unrealised gains in the capital reserve. The amounts
within capital reserve less unrealised gains are available for distribution.
(j) Special Reserve
The special reserve arose following court approval in 2016 to cancel the share
premium account. This reserve is distributable and can be used to fund share
repurchases.
(k) Revenue Reserve
The revenue reserve represents the surplus of accumulated revenue profits
being the excess of income derived from holding investments less the costs
associated with running the Company. This reserve may be distributed by way of
dividends, when positive.
2. INCOME FROM INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT OR
LOSS
2022 2021
£’000 £’000
Income from investments
Unquoted distributions 419 550
Dividends from quoted investments 883 606
1,302 1,156
Bank interest 7 –
Total income 1,309 1,156
3. INVESTMENT MANAGEMENT FEES AND PERFORMANCE FEE PROVISIONS
2022 2021
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
AIFM fee 50 198 248 52 208 260
Portfolio management fee 273 1,092 1,365 286 1,143 1,429
Performance fee provisions – (1,677) (1,677) – 1,677 1,677
323 (387) (64) 338 3,028 3,366
4. OTHER EXPENSES
2022 2021
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Directors’ remuneration 186 – 186 176 – 176
Employers NIC on directors’ remuneration 18 – 18 18 – 18
Auditor’s remuneration for the audit of the Company’s financial statements 41 – 41 44 – 44
Registrar fee 18 – 18 17 – 17
Broker retainer 30 – 30 30 – 30
Custody and depositary fees 47 – 47 47 – 47
Other expenses 64 – 64 118 – 118
Total expenses 404 – 404 450 – 450
The Company has no employees and details of the amounts paid to Directors are
included in the Directors’ Remuneration Report beginning on page 54 of the
Annual Report.
5. TAXATION ON NET RETURN
(a) Analysis of charge in period
2022 2021
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
UK corporation tax – – – – – –
Overseas witholding taxation 96 – 96 65 – 65
(b) Factors affecting current tax charge for the year
Approved investment trusts are exempt from tax on capital gains made within
the Company.
The tax charged for the period is lower than the standard rate of corporation
tax in the UK of 25% (2021: 19%). The difference is explained below.
2022 2021
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Net income/(loss) before taxation 582 (21,026) (20,444) 368 18,096 18,464
Corporation tax at 19% (2021: 19%) 110 (3,995) (3,885) 70 3,438 3,508
Non-taxable gains on investments held at fair value through profit or loss – 4,068 4,068 – (4,013) (4,013)
Overseas withholding taxation 96 – 96 65 – 65
Non-taxable overseas dividends (247) – (247) (220) – (220)
Excess management expenses* 137 (73) 64 150 575 725
Tax charge for the year 96 – 96 65 – 65
* Excess management expenses are expenses that are not relieved in full
against income generated by the Company.
(c) Provision for deferred tax
No provision for deferred taxation has been made in the current period. The
Company has not provided for deferred tax on capital profits and losses
arising on the revaluation or disposal of investments, as it is exempt from
tax on these items because of its status as an investment trust company.
The UK Government announced in the 2021 budget that from 1 April 2023, the
rate of corporation tax in the United Kingdom would increase from 19% to 25%
for companies with taxable profits between £50,000 and £250,000, but with a
marginal relief applying as profits increase. The Company has not recognised a
deferred tax asset of £3,042,000 (25% tax rate) (2021: £2,950,000, 25% tax
rate) as a result of excess management expenses. It is not anticipated that
these excess expenses will be utilised in the foreseeable future.
6. INCOME/(LOSS) PER SHARE
The capital, revenue and total return per ordinary share are based on the net
income/(loss) shown in the Income Statement and the weighted average number of
ordinary shares in issue 80,000,001 (2021: 80,000,001).
There are no dilutive instruments issued by the Company.
7. DIVIDENDS PAID
Under UK GAAP, final dividends are not recognised until they are approved by
shareholders and interim dividends are not recognised until they are paid.
They are also debited directly from reserves. Amounts recognised as
distributable in these financial statements were as follows:
2022 2021
£’000 £’000
2021 final dividend of 0.2p per share 160 –
In respect of the year ended 31 December 2022, a final dividend of 0.4p per
share or £320,000 (2021: 0.2p per share or £160,000) in total has been
recommended to shareholders and, if the resolution is passed at the AGM, will
be reflected in the Annual Report for the year ending 31 December 2023.
Details of the ex-dividend and payment dates are provided in the Chairman’s
Statement.
The Board’s current policy is to only pay dividends out of revenue reserves
if the need arises in order to maintain investment trust status. The amount of
revenue reserve available for distribution as at 31 December 2022 is £690,000
(2021: £364,000). The Company generated a revenue profit in the year ended 31
December 2022 of £486,000 (2021: £303,000).
8. INVESTMENTS
2022 2021
Quoted Unquoted Quoted Unquoted
Investments Investments Total Investments Investments Total
£’000 £’000 £’000 £’000 £’000 £’000
Opening balance
Cost at 1 January 68,965 17,901 86,866 60,672 18,758 79,430
Investment holdings gains/(losses) at 1 January 40,874 (2,125) 38,749 22,963 642 23,605
Valuation at 1 January 109,839 15,776 125,615 83,635 19,400 103,035
Movement in the year:
Purchases at cost 9,669 652 10,321 15,503 4,989 20,492
Sales – proceeds received (13,197) (3,218) (16,415) (11,579) (9,486) (21,065)
Net movement in investment holdings (losses)/gains (29,366) 3,654 (25,712) 22,280 873 23,153
Valuation at 31 December 76,945 16,864 93,809 109,839 15,776 125,615
Closing balance
Cost at 31 December 58,985 9,132 68,117 68,965 17,901 86,866
Investment holding gains/(losses) at 31 December 17,960 7,732 25,692 40,874 (2,125) 38,749
Valuation at 31 December 76,945 16,864 93,809 109,839 15,776 125,615
The Company received £16,415,000 (2021: £21,065,000), net of the
£12,488,000 payment (2021: £902,000 receipt) on currency forward contracts
(Note 9) from investments sold in the year. The book cost of these investments
was £29,070,000 (2021: £13,056,000). These investments have been revalued
over time and until they were sold any unrealised gains/losses were included
in the fair value of the investments.
Gains on investments
2022 2021
£’000 £’000
Net movement in investment holding (losses)/gains in the year (25,712) 23,153
Net movement in derivative holding gains/(losses) in the year 4,299 (2,029)
(Losses)/gains on investments (21,413) 21,124
Total unrealised gains, including transfers, during the year were £13,057,000
(2021: £15,144,000).
Purchase transaction costs were £3,000 (2021: £28,000). These comprise
mainly commission and stamp duty. Sales transaction costs were £3,000 (2021:
£5,000). These comprise mainly commission.
9. DERIVATIVES
2022 2021
£’000 £’000
Fair value of FX forwards 4,200 (99)
FX forwards are currently used to hedge the Company’s exposure to the euro
and US dollar. See note 17(ii) for further details. The Company paid
£12,488,000 (2021: received £902,000) on FX forwards closed during the year.
The FX forwards are revalued over time and any gains or losses (both realised
and unrealised) are included in gains/(losses) on investments in the capital
column of the Income Statement.
The current currency forward contracts had an unrealised gain of £4,200,000
at the year end and the unrealised gains further improved to £4.8 million as
at the approval date of this Annual Report. The next settlement date for the
current currency forwards contract is 31 March 2023.
10. DEBTORS
2022 2021
£’000 £’000
VAT recoverable 3 2
Withholding tax recoverable 68 49
Prepayments and accrued income 33 167
104 218
11. CREDITORS
2022 2021
£’000 £’000
Other creditors and accruals 343 404
343 404
12. PERFORMANCE FEE PROVISIONS
Performance fee provisions are recognised when a present obligation arises
from past events, it is probable that the obligation will materialise and it
is possible for a reliable estimate to be made, but the timing of settlement
or the exact amount is uncertain.
As at 31 December 2022, no performance fee is expected to be payable in
relation to the Portfolio Manager’s cumulative performance during 2021 and
2022, being the first two years of the thee-year performance period that
commenced on 1 January 2021. The £1,677,000 performance fee provisions
provided for on 31 December 2021 have been fully reversed during the year
ended 31 December 2022. This represents the Directors’ best estimate of the
obligation based on the NAV as at 31 December 2022 and has been charged to the
capital column of the Income Statement.
If crystalised, settlement of performance fee provisions will take place
following approval of the annual results for the year ended 31 December 2023.
Incremental changes to the provision will be recognised in each subsequent
period until crystallisation.
Full details of the performance fee arrangement can be found in the
Performance Fee section in the Strategic Report.
13. SHARE CAPITAL
2022 2021
£’000 £’000
Issued and fully paid:
80,000,001 ordinary shares of 1p per share 800 800
There is a single class of ordinary shares. The voting rights of the ordinary
shares on a poll are one vote for each share held. There are no:
• restrictions on transfer of, or in respect of the voting
or dividend rights of, the Company’s ordinary shares;
• agreements, known to the Company, between holders of
securities regarding the transfer of ordinary shares;
or
• special rights with regard to control of the Company
attaching to the ordinary shares
14. NET ASSET VALUE PER SHARE
2022 2021
Net asset value per share 129.8p 155.7p
The net asset value per share is based on the assets attributable to equity
shareholders of £103,831,000 (2021: £124,531,000) and on the number of
ordinary shares in issue at the year end of 80,000,001.
There are no dilutive instruments issued by the Company.
15. RECONCILIATION OF NET CASH OUTFLOW FROM OPERATING
ACTIVITIES
2022 2021
£’000 £’000
(Losses)/gains before taxation (20,444) 18,464
Losses/(gains) made on investments 21,413 (21,124)
969 (2,660)
Decrease/(increase) in other debtors 133 (134)
(Decrease)/increase in creditors, accruals and performance fee provisions (1,738) 1,730
Net taxation suffered on investment income (115) (44)
Net cash outflow from operating activities (751) (1,108)
16. RELATED PARTIES
The following are considered to be related parties:
• Frostrow Capital LLP
• The Directors of the Company
Details of the relationship between the Company and the Company’s AIFM are
disclosed in the Strategic Report. Details of fees paid to Frostrow by the
Company can be found in note 3. All material related party transactions have
been disclosed in note 3. Details of the remuneration of the Directors can be
found in note 4 and in the Directors’ Remuneration Report within the Annual
Report. Details of the Directors’ interests in the capital of the Company
can be found on in the Directors’ Remuneration Report.
The balance outstanding to Frostrow at the year end was £20,000 (2021:
£23,000). No balances were due to the Directors (2021: nil).
17. FINANCIAL INSTRUMENTS
Risk management policies and procedures
The Company’s financial instruments comprise securities and other
investments, cash balances and certain debtors and creditors that arise
directly from its operations.
As an investment trust, the Company invests in equities and other investments
for the long term so as to achieve its Investment Objective. In pursuing its
Investment Objective, the Company is exposed to a variety of risks that could
result in a reduction in the Company’s net assets.
The main risks that the Company faces arising from its use of financial
instruments are:
(i) market risk (including foreign currency risk, interest rate
risk and other price risk)
(ii) liquidity risk
(iii) credit risk
These risks and the Directors’ approach to the management of them, are set
out in the Strategic Report. The AIFM, in close co-operation with the Board
and the Portfolio Manager, co-ordinates the Company’s risk management.
(i) Other price risk
In pursuance of the Investment Objective, the Company’s portfolio is exposed
to the risk of fluctuations in market prices and foreign exchange rates.
The Board manages these risks through the use of investment limits and
guidelines, and monitors the risks through monthly compliance reports from
Frostrow, with reports from Frostrow and the Portfolio Manager also presented
at each Board meeting. In addition, Frostrow monitors the exposure of the
Company and compliance with the investment limits and guidelines on a daily
basis.
Other price risk sensitivity
Other price risk may affect the value of the quoted investments.
If market prices at the date of the Statement of Financial Position had been
25% higher or lower while all other variables had remained constant: the
revenue return would have decreased/increased by £46,000 and £57,000
respectively (2021: £66,000 and £81,000 respectively); the capital return
would have increased/decreased by £18,199,000 and £19,009,000 respectively
(2021: £24,450,000 and £24,389,000 respectively); and, the return on equity
would have increased/decreased by £18,152,000 and £18,953,000 respectively
(2021: £24,384,000 and £24,309,000 respectively). The calculations are based
on the portfolio as at the respective dates of the Statement of Financial
Position and are not representative of the year as a whole.
(ii) Foreign currency risk
A significant proportion of the Company’s portfolio positions are
denominated in currencies other than sterling (the Company’s functional
currency, and the currency in which it reports its results). As a result,
movements in exchange rates can significantly affect the sterling value of
those items.
Foreign currency risk is monitored in conjunction with other price risk as
described above. The Portfolio Manager uses foreign currency forwards to hedge
the foreign currency risk. As at 31 December 2022, approximately 50% of the
Company’s euro and US dollar exposures were hedged.
Foreign currency exposure
The fair values of the Company’s assets and liabilities that are denominated
in foreign currencies are shown below:
2022 2021
Current Current
Investments Derivatives* assets Net Investments Derivatives assets Net
£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
U.S. dollar 69,885 (37,329) 2,003 34,560 102,158 (48,015) 1 54,144
Euro 16,074 (6,680) 68 9,462 15,806 (8,400) 49 7,455
Other – – 44 44 – – 38 38
85,959 (44,009) 2,115 44,066 117,964 (56,415) 88 61,637
* Derivatives comprise foreign currency forwards used to partially hedge the
Company’s exposure to overseas currencies.
Foreign currency sensitivity
The following table details the sensitivity of the Company’s net return for
the year and shareholders’ funds to a 10% increase and decrease in sterling
on the Company’s net currency exposures after hedging.
These percentages have been determined based on market volatility in exchange
rates over the period since launch. The sensitivity analysis is based on the
Company’s significant foreign currency exposures at each Statement of
Financial Position date.
2022 2021
USD EUR Other Impact on NAV USD EUR Other Impact on NAV
£’000 £’000 £’000 £’000 % £’000 £’000 £’000 £’000 %
Sterling depreciates 3,840 1,051 5 4,896 5% 6,016 828 4 6,848 5%
Sterling appreciates (3,142) (860) (4) (4,006) (4%) (4,922) (678) (3) (5,603) (4%)
(iii) Interest rate risk
Interest rate changes may affect:
* the level of income receivable from floating and fixed rate securities and
cash at bank and on deposit; and
* the fair value of investments in fixed interest securities.
Interest rate exposure
The exposure of financial assets and liabilities to fixed and floating
interest rates, is shown below.
2022 2021
Fixed Floating Fixed Floating
rate rate rate rate
£’000 £’000 £’000 £’000
Cash – 6,061 – 878
– 6,061 – 878
Interest rate sensitivity
If interest rates had been 1% higher or lower and all other variables were
held constant, the Company’s net return for the year ended 31 December 2022
and the net assets would increase/decrease by £61,000 (2021: £9,000).
(iv) Liquidity risk
This is the risk that the Company will encounter difficulty in meeting
obligations associated with financial liabilities.
The main liquidity requirements the Company may face are its commitments to
the investments in limited partnership funds, as set out in note 19. These
commitments can be drawn down on 3 or 10 days notice. Having reviewed the
nature of the investment and the track record of the underlying mandate for
the most significant commitment, to TCI Real Estate Fund III Limited, the
Board consider that it will be drawn down gradually over the life of the
investment and as such poses a low risk to the liquidity of the Company.
Frostrow and/or the Portfolio Manager are in regular contact with the managers
of the limited partnership funds, as a part of which they would be made aware
of, and plan accordingly for any drawdowns under those commitments.
The Company’s assets comprise quoted securities (equity shares, fixed income
and fund investments), cash, and unquoted limited partnership funds and
investments. Whilst the unquoted investments are illiquid, short-term
flexibility is achieved through the quoted securities, which are liquid, and
cash which is available on demand.
The liquidity of the quoted securities is monitored on at least a monthly
basis to ensure that there is sufficient liquidity to meet the company’s
liabilities and any forthcoming drawdowns.
(v) Credit risk
Credit risk is the risk of failure of a counterparty to discharge its
obligations resulting in the Company suffering a financial loss. The quoted
debt investments are managed as part of an investment portfolio, and their
credit risk is considered in the context of their overall investment risk.
Credit risk exposure
2022 2021
£’000 £’000
Derivative financial instruments 4,200 224
Current assets:
Other receivables 104 218
Cash 6,061 878
(vi) Hierarchy of investments
The Company’s investments are valued within a fair value hierarchy that
reflects the significance of the inputs used in making the fair value
measurements as described in the accounting policies.
Level 1 Level 2 Level 3 Total
At 31 December 2022 £’000 £’000 £’000 £’000
Investments 76,945 – 16,864 93,809
Derivatives – 4,200 – 4,200
Level 1 Level 2 Level 3 Total
At 31 December 2021 £’000 £’000 £’000 £’000
Investments 109,839 – 15,776 125,615
Derivatives – (99) – (99)
Level 3 investments at 31 December 2022
Cost Value Ownership Valuation basis
‘000 £’000
Helios Co-Invest LP (1) US$4,458 10,672 4.73% NAV
KKR Aqueduct Co-Invest LP (2) £4,000 4,646 1.15% NAV
TCI Real Estate Partners Fund III Ltd US$1,715 1,546 1.18% NAV
1 Described as X-ELIO in the portfolio statement
2 Described as John Laing in the portfolio statement
Level 3 investments at 31 December 2021
Cost Value Ownership Valuation
‘000 £’000 basis
Helios Co-Invest LP (1) US$6,084 10,174 4.73% NAV
KKR Aqueduct Co-Invest LP (2) £4,000 4,000 1.23% Price of recent transactions
TCI Real Estate Partners Fund III Ltd US$2,169 1,602 1.18% NAV
WCP Growth Fund LP £7,447 – 10.30% Discount to adjusted NAV
1 Described as X-ELIO in the portfolio statement
2 Described as John Laing in the portfolio statement
During the year, the Company realised a gain of £1,023,000 (2021: £996,000)
on Helios Co-Invest LP after receiving a distribution of £2,003,000 (2021:
£2,034,000) in relation to the disposal of a portfolio of X-ELIO’s
operating assets in Mexico (2021: Spain). Helios Co-Invest LP remained the
largest unquoted investment of the Company as at 31 December 2022.
The Company’s co-investment with KKR in John Laing was completed in December
2021 with an initial investment of £4 million. It is expected that the
development pipeline of infrastructure assets developed by John Laing will
provide the Company with opportunities to commit additional capital over time.
WCP Growth Fund LP has been dissolved during the year and no distributions
were received by the Company.
If a 25% discount to NAV was applied to the NAV of the level 3 investments as
at 31 December 2022, the impact would have been a decrease of £4,154,000
(2021: £3,512,000) in net assets and the net return for the year.
(vii) Capital management policies and procedures
The Company’s capital management objectives are to ensure that it will be
able to continue as a going concern and to maximise the income and capital
return to its equity shareholders through an appropriate level of gearing.
The Board’s policy is to limit gearing to a maximum of 20% of the
Company’s net assets. Currently the Company does not have any gearing and
there are no facilities in place.
The capital structure of the Company comprises the equity share capital
(ordinary shares), retained earnings and other reserves as disclosed on the
Statement of Financial Position.
The Board, with the assistance of the AIFM and the Portfolio Manager, monitors
and reviews the broad structure of the Company’s capital on an ongoing
basis. This includes a review of:
* the planned level of gearing, which takes into account the Portfolio
Manager’s view of the market;
* whether to buy back equity shares, either for cancellation or to hold in
treasury, in light of any share price discount to net asset value per share;
* whether to issue new equity shares; and,
* the extent to which revenue in excess of that required for distributions
should be retained.
18. CAPITAL RESERVE
2022 2021 Capital
Capital Reserve Reserve
Other £’000 Investment Holding Gains £’000 Total £’000 Other £’000 Investment Holding (Losses) /Gains £’000 Total £’000
At 1 January 7,347 38,649 45,996 2,366 25,534 27,900
Net (losses)/gains on investments (12,655) (8,758) (21,413) 8,009 13,115 21,124
Expenses charged to capital 387 – 387 (3,028) – (3,028)
At 31 December (4,921) 29,891 24,970 7,347 38,649 45,996
Sums within the Total Capital Reserve less unrealised gains (those on
investments not readily convertible to cash) are available for distribution.
In addition, the Revenue Reserve is available for distribution.
19. FINANCIAL COMMITMENT
The Company has made commitments to provide additional funds to the following
investments:
Sterling Local currency Notice of
Commitment Commitment drawdown
Helios Co-Invest LP £52,000 US$62,000 3 business days
TCI Real Estate Partners Fund III Limited £2,855,000 US$3,434,000 10 business days
20. THE COMPANY
The Company is a public limited company (PLC) incorporated in England and
Wales. Its principal activity is that of an investment trust company within
the meaning of sections 1158/1159 of the Corporation Tax Act 2010 and its
registered office and principal place of business is 25 Southampton Buildings,
London, WC2A 1AL.
21. POST BALANCE SHEET EVENT
As shown in the portfolio listing above, the Company has a co-investment with
KKR in X-ELIO, held through Helios Co?Invest LP (“Helios”). As at 31
December 2022, the Company had a 4.73% holding in Helios (Note 17), which
translates into an effective holding of 0.97% in X-ELIO. On 21 March 2023, KKR
announced that it had reached an agreement to sell its 50% stake in X-ELIO to
Brookfield Renewable, which owns the remaining 50%.
As at the approval date of this Annual Report, the exact deal terms are yet to
be confirmed but once finalised the impact will be reflected in the
Company’s daily NAV announcements to the stock exchange.
Glossary
Alternative Investment Fund Managers Regulations (“UK AIFMD”)
Agreed by the European Parliament and the Council of the European Union and
transposed into UK legislation, the UK AIFMD classifies certain investment
vehicles, including investment companies, as Alternative Investment Funds
(“AIFs”) and requires them to appoint an Alternative Investment Fund
Manager (“AIFM”) and depositary to manage and oversee the operations of
the investment vehicle. The Board of the Company retains responsibility for
strategy, operations and compliance and the Directors retain a fiduciary duty
to shareholders.
Compounding Hurdle
The payment of a performance fee is conditional on the Company’s NAV being
above the high-water mark and the return on the gross proceeds from the IPO of
the Company exceeding an annualised compound return of 5%.
Discount or Premium
A description of the difference between the share price and the net asset
value per share. The size of the discount or premium is calculated by
subtracting the share price from the net asset value per share and is usually
expressed as a percentage (%) of the net asset value per share. If the share
price is higher than the net asset value per share the result is a premium. If
the share price is lower than the net asset value per share, the shares are
trading at a discount.
Gearing
In simple terms gearing is borrowing. An investment trust can borrow money to
invest in additional investments for its portfolio. The effect of the
borrowing on shareholders’ funds is called ‘gearing’. If the Company’s
assets grow, shareholders’ funds grow proportionately more because the debt
remains the same. But if the value of the Company’s assets falls, the
situation is reversed. Gearing can therefore enhance performance in rising
markets but can adversely impact performance in falling markets.
Gearing represents borrowings at par less cash and cash equivalents expressed
as a percentage of shareholders’ funds. Potential gearing is the company’s
borrowings expressed as a percentage of shareholders’ funds.
High Watermark
The high watermark is the highest net asset value that the Company has reached
on which a performance fee has been paid. Its initial level was set at 100p on
the launch of the Company.
Leverage
For the purposes of the UK AIFMD, leverage is any method which increases the
Company’s exposure, including the borrowing of cash and the use of
derivatives. It is expressed as a ratio between the Company’s exposure and
its net asset value and can be calculated using gross and commitment methods.
Under the gross method, exposure represents the sum of the Company’s
positions after the deduction of sterling cash balances, without taking into
account any hedging and netting arrangements. Under the commitment method,
exposure is calculated without the deduction
of sterling cash balances and after certain hedging and netting positions (as
detailed in the UK AIFMD) are offset against each other.
Net Asset Value (“NAV”)
The value of the Company’s assets, principally investments made in other
companies and cash being held, minus any liabilities. The NAV per share is
also described as ‘shareholders’ funds’ per share. The NAV is often
expressed in pence per share after being divided by the number of shares in
issue. The NAV per share is unlikely to be the same as the share price which
is the price at which the Company’s shares can be bought or sold by an
investor. The share price is determined principally by the relationship
between the demand for and supply of the shares.
NAV Total Return (APM)
The theoretical total return on shareholders’ funds per share, reflecting
the change in NAV assuming that any dividends paid to shareholders were
reinvested at NAV at the time the shares were quoted ex-dividend. A way of
measuring investment management performance of investment trusts which is not
affected by movements in the share price.
31 December 2022 31 December 2021
Opening NAV 155.7p 132.7p
(Decrease)/increase in NAV (25.9)p 23.0p
Closing NAV 129.8p 155.7p
% (decrease)/increase in NAV (16.6%) 17.3%
Impact of dividend reinvested 0.1% -
NAV total (loss)/return (16.5%) 17.3%
Share Price Total Return (APM)
The return to the investor, on a last traded price to a last traded price
basis, assuming that all dividends paid were reinvested, without transaction
costs, into the shares of the Company at the time the shares were quoted
ex-dividend.
31 December 2022 31 December 2021
Opening share price 112.0p 99.0p
(Decrease)/increase in share price (23.0)p 13.0p
Closing share price 89.0p 112.0p
% (decrease)/increase in share price (20.5%) 13.1%
Impact of dividend reinvested 0.2% -
Share price total (loss)/return (20.3%) 13.1%
Ongoing Charges (APM)
Ongoing charges are calculated by taking the Company’s annualised operating
expenses and expressing them as a percentage of the average daily net asset
value of the Company over the year. The costs of buying and selling
investments are excluded, as are interest costs, taxation, costs of buying
back or issuing shares and other non-recurring costs. These items are excluded
because if included, they could distort the understanding of the Company’s
performance for the year and the comparability between periods.
31 December 2022 £’000 31 December 2021 £’000
Total Expenses 2,018 2,138
Average NAVs 111,560 117,721
Ongoing charge ratio 1.8% 1.8%
The figures and financial information for 2021 are extracted from the
published Annual Report for the year ended 31 December 2021 and do not
constitute the statutory accounts for that year. The Annual Report for the
year ended 31 December 2021 has been delivered to the Registrar of Companies
and included the Independent Auditor’s Report which was unqualified and did
not contain a statement under either section 498(2) or section 498(3) of the
Companies Act 2006.
The figures and financial information for 2022 are extracted from the Annual
Report and financial statements for the year ended 31 December 2022 and do not
constitute the statutory accounts for the year. The Annual Report for the
year ended 31 December 2022 includes the Independent Auditor’s Report which
is unqualified and does not contain a statement under either section 498(2) or
section 498(3) of the Companies Act 2006. The Annual Report and financial
statements have not yet been delivered to the Registrar of Companies.
ANNOUNCEMENT ENDS
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