REG-Menhaden Resource Efficiency Plc: Annual Financial Report
22/04/2024 07:15
Menhaden Resource Efficiency PLC
(the “Company”)
Final Results for the Year Ended 31 December 2023
The Company’s Annual Report for the year ended 31 December 2023, which
includes the notice of the Company’s forthcoming annual general meeting,
will be posted to shareholders shortly.
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
19 April 2024
.
Strategic Report
Company Performance
As at For the year ended
31 December 2023 31 December 2023
126.7m 23.8%
NAV per share NAV per share total return*
2022: £103.8 million 2022: (16.5%)
160.3p 13.6%
NAV per share Share price total return*
2022: 129.8p 2022: (20.3%)
100.8p 0.9p**
Share price Dividend
2022: 89.0p 2022: 0.4p
37.2% 1.7%
Share price discount to NAV per share* Ongoing charges ratio*
2022: 31.4% 2022: 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”)
**Subject to shareholder approval
.
Chairman’s Statement
Introduction
After becoming Chair in May 2023, I am pleased to present our ninth annual
report since our launch in July 2015. It covers the calendar year ended 31
December 2023. By way of reminder, the Company aims to generate long term
shareholder returns, predominantly in the form of capital growth, by investing
in businesses and opportunities that are demonstrably delivering or
benefitting significantly from the efficient use of energy and natural
resources, irrespective of their size, location or stage of development. We
are a high conviction long term patient capital investment.
Financial performance
Short term
The overall performance in 2023 has been encouraging, and it was pleasing to
be short listed for specialist investment company of 2023 by ‘Investment
Week’.
The Company’s total net asset value (“NAV”) increased 21.9% from £103.8
million to £126.7 million, and the Company’s share price increased 13.2%
from 89.0p per share to 100.8p.
The NAV per share increased by 16.6% from 129.8p to 160.3p in 2023 giving a
NAV per share total return* of 23.8% (2022: -16.5%). This is a 15.6%
outperformance over the Company’s performance benchmark, RPI+3% (compound),
which returned 8.4%, and a 15.0% outperformance over the AIC environmental
sector which returned 8.8%.
Although the Company’s share price discount to NAV increased to -37.2%
(2022: -31.4%), the share price total return* was a respectable 13.6%
(compared to 2022: -0.3%). Notwithstanding this, the Board continues to try to
reduce the discount and actions it is taking are outlined below.
*Alternative Performance Measure (see Glossary)
Longer term
In line with our aim to generate long term shareholder returns, predominantly
in the form of capital growth, the Company’s compound NAV performance over
the last 5 years of 12.3% per annum in 2023 (2022: 7.3% per annum)
outperformed by 5.6%, the compound return for our RPI +3% benchmark of 6.7%
per annum (2022: 5.3% per annum).
Moreover, the Company’s NAV performance has been ranked 1st in the AIC
environmental sector over the last 1, 3, and 5 years. The Company aims,
wherever it can to reduce on-going charges, and over the last 5 years they
have reduced by nearly 20% from 2.1% to 1.7% in 2023 (2022:1.8%). A small
shareholder dividend has been paid annually since 2018, the exception being
2020 during the global pandemic.
Further information and performance metrics that describe the development of
the Company over the last 9 years between 2015 and 2023 is presented on page
89.
Investment strategy
2023 saw the global demand for energy and resources continue to rise. The
World Meteorological Association stated that 2023 was the hottest year ever
recorded and the International Monetary Fund reported that financial markets
were underpricing climate related risk. The need for businesses to
progressively reduce their use of fossil fuels and greenhouse gas emissions
has never been so critical as part of the green industrial shift mega trend.
We have continued to invest in a concentrated portfolio of high quality
largely global businesses, the majority of which have a key role in enabling
the transition to a lower-carbon future. 2023 saw a moderate reweighting
towards sustainable infrastructure and transportation, leading to a
commensurate decrease towards our digitalisation, industrial emissions
reduction, water and waste management, and clean energy themes.
Our public equity investments, comprising 77.2% of our portfolio, performed
well during the year delivering a total return of 29.0%, and adding 21.6% to
the NAV per share. The largest contributions came from our digitalisation
themed investments (Alphabet, Microsoft, Amazon) and sustainable transport
companies (VINCI, Safran and Airbus). The weakest contributors were our
investments in North American railway companies.
Our unique private equity co-investments, which at the end of 2023 comprised
9.7% of our portfolio, also performed well in 2023 delivering a total return
of 32.3%, adding 2.9% to the NAV per share. We made a successful exit from our
largest ever co-investment (£9.1 million) in a clean energy developer, X-ELIO
with Kohlberg Kravis Roberts (KKR). It delivered a 2.6x return (in sterling
terms) following its acquisition in November 2023 by Brookfield Renewables.
Following on from our US$15 million commitment to The Children’s Investment
Trust (TCI) Real Estate Partners Fund III, which finances the development of
best in class energy efficient buildings, during 2023 we made a further US$25
million commitment to TCI Real Estate Partners Fund IV.
In addition to the investments, our net assets as at 31 December 2023
predominantly comprised 1.5% FX hedge and 11.8% cash. In early 2024 FX hedging
was discontinued and a proportion of the cash proceeds deployed to increase
our public equity positions. In March 2024 we have made a new US$17.5 million
clean energy co-investment commitment with KKR in Avantus (a USA solar and
energy storage developer), further increasing our strategic asset allocation
to private equity. Further details and commentary about the performance and
development of the Company’s investment portfolio can be found in the
Portfolio Manager’s report (pages 15 to 19).
Environmental performance
In 2023, the energy use disclosures from our listed equities reported a 7%
uplift in the renewable energy they generated and 36% increase in renewable
energy consumed, so reducing emissions from their use of fossil fuel energy.
Some 75% of our listed equities have committed to, or set science-based
targets for emissions reductions in line with the goals of the Paris global
climate agreement.
Whilst some companies in which the Company’s portfolio is invested, such as
in transport infrastructure, use fossil fuels, our Portfolio Manager only
invests in those that are using innovative, best practice technological
solutions to significantly reduce their emissions and become more climate
friendly. For example, Airbus is global leader in decarbonising and improving
the efficiency of aircraft with a target that 50% will use sustainable
aviation fuel by 2030.
E-commerce is also a key driver of decarbonisation and companies like
Microsoft and Amazon are essential utilities for millions of businesses and
consumers. Microsoft is committed to be carbon negative by 2030. Amazon has an
ambition to reach 100% renewable energy usage across its business by 2025 and
at the end of 2022 used 85% renewable energy.
The Company is a supporter of the UN Sustainable Development Goals (SDGs) and
a snapshot of how our portfolio companies contribute to seven key goals can be
found within the Company’s Environmental Impact Report on pages 20 to 24. It
is also made available as a separate document on our website www.menhaden.com,
including methodological details that are not included within this annual
report.
Share price discount to NAV per share
At the end of 2023 the shares of over 90% of the London Stock Exchange listed
investment company sector were trading at a discount, including this Company.
It is the Board’s view that this metric is not necessarily a fair reflection
of the value of our assets and overall financial performance.
However, the Company’s share price discount continues to be a metric that
concerns the Board and which it monitors extremely closely. The Board has not
previously favoured share buy backs as a means for mitigation of the share
price discount. It remains our view that share buybacks are not usually in the
best long-term interest of shareholders taken a whole as they reduce the size
of the Company and increase the ongoing charges ratio.
However, after a step-down in the share price in January 2023 the Board
decided it would undertake a modest programme of share buybacks. We considered
that this might reduce the volatility of the share price at that time, take
advantage of the accretion to NAV that buying back shares at a discount
achieves, and provide a signal to the market of our confidence in the inherent
value of the Company’s portfolio. 975,000 shares (1.2% of total issuance)
were bought back between February and April 2023. While this provided some
additional share liquidity in the volatile market conditions at that time, the
buybacks resulted in no discernible short-term or longer-term impact on the
discount. For small investment companies, there is scant published evidence
that share buybacks can deliver any sustainable discount reduction.
During late 2023 the Board approved an enhanced marketing and communications
plan which is being implemented by our AIFM and Portfolio Manager with the aim
to influence investor sentiment and develop new demand for our shares to try
and reduce the discount. The efficacy of these actions, which together with
the relentless efforts of the Portfolio Manager to continue to generate strong
investment returns should help to narrow the share price discount over time,
will be continuously assessed during 2024.
While further buybacks to help stabilise a falling share price are not ruled
out, any future decision will be dependent on the prevailing market
conditions, the Company’s available liquid resources, and the potential
conflict between accretive share buybacks and the availability of more
attractive portfolio investment opportunities offering a greater return on
capital.
Additionally, in the course of the Board’s considerations of the impact of
any such further action, the Company, in consultation with the Takeover Panel,
identified that in the context of any such buybacks Ben Goldsmith, the CEO of
the Portfolio Manager (Menhaden Capital Management LLP), together with persons
who are, or may be presumed to be, acting in concert with him, hold a
significant percentage of the voting rights of the Company (27.9% of the
Company’s issued share capital as at 31 March 2024). Under Rule 37 of the
Takeover Code, any increase in the percentage of shares carrying voting rights
held by a shareholder or group of persons acting in concert with that
shareholder resulting from the purchase by a company of its own shares will be
treated as an acquisition for the purpose of Rule 9 of the Takeover Code.
The identification of this concert party and the level of its aggregate
interests in the Company’s shares is likely to have the effect of limiting
any share buybacks. The Company and the members of the concert party are keen
to avoid inadvertently triggering Rule 9.1(a) of the Takeover Code, which
requires a mandatory offer to be made for the entire issued share capital of
the Company in the event that any person acquires an interest (taken together
with shares in which other persons deemed to be acting in concert are
interested) of 30% or more of the voting rights of the Company.
The Board has instructed the Company Secretary to monitor the interests and
dealings of the members of the concert party and has requested that the
Portfolio Manager keep the Board and the Company Secretary updated with the
details of any changes to the composition of the concert party and its
interests in the Company in order for the Board to be informed of the concert
party’s position prior to considering any future share buybacks.
The Board is asking shareholders to renew the authority to repurchase the
Company’s shares in the market at the forthcoming AGM. Buybacks will remain
at the discretion of the Board.
It remains our aim for the Company to be in a position to enlarge its capital
base through the issuance of new shares. This would reduce the annual ongoing
charges and enhance the secondary market liquidity of the Company’s shares,
which the Board believes is in the best interest of all shareholders. As the
Company can only issue new shares when the share price is at a premium to NAV,
our fundamental aim is to improve the share price through enhanced investment
performance supported by effective marketing strategies and informative
communications to potential new investors who are attracted by our investment
thesis and track record.
Shareholder dividend
While income generation, via the payment of annual shareholder dividends, is
not one of our primary investment aims, such payments are an important
shareholder benefit. The Company’s dividend policy is to pay a dividend
sufficient for it to maintain compliance with its investment trust legal
status. The revenue return for the year to 31 December 2023 of £894,000 means
that the legal threshold requiring a dividend payment has been exceeded and
so, subject to shareholder approval, a dividend will be paid for 2023, as it
has been four times previously. The Board is recommending to shareholders that
a final dividend of 0.9p per share (0.4p in 2022) be declared in respect of
the year ended 31 December 2023 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 5 July 2024 to shareholders on the register on 7
June 2024. The shares will be marked ex-dividend on 6 June 2024.
Board developments
There have been a number of changes to the Board during 2023. In May 2023 Ian
Cheshire stepped down as Chair and became an independent non-executive
Director and Barbara Donoghue became Chair of the Audit Committee. Later, in
December, Barbara succeeded Ian Cheshire as Chair of the Management Engagement
Committee and was also appointed as Senior Independent Director. Following a
competitive recruitment process, I am delighted that Soraya Charabak joined
the Board in March 2023. Duncan Budge retired from the Board at our last AGM.
We are exceedingly grateful for his valuable contributions to our Board and
Committee meetings.
Strategic outlook
Looking ahead further, continued geo-political tensions and economic
uncertainties, with potential disruption to global supply chains, are quite
likely. For example, arising from the continuing conflicts in the Ukraine and
Gaza; tensions between America and China over trade; and volatility in the
price of energy and natural resources. Also the impact of climate change, and
increasing incidence of extreme weather events, has increasing financially
material consequences. All these macro-factors have significant impacts on
millions of people, financial markets and on investor sentiment.
Notwithstanding these challenges, the Board considers the Company’s unique
strategy and high conviction portfolio to be well placed for further capital
growth because of the high quality and the defensive and inflation resistant
properties of our investment holdings. Moreover, the Board remains convinced
all businesses must respond to climate change by navigating the energy
transition from fossil fuels to more renewable sources and the need to be ever
more energy and resource efficient becomes even more critical to their
on-going sustainability and success. Accordingly, the Company’s investment
thesis should continue to provide long-term benefits for our investors. The
next five-yearly continuation vote for the Company will be in July 2025.
Annual General Meeting
The Company’s AGM will be held at the offices of Frostrow Capital LLP, 25
Southampton Buildings, London WC2A 1AL on Thursday, 27 June 2024 at 11.30 a.m.
The Notice convening the AGM together with explanations of the proposed
resolutions can be found on pages 94 to 99 of the Annual Report. The Board
considers that all the resolutions are in the best interests of the Company
and the shareholders taken as a whole and unanimously recommend they be
approved.
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,
especially if they are unable to attend, are invited to send any questions
they may have to the Company Secretary by email to info@frostrow.com ahead of
the meeting.
Howard Pearce
Chairman
19 April 2024
.
Portfolio
Investments held as at 31 December 2023
Investment Country Fair % of
Value £’000 Total Net Assets
Airbus France 15,858 12.5
Alphabet United States 15,342 12.1
Microsoft United States 13,269 10.5
Safran France 11,329 8.9
VINCI France 10,345 8.2
Canadian Pacific Kansas City Canada 9,181 7.2
Canadian National Railway Canada 8,536 6.7
Amazon United States 6,198 4.9
TCI Real Estate Partners Fund IV* United States 6,021 4.8
John Laing Group* 1 UK 4,503 3.6
Ten Largest Investments 100,582 79.4
Ocean Wilsons Bermuda 4,320 3.4
TCI Real Estate Partners Fund III* United States 1,736 1.4
Waste Management United States 886 0.7
Union Pacific United States 771 0.6
ASML Netherlands 709 0.6
KLA United States 593 0.5
Lam Research United States 430 0.3
Total Investments 110,027 86.9
Net Current Assets (including cash) 16,652 13.1
Total Net Assets 126,679 100.0
1 Investment made through KKR Aqueduct Co-Invest L.P.
* Unquoted
Business Description Investment Theme
Designs and manufactures next generation commercial aircraft which offer significant fuel efficiency savings Sustainable infrastructure and transportation
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 Digitalisation
Provides cloud infrastructure and software services which deliver energy efficiency savings for customers versus legacy solutions Digitalisation
Designs, manufactures and services next generation aircraft engines which offer significant fuel efficiency savings Industrial emissions reduction
Builds and operates energy efficient critical infrastructure assets Sustainable infrastructure and transportation
Owns and operates fuel-efficient freight railways in Canada and the USA Sustainable infrastructure and transportation
Operates rail freight services across North America, which represent the most environmentally friendly way to transport freight over land Sustainable infrastructure and transportation
An energy efficient ecommerce and cloud computing business aiming to use only renewable energy by 2030 Digitalisation
Invests in energy-efficient real estate projects Sustainable infrastructure and transportation
Portfolio of mostly renewable rail and social infrastructure assets Sustainable infrastructure and transportation
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 Digitalisation
Develops, manufactures and services inspection and metrology equipment used to increase the efficiency of semiconductor manufacturing Digitalisation
Develops, manufactures and services etching and deposition equipment used to produce more energy efficient semiconductor chips Digitalisation
.
Portfolio Manager’s Review
Performance
During 2023, the Company’s NAV per share increased from 129.8p to 160.3p.
Together with the 0.4p per share dividend paid in the year, this represents a
total return of 23.8% and compares to the benchmark (RPI+3%) return of 8.4%.
Importantly, this level of performance has been achieved with no change in our
appetite for, and attitude towards, risk. The contributions to the NAV per
share total return over the period are summarised below:
31 December 2023
NAV Contribution
% %
Quoted Equities 77.2 21.6
Private Investments 9.7 2.9
FX Hedges 1.5 2.2
Cash 11.8 0.0
Other net current liabilities (0.2) (1.2)
Expenses (1.7)
Dividend paid (0.4)
Net Assets 100.0
Net Return 23.4
Impact of dividend reinvestment 0.4
Total Return 23.8
The drive for resource efficiency continues to accelerate, with the US and
China restarting a joint effort to tackle climate change in November 2023 and
then nearly every country in the world agreeing to transition away from fossil
fuels at the COP28 summit in December 2023. More than 100 countries also
signed pledges to triple global renewable power capacity by 2030 and double
the annual rate of energy efficiency improvements every year to 2030. Our
approach of pairing this theme with a strict focus on quality and valuation
was once again fundamental to generating good investment returns. This
preference for businesses which benefit from barriers to entry, and which
trade at reasonable valuations has led us to invest primarily within the
sustainable infrastructure and transportation and digitalisation themes, and
has mainly been expressed in quoted equities where the return relative to risk
has been more favourable.
Investment performance was led by the portfolio’s digitalisation holdings
(Microsoft, Alphabet and Amazon), in a reversal of their poor performance in
2022. Safran, VINCI and Airbus performed strongly following the aviation
industry’s post Covid resurgence. Within the private portfolio, KKR agreed a
deal to sell its 50% stake (in which the Company participated) in Spanish
solar developer, X-ELIO, to joint venture partner, Brookfield Renewable. The
transaction completed in November and crystallized an aggregate return on
invested capital of 2.15x in US dollars, equivalent to an IRR of ~13% over 8
years. This was our fourth successful exit from a private investment since
inception. In aggregate, these have generated realised gains of approximately
£21 million (and 2.0x cost).
Key portfolio decisions during the period included the reduction of the
Alphabet position by one half, due to concerns over rising competition, and
the partial redeployment of the proceeds into re-establishing a position in
Airbus in February 2023. Airbus has the leading narrow body aircraft franchise
and in our view is best placed to help airlines meet their growing needs for
fleet renewals and decarbonisation. We continued to increase the size of the
Airbus position over the subsequent months. We always monitor valuations and
adjust positions accordingly where appropriate. In this vein, we opted to take
some profits on the Microsoft holding in June, following very strong
performance. We then added the proceeds, and some excess cash, to the
portfolio’s Airbus, Canadian National Railway and VINCI holdings. We
believed these investments offered similar returns premised on less demanding
valuations.
Within the Company’s private portfolio, we made a US$25 million commitment
to the fourth vintage of the TCI Real Estate Partners strategy in March 2023.
This fund will follow the same strategy, and offer similar environmental
benefits, as the TCI Real Estate Partners Fund III. The Fund helps to finance
developments which are best in class in terms of energy efficiency and
environmental standards. The first drawdown was called in October 2023, which
was funded from cash on hand and by partial sales of quoted equity holdings.
Following the year end and the settlement of outstanding currency hedges, we
decided to cease partly hedging US dollar and Euro currency exposures due to
changes in the outlook for currencies and a new requirement to cash
collateralise forward exposures on a daily basis.
In February 2023, following a widening of the discount of the price at which
the Company’s shares traded relative to their NAV, the Board of Directors
authorised the deployment of up to £1 million for a share buyback programme.
975,000 shares (1.2% of the total issued) were purchased between mid-February
to early April at a cost of £920,000.
We maintain a proactive stance on stewardship. We carefully assess shareholder
resolutions and engage with portfolio companies on environmental issues. We
seek to promote energy transition plans to progress towards net zero targets
and greater disclosure of greenhouse gas emission reduction and mitigation
strategies. During the period we voted against the recommendation of both
Amazon’s and Microsoft’s management on resolutions requesting disclosure
on how the company is protecting the retirement plan’s beneficiaries from
climate risk.
Quoted Equities
Quoted equities represented 77.2% of total NAV at 31 December 2023, and
delivered a total return of 29.0% over the period, adding 21.6% to the NAV per
share.
Investment Increase/ Contribution
(Decrease) % to NAV %
Alphabet 72.2 5.7
Microsoft 78.5 5.1
Safran 39.4 2.9
Amazon` 90.1 2.7
VINCI 21.2 1.6
Airbus 11.7 1.4
Ocean Wilsons 46.3 1.3
KLA 55.6 0.2
LAM Research 89.1 0.2
ASML 36.7 0.2
Canadian National Railway 6.8 0.1
Union Pacific 20.7 0.1
Waste Management Inc 16.0 0.1
Canadian Pacific Kansas City 6.2 0.1
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.
Alphabet is the market leader in search. The company’s market share (>90%)
has not materially changed following the launch of Open AI’s ChatGPT and the
proliferation of large language models. Ecommerce still represents only a
fraction of total retail sales and we believe Google’s Search business can
continue to generate healthy revenue growth going forward. The company
continues to drive its sustainability agenda with aims to achieve net-zero
emissions, run on 24/7 carbon-free energy and to replenish more water than it
consumes. Progress is also being made on costs, with management continuing to
restructure business units and reduce headcount. Core operating margins are
improving. Alphabet remains focused on using Generative AI to enhance
Google’s products and services for both users and advertisers and launched
its Gemini AI model in December 2023, followed by full release in February
2024.
That said, we reduced the position materially in February 2023 in the face of
rising competition in Search, following Microsoft’s launch of its new Bing
search engine. Whilst we thought that Alphabet was well positioned to fend off
this new challenge, we believed that the range of outcomes had widened and
associated risk increased. We sold approximately one half of the position. We
also continue to monitor the various anti-trust actions against the company.
The evidentiary phase of the US Department of Justice’s antitrust trial
against Google concluded during 2023 and closing arguments are set for May
2024.
Microsoft is the key technology partner for enterprise and its software
products are ubiquitous. More than 95% of Fortune 500 companies are customers
of the Azure cloud business and four out of every five use Office 365.
Microsoft strives to ensure their technology infrastructure is fully
sustainable, aiming to operate on carbon-free energy everywhere, at all times,
by 2030. Azure continues to gain share, with growth rates materially outpacing
both Amazon Web Services and Google Cloud. Microsoft’s CFO expects the
growth rate to remain in the high 20s for the first half of 2024. Office 365
is approaching 500 million users across Commercial and Consumer platforms and
continues to grow. The company fully launched its Microsoft 365 Copilot
product at the start of November. Whilst the rate of adoption may be gradual,
we believe that the end productivity gains will support significant future
revenue growth. We opted to take some profits in June, with the shares then up
more than 40% year-to-date in US dollars, and reduced the position by 2.0% of
NAV.
French aircraft engine manufacturer Safran continues to lead the way towards
the decarbonisation of the aviation sector. The company has committed to
reduce absolute Scope 1 and 2 emissions (see page 20) by 50% by 2030 and
reduce Scope 3 emissions by 42.5% per available seat kilometre by 2035 (versus
2018). These targets were independently approved by the SBTi in January 2023.
Renewal of the existing fleet with the latest generation of aircraft powered
by Safran’s LEAP engine should reduce the carbon emissions per passenger
mile by 1-2% per year over the next 15 years. Safran and GE also launched the
RISE (Revolutionary Innovation for Sustainable Engines) programme in 2021.
This engine programme targets further fuel efficiency improvements of more
than 20% and full compatibility with sustainable aviation fuels. The
commercial launch is scheduled for the mid-2030s.
Safran has profited from the commercial aviation industry’s resurgence.
Flight cycles are the key driver of the company’s financial performance,
with most of its earnings coming from aftermarket sales of spare parts. We
believe air travel remains a secular growth story, with most people still
never having travelled on a plane. Growing aftermarket volumes should be
augmented by a benign pricing environment, following difficulties encountered
by engine manufacturer rivals, Pratt & Whitney and Rolls Royce.
Amazon aims to reach net zero carbon emissions by 2040. Progress so far
includes the company’s carbon intensity falling 7% from 2021 to 2022 and 90%
of electricity consumed attributable to renewable energy sources, with a path
to 100% by 2025. Profitability and free cash flow generation have meaningfully
recovered and we expect both to continue growing well. The retail business’
operating margins are benefiting from the switch to a regional fulfilment
model in the US. This translates into shorter delivery distances and faster
delivery speeds. New robotics initiatives could further boost productivity in
the coming years. Amazon Web Services’ growth rate is picking up following a
softer Cloud environment focused on workload optimisations. CEO Jassy is still
keen to highlight the remaining opportunity, with 90% of IT spend still
on-premises. Capital investment is also moderating, following the expansion of
the fulfilment network.
French infrastructure group, VINCI, aims to reduce Scope 1 and 2 emissions by
40% and Scope 3 emissions by 20% by 2030. These are notable goals for a
construction company and include increasing the use of low carbon concrete for
90% of its needs. The airports segment has recovered strongly in 2023. Traffic
is now above 95% of 2019 levels but there are considerable differences between
regions. Neither France nor the UK, two of the most important countries, have
yet returned to 2019 levels. VINCI’s management team continues to deploy
capital in a measured way and outlined plans to build and operate a portfolio
of renewable energy assets through its Cobra IS business unit at its Investor
Day in December 2023. The team is aiming to have 5 GW of capacity in operation
or under construction by 2025 and 12 GW by 2030. The company started operating
its first renewable energy asset last year, with the commissioning of the
Brazilian Belmonte solar farm (0.6 GW) in July 2023.
We renewed a position in aircraft manufacturer Airbus in February and
repeatedly increased its size over the next six months. This was the
portfolio’s largest holding at 12.5% of NAV at the year end. The company’s
shares had previously been held in the portfolio but we exited in April 2021,
believing that the post-Covid recovery would take significantly longer than
implied by the price. Now commercial aviation’s recovery is nearly complete
and the secular growth of air travel appears set to resume. Fleet renewal
requirements and the need for the global aviation sector to accelerate their
decarbonisation are key drivers. By upgrading to Airbus’ latest generation
aircraft, customers can reduce carbon emissions by 20-30%. Airbus’ aircraft
are also certified to operate on 50% sustainable aviation fuel (SAF), with a
target to reach 100% by the end of the decade. Airbus plans to reduce scope 1
and 2 emissions by 63% by 2030 and reduce scope 3 emissions by 46% by 2035.
Their management team remains focused on ramping A320 production. This
programme is sold out until 2029. Personnel hiring ahead of current
manufacturing needs and the building of certain key inventories should help to
ensure a successful ramp up. Engine deliveries remain a bottleneck but both
CFM (Safran and GE) and Pratt & Whitney have reaffirmed their commitments for
2024. Deliveries of aircraft should increase from 735 in 2023 to more than
1,000 annually in the coming years and underpin significant earnings growth.
This profile is well supported by the current backlog of nearly 8,600
aircraft.
Holding company, Ocean Wilsons, comprises a controlling interest in publicly
listed Brazilian port operator, Wilson Sons, and a diversified investment
portfolio. Shipping has the lowest climate impact of any freight method, on a
per unit basis, producing between 10-40 grams of CO2 per metric ton of freight
per kilometre of transportation, which is around half that even of rail
freight. Wilson Sons’ asset base enjoys high barriers to entry and
substantial operating leverage for growth in Brazil’s international trade
shipping sector. Following a strategic review in June, Ocean Wilsons confirmed
the receipt of several indicative non-binding offers for its investment in
Wilson Sons. The company could unlock significant value, with the shares
trading at more than a 50% discount to NAV.
The semiconductor industry appears to have passed the bottom of its sales
cycle. Whilst the profile of any recovery is uncertain, a return to growth
should translate into higher capital spending. This should benefit the
semiconductor capital equipment companies in the portfolio, ASML, Lam Research
and KLA. 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 believe the fundamental drivers of
semiconductor demand remain as clear as ever: cloud computing, artificial
intelligence, 5G, the Internet of Things (IoT) and the digitalisation of the
automotive industry. Semiconductor manufacturers’ capital intensity also
continues to increase. We expect all these companies to have very bright
futures.
The Company’s North American railroad holdings, Canadian National Railway,
Canadian Pacific Kansas City and Union Pacific, have contended with a slowing
economy and a period of inventory destocking in 2023. We view these headwinds
as only cyclical in nature. Rail retains a significant cost advantage over
trucks on longer haul routes and no one is building railroads today. 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. Furthermore, these companies continue to evaluate and trial
new technologies to move beyond the internal combustion engine.
We opted to add incrementally to the portfolio’s position in Canadian
National Railway in June. We believed the shares offered good value compared
to the company’s midterm organic growth profile. Canadian Pacific finally
completed its merger with Kansas City Southern in April 2023. The combined
entity has multiple opportunities to grow volumes, including by converting
truck traffic to rail. We believe the company can outperform its published
earnings per share guidance. New Union Pacific CEO, Jim Vena, has embarked
upon a programme of decentralisation as he aims for the company to grow faster
than the economy with industry leading margins.
Waste Management provides essential services 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.
Solid waste pricing has now moved ahead of cost inflation and the company
should be able to regain some of the lost ground over the past two years.
Progress is also being made on the automation programme to reduce labour
requirements by 5,000-7,000 roles, equivalent to more than 10% of headcount.
Growth investments in new automated recycling facilities and renewable natural
gas plants at landfill sites continue, although certain of the latter projects
have been hampered by interconnection and permission issues. We believe these
will ultimately be resolved and underpin sustained double digit earnings
growth going forward.
Private Investments
The Company’s portfolio of private investments represented 9.7% of the total
NAV as at 31 December 2023, and delivered a total return of 32.3% over the
period, adding 2.9% to the NAV per share.
Investment Increase/ Contribution
(Decrease) % to NAV %
X-ELIO 31.3 3.0
TCI REP Fund III (1.9) (0.1)
John Laing 3.2 0.1
TCI REP Fund IV 1.6 (0.1)
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. Excludes distributions received.
As noted above, KKR completed the sale of its 50% stake (incorporating the
Company’s co-investment) in Spanish solar energy developer, X-ELIO, in
November. This crystallised an aggregate return on invested capital of 2.6x in
Sterling terms, equivalent to an IRR of ~16% over 8 years. The increase and
contribution to NAV in the table above represent percentages for the period
until X-ELIO's disposal in November.
The remaining investments in TCI Real Estate Partners Fund III are three loans
to separate real estate developments in the United States. They are first
mortgages and have low loan-to-value ratios (less than 60%). These
developments are best in class in terms of energy efficiency and environmental
standards. Buildings contribute more than 30% of GHG emissions in the United
States and raising their efficiency levels is vital to reducing emissions.
Whilst the Fund did not manage to commit the level of capital we originally
hoped, investment returns have remained in line with expectations. The Fund
has continued to draw down from its remaining commitment (circa US$3.2
million) in line with the schedules of its existing loans. We expect two loans
to be repaid this year and the last one to be repaid in 2026.
We finalised a new US$25 million commitment to the TCI Real Estate Partners
Fund IV in March 2023. This fund will follow the same strategy, and offer
similar environmental benefits, as the TCI Real Estate Partners Fund III. The
coronavirus epidemic provided a stress test for Fund III. We were very pleased
that while certain developments were affected by construction delays, return
expectations on the loans remained unchanged. Each loan has several elements
of downside protection such as credit seniority, loan-to-value ratios of up to
65% and completion and carry guarantees. The strategy has only ever recorded
one loss out of 37 loans. The manager believes that stress is starting to
permeate real estate credit markets and that the emerging conditions should
underpin strong demand for its differentiated financing. Furthermore, the rise
in interest rates has increased the relative attractiveness of their
traditionally premium rates. The manager is targeting gross returns of 11-14%.
We believe this level of return represents an exceptional balance between risk
and reward. The fund made its first drawdown in October 2023, which was funded
from cash on hand and by partial sales of quoted equity holdings. We expect
the Company’s net invested amount, on a cost basis, to peak at approximately
70% of the total commitment in mid-2026. This will significantly increase the
portfolio’s exposure to real estate and the sustainable infrastructure and
transportation theme.
John Laing is an active manager of public-private partnerships and similar
concession-based assets. The company makes both green and brownfield
investments. The management team launched a new sustainability strategy in
August 2023 and is aiming to reach net zero by 2050, with an interim target
for 70% of assets to align with net zero by 2030. John Laing completed its
largest ever investment with the purchase of three Irish infrastructure assets
from AMP Capital in 2023. These consisted of Valley Healthcare, a portfolio of
primary care centres, the Convention Centre Dublin and Towercom, a mobile
tower operator. Then the purchase of equity interests in four UK
Public-Private Partnerships and a stake in the Hornsea II offshore
transmission assets from HICL Infrastructure PLC was agreed in September 2023.
Finally, the sale of the Clarence Correctional Centre in Australia, which was
planned as part of KKR’s acquisition, was also agreed.
FX Hedges
We first hedged currency exposure in November 2017, after a prolonged phase of
Sterling weakness. This had benefitted the portfolio, which was heavily
weighted to assets denominated in US dollars and Euros. We sought to protect
some of these gains by hedging approximately half of the portfolio’s
currency exposures. With the benefit of hindsight, we can see our concerns
that these Sterling currency gains might be substantially given back were
unfounded. Following the settlement of the outstanding currency forward
contracts in early January 2024 we have ceased to hedge the Company’s
currency exposures, due to a new requirement to cash collateralise the forward
exposures on a daily basis (whereas in the past these were only cash settled,
or paid out, on expiry). Since inception, the cumulative net losses from our
hedging strategy amounted to £5.3 million. It should be noted that, as a
hedge, this loss has been more than offset by the currency gains on
non-Sterling holdings.
Outlook
We keep focusing on what we can control. Our preference remains for
investments that require us to make as few predictions as possible. We believe
our criteria of investing in energy and resource efficiency businesses
offering quality and value results in a portfolio well placed to generate
superior returns over time relative to the level of risk taken, in most market
conditions.
The completion of the sale of X-ELIO meant we finished the year with a high
cash balance. Following the year end, we deployed a portion of the cash,
equivalent to 5.8% of NAV, across the portfolio’s existing quoted equity
holdings in January. Since then, we were pleased to agree a new co-investment
with KKR in a solar developer in the United States, Avantus, in March. This
company has one of the largest development pipelines across California and the
Southwest. We believe the deal is highly opportunistic and at an attractive
valuation. As always, we only make private investments when they offer a more
attractive balance between risk and reward compared to public markets. We
believe this transaction met this criterion and we expect it to produce
returns significantly in excess of public equity markets. Our initial US$17.5
million investment equates to ~10% of the Company’s NAV and was funded from
cash on hand and the partial sales of existing quoted equities. We expect this
transaction and further drawdowns on our commitment to TCI Real Estate
Partners Fund IV to significantly increase the portfolio’s allocation to
private investments.
Following the strong performance in 2023, the Company’s net asset value per
share has now compounded at over 12.3%, after fees, for the five years ended
31 December 2023 compared to our benchmark RPI+3% return of 6.7%. Share price
performance continues to trail the Company’s net asset value returns,
resulting in a widening discount to net asset value. We believe this is
primarily due to the size of the Company and a corresponding lack of liquidity
in the shares. We intend to keep our relentless focus on investment
performance to deliver growth, and a reduction in the discount, as both the
performance and growth are recognised by the market. With all members of the
Portfolio Manager owning significant equity stakes in the Company, our
interests are in full alignment with shareholders. Below is a summary of the
Company's compound annual growth rate on total return basis:
To 31 December 1 year 3 years 5 years 7 years Inception
2023
NAV per share 23.8% 6.6% 12.3% 9.6% 6.7%
Share Price 13.6% 0.7% 8.8% 6.4% 0.0%
RPI+3% 8.4% 11.2% 6.7% 7.2% 6.7%
Menhaden Capital Management LLP
Portfolio Manager
19 April 2024
.
Business Review
The Strategic Report on pages 2 to 36 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 44.
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 15.
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, as
set out on pages 8 and 9.
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 pay a dividend as a
minimum to maintain investment trust status.
The Board
Biographical details of the Directors are set out on pages 37 and 38 and
information on the workings of the Board and its Committees is set out in the
Corporate Governance Statement on pages 44 to 50.
All of the Directors will seek re-election by shareholders at the Annual
General Meeting to be held on 27 June 2024.
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 an 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 2023, 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 on page 26, 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.
Foreign Exchange Exposure
As explained in the Portfolio Manager's Review on page 19, the Portfolio
Manager has sought to reduce the volatility in returns caused by currency
movements in respect of the portfolio’s non-sterling denominated investments
through the use of currency forward contracts. For much of the year
approximately 50% of the Company’s US dollar and euro exposures were hedged
in this manner using 3-month contracts. However, following a review near the
year end it was concluded that the combination of exchange rate volatility and
the relatively short forward contract periods not matching the longer term
nature of the portfolio created a non-correlated risk of crystallising
currency losses on the rollover of the contracts. Additionally, it has become
necessary for the Company to lodge cash collateral for such contracts, making
them less economic, and the decision has been taken to discontinue such
hedging transactions for the foreseeable future.
Position, Performance and Future Developments
The Statement of Financial Position on page 70 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 beginning on page 4 and the Portfolio
Manager’s Review on pages 15 to 19.
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 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 beginning on page 4.
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
beginning on page 90 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 2023 was 23.8% (2022: -16.5%). 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 8.4% (2022: 16.4%).
A full description of the portfolio and performance during the year under
review is contained in the Portfolio Manager’s Review commencing on page 15
of this report.
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 2023 was 13.6% (2022: -20.3%).
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 2023 the discount stood at 37.2%
(2022: 31.4%). The Chairman’s Statement beginning on page 4, addresses the
discount and the approach of the Board. The discount continued to remain
disappointingly 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 2023 was 1.7% (2022: 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 key risks are registered in the Company's risk
matrix, which the Audit Committee has been delegated to maintain and review at
regular intervals. The risk matrix covers all key risks the Directors believe
the Company faces, the likelihood of their occurrence and their potential
impact, how these risks are monitored and the mitigating controls in place.
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:
• Legal and Regulatory Risks
• Investment Risks
• Geopolitical and other Macro Risks
• Corporate Risks
• Operational Risks
• Financial Risks
The following sections detail the risks the Board considers to be the most
significant to the Company under these headings.
The main change from last year is an acceptance, and hence reduced risk
rating, that investment risks are largely inherent in the investment strategy,
and investing generally, and that these have been mitigated so far as
practical.
It is considered that potential impacts from regulation, including on
portfolio companies, related to climate change and Paris Accord undertakings
are tangible and this is recognised below, albeit that the Company’s
resource efficiency theme ought to position it as a beneficiary of related
policies.
Principal Risks and Uncertainties Management and Mitigation
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. Climate change regulations could affect portfolio companies and portfolio construction. 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. Generally, the Company's resource efficiency theme should tend to align with climate change regulation. The Portfolio Manager also corresponds with portfolio companies on environmental matters.
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 beginning on page 82), 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 on pages 39 and 31 respectively. 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 set out on pages 8 and 9. 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. Compliance with the investment restrictions is monitored daily by the AIFM and reported to the Board on a monthly basis. 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.
Geopolitical and other Macro Risks Portfolio constituents may be affected by regional events or politics. Examples are the conflicts in Ukraine, and related sanctions, and the Middle East, with their potential impacts on supply chains. 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 exposed to Russia or
Ukraine, but the Board will continue to monitor developments.
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.
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 also 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 considered to be 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 on page 52.
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 on page 82. 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.
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, including unfunded commitments on
unquoted investments, 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 86% 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 nonexecutive 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 improve the share
price and 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 Deutsche Numis, 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 Annual General Meeting. • The Company’s website which hosts reports, articles and insights, and monthly factsheets. • One-to-one investor meetings. • Group meetings with professional
investors. • The Annual and Half yearly Reports. 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
• Ongoing dialogue with shareholders concerning the strategy of the Company, performance and the portfolio. • Share price performance. • The Portfolio Manager’s investment approach. 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 beginning on page 4.
• Portfolio composition, performance, outlook and business updates. • The suitability of new investments with respect to the Company’s resource efficiency theme. • The Portfolio Manager’s engagement with investee companies on ESG matters. • The Portfolio Manager’s system of internal controls and investment risk management. • The Company’s management fee structure. 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 on page 27. The Audit Committee concluded that the Portfolio
Manager’s internal controls were satisfactory. See the Audit Committee Report, beginning on page 51, for further information.
• The quality of service provision and the terms and conditions under which service providers are engaged. • The assessment of the effectiveness of the audit and the Auditor’s reappointment. • The terms and conditions under which the Auditor is engaged. 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 page 27 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 beginning on page 51 and the Notice of AGM beginning on page 94 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 on pages 20 to 24 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 set out on pages 20 to 24.
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 on pages 2 to 36 has been approved by the Board.
Howard Pearce
Chairman
19 April 2024
.
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 on pages 37 and 38, 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 2023; 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
Howard Pearce
Chairman
19 April 2024
.
Financial Statements
Income Statement
For the year ended 31 December 2023 For the year ended 31 December 2022
Notes Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Gains/(losses) on investments held at fair value through profit or loss 8 – 25,374 25,374 – (21,413) (21,413)
Income from investments held at fair value through profit or loss 2 1,692 – 1,692 1,309 – 1,309
Investment and portfolio management fees 3 (336) (2,175) (2,511) (323) 387 64
Other expenses 4 (319) – (319) (404) – (404)
Net income/(loss) before taxation 1,037 23,199 24,236 582 (21,026) (20,444)
Taxation 5 (143) – (143) (96) – (96)
Net income/(loss) after taxation 894 23,199 24,093 486 (21,026) (20,540)
Income/(loss) per share – basic and diluted (pence) 6 1.1 29.3 30.4 0.6 (26.3) (25.7)
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 on pages 72 to 87 are an integral part of these
financial statements.
.
Statement of Changes in Equity
For the year ended 31 December 2023
Notes Ordinary Special Capital Capital Revenue Total
share reserve redemption reserve reserve £’000
capital £’000 reserve £’000 £’000
£’000 £’000
At 31 December 2022 800 77,371 – 24,970 690 103,831
Net income after taxation – – – 23,199 894 24,093
Repurchase of ordinary shares for cancellation (10) (929) 10 – – (929)
Dividends paid 7 – – – – (316) (316)
At 31 December 2023 790 76,442 10 48,169 1,268 126,679
For the year ended 31 December 2022
Notes Ordinary Special Capital Revenue Total
share reserve reserve reserve £’000
capital £’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)
Dividend paid 7 – – – (160) (160)
At 31 December 2022 800 77,371 24,970 690 103,831
The accompanying notes on pages 72 to 87 are an integral part of these
financial statements.
.
Statement of Financial Position
Notes As at As at
31 December 31 December
2023 2022
£’000 £’000
Fixed assets
Investments 8 110,027 93,809
Current assets
Debtors 10 928 104
Derivative financial instruments 9 1,917 4,200
Cash 14,898 6,061
17,743 10,365
Current liabilities
Performance fee payable 12 (829) -
Creditors 11 (262) (343)
Net current assets 16,652 10,022
Net assets 126,679 103,831
Capital and reserves
Ordinary share capital 13 790 800
Special reserve 76,442 77,371
Capital redemption reserve 13 10 -
Capital reserve 18 48,169 24,970
Revenue reserve 1,268 690
Total shareholders’ funds 126,679 103,831
Net asset value per share – basic and diluted (pence) 14 160.3 129.8
The financial statements on pages 68 to 87 were approved by the Board of
Directors and authorised for issue on 19 April 2024 and were signed on its
behalf by:
Howard Pearce
Chairman
The accompanying notes on pages 72 to 87 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
Notes For the For the
year ended year ended
31 December 31 December
2023 2022
£’000 £’000
Net cash outflow from operating activities 15 (489) (751)
Cash flows from investing activities
Purchases of investments (27,624) (10,321)
Sales of investments 33,684 28,903
Settlement of derivatives 9 4,497 (12,488)
Net cash inflow from investing activities 10,557 6,094
Cash flows from financing activities
Repurchase of ordinary shares for cancellation (929) -
Dividends paid 7 (316) (160)
Net cash outflow from financing activities (1,245) (160)
Increase in cash and cash equivalents 8,823 5,183
Cash and cash equivalents at start of the year 6,061 878
Exchange rate movement 14 -
Cash and cash equivalents at the end of the year 14,898 6,061
The accompanying notes on pages 72 to 87 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 on pages 53 and 54. 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.
£12,260,000 or 11.1% (2022: £16,864,000 or 18.0%) 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 on page 86.
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. As set out on
page 86, a 25% discount to NAV has been employed by the Company as a
sensitivity test for the impact of the inherent valuation risk associated with
its unquoted investments.
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 and 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. Transaction costs associated with purchases and sales of
investments are charged in the capital column in the Company’s Income
Statement.
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 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 that were 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.
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. 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.
(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
2023 2022
£’000 £’000
Income from investments
Unquoted distributions 469 419
Dividends from quoted investments 1,175 883
1,644 1,302
Bank interest 48 7
Total income 1,692 1,309
3. INVESTMENT AND PORTFOLIO MANAGEMENT FEES
2023 2022
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
AIFM fee 52 208 260 50 198 248
Portfolio management fee 284 1,138 1,422 273 1,092 1,365
Performance fee provisions – 829 829 – (1,677) (1,677)
336 2,175 2,511 323 (387) (64)
4. OTHER EXPENSES
2023 2022
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Directors’ remuneration 182 – 182 186 – 186
Employers NIC on directors’ remuneration 14 – 14 18 – 18
Auditor’s remuneration for the audit of the Company’s financial statements 46 – 46 41 – 41
Registrar fee 18 – 18 18 – 18
Broker retainer 30 – 30 30 – 30
Custody and depositary fees 43 – 43 47 – 47
Other expenses (14) – (14) 64 – 64
Total expenses 319 – 319 404 – 404
The Company has no employees and details of the amounts paid to Directors are
included in the Directors’ Remuneration Report beginning on page 56 of the
Annual Report. Other expenses balance for the year ended 31 December 2023
includes non-recurring credits of £39,000 relating to historic periods.
5. TAXATION ON NET RETURN
(a) Analysis of charge in period
2023 2022
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
UK corporation tax – – – – – –
Overseas withholding tax 143 – 143 96 – 96
(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 23.25% (2022: 19%). The difference is explained below.
2023 2022
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Net income/(loss) before taxation 1,037 23,199 24,236 582 (21,026) (20,444)
Corporation tax at 23.25% 244 5,457 5,701 110 (3,995) (3,885)
(2022: 19%)
Non-taxable gains on investments held at fair value through profit or loss – (5,969) (5,969) – 4,068 4,068
Overseas withholding tax 143 – 143 96 – 96
Non-taxable overseas dividends (387) – (387) (247) – (247)
Excess management expenses* 143 512 655 137 (73) 64
Tax charge for the year 143 – 143 96 – 96
* 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 £3,725,000 (25% tax rate) (2022: £3,042,000, 25% tax
rate) as a result of unutilised excess management expenses of £14,900,000
(2022: £12,168,000). 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 on page 68 and the weighted
average number of ordinary shares in issue 79,199,042 (2022: 80,000,001).
No dilutive instruments have been 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:
2023 2022
£’000 £’000
2022 final dividend of 0.4p per share 316 -
2021 final dividend of 0.2p per share - 160
In respect of the year ended 31 December 2023, a final dividend of 0.9p per
share or £711,000 (2022: 0.4p per share or £316,100) 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 2024.
Details of the ex-dividend and payment dates are shown on page 39.
The Board’s current policy is to only pay dividends out of revenue reserves.
The amount of revenue reserve available for distribution as at 31 December
2023 is £1,268,000 (2022: £690,000). The Company generated a revenue profit
in the year ended 31 December 2023 of £894,000 (2022: £486,000).
8. INVESTMENTS
2023 2022
Quoted Unquoted Total Quoted Unquoted Total
Investments Investments £’000 Investments Investments £’000
£’000 £’000 £’000 £’000
Opening balance
Cost at 1 January 58,985 9,132 68,117 68,965 17,901 86,866
Investment holdings gains/(losses) at 1 January 17,960 7,732 25,692 40,874 (2,125) 38,749
Valuation at 1 January 76,945 16,864 93,809 109,839 15,776 125,615
Movement in the year:
Purchases at cost 20,084 7,540 27,624 9,669 652 10,321
Sales proceeds (20,204) (14,347) (34,551) (13,197) (3,218) (16,415)
Net movement in investment holdings gains/(losses) 20,942 2,203 23,145 (29,366) 3,654 (25,712)
Valuation at 31 December 97,767 12,260 110,027 76,945 16,864 93,809
Closing balance
Cost at 31 December 66,263 12,088 78,351 58,985 9,132 68,117
Investment holding gains at 31 December 31,504 172 31,676 17,960 7,732 25,692
Valuation at 31 December 97,767 12,260 110,027 76,945 16,864 93,809
Proceeds from investments sold during the year were £34,551,000 (2022:
£16,415,000), of which £867,000 were receivable as at 31 December 2023
(2022: £nil). The book cost of these investments was £17,390,000 (2022:
£29,070,000). 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.The Company also received £4,497,000 (2022: paid £12,488,000) in
cash on currency forward contracts (Note 9) expired during the period.
Net movement in investment holding gains/(losses) on investments
2023 2022
£’000 £’000
Net movement in investment holding gains/(losses) in the year (25,712) (25,712)
Net movement in derivative holding (losses)/gains in the year 4,299 4,299
Gains/(losses) on investments (21,413) (21,413)
Total unrealised gains, including transfers, during the year were £5,984,000
(2022: £13,057,000).
Purchase transaction costs were £27,000 (2022: £3,000). These comprise
mainly commission and stamp duty. Sales transaction costs were £5,000 (2022:
£3,000). These comprise mainly commission.
9. DERIVATIVES
2023 2022
£’000 £’000
Fair value of currency forward contracts 1,917 4,200
Forward contracts were used during the year to hedge the Company’s exposure
to the euro and US dollar. See note 17(ii) for further details. The Company
received £4,497,000 (2022: paid £12,488,000) on contracts closed during the
year. The forward contracts 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 currency forward contracts expired post year end and the Company received
£1,614,000 in cash on expiry. As disclosed in the Portfolio Manager's Review
and the Business Review in the Strategic Report, the Company has discontinued
hedging activities since the year end.
10. DEBTORS
2023 2022
£’000 £’000
Amounts due from brokers 867 -
Withholding tax recoverable 29 68
Prepayments and accrued income 32 36
928 104
11. CREDITORS
2023 2022
£’000 £’000
Performance fees payable 829 -
Other creditors and accruals 262 343
1,091 343
12. PERFORMANCE FEE PROVISIONS
The three-year performance period that commenced on 1 January 2021 ended on 31
December 2023 and £829,000 has been charged in the Income Statement with a
corresponding payable balance in the Statement of Financial Position.
Settlement of performance fee provisions will take place following approval of
the annual results for the year ended 31 December 2023, in April 2024.
Full details of the performance fee arrangement can be found in the
Performance Fee section in the Strategic Report.
13. SHARE CAPITAL
2023 2022
£’000 £’000
Issued and fully paid:
79,025,001 (2022: 80,000,001) ordinary shares of 1p per share 790 800
There is a single class of shares in issue, being 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
The Company repurchased 975,000 ordinary shares during the year ended 31
December 2023 (2022: none) and all repurchased ordinary shares were
subsequently cancelled. The nominal amount of £9,750 related to these
cancelled shares was credited to the capital redemption reserve.
14. NET ASSET VALUE PER SHARE
2023 2022
£’000 £’000
Net asset value per share 160.3p 129.8p
The net asset value per share is based on the assets attributable to equity
shareholders of £126,679,000 (2022: £103,831,000) and on the number of
ordinary shares in issue at the year end of 79,025,001.
No dilutive instruments have been issued by the Company.
15. RECONCILIATION OF NET CASH OUTFLOW FROM OPERATING ACTIVITIES
2023 2022
£’000 £’000
Gains/(losses) before taxation 24,236 (20,444)
(Gains)/losses on investments (25,374) 21,413
(1,138) 969
Decrease in other debtors 5 133
Increase/(decrease) in creditors 748 (1,738)
Withholding taxation suffered on investment income (104) (115)
Net cash outflow from operating activities (489) (751)
16. RELATED PARTIES
The following are considered to be related parties:
• Frostrow Capital LLP; and
• The Directors of the Company
Details of the relationship between the Company and the Company’s AIFM are
disclosed in the Strategic Report on page 27. Details of fees paid to Frostrow
by the Company can be found in note 3 on page 76. All material related party
transactions have been disclosed in note 3 on page 76. Details of the
remuneration of the Directors can be found in note 4 and in the Directors’
Remuneration Report starting on page 56. Details of the Directors’ interests
in the capital of the Company can be found on page 57.
The balance outstanding to Frostrow at the year end was £24,000 (2022:
£20,000). No balances were due to the Directors (2022: 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 on pages 29 to 31. 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 as set out on pages 8 and 9, 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 £59,000 and £72,000
respectively (2022: decreased/increased by £46,000 and £81,000
respectively); the capital return would have increased/decreased by
£21,763,000 and £23,324,000 respectively (2022: increased/decreased by
£18,199,000 and £19,009,000 respectively); and, the return on equity would
have increased/decreased by £21,704,000 and £23,252,000 respectively (2022:
increased/decreased by £18,152,000 and £18,953,000 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 used foreign currency forwards to hedge
some of the foreign currency risk historically, but as disclosed in the
Manager’s Review and the Business Review in the Strategic Report hedging
activities ceased post the year ended 31 December 2023.
Foreign currency exposure
The fair values of the Company’s assets and liabilities that are denominated
in foreign currencies are shown below:
2023 2022
Investments Derivatives* Current Net Investments Derivatives* Current Net
£’000 £’000 assets £’000 £’000 £’000 assets £’000
£’000 £’000
US dollar 62,963 (33,339) 868 30,492 69,885 (37,329) 2,003 34,559
Euro 38,242 (17,331) 29 20,940 16,074 (6,680) 68 9,462
Other – – 49 49 – – 44 44
101,205 (50,670) 946 51,481 85,959 (44,009) 2,115 44,065
* Derivatives comprise foreign currency forward contracts used to partially
hedge the Company’s exposure to the euro and US dollar. As at 31 December
2023, the fair value of the US dollar forward contract was £1,827,000 (2022:
£4,096,000) and of the Euro forward contract was £90,000 (2022: £103,000).
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.
2023 2022
USD EUR Other Impact on NAV USD EUR Other Impact on NAV
£’000 £’000 £’000 £’000 % £’000 £’000 £’000 £’000 %
Sterling depreciates 3,388 2,327 5 5,720 5% 3,840 1,051 5 4,896 5%
Sterling appreciates (2,772) (1,904) (4) (4,680) (4%) (3,142) (860) (4) (4,006) (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.
2023 2022
Fixed Floating Fixed Floating
rate rate rate rate
£’000 £’000 £’000 £’000
Cash – 14,898 – 6,061
– 14,898 – 6,061
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 2023
and the net assets would increase/decrease by £149,000 (2022: £61,000).
(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 on page
87. 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 and TCI Real Estate Fund IV Limited, the Board expects 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
Company’s investments are held by J.P. Morgan Europe Limited(“the
Depositary”), which is a large and reputable international banking
institution. The Depositary is liable for the loss of any financial assets
under its custody, and in accordance with its agreement with the Company, is
required to segregate such assets from its own assets.
Credit risk exposure
2023 2022
£’000 £’000
Derivative financial instruments 1,917 4,200
Current assets:
Other receivables 928 104
Cash 14,898 6,061
(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 beginning on page 72.
At 31 December 2023 Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Investments 97,767 – 12,260 110,027
Derivatives – 1,917 – 1,917
At 31 December 2022 Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Investments 76,945 – 16,864 93,809
Derivatives – 4,200 – 4,200
Level 3 investments at 31 December 2023
Cost Value Ownership Valuation basis
‘000 £’000
TCI Real Estate Partners Fund IV Limited US$7,849 6,021 5.72% NAV
KKR Aqueduct Co-Invest LP 1 £4,000 4,504 1.12% NAV
TCI Real Estate Partners Fund III Ltd US$2,461 1,736 1.18% NAV
1 Described as John Laing in the portfolio statement
Level 3 investments at 31 December 2022
Cost Value Ownership Valuation
‘000 £’000 basis
KKR Aqueduct Co-Invest LP 1 £4,000 4,646 1.15% NAV
Helios Co-Invest LP 2 US$4,458 10,672 4.73% NAV
TCI Real Estate Partners Fund III Ltd US$1,715 1,546 1.18% NAV
1 Described as John Laing in the portfolio statement
2 Described as X-ELIO in the portfolio statement
In November 2023, the Company received a final distribution of US$16.9 million
(£13.8 million) from its investment in Helios Co-Invest LP, following the
disposal of the partnership’s remaining holding in X-ELIO.
Unquoted investment valuations are provided by the underlying investment
managers, who follow industry recognised guidelines and a stringent valuation
process, which includes independent review by third parties. The Company is
satisfied that the valuations received represent fair value of the investments
it holds, but retains the discretion to make adjustments if there are
indicators that suggest otherwise.
If a 25% discount to NAV was applied to the NAV of the level 3 investments as
at 31 December 2023, the impact would have been a decrease of £2,191,000
(2022: £4,154,000) 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 on page 70.
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
2023 2022
Capital Reserve Capital Reserve
Realised Unrealised Total £’000 Realised Unrealised Total £’000
gains/ gains/ gains/ gains/
(losses) £’000 (losses) £’000 (losses) £’000 (losses) £’000
At 1 January (4,921) 29,891 24,970 7,347 38,649 45,996
Net gains/(losses) on investments 17,161 8,213 25,374 (12,655) (8,758) (21,413)
Expenses charged to capital (2,175) – (2,175) 387 – 387
At 31 December 10,065 38,104 48,169 (4,921) 29,891 24,970
Realised capital reserve and revenue reserve are available for distribution.
Unrealised gains, which are not readily
convertible to cash are not considered distributable.
19. FINANCIAL COMMITMENT
The Company has made commitments to provide additional funds to the following
investments:
Sterling Local currency Notice of
Commitment Commitment drawdown
TCI Real Estate Partners Fund IV Limited £13,664,000 US$17,419,000 10 business days
TCI Real Estate Partners Fund III Limited £2,200,000 US$2,805,000 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 disclosed in the Portfolio Manager’s Review on page 19, in January 2024
the Company ceased to hedge its currency exposures. There are no other post
balance sheet events which would require adjustment of or disclosure in the
financial statements.
.
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.
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)
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 31 December
2023 2022
Opening NAV 129.8p 155.7p
Increase/(decrease) in NAV 30.5p (25.9)p
Closing NAV 160.3p 129.8p
% increase/(decrease) in NAV 23.4% (16.6%)
Impact of dividend reinvested 0.4% 0.1%
NAV total return/(loss) 23.8% (16.5%)
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 31 December
2023 2022
Opening share price 89.0p 112.0p
Increase/(decrease) in share price 11.8p (23.0)p
Closing share price 100.8p 89.0p
% increase/(decrease) in share price 13.2% (20.5%)
Impact of dividend reinvested 0.4% 0.2%
Share price total return/(loss) 13.6% (20.3%)
Ongoing Charges Ratio (APM)
Ongoing charges ratio is 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. Performance
fees are also excluded from the ongoing charges ratio calculation.
31 December 31 December
2023 2022
£’000 £’000
Total Expenses 2,040 2,018
Average NAVs 117,147 111,560
Ongoing charge ratio 1.7% 1.8%
.
The figures and financial information for 2022 are extracted from the
published Annual Report for the year ended 31 December 2022 and do not
constitute the statutory accounts for that year. The Annual Report for the
year ended 31 December 2022 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 2023 are extracted from the Annual
Report and financial statements for the year ended 31 December 2023 and do not
constitute the statutory accounts for the year. The Annual Report for the year
ended 31 December 2023 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
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on the Company's website (or any other website) is
incorporated into, or forms part of, this announcement.
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