Annual Financial Report
05/04/2023 07:00
For best results when printing this announcement, please click on link below:
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20230405:nRSE3758Va&default-theme=true
RNS Number : 3758V North American Income Trust (The) 05 April 2023
THE NORTH AMERICAN INCOME TRUST PLC
ANNUAL FINANCIAL REPORT ANNOUNCEMENT FOR THE YEAR ENDED
31 JANUARY 2023
Investment Objective
To provide investors with above average dividend income and long-term capital
growth through active management of a portfolio consisting predominately of
S&P 500 US equities.
Financial Results and Performance
Performance Highlights
Net asset value total return(AB) Share price total return(AB)
+9.6% +12.4%
2022 +25.7% 2022 +25.6%
Revenue return per share Dividends per share
12.2p 11.0p
2022 10.28p 2022 10.30p
Net asset value per Ordinary share Total assets(C)
337.2p £513.4m
2022 318.8p 2022 £485.7m
Dividend yield(AD) Ongoing charges(A)
3.6% 0.93%
2022 3.6% 2022 0.95%
(A) Considered to be an Alternative Performance Measure. See below for more
information.
(B) Includes dividends reinvested.
(C) As defined on page 100.
(D) Calculated as the dividend for the year divided by the year end share
price.
Financial Calendar, Dividends and Highlights
Annual General Meeting (Edinburgh) 8 June 2023
Half year end 31 July 2023
Payment dates of quarterly dividends for financial year ending 31 January 2024 August 2023
October 2023
January 2024
May 2024
Financial year end 31 January 2024
Dividends
Rate xd date Record date Payment date
1st Interim dividend 2023 2.50p 21 July 2022 22 July 2022 5 August 2022
2nd Interim dividend 2023 2.50p 6 October 2022 7 October 2022 28 October 2022
3rd Interim dividend 2023 2.50p 2 February 2023 3 February 2023 24 February 2023
Proposed final dividend 2023 3.50p 4 May 2023 5 May 2023 12 June 2023
Total dividends 2023 11.00p
1st Interim dividend 2022 1.90p 22 July 2021 23 July 2021 6 August 2021
2nd Interim dividend 2022 1.90p 7 October 2021 8 October 2021 29 October 2021
3rd Interim dividend 2022 2.50p 3 February 2022 4 February 2022 25 February 2022
Final dividend 2022 4.00p 5 May 2022 6 May 2022 13 June 2022
Total dividends 2022 10.30p
Highlights
31 January 2023 31 January 2022 % change
Total assets (as defined on page 100) £513.4m £485.7m +5.7
Equity shareholders' funds £472.9m £448.5m +5.4
Share price (mid market) 306.00p 283.00p +8.1
Net asset value per Ordinary share 337.21p 318.79p +5.8
Discount (difference between share price and net asset value)(AB) (9.3%) (11.2%)
Net gearing (A) (2.9%) (4.9%)
Dividends and earnings
Revenue return per share 12.21p 10.28p +18.8
Dividends per share 11.00p 10.30p +6.8
Dividend yield (based on year end share price)(A) 3.6% 3.6%
Dividend cover(A) 1.11 1.00
Revenue reserves per share
Prior to payment of third interim and final dividends 17.57p 16.81p
After payment of third interim and final dividends 11.57p 10.31p
Operating costs
Ongoing charges(A) 0.93% 0.95%
(A) Considered to be an Alternative Performance Measure. See below for further
information.
(B) Including undistributed revenue.
Strategic Report
Chair's Statement
Market Review
North American equity market indices fell significantly over the year ended 31
January 2023. A combination of higher interest rates and surging inflation
caused North American share prices to fall sharply from early 2022 onwards.
Overall, however, North American equities ended higher in sterling terms on a
total return basis as the US dollar strengthened against the pound. Please
refer to your Manager's Review on pages 22 to 24 of the 2023 Annual Report for
an in-depth review of the market.
Performance
Over the year ended 31 January 2023, the Company's net asset value ("NAV")
total return per share was 9.6% outperforming the 8.5% total return in
sterling terms for the Russell 1000 Value Index, the Company's primary
reference index, while the share price total return was 12.4%. The discount
at which the share price traded relative to the NAV narrowed over the year
from 11.2% to 9.3%. While it is pleasing to report outperformance, it is
important to note that most of the absolute increase in the value of the
portfolio can be ascribed to the strengthening of the US dollar by 12.2% year
over year, which boosted the valuations on the balance sheet in sterling
terms. By way of illustration, the Russell 1000 Value Index delivered a total
return in US dollar terms of -0.4%.
The outperformance was attributable mainly to stock selection in the materials
and real estate sectors although allocation was a small negative in the
latter. The Company's performance relative to the reference index was hampered
by stock selection in the consumer discretionary and energy sectors although
allocation within those segments partially offset the negative impact.
A more detailed review of portfolio activity and performance can be found in
the Manager's Review on pages 22 to 24 of the 2023 Annual Report.
Revenue Account
Total revenue from portfolio's equity holdings over the period under review
was £17.8 million (2022 - £15.0 million). This was against a background
which saw most of the Company's equity holdings continue their established
record of dividend growth and the US dollar strengthen from a weighted average
of $1.37 to the pound in 2022 to a weighted average of $1.22 to the pound in
the current year. During the year ended 31 January 2023, the Company received
premiums totalling £4.2 million (2022 - £3.9 million) in exchange for
entering into stock option transactions. This option income, the generation of
which remains consistent with the Manager's company-focused investment
process, represented 18.1% of total income (2022 - 19.8%). As the Company's
exposure to corporate bonds has decreased over recent years, interest income
from bonds was 0.5% of total income (2022 - 0.6%). Bond coupons and option
premiums will remain secondary sources of income in the belief that dividends
must remain the overwhelming source of income available for distribution. The
resulting revenue return per Ordinary share rose by 18.8% to 12.2 pence per
share for the year ended 31 January 2023 compared to 10.3 pence per share for
the year ended 31 January 2022. This comprised an increase in the dividend
income of 17.6% in sterling terms and an increase in option income of over
7.6%. Further details of the portfolio are shown on pages 31 to 32 of the 2023
Annual Report.
Dividend
In light of the above, the Board has declared a final dividend of 3.5 pence
per share, resulting in total dividends for the year ended 31 January 2023 of
11.0 pence per share (2022 - 10.3p) - a 6.8% increase. The proposed final
dividend is payable on 12 June 2023 to shareholders on the register on 5 May
2023 (ex-dividend date: 4 May 2023).
In reaching its decision, the Board balanced the wish to increase the amount
distributed to shareholders with the recognition that most of the increase in
revenue was due to the US dollar strengthening against the sterling during the
year, a situation which could reverse at any time, with maintaining revenue
reserves at the equivalent of one full year's dividend payout.
The Board remains committed to its progressive dividend policy and extending
its track record of twelve consecutive years of dividend growth. To that end,
the Board intends, in the absence of any unforeseen developments, to pay three
quarterly dividends of 2.6 pence per share for the financial year ending 31
January 2024, with the fourth interim dividend being determined once the
full-year results are known.
During the year the Board reviewed the schedule of dividend payments and has
decided to put a resolution to the shareholders for them to approve the
dividend policy in future, rather than approving the final dividend. The
effect of this will be to allow the Board to accelerate the payment of the
final distribution for the year and to make the quarterly payments more evenly
spaced over the year, for the benefit of shareholders. If approved, the
changes, illustrated by way of example in the table on page 9 of the 2023
Annual Report, will take effect for the year ending 31 January 2024.
Dividend Payment Date
Year to Jan 2023 Year to Jan 2024*
1st interim 5 August 2022 4 August 2023
2nd interim 28 October 2022 27 October 2023
3rd interim 24 February 2023 19 January 2024
Final / 4th interim 12 June 2023 4 May 2024
* indicative date only
Management of Premium and Discount
The Company's share price rose by 8.1% to 306.0 pence per share and ended the
year at a 9.3% discount to total NAV, compared with a 11.2% discount at the
end of the 2022 financial year. The Board continues to work with the Manager
in both promoting the Company's benefits to a wider audience and providing
liquidity to the market through the use of share buybacks. Over the course of
the year, the Company's shares mainly traded at discounts ranging between 6.0%
and 10.0%.
During the year, 441,185 shares were bought back and cancelled at a weighted
average price of 281.90p and a weighted average discount of 11.7%. The total
cost was £1.3 million. The Company has not bought back any additional
Ordinary shares since 31 January 2023.
Gearing
The Board believes that sensible use of gearing should enhance returns to our
shareholders over the longer term. In December 2020, the Company entered into
a long-term financing agreement for US$50 million with MetLife comprising two
loans of US$25 million with terms of ten and 15 years. As a result, net
gearing at 31 January 2023 stood at 2.9% (2022: 4.9%).
Promotional Activity
The Board continues to promote the Company through the Manager's investment
trust share plan, which provides a series of savings schemes through which
savers can invest in the Company in a low-cost and convenient manner (see page
95 of the 2023 Annual Report).
During the last year we have worked with our Manager to refine our messaging
and provide clarity to shareholders around our investment objectives. This
includes introducing a new descriptor line as seen on the front cover of this
report: Seeking resilient growth and rising income from North American
equities.
Through our marketing efforts we aim to keep all shareholders informed and
updated on their investments, particularly during periods of volatility.
Updates include commentary, articles and videos allowing investors to hear
directly from the Investment Manager on a regular basis - to understand both
the outlook and the decisions being made within the portfolio itself. All of
this communication can be found on the Company's website
northamericanincome.co.uk and helps to inform shareholders' investment
decisions to ensure they remain aligned with their individual needs.
You can also follow 'abrdn Investment Trusts' on LinkedIn and Twitter or
register for email updates here: northamericanincome.co.uk/signup
Board Activity
In April 2022, for the first time since 2019 due to the travel restrictions
that the pandemic had placed upon us, the Board was pleased to travel to North
America and meet with the Investment Manager and local experts face-to-face.
The benefit of these meetings is evident in the engagement that follows. Since
then, the Board has focused in particular on matters of sustainability and how
they are perceived and approached by North American companies, as well as the
economic pressures in the US, as distinct from those in the UK. We continue to
monitor developments in these areas with interest. More information on the
Manager's approach to ESG integration in its investment process can be found
on pages 25 to 27 of the 2023 Annual Report.
On 1 July 2022 Patrick Edwardson was appointed as an independent Non-Executive
Director of the Company. Patrick has a wealth of investment management
experience, including managing the Scottish American Investment Company plc
for ten years, having worked for Baillie Gifford for 27 years. The Board is
already benefitting from Patrick's experience. He will stand for election as a
Director for the first time at the Company's Annual General Meeting ("AGM") in
June 2023.
Also, during the year, after my first AGM as Chair of the Company, I took the
opportunity to meet with investors in the UK, on behalf of the Board, to gain
a deeper understanding of their interests in the Company and address questions
on a more informal basis. As usual, we encourage all shareholders to contact
the Board with any queries using contact details on page 109 of the 2023
Annual Report.
Towards the end of the year, the Board undertook its board evaluation. Whilst
the Board does not consider it appropriate to utilise an external agent for
this, due to the current size and composition of the Board, the Board does
take a more thorough approach to its evaluation every other year. The results
of the board evaluation are outlined in the Statement of Corporate Governance
on pages 44 to 46 of the 2023 Annual Report.
Outlook
The Federal Reserve (the "Fed") accompanied its rate hike at the start of
December 2022 with a slightly less hawkish message around future policy, a
near-term positive for equity markets. Indeed, a majority of policymakers are
now forecasting an easing in the pace of future rate hikes. Also, following
major central banks' rapid monetary tightening to combat high inflation,
certain banks' balance sheets came under severe pressure in March 2023 as the
value of their fixed income portfolios fell and customers withdrew deposits.
Technology-focused Silicon Valley Bank (SVB), as well as
cryptocurrency-industry lenders Signature Bank and Silvergate Capital,
collapsed. SVB's demise was the largest banking failure since the Global
Financial Crisis of 2007-2008. A consortium of US banks also injected $30
billion into regional lender First Republic Bank. In Europe, UBS mounted a
$3.3 billion government-backed takeover of Credit Suisse after the latter ran
into financial difficulties. These events, which led to major central banks
boosting dollar liquidity to ease strains in funding markets, have caused
fears of a global banking crisis and deep recession.
While, as a result, investors have lowered their expectations of further
monetary tightening, the Federal Open Market Committee remains determined to
tame inflation, even if this comes at the cost of a recession. The continued
strength of employment suggests that wage growth will continue to run at rates
well in excess of those consistent with the Fed's inflation target. The
strength of wage growth has clearly contributed to surging services inflation,
alongside very aggressive increases in rent measures and rebounding services
demand as Covid-19 headwinds fade and in March 2023, the Fed increased rates
again by 25bps as inflation hit 6% year-on-year in February. Your Manager's
view is that this will lead to further tightening by the Fed over the coming
months as policy remains restrictive, adding to its conviction that the
economy will enter a downturn in the middle of this year.
So, what does this mean for equity markets going forward? Despite the recent
rise in markets, sentiment has remained under pressure due to the ongoing
banking crisis, hawkish Federal Reserve comments and further negative
macroeconomic readings, with equity levels still materially lower than their
recent peak. The economic outlook, both in the US and abroad, remains
challenging and earnings downgrades have continued to come through since the
end of the third-quarter earnings season. Nonetheless, US equity levels now
appear to have priced in a strong probability of slowing economic growth and
that inflation has peaked. On that basis, your Manager is now seeing some
target companies trading on attractive multiples and increasingly appealing
valuation points for long-term investors, such as ourselves, and has,
therefore, become cautiously optimistic on the outlook for US equities in
particular as an asset class.
Annual General Meeting ("AGM") and Online Shareholder Presentation
AGM
The AGM is scheduled to be held at 2:00 pm on 8 June 2023 at the offices of
abrdn at 1 George Street, Edinburgh, EH2 2LL. We encourage all shareholders to
complete and return the form of proxy enclosed with the Annual Report to
ensure that your votes are represented at the meeting (whether or not you
intend to attend in person). If you hold your shares in the Company via a
share plan or a platform and would like to attend and/or vote at the AGM, then
you will need to make arrangements with the administrator of your share plan
or platform. For this purpose, investors who hold their shares in the Company
via the abrdn Investment Plan for Children, Share Plan or ISA will find a
Letter of Direction enclosed. abrdn Planholders are encouraged to complete and
return the Letter of Direction in accordance with the instructions.
The Notice of Meeting can be found on pages 102 to 106 of the 2023 Annual
Report.
Online Shareholder Presentation
In order to encourage as much interaction as possible with our shareholders,
there will also be an online shareholder presentation at 2:30 pm on 22 May
2023. At this event, you will receive a presentation from the Investment
Manager and have the opportunity to ask questions of the Chair and the
Investment Manager. The online presentation is being held ahead of the AGM to
allow shareholders to submit their proxy votes prior to the meeting.
Full details on how to register for this event will be available on the
Company's website. Shareholders are also encouraged to submit questions in
advance of the online shareholder presentation and the AGM at the following
email address: northamericanincome@abrdn.com.
If you are unable to attend the online event, the Investment Manager's
presentation will be available on the Company's website shortly after the
presentation.
As usual, the Board strongly encourages all shareholders to exercise their
votes in respect of the AGM in advance of the meeting, and to appoint the
Chair of the meeting as their proxy, by completing the enclosed Form of Proxy
(or Letter of Direction for those who hold shares through the abrdn savings
plans).
Dame Susan Rice
Chair
4 April 2023
Overview of Strategy
Introduction
The Company is an investment trust and its Ordinary shares are listed on the
premium segment of the London Stock Exchange. The Company aims to attract
long-term private and institutional investors wanting to benefit from the
income and growth prospects of North American companies. The Board does not
envisage any change in the Company's activity in the foreseeable future.
Investment Objective and Purpose
To provide investors with above average dividend income and long-term capital
growth through active management of a portfolio consisting predominately of
S&P 500 US equities.
Reference Index
The Board reviews performance against relevant indices, including the Russell
1000 Value Index (in sterling terms) and the S&P 500 Index (in sterling
terms) as well as peer group comparisons. The aim is to provide investors with
above average dividend income from predominantly US equities which means that
investment performance can diverge, possibly quite materially in either
direction, from these indices.
Investment Policy
The Company invests in a portfolio predominantly comprised of S&P 500
constituents. The Company may also invest in Canadian stocks and US mid and
small capitalisation companies to provide for diversified sources of income.
The Company may invest up to 20% of its gross assets in fixed income
investments, which may include non-investment grade debt. The Company's
investment policy is flexible, enabling it to invest in all types of
securities, including (but not limited to) equities, preference shares, debt,
convertible securities, warrants, depositary receipts and other equity-related
securities.
The maximum single investment will not exceed 10% of gross assets at the time
of investment and it is expected that the portfolio will contain around 50
holdings (including fixed income investments), with an absolute minimum of 35
holdings. The composition of the Company's portfolio is not restricted by
minimum or maximum market capitalisation, sector or country weightings.
The Company may borrow up to an amount equal to 20% of its net assets.
Subject to the prior approval of the Board, the Company may also use
derivative instruments for efficient portfolio management, hedging and
investment purposes. The Company's aggregate exposure to such instruments for
investment purposes (excluding collateral held in respect of any such
derivatives) will not exceed 20% of the Company's net assets at the time of
the relevant acquisition, trade or borrowing.
The Company does not generally hedge its exposure to foreign currency. The
Company will not acquire securities that are unlisted or unquoted at the time
of investment (with the exception of securities which are about to be listed
or traded on a stock exchange). However, the Company may continue to hold
securities that cease to be listed or quoted, if appropriate.
The Company may participate in the underwriting or sub-underwriting of
investments where appropriate to do so.
The Company may invest in open-ended collective investment schemes and
closed-ended funds that invest in the North American region. However, the
Company will not invest more than 10%, in aggregate, of the value of its gross
assets in other listed investment companies (including listed investment
trusts), provided that this restriction does not apply to investments in any
such investment companies which themselves have stated investment policies to
invest no more than 15% of their gross assets in other listed investment
companies.
The Company will normally be substantially fully invested in accordance with
its investment objective but, during periods in which changes in economic
conditions or other factors so warrant, the Company may reduce its exposure to
securities and increase its position in cash and money market instruments.
Management
The Board has appointed abrdn Fund Managers Limited ("aFML") to act as the
alternative investment fund manager ("AIFM" or the "Manager").
The Directors are responsible for determining the investment policy and the
investment objective of the Company. The Company's portfolio is managed on a
day-to-day basis by abrdn Inc. (the "Investment Manager") by way of a
delegation agreement in place between aFML and abrdn Inc.
The Investment Manager invests in a range of North American companies,
following a bottom-up investment process based on a disciplined evaluation of
companies through direct visits by its fund managers. Stock selection is the
major source of added value, concentrating on quality first, then price.
Top-down investment factors are secondary in the Investment Manager's
portfolio construction, with diversification rather than formal controls
guiding stock and sector weights.
Key Performance Indicators ("KPIs")
The Board uses a number of financial performance measures to assess the
Company's success in achieving its objective and determining the progress of
the Company in pursuing its investment policy. The main KPIs identified by the
Board in relation to the Company which are considered at each Board meeting
are as follows:
KPI Description
Net asset value and share price performance against the reference indices The Board reviews the Company's NAV and share price total return performance
against the reference indices, the Russell 1000 Value and the S&P 500
(both in sterling terms). Performance graphs and tables are provided on pages
19 to 21 of the 2023 Annual Report. The Board also reviews the performance of
the Company against its peer group of investment trusts with similar
investment objectives.
Revenue return and dividend yield (A) The Board monitors the Company's net revenue return and dividend yield through
the receipt of detailed income forecasts. A graph showing the dividends and
yields over five years is provided on page 20 of the 2023 Annual Report.
Share price discount/Premium to net asset value (A) The discount/premium relative to the net asset value per share is closely
monitored by the Board. A graph showing the share price discount/premium
relative to the net asset value is shown on page 13 of the 2023 Annual Report.
Ongoing charges ratio ("OCR") (A) The Board reviews the Company's operating costs carefully against its peer
group of investment trusts with similar investment objectives. The Company's
OCR is provided on page 90 of the 2023 Annual Report.
(A) Considered to be an Alternative Performance Measure. See below for more
information(.)
Principal Risks and Uncertainties
There are a number of risks which, if realised, could have a material adverse
effect on the Company and its business model, financial position, performance
and prospects. The Board has in place a robust process to identify, assess and
monitor the principal risks and uncertainties facing the Company and to
identify and evaluate newly emerging risks, such as climate change and
geopolitical developments. This process is supported by a risk matrix which
identifies the key risks for the Company, including emerging risks, and covers
strategy, investment management, operations, shareholders, regulatory and
financial obligations and third party service providers. This risk matrix is
reviewed on a regular basis. A summary of the principal risks and
uncertainties facing the Company, which have been identified by the Board, is
set out in the following table, together with a description of the mitigating
actions it has taken.
The principal risks associated with an investment in the Company's shares are
published monthly in the Company's factsheet or they can be found in the
pre-investment disclosure document ("PIDD") published by the Manager, both of
which are on the Company's website.
Description Mitigating Action
Market Risk The day-to-day management of the Company's assets has been delegated to the
Manager under investment guidelines determined by the Board. The Board
The risks facing the Company relate to the Company's investment activities and monitors these guidelines and receives regular reports from the Manager which
include market risk (comprising interest rate risk and other price risk), include performance reporting. The Board regularly reviews these guidelines to
liquidity risk and credit risk. The Company is exposed to the effect of ensure they remain appropriate.
variations in share prices and movements in the currency exchange rate due to
the nature of its business. A fall in the market value of its portfolio would Details on financial risks, including market price, inflation liquidity and
have an adverse effect on shareholders' funds. Any debt securities that may be foreign currency risks and the controls in place to manage these risks are
held by the Company will be affected by general changes in interest rates that provided in note 18 to the financial statements.
will in turn result in increases or decreases in the market value of those
instruments.
Major Market Event or Geopolitical Risk The Board is cognisant of the risks arising from recent bank failures,
geopolitical developments such as Russia's invasion of Ukraine or tensions
The Company is exposed to stockmarket volatility or illiquidity that could between US and China, including stockmarket instability and longer term
result from major market shock due to a national or global crisis such as a economic effects or the potential impact on the operations of the third-party
pandemic, war, natural disaster, geopolitical developments or similar. There suppliers, including the Manager.
could also be the resulting impact of disruption on the operations of the
Company and its service providers, temporarily or for prolonged duration. The Manager assesses and reviews the investment risks arising from these macro
developments on the companies in the portfolio, including but not limited to:
employee absence, reduced demand, supply chain breakdown, balance sheet
strength, ability to pay dividends, and takes the necessary investment
decisions. The Manager communicates regularly with the underlying investee
companies in order to navigate and guide the Company through the current
challenges.
The Manager has business continuity procedures and contingency arrangements in
place to ensure that it is able to continue to service their clients,
including investment trusts. The services from third parties, including the
Manager, have continued to be supplied effectively during the current market
environment. The Board will continue to monitor third party risk management
through regular updates from the Manager.
Income and Dividend Risk The Board monitors this risk through the regular review of detailed revenue
forecasts and considers the level of income at each meeting.
The ability of the Company to pay dividends and any future dividend growth
will depend primarily on the level of income received from its investments The Company has built up its revenue reserves over recent years which provides
(which may be affected by currency movements, exchange controls or withholding flexibility in future years, should the dividend environment become
taxes imposed by jurisdictions in which the Company invests) and the timing of challenging.
receipt of such income by the Company. Accordingly, there is no guarantee that
the Company's dividend income objective will continue to be met and the amount
of the dividends paid to Ordinary shareholders may fluctuate and may go down
as well as up.
Operational Written agreements are in place defining the roles and responsibilities of all
third party service providers. The Board reviews reports on the operation and
The Company is reliant on services provided by third parties (in particular efficacy of the Manager's risk management and control systems, including those
those of the Manager). Failure by any service provider to carry out its relating to cyber-crime. The Board also reviews regular reports from internal
contractual obligations could expose the Company to loss or damage and have a audit as well as third party control reports.
detrimental impact on the Company, including disruption caused by information
technology breakdown or other cyber-related issue. The Manager monitors the control environment and quality of services provided
by other third party service providers through due diligence reviews, service
level agreements, regular meetings and key performance indicators. The Board
reviews reports on the Manager's monitoring of third party service providers
on a periodic basis.
Regulatory Risk Directors are aware of the relevant regulations and are provided with
information on changes by the Association of Investment Companies, as well as
Changes to, or failure to comply with, relevant regulations (including the the Manager.
Companies Act, The Financial Services and Markets Act, The Alternative
Investment Fund Managers Directive, accounting standards, investment trust The Manager provides six-monthly reports to the Audit Committee on its
regulations, the Listing Rules, Disclosure Guidance and Transparency Rules and internal control systems, which monitor compliance with relevant
Prospectus Rules) could result in fines, loss of reputation, reduced demand regulations. In addition, the Board will use the services of its
for the Company's shares and potentially loss of an advantageous tax regime. professional advisers when necessary, to monitor compliance with regulatory
requirements.
The Manager and depositary provide reports to the Audit Committee on their
operations to evidence that the AIFMD regulations are complied with.
The Manager has implemented procedures to ensure compliance with the
provisions of the Corporation Tax Act 2010 and reports results to the Board.
Gearing Risk In order to manage the level of gearing, the Board has set a maximum gearing
ratio of 20% of net assets. The Board receives regular updates from the
Gearing is used to leverage the Company's portfolio in order to enhance Manager on the Company's net gearing levels and its compliance with loan
returns where and to the extent this is considered appropriate to do so. covenants. As at 31 January 2023 the Company had £40.5 million of borrowings
Gearing has the effect of accentuating market falls and market gains. The and net gearing was 2.9% at the year end. More details are provided on page 90
ability of the Company to meet its financial obligations, or an increase in of the 2023 Annual Report.
the level of gearing, could result in the Company becoming over-geared or
unable to take advantage of potential opportunities and result in a loss of
value to the Company's shares.
Discount volatility In an effort to minimise the impact of share price volatility, where shares
are trading at a significant discount, the Company operates a share buyback
Investment company shares can trade at discounts to their underlying net asset programme. The share price, NAV and discount are monitored daily by the
values, although they can also trade at premia. Manager. The Board monitors the discount level of the Company's shares and
will exercise discretion to undertake share buybacks, within shareholder
authorities, when it is deemed to be in the best interest of shareholders.
Derivatives The risks associated with derivatives contracts are managed within guidelines
and limits set by the Board.
The Company uses derivatives primarily to enhance the income generation of the
Company. Derivatives are difficult to value and exposed to counterparty
risk.
Potential Impact of Environmental, Social and Governance ("ESG") Investment The Board supports and encourages the ESG analysis incorporated by the Manager
Principles as part of its investment decision making process and understands that over
the short-term companies with weak ESG compliance may appear to perform
Applying ESG and sustainability criteria in the investment process may result strongly. Over the long term the Board believes companies that carefully
in the exclusion of assets in which the Company might otherwise invest. The understand and proactively manage the ESG issues relevant to their businesses
Manager also monitors and responds to ESG and sustainability risks at will prove more resilient and capture emerging opportunities for growth. The
portfolio companies as they evolve over time. This may have a positive or Manager also actively engages with investee companies in relation to ESG and
negative impact on performance. sustainability issues that it deems material.
In addition to these risks, the Company is exposed to the impact of continued
geopolitical tensions or changes, including recent banking failures, which
could have an adverse impact on stockmarkets and the Company's portfolio.
In all other respects, the Company's principal risks and uncertainties have
not changed materially since the year end.
Promoting the Success of the Company
The Board is required to report on how it has discharged its duties and
responsibilities under section 172 of the Companies Act 2006 (the "s172
Statement"). Under section 172, the Directors have a duty to promote the
success of the Company for the benefit of its members as a whole, taking into
account the likely long-term consequences of decisions, the need to foster
relationships with the Company's stakeholders and the impact of the Company's
operations on the environment.
The Board comprises five Directors at the time of writing this report and the
Company has no employees or customers in the traditional sense. As the Company
has no employees, the culture of the Company is embodied in the Board of
Directors. The Board seeks to promote a culture of strong governance and to
challenge, in a constructive and respectful way, the Company's advisers and
other stakeholders.
The Board's principal concern has been, and continues to be, the interests of
the Company's shareholders and potential investors. The Manager undertakes an
annual programme of meetings with the largest shareholders and investors and
reports back to the Board on issues raised at these meetings. The Investment
Manager, who is based in the Manager's Philadelphia office, will attend such
meetings.
The Board encourages all shareholders to attend and participate in the
Company's and can contact the Directors via the Company Secretary.
Shareholders and investors can obtain up-to-date information on the Company
through its website and the Manager's information services and have direct
access to the Company through the Manager's customer services team or the
Company Secretary. The Chairman also held a live webinar ahead of the 2022
AGM, taking questions with the Investment Manager. This was made available on
the Company's website for shareholders.
As an investment trust, a number of the Company's functions are outsourced to
third parties. The key outsourced function is the provision of investment
management services to the Manager and other stakeholders support the Company
by providing secretarial, administration, depositary, custodial, banking and
audit services.
The Board undertakes a robust evaluation of the Manager, including investment
performance and responsible ownership, to ensure that the Company's objective
of providing sustainable income and capital growth for its investors is met.
The Board typically visits the Manager's offices in the US on a periodic basis
and last visited the Manager in April 2022. This enables the Board to conduct
face to face review meetings with the fund management and research teams. The
portfolio activities undertaken by the Investment Manager on behalf of the
Company can be found on page 22 to 24 of the 2023 Annual Report and details of
the Board's relationship with the Manager and other third party providers,
including oversight, is provided in the Statement of Corporate Governance on
page 42 of the 2023 Annual Report.
Key decisions and actions during the year ended 31 January 2023, which
required the Directors to have greater focus on stakeholders included:
Directorate
The Board is mindful of the importance of having a well- considered and
orderly succession plan for continuity of performance and delivery of the
Company's strategy. The search process for a new director was concluded in the
first half of 2022, resulting in the appointment of Patrick Edwardson in July
2022. The Board believes that its composition is well placed to promote the
success of the Company and to oversee the Manager's activities.
Marketing Strategy
With the Board Changes last year, the Board considered it an opportune time to
engage with investors directly. This included direct meetings with the Chair
and the Company's first webinar in May 2022, where shareholders had a chance
to ask questions prior to exercising their proxy votes for the 2022 AGM.
In addition, the Board worked with the Manager to refine the Company's
corporate narrative to provide clarity to shareholders around the Company's
investment objectives.
Dividends paid to shareholders
During the year, the Board reviewed the dividend payment policy. It concluded
that it would propose a revised dividend calendar, with quarterly interim
dividend payment dates spread more evenly throughout the year, instead of
three interim dividends and a final dividend. Subject to shareholder approval
of the proposed dividend policy, four interim dividends will be proposed for
the financial year ending 31 January 2024 (see page 9 of the 2023 Annual
Report for more details). The Board recognises the importance of dividends to
shareholders and the importance of receiving a regular income.
Management of the portfolio
As in previous years, the Board focused on the performance of the Manager in
achieving the Company's investment objective within an appropriate risk
framework.
As explained in more detail on page 46 of the 2023 Annual Report, during the
year, the Management Engagement Committee decided that the continuing
appointment of the Manager was in the best interests of shareholders.
Duration
The Company does not have a fixed winding-up date; however, shareholders are
given the opportunity to vote on the continuation of the Company every three
years at the AGM. The Company's continuation vote held in 2021 was supported
by shareholders and the next continuation vote is scheduled at the AGM in
2024.
Board Diversity
The Board recognises the importance of having a range of skilled, experienced
individuals with the appropriate knowledge in order to allow the Board to
fulfil its obligations. At 31 January 2023 the Board comprised two men and
three women with diverse and relevant expertise and perspectives.
Environmental, Social and Human Rights Issues
The Company has no employees as the Board has delegated day to day management
and administrative functions to aFML. There are therefore no disclosures to be
made in respect of employees. Further information on socially responsible
investment can be found on pages 25 to 27 of the 2023 Annual Report.
Global Greenhouse Gas Emissions and Streamlined Energy and Carbon Reporting
("SECR")
All of the Company's activities are outsourced to third parties. The Company
therefore has no greenhouse gas emissions to report from the operations of its
business other than directors' travel, nor does it have responsibility for any
other emissions producing sources under the Companies Act 2006 (Strategic
Report and Directors' Reports) Regulations 2013. For the same reasons as set
out above, the Company considers itself to be a low energy user under the SECR
regulations and therefore is not required to disclose energy and carbon
information.
The Investment Manager has access to a range of ESG tools, two of which are
climate-related. These tools allow the Company's Investment Manager to look at
the overall carbon footprint of their portfolios and compare with the
reference index. It also allows them to identify the highest carbon emissions
stocks across portfolios. Furthermore, the carbon footprint tool has been used
to help further guide the Investment Manager's engagement with companies (for
example, including the top three carbon-emitting stocks in the priority
engagement process).
Viability Statement
The Company does not have a formal fixed period strategic plan but the Board
does formally consider risks and strategy on at least an annual basis. The
Board considers the Company to be a long-term investment vehicle but for the
purposes of this Viability Statement has decided that a period of three years
is an appropriate period over which to report. The Board considers that this
period reflects a balance between looking out over a long-term horizon and the
inherent uncertainties of looking out further than three years.
In assessing the viability of the Company over the review period the Directors
have focused upon the following factors:
- The ongoing relevance of the Company's investment objective in the
current environment and recent feedback from the Company's brokers and
shareholders, where available.
- A resolution for the continuation of the Company was passed at the
AGM in June 2021 showing ongoing support from shareholders for the Company's
mandate.
- The principal risks detailed in the strategic report on pages 13
to 16 of the 2023 Annual Report and the steps taken to mitigate these risks.
In particular, the Board has considered the operational ability of the Company
to continue in the current environment, including the impact of geopolitical
developments, and the ability of the key third party suppliers to continue to
provide essential services to the Company. Third party services have continued
to be provided effectively.
- The Company is invested in readily realisable listed securities.
Recent stress testing has confirmed that shares can be easily liquidated,
despite the more uncertain and volatile economic environment.
- The level of revenue surplus generated by the Company and its
ability to achieve the dividend policy. The Company has continued to deliver
dividend growth whilst building up revenue reserves (see pages 2 and 4 of the
2023 Annual Report) which can be used to top up the dividend in tougher times.
- The level of gearing is closely monitored by the Board and the
Manager. Covenants are actively reviewed and there is adequate headroom in
place.
- The availability of long-term gearing facilities. The Company's
gearing comprises $25 million of ten year loan notes (until December 2030) and
$25 million of 15 year loan notes (until December 2035).
Accordingly, taking into account the Company's current position and the
potential impact of its principal risks and uncertainties, the Board has a
reasonable expectation that the Company will be able to continue in operation
and meet its liabilities as they fall due for a period of three years from the
date of this Report. In making this assessment, the Board has considered that
matters such as significant economic or stockmarket volatility, a substantial
reduction in the liquidity of the portfolio, or changes in investor sentiment
could have an impact on its assessment of the Company's prospects and
viability in the future.
Dame Susan Rice
Chair
4 April 2023
Results
Performance (total return)
1 year return 3 year return(A) 5 year return(A)
Total return (Capital return plus dividends reinvested) % % %
Share price(B) +12.4 +17.9 +39.8
Net asset value per share(B) +9.6 +30.0 +43.7
Russell 1000 Value Index (in sterling terms) +8.5 +36.9 +61.5
S&P 500 Index (in sterling terms) 0.0 +42.1 +82.2
(A) Cumulative return
(B) Considered to be an Alternative Performance Measure. See below for more
information.
Ten Year Financial Record
Year to 31 January 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Per share (p)
Net revenue return(A) 5.96 6.54 7.15 7.98 8.42 10.04 11.42 11.79 10.28 12.21
Dividends(A) 5.40 6.00 6.60 7.20 7.80 8.50 9.50 10.00 10.30 11.00
As at 31 January
Net asset value per share(A) (p) 163.1 187.8 187.1 264.7 275.5 280.4 288.9 262.5 318.8 337.2
Shareholders' funds (£'000) 271,952 309,273 280,644 379,101 391,649 398,657 413,948 375,416 448,463 472,891
(A) Comparative figures have been restated due to the sub-division of each
existing Ordinary share of 25p into five Ordinary shares of 5p each on 10 June
2019.
Investment Manager's Review
Market review
North American equity market indices were volatile over the year ended 31
January 2023, however, ended higher in sterling terms on a total return basis
as the US dollar strengthened against the pound, from a weighted average of
$1.37 to the pound in 2022 to a weighted average of $1.22 to the pound in the
current year. This inflated the valuations on the balance sheet in sterling
terms.
A combination of higher interest rates and surging inflation - due in part to
a booming jobs market - caused North American share prices to fall sharply
from early 2022 onwards. Growth-focused stocks, such as technology companies,
which had been among the strongest stock market performers in the years
leading up to 2022, were particularly hard hit. These stocks are more
sensitive to higher interest rates. As US inflation hit a 40-year high, the
Federal Reserve ("Fed") became increasingly aggressive in its response. It
raised its main interest rate by 0.25% in March 2022, 0.50% in May 2022 and by
0.75% at each of its next four meetings. Signs of progress in the battle
against inflation emerged in November 2022 when the annual consumer inflation
figure (for the twelve months to October) showed an unexpected drop to 7.7%.
Further falls in the annual consumer inflation rate increased investor
confidence that price pressures in the US were subsiding. Accordingly, the Fed
increased its main interest rate by a more measured 0.50% in December, down
from the 0.75% rate hikes of previous months.
The energy, materials and healthcare sectors were the strongest performers
within the Russell 1000 Value index, the Company's primary reference index,
while the information technology, communication services and real estate
sectors were the primary market laggards for the period.
Performance
The Company returned 9.60% on a NAV basis in sterling terms for the year ended
31 January 2023, outperforming the 8.51% return of its primary reference
index, the Russell 1000 Value Index (total return) in sterling terms. The
revenue account remained in good shape, building upon the record established
in prior years.
At a sector level, the largest contributor to the Company's performance was
information technology due to stock selection and, to a lesser extent, having
an underweight exposure. The second-largest contributor was real estate,
thanks to stock selection, which was partially offset by a small negative
effect from being overweight in the sector.
Looking at individual stock contributors to performance included real estate
investment trust Gaming & Leisure Properties, its shares rerating higher
after the company made some acquisitions of regional casinos. Pharmaceutical
company Bristol-Myers Squibb was also a positive. Cash flows remained strong
and there were some signs of early successes in the company's drugs pipeline.
The pharmaceutical sector, where Bristol-Myers Squibb is our largest position,
was rerated over the period. Oil refiner, Phillips 66, was also a positive for
the Company. The diversified energy company benefited from extremely strong
refining margins following Russia's invasion of Ukraine. Also, Phillips 66
completed two acquisitions that increased the company's exposure to a more
stable part of the energy value chain while also growing the earnings power of
the company.
On the negative side, the main detractor from the Company's performance at a
sector level was consumer discretionary, due to stock selection and, to a
lesser extent, having an overweight exposure. The second-largest detractor was
energy, with weaker stock selection that was partially offset by a positive
effect from being overweight to the sector.
The largest individual stock detractors from performance were clothing
companies HanesBrands and VF Corporation. Shares in HanesBrands were weak due
to a delay in the company's new management implementing changes during a
period when excessive apparel inventories pressurised all stocks in the
industry. Meanwhile, VF Corporation suffered from a continued lack of traction
and a subsequent change of management at its important Vans brand. Also,
China's strict 'zero-Covid' policy adversely affected both demand for VF
Corporation's products and the company's supply chain.
Canadian financial services company CI Financial was also a detractor over the
period. Its shares de-rated as investors were worried about the company's
increased leverage after its acquisition of several high-quality registered
investment advisors.
Portfolio activity
The investments in the Company's portfolio remained consistent with our
investment process which aims to identify high-quality, cash generative
companies. During the year, market volatility created opportunities to add
quality companies into the portfolio at compelling prices. The changes in the
portfolio are summarised below.
We re-initiated a position in Home Depot as a best-in-class retailer, led by a
high-quality management team. At the time that we re-initiated, the shares
were caught in a collective market drawdown that meaningfully detached Home
Depot's shares from their intrinsic value. The company has a strong real
estate position from a location standpoint, best-in-class execution and a
culture that has led to far superior sales per square foot metrics than its
closest peer. Home Depot operates in a near duopoly with rational pricing.
We believe that CVS Health ("CVS") is making significant improvements to the
quality of the business, pivoting it towards more attractive, structurally
growing areas of healthcare. The key strategic initiative is to lower the
retail pharmacy footprint and invest in primary care delivery. In the latter
area, there is a significant opportunity for growth as 30% of Americans do not
have a primary care provider and the industry is moving towards value-based
care, which offers more attractive returns. CVS can build on the existing
range of basic services offered at its HealthHUBs and MinuteClinics to bring a
more affordable model of care delivery.
We believe PNC Financial Services ("PNC") can continue to take deposit and
loan market share over time as the bank's scale gives it capacity to invest in
technology as banking moves further into the digital world. In addition, we
think there is a long runway for growth from PNC's BBVA acquisition that will
create additional upside. PNC historically has a good underwriting track
record and we believe it will hold up well relative to peers in a tough market
environment.
We initiated a position in Merck, with the view that its modest valuation
captures concerns on both the potential to overpay for large scale M&A as
well as the concentration in Keytruda, which will lose patent protection in
2028. We believe that Merck has other growth drivers that will help offset
this view. For example, Gardasil's capacity expansion, beginning in 2023, will
help as will additional M&A that capitalises on opportunities like the
Acceleron deal. Further information on the company can be found in the case
study on page 35 of the 2023 Annual Report.
We sold the position in Nutrien after a rally in fertiliser prices drove the
company's earnings to unsustainably high levels. We expect earnings to revert
lower over time, along with the stock price.
We disposed of the holding in Class I railroad operator Union Pacific given
multiple quarters of mixed performance. The company has faced operational
challenges, combined with a high relative valuation that embeds faster growth
over the next year than we believe is attainable. Union Pacific remains a
high-quality operator, but, at current valuations, better opportunities can be
found elsewhere within cyclicals.
We sold out of the holding in Genuine Parts Company, a high-quality
distributor that focuses on two distinct segments - the automotive aftermarket
parts and a broad industrial offering. The company's valuation expanded from a
market multiple to a 30-40% premium on peak earnings.
We sold the position in Huntington Bancshares on fears that consensus expense
expectations for 2023 were too low and needed to be adjusted upwards.
We disposed of the holding in Gilead Sciences on the view that the company's
recent acquisitions will not provide quite the level of commercial upside that
was originally hoped for. Therefore, upside is dependent on success in some
clinical trials, where the outlook is more limited. While Gilead continues to
execute reasonably well on its base business, this appears to be fairly well
captured by the stock's current valuation. Gilead remains a solid, quality
company, but M&A deals that were needed to rejuvenate interest in the
stock may struggle to generate attractive returns.
We sold the position in HanesBrands due to management's inability to improve
the company's weakened operations given the demand drop that affected cash
flows. While the company's turnaround plan to reduce complexity, focus on the
most profitable products and grow the Champion brand had strong merits, the
unwinding of demand tailwinds from the pandemic has proved to be too strong.
We sold the holding, as the timing of any recovery did not justify the
embedded risk of retaining a position.
We sold the position in utility CMS Energy early in the period on valuation
concerns but bought it back later on, as a pullback in the company's shares
gave us the opportunity to re-establish a holding in a company that we regard
as a best-in-class operator in its sector.
Dividend growth
The Company's strong track record of dividend growth continued over the review
period. A number of holdings grew their dividends above our long-term average,
with several announcing increases in the double digits.
The highest increase was PNC Financial Services Group, which increased its
dividend by 20%. Other notable increases came from home-improvement retailer
Home Depot, which increased its dividend by 15%; oil refiner Philips 66, with
a 12% increase; Broadcom, a provider of semiconductor and infrastructure
software services, which increased the payout by 12% and telecommunications
equipment firm Cogent Communications, which raised its dividend by 11%.
Three other companies that increased dividends by 10% were CVS Health, the
owner of several healthcare brands, Analog Devices, the semiconductor
manufacturer, and Royal Bank of Canada.
Additionally, one holding announced special payments to shareholders during
the review period. Derivatives exchange operator CME Group declared an annual
variable dividend of US$4.50 per share in December 2022. The company uses this
approach to facilitate paying out all cash that it generates over the year
beyond a minimum threshold. This compares favourably to the prior year
variable dividend of $3.3.
Outlook
With major central banks, led by the Fed, continuing to tighten monetary
policy in an effort to control inflation, the risk of an economic slowdown
remains. However, the likelihood of a US recession seems to have fallen
lately, helped by a relatively robust labour market. Although corporate
earnings are still being revised down, we see some interesting investment
opportunities at current levels and, as a result, have become more
constructive on equities as an asset class. We continue to see improvement in
supply chains globally and continued advancement on this front will be one
component on reducing inflation.
Fran Radano
abrdn Inc.
4 April 2023
Ten Largest Investments
As at 31 January 2023
Baker Hughes CVS Health
Baker Hughes Company provides oilfield products and services. The Company CVS Health Corporation provides health care and retail pharmacy services. The
engages in surface logging, drilling, Company offers prescription medications, beauty, personal care, cosmetics, and
pipeline operations, petroleum engineering, and fertilizer solutions, as well health care products as well as pharmacy benefit management, disease
as offers management and administrative services.
gas turbines, valves, actuators, pumps,
flow meters, generators and motors.
Baker Hughes serves oil and gas
industries worldwide.
Merck & Co Bristol-Myers Squibb
Merck & Co., Inc. is a global health care company that delivers health Bristol-Myers Squibb Company is a global biopharmaceutical company. The
solutions through its prescription medicines, vaccines, biological therapies, Company develops, licenses, manufactures, markets, and sells pharmaceutical
animal health, and consumer care products, which it markets directly and and nutritional products.
through its joint ventures. The Company has operations in pharmaceutical,
animal health, and consumer care.
MetLife Comcast
MetLife, Inc. provides individual insurance, employee benefits, and financial Comcast Corporation provides media and television broadcasting services. The
services with operations throughout the United States and the regions of Latin company offers video streaming, television programming, high-speed Internet,
America, Europe, and Asia Pacific. cable television and communication services. Comcast serves customers
worldwide.
Omega Healthcare Investors Gaming & Leisure Properties
Omega Healthcare Investors, Inc is a real estate investment trust (REIT). The Gaming and Leisure Properties, Inc. owns and leases casinos and other
Company invests in and provides financing to the long-term care industry. entertainment facilities.
Omega operates healthcare facilities in the United States which are operated
by independent healthcare operating companies.
Philip Morris Phillips 66
Philip Morris International Inc., through its subsidiaries, manufactures and Phillips 66 is a downstream energy company. The Company's operations include
sells cigarettes and other tobacco products. oil refining, marketing and transportation.
List of Investments
As at 31 January 2023
Valuation Total Valuation
2023 assets 2022
Company Industry classification £'000 % £'000
Baker Hughes Energy Equipment & Services 23,204 4.5 13,294
CVS Health Health Care Providers & Services 21,498 4.2 -
Merck & Co Pharmaceuticals 20,939 4.1 -
Bristol-Myers Squibb Pharmaceuticals 20,654 4.0 20,797
MetLife Insurance 20,166 3.9 14,995
Comcast Media 19,178 3.8 19,561
Omega Healthcare Investors Equity Real Estate Investment Trusts (REITs) 19,131 3.7 14,078
Gaming & Leisure Properties Equity Real Estate Investment Trusts (REITs) 17,402 3.4 16,837
Philip Morris Tobacco 16,935 3.3 19,165
Phillips 66 Oil, Gas & Consumable Fuels 16,290 3.2 15,800
Ten largest investments 195,397 38.1
American International Insurance 15,406 3.0 12,913
Analog Devices Semiconductors & Semiconductor Equipment 15,321 3.0 4,889
Citigroup Banks 14,846 2.9 19,415
Emerson Electric Electrical Equipment 14,657 2.9 13,707
L3 Harris Technologies Aerospace & Defense 13,959 2.7 12,480
Cogent Communications Diversified Telecommunication 13,924 2.7 11,853
Cisco Systems Communications Equipment 13,837 2.7 14,523
Medtronic Health Care Equipment & Supplies 13,596 2.6 15,427
FMC Chemicals 13,517 2.6 12,340
PNC Financial Services Banks 13,438 2.6 -
Twenty largest investments 337,898 65.8
Restaurant Brands International Hotels, Restaurants & Leisure 13,048 2.5 8,344
CMS Energy Multi-Utilities 12,832 2.5 11,996
AbbVie Biotechnology 12,001 2.3 25,508
Broadcom Semiconductors & Semiconductor Equipment 11,880 2.3 6,550
TC Energy Oil, Gas & Consumable Fuels 10,470 2.1 15,388
CI Financial Capital Markets 9,707 1.9 9,701
OneMain Consumer Finance 8,760 1.7 9,626
VF Textiles, Apparel & Luxury Goods 8,168 1.6 11,665
JPMorgan Chase & Co. Banks 7,958 1.6 8,861
CME Group Capital Markets 7,892 1.5 6,842
Thirty largest investments 440,614 85.8
Air Products & Chemicals Chemicals 7,810 1.5 10,514
Royal Bank of Canada Banks 7,483 1.5 7,645
Coca-Cola Beverages 7,471 1.4 8,185
Texas Instruments Semiconductors & Semiconductor Equipment 5,758 1.1 6,020
Hannon Armstrong Sustainable Mortgage Real Estate Investment Trusts (REITs) 5,397 1.1 6,183
Home Depot Specialty Retail 5,266 1.0 -
CCO Holdings 4.75% 01/02/32 Media 1,447 0.3 -
Venture Global Calcasie 6.25% 15/01/30 Oil, Gas & Consumable Fuels 746 0.2 -
NRG Energy 3.625% 15/02/31 Multi-Utilities 726 0.2 -
Venture Global Calcasie 3.875% 01/11/33 Oil, Gas & Consumable Fuels 717 0.2 -
Forty largest investments 483,435 94.3
Goodyear Tire & Rubber 5% 15/07/29 Consumer Durables 715 0.1 745
Howmet Aerospace 3% Aerospace & Defense 709 0.1 -
15/01/29
Viatris 2.7% 22/06/30 Pharmaceuticals 706 0.1 -
Graphic Packaging 3.75% 01/02/30 Packaging & Containers 693 0.1 -
NCL 5.875% 15/02/27 Consumer Discretionary 682 0.1 -
Total investments 486,940 94.8
Net current assets 26,494 5.2
Total assets 513,434 100.0
Geographical/Sector Analysis
Geographic Analysis
As at 31 January
2023 2022
Equity Fixed interest Total Equity Fixed interest Total
Country % % % % % %
Canada 8.4 - 8.4 9.8 - 9.8
USA 90.1 1.5 91.6 89.8 0.4 90.2
98.5 1.5 100.0 99.6 0.4 100.0
Investment Case Studies
Merck & Co
Dividend yield: 2.8%
Merck & Co (MRK) is a global biopharmaceutical company with strong
leadership in the immuno-oncology space. It generated nearly $60 billion in
sales in 2022 with a 37% operating margin resulting in very strong cash flow
generation which has led to the company consistently growing its dividend by
5-6% in recent years. A key driver for these sales has been uptake of Keytruda
with its impressive profile for use against an array of cancers. This drug
generated $20 billion in sales in 2022 and is expected to grow until it loses
patent protection in 2028.
The position in Merck was taken when the multiple on future earnings post the
2028 patent loss on Keytruda appeared undemanding, while at the same time the
expectations for other growth drivers had increased, which would bolster the
post 2028 earnings stream. Since then, outstanding Phase 3 data for a drug in
peripheral arterial hypertension has been presented that supports a
multi-billion dollar opportunity. In addition, manufacturing capacity for
Gardasil, an HPV vaccine that prevents certain cancers, will come online in
2023 for a product that has been capacity constrained for the last few years.
Finally, excellent Phase 2b data for an oral cholesterol lowering drug
supports the Phase 3 development and points to a multi-billion dollar
opportunity as Merck expects to price the drug at a level that will optimize
payer coverage. Confidence that Merck will generate longer term growth has
increased, suggesting that efforts to improve margins by the company should be
successful.
Merck has a strong history where it has been on the forefront of efforts to
enable patient access to drugs. The company focuses on developing drugs that
can reach 75% of the world, with a view towards enabling access from
developing countries and underserved populations in the US. Merck has
targeted enabling 100 million people to gain access to its medicines by 2025
through a variety of strategies, solutions, and partnerships. And Merck is
specifically trying to reach 30 million people from lower and middle income
countries as well as underserved US populations with its social investments.
The company provides annual updates to measure progress against these goals.
Analog Devices
Dividend yield: 1.9%
Analog Devices (ADI) is a semiconductor company focused on the analog market
selling a wide range of products (over 75,000) into a diversified set of more
than 125,000 customers. The analog semiconductor market is the most attractive
part of the industry, as the products are in most cases designed specifically
for particular end-customer products and add a significant part of the value
of the end product but are a very small part of the end cost. This results in
ADI's products typically having a long life cycle (over 7 years) and also
pricing (as the cost is small and replacement is difficult). ADI's largest two
end markets are industrial equipment and autos, both of which have structural
growth drivers. In industrial equipment, newer generations of machinery have
significantly more functionality built into them at the machine level (rather
than the remote computer systems that control them), and in autos, the move
towards Electric Vehicles is driving a step change in semiconductor content.
These trends should drive 7-10% revenue growth per annum over the cycle,
providing a supportive medium term revenue backdrop.
Analog semiconductors have properties which do not require leading edge
manufacturing capability, which enables ADI to have strong cash generation and
attractive gross margins (74% in 2022). In addition, ADI has pioneered
technology sharing arrangements with leading Taiwan based fabrication company,
Taiwan Semiconductor Manufacturing Company (TSMC), such that ADI does around
half of its own manufacturing and outsources the other half to TSMC. The
manufacturing processes used are interchangeable, which enables ADI to take
back a larger share of production in house in periods of weaker demand, hereby
significantly lowering margin volatility over the cycle. We believe that ADI's
strong margins and ongoing cash generation are sustainable and with strong
medium term growth outlook driven by the structural drivers in its end
markets.
ADI has robust management of its main ESG risks, over a five year period the
company reduced water usage by 7% despite 70% revenue growth, and management
have targets to increase the rate of water recycling in its operations. It
also targets 50% reduction in Greenhouse Gas emissions by 2025. The company
also stands to benefit substantially from the ongoing growth in Electric
Vehicles, which is a significant driver of increased semiconductor content in
cars.
Directors' Report
The Company, which was incorporated in 1902, is registered as a public limited
company and is an investment company within the meaning of Section 833 of the
Companies Act 2006. The Company's registration number is SC005218.
The Company has been accepted by HM Revenue & Customs as an investment
trust subject to the Company continuing to meet the relevant eligibility
conditions of Section 1158 of the Corporation Tax Act 2010 and the ongoing
requirements of Part 2 Chapter 3 Statutory Instrument 2011/2999 for all
financial years commencing on or after 1 February 2012. The Directors are of
the opinion that the Company has conducted its affairs for the year ended 31
January 2023 so as to enable it to comply with the ongoing requirements for
investment trust status.
The Company has conducted its affairs so as to satisfy the requirements as a
qualifying security for Individual Savings Accounts. The Directors intend that
the Company will continue to conduct its affairs in this manner.
Results and Dividends
The audited financial statements for the year ended 31 January 2023 are
contained on pages 66 to 88 of the 2023 Annual Report. Details of dividends
for the year to 31 January 2023 can be found on page 4 of the 2023 Annual
Report.
Share Capital and Rights attaching to the Company's Shares
At 31 January 2023, the Company's capital structure consisted of 140,234,749
Ordinary shares of 5p each (2022 - 140, 675,934 Ordinary shares of 5p each).
During the year to 31 January 2023, the Company bought back 441,185 Ordinary
shares for cancellation. There were no Ordinary shares repurchased for
cancellation subsequent to the year end.
The Ordinary shares carry a right to receive dividends which are declared from
time to time by an ordinary resolution of the Company (up to the amount
recommended by the Board) and to receive any interim dividends which the
Company may resolve to pay. On a winding-up, after meeting the liabilities of
the Company, the surplus assets will be paid to Ordinary shareholders in
proportion to their shareholdings. On a show of hands, every shareholder
present in person, or by proxy, has one vote and, on a poll, every Ordinary
shareholder present in person has one vote for each share held and a proxy has
one vote for every share represented.
There are no restrictions concerning the holding or transfer of the Company's
shares and there are no special rights attached to any of the shares. The
Company is not aware of any agreements between shareholders which may result
in restriction on the transfer of shares or the voting rights. The rules
concerning amendments to the Articles of Association and powers to issue or
buyback the Company's shares are contained in the Articles of Association of
the Company and the Companies Act 2006.
Significant Agreements
The Company is not aware of any significant agreements to which it is a party
that take effect, alter or terminate upon a change of control of the Company
following a takeover and there are no agreements between the Company and its
Directors concerning compensation for loss of office. Other than the
management agreement with the Manager and the depositary agreement, further
details of which are set out below, the Company is not aware of any
contractual or other agreements which are essential to its business which
ought to be disclosed in the Directors' Report.
Directors
Details of the Directors of the Company who were in office during the year and
up to the date of this report are shown on pages 38 to 39 of the 2023 Annual
Report. Patrick Edwardson was appointed on 1 July 2022.
No contract or arrangement existed during the period in which any of the
Directors was materially interested. No Director has a service contract with
the Company.
Directors' & Officers' Liability Insurance
The Company maintains insurance in respect of Directors' and Officers'
liabilities in relation to their acts on behalf of the Company for the year to
31 January 2023 and up to the date of this report. Each Director of the
Company shall be entitled to be indemnified out of the assets of the Company
to the extent permitted by law against any loss or liability incurred by him
in the execution of his duties in relation to the affairs of the Company.
These rights are included in the Articles of Association of the Company.
Corporate Governance
The Statement of Corporate Governance, which forms part of the Directors'
Report, is shown on pages 44 to 46 of the 2023 Annual Report.
Principal Agreements
Management Agreement
The Company has appointed abrdn Fund Managers Limited ("aFML" or the
"Manager"), a wholly owned subsidiary of abrdn plc, as its alternative
investment fund manager ("AIFM"). aFML has been appointed to provide the
Company with investment management, risk management, administration, company
secretarial services and promotional activities. The Company's portfolio is
managed by abrdn Inc. (the "Investment Manager") by way of a delegation
agreement in place between aFML and abrdn Inc. In addition, aFML has
sub-delegated promotional activities to abrdn Investments Limited and
administrative and secretarial services to abrdn Holdings Limited. Details of
the management agreement, including notice period and fees paid during the
year ended 31 January 2023 are shown in note 5 to the financial statements.
Depositary Agreement
The Company has appointed BNP Paribas Trust Corporation UK Limited ("BNPP") as
its depositary. During the period, the Depositary was also BNP Paribas
Securities Services, London Branch. The depositary agreement was novated to
BNPP on 30 June 2022.
Loan Note Agreement
In December 2020, the Company entered into a long-term financing agreement for
US$50 million with MetLife comprising two loans of US$25 million with terms of
ten and 15 years at an all-in cost of 2.70% and 2.96% respectively, giving a
blended rate for ten years of 2.83% (the "Long-Term Financing Agreement").
Substantial Interests
As at 31 January 2023 the Company had received notification or was aware of
the following interests in its Ordinary shares:
Shareholder Number of shares held % held
Rathbone Brothers 16,928,507 12.1
RBC Brewin Dolphin 11,230,382 8.1
abrdn Retail Plans 10,033,987 7.2
Interactive Investor 6,742,141 4.8
Hargreaves Lansdown 6,496,770 4.6
Canaccord Genuity Wealth Management 6,296,642 4.5
Charles Stanley 5,096,204 3.6
1607 Capital Partners 4,987,174 3.6
WM Thomson 4,357,105 3.1
EFG Harris Allday 4,306,065 3.1
Allspring Global Investments 4,236,597 3.0
As at the date of this Report, no changes to the above interests had been
notified to the Company.
Accountability and Audit
The Directors who held office at the date of approval of this Directors'
Report confirm that, so far as they are each aware, there is no relevant audit
information of which the Company's auditor is unaware; and each Director has
taken all the steps that he/she could reasonably be expected to have taken as
a Director in order to make himself/herself aware of any relevant audit
information and to establish that the Company's auditor is aware of that
information.
The Audit Committee has reviewed the services provided by the auditor during
the year, together with the auditor's fees and procedures in connection with
the provision of non-audit services. There were no non-audit service fees paid
during the year. The Board remains satisfied that PricewaterhouseCoopers LLP's
objectivity and independence is being safeguarded.
Going Concern
The Company's assets consist substantially of securities in companies listed
on recognised stock exchanges and in normal circumstances are realisable
within a short timescale and which can be sold to meet funding commitments if
necessary.
The Board has set gearing limits and regularly reviews actual exposures, cash
flow projections and compliance with banking covenants.
The Company undertakes a continuation vote every three years. The last
continuation vote was passed at the AGM held in June 2021 with 98.6% of votes
in favour.
The Board has considered the impact of recent market events, such as
geopolitical developments and believes that there will be a limited resulting
financial impact on the Company's operational resources and existence. Given
that the Company's portfolio comprises primarily "Level One" assets (listed on
a recognisable exchange and realisable within a short timescale), and the
Company's relatively low level of gearing, the Company has the ability to
raise sufficient funds so as to remain within its debt covenants and pay
expenses.
Taking the above factors into consideration, the Directors have a reasonable
expectation that the Company has adequate financial resources to continue in
operational existence for the foreseeable future and for at least twelve
months from the date of this Report. Accordingly, the Board continues to adopt
the going concern basis in preparing the financial statements.
Annual General Meeting
The Notice of General Meeting is included at pages 102 to 106 of the 2023
Annual Report. Among the resolutions being put at the Annual General Meeting
("AGM") of the Company to be held on 8 June 2023 at 2.00pm, the following
resolutions will be proposed as special business:
(i) Section 551 Authority to Allot Shares
Resolution 13, which is an ordinary resolution, seeks to renew the Directors'
authority under section 551 of the Companies Act to allot shares (excluding
treasury shares) up to an aggregate nominal amount of £2,313,873 or, if less,
the number representing 33.33% of the issued Ordinary share capital of the
Company as at the date of the passing of the resolution. This authority will
expire on 31 July 2024 or, if earlier, at the conclusion of the AGM to be held
in 2024 (unless previously revoked, varied or extended). The Directors will
only exercise this authority if they believe it is advantageous and in the
best interests of shareholders. There are no treasury shares in issue.
(ii) Dis-application of Pre-emption Provisions
Resolution 14, which is a special resolution, seeks to renew the
dis-application of statutory pre-emption rights in relation to the issue of
shares (or sale of shares out of treasury) up to an aggregate nominal amount
of £701,174 or, if less, the number representing 10% of the issued Ordinary
share capital of the Company as at the date of the passing of the resolution.
This authority will expire on 31 July 2024 or, if earlier, at the conclusion
of the AGM to be held in 2024. The Directors will only exercise this authority
if they believe it is advantageous and in the best interests of shareholders.
Ordinary shares would only be issued for cash at a price not less than the NAV
per share.
(iii) Share Repurchases
Resolution 15, which is a special resolution, seeks to renew the Company's
authority for the Company to make market purchases of its own Ordinary shares,
up to a maximum of 14.99% of the issued Ordinary share capital of the Company
as at the date of the passing of the resolution. Shares so repurchased will be
cancelled or held in treasury. The principal reasons for share buybacks are:
- to enhance net asset value for continuing shareholders by
purchasing shares at a discount to the prevailing net asset value; and
- to address any imbalance between the supply of and demand for the
Company's shares that results in a discount of the quoted market price to the
published NAV per share.
Recommendation
The Directors believe that the resolutions to be proposed at the AGM are in
the best interests of the Company and its shareholders as a whole and
recommend that shareholders vote in favour of the resolutions, as the
Directors intend to do in respect of their own beneficial shareholdings
totalling, in aggregate, 47,718 Ordinary shares, and representing 0.03% of the
existing issued Ordinary share capital of the Company.
By order of the Board
abrdn Holdings Limited
Secretary, Edinburgh
4 April 2023
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report in accordance
with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law they are required to prepare the financial
statements in accordance with UK accounting standards, including FRS 102, the
Financial Reporting Standard applicable in the UK and Republic of Ireland.
Under company law the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Company and of its profit or loss for that period. In
preparing these financial statements, the Directors are required to:
- select suitable accounting policies and then apply them
consistently;
- make judgements and estimates that are reasonable and prudent;
- state whether applicable UK accounting standards have been
followed, subject to any material departures disclosed and explained in the
financial statements;
- assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern; and
- use the going concern basis of accounting unless they either
intend to liquidate the Company or to cease operations, or have no realistic
alternative but to do so.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that its financial statements comply with the Companies
Act 2006. They are responsible for such internal control as they determine
is necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error, and have general
responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Company and to prevent and detect fraud and other
irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, Directors' Report, Directors' Remuneration
Report and Corporate Governance Statement that complies with that law and
those regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the company's website.
Legislation in the UK governing the preparation and dissemination of financial
statements may differ from legislation in
other jurisdictions.
Responsibility statement of the Directors in respect of the annual financial
report
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the Company;
and
- the Strategic Report includes a fair review of the development and
performance of the business and the position of the issuer, together with a
description of the principal risks and uncertainties that they face.
We consider this Annual Report, taken as a whole, is fair, balanced and
understandable and provides the information necessary for shareholders to
assess the Company's position and performance, business model and strategy.
For and on behalf of The North American Income Trust plc
Dame Susan Rice
Chair
4 April 2023
Statement of Comprehensive Income
Year ended 31 January 2023 Year ended 31 January 2022
Revenue Capital Total Revenue Capital Total
Note £'000 £'000 £'000 £'000 £'000 £'000
Net gains on investments 11 - 28,105 28,105 - 81,766 81,766
Net currency losses 3 - (1,557) (1,557) - (558) (558)
Income 4 22,295 731 23,026 19,040 604 19,644
Investment management fee 5 (947) (2,209) (3,156) (910) (2,123) (3,033)
Administrative expenses 7 (854) - (854) (735) - (735)
Return before finance costs and taxation 20,494 25,070 45,564 17,395 79,689 97,084
Finance costs 6 (354) (825) (1,179) (316) (737) (1,053)
Return before taxation 20,140 24,245 44,385 17,079 78,952 96,031
Taxation 8 (3,014) 447 (2,567) (2,522) 363 (2,159)
Return after taxation 17,126 24,692 41,818 14,557 79,315 93,872
Return per Ordinary share (pence) 10 12.21 17.60 29.81 10.28 56.00 66.28
The total column of this statement represents the profit and loss account of
the Company.
All revenue and capital items in the above statement derive from continuing
operations.
The accompanying notes on pages 70 to 88 of the 2023 Annual Report are an
integral part of the financial statements.
Proposed final dividend. The Board is proposing a final dividend of 3.50p per
share (£4,908,000), making a total dividend of 11.00p per share
(£15,426,000) for the year to 31 January 2023 which, if approved, will be
payable on 12 June 2023 (see note 9). For the year ended 31 January 2022, a
final dividend of 4.00p per share was paid (£5,609,000) making a total
dividend of 10.30p per share (£14,495,000).
Statement of Financial Position
As at As at
31 January 2023 31 January 2022
Note £'000 £'000
Non-current assets
Investments at fair value through profit or loss 11 486,940 470,974
Current assets
Debtors and prepayments 12 2,675 5,712
Cash and short term deposits 26,699 13,875
29,374 19,587
Creditors: amounts falling due within one year
Other creditors 13 (2,880) (4,907)
(2,880) (4,907)
Net current assets 26,494 14,680
Total assets less current liabilities 513,434 485,654
Creditors: amounts falling due after more than one year
Senior Loan Notes 14 (40,543) (37,191)
Net assets 472,891 448,463
Capital and reserves
Called up share capital 15 7,012 7,034
Share premium account 51,806 51,806
Capital redemption reserve 15,604 15,582
Capital reserve 373,828 350,388
Revenue reserve 24,641 23,653
Total shareholders' funds 472,891 448,463
Net asset value per Ordinary share (pence) 16 337.21 318.79
The financial statements on pages 66 to 88 were approved and authorised for
issue by the Board on 4 April 2023 and were signed on its behalf by:
Dame Susan Rice
Director
The accompanying notes on pages 70 to 88 of the 2023 Annual Report are an
integral part of the financial statements.
Statement of Changes in Equity
For the year ended 31 January 2023
Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 1 February 2022 7,034 51,806 15,582 350,388 23,653 448,463
Buyback of Ordinary shares (22) - 22 (1,252) - (1,252)
Return after taxation - - - 24,692 17,126 41,818
Dividends paid (see note 9) - - - - (16,138) (16,138)
Balance at 31 January 2023 7,012 51,806 15,604 373,828 24,641 472,891
For the year ended 31 January 2022
Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 1 February 2021 7,151 51,806 15,465 277,403 23,591 375,416
Buyback of Ordinary shares (117) - 117 (6,330) - (6,330)
Return after taxation - - - 79,315 14,557 93,872
Dividends paid (see note 9) - - - - (14,495) (14,495)
Balance at 31 January 2022 7,034 51,806 15,582 350,388 23,653 448,463
The accompanying notes on pages 70 to 88 of the 2023 Annual Report are an
integral part of the financial statements.
Statement of Cash Flows
Year ended Year ended
31 January 2023 31 January 2022
Note £'000 £'000
Operating activities
Net return before taxation 44,385 96,031
Adjustments for:
Net gains on investments 11 (27,997) (81,710)
Net losses on foreign exchange transactions 1,557 558
(Increase)/decrease in dividend income receivable 12 (54) 265
(Increase)/decrease in fixed interest income receivable 12 (134) 66
Increase/(decrease) in derivatives 13 240 (120)
(Increase)/decrease in other debtors 12 (146) 1
Increase/(decrease) in other creditors 13 129 (828)
Tax on overseas income 8 (2,567) (2,159)
Amortisation/(accretion) of senior loan note expenses 6 5 (1)
Accretion of fixed income book cost 11 (1) (2)
Net cash inflow from operating activities 15,417 12,101
Investing activities
Purchases of investments (186,765) (193,847)
Sales of investments 199,772 206,909
Net cash generated from investing activities 13,007 13,062
Financing activities
Equity dividends paid 9 (16,138) (14,495)
Buyback of Ordinary shares (1,252) (6,330)
Net cash used in financing activities (17,390) (20,825)
Increase in cash and cash equivalents 11,034 4,338
Analysis of changes in cash and cash equivalents during the year
Opening balance 13,875 9,239
Effect of exchange rate fluctuation on cash held 3 1,790 298
Increase in cash as above 11,034 4,338
Closing balance 26,699 13,875
The accompanying notes on pages 70 to 88 of the 2023 Annual Report are an
integral part of the financial statements.
Notes to the Financial Statements
For the year ended 31 January 2023
1 Principal activity
The Company is a closed-end investment company, registered in Scotland No.
SC005218, with its Ordinary shares being listed on the London Stock Exchange.
2. Accounting policies
A summary of the principal accounting policies, all of which, unless otherwise
stated, have been consistently applied throughout the year and the preceding
year is set out below.
(a) Basis of preparation and going concern. The financial statements have been
prepared in accordance with Financial Reporting Standard 102, the Companies
Act 2006 and with the Statement of Recommended Practice 'Financial Statements
of Investment Trust Companies and Venture Capital Trusts' issued in July 2022.
The financial statements are prepared in sterling which is the functional
currency of the Company and rounded to the nearest £'000. They have also been
prepared on a going concern basis and on the assumption that approval as an
investment trust will continue to be granted.
Going concern. The Company's assets consist substantially of securities in
companies listed on recognised stock exchanges and in normal circumstances are
realisable within a short timescale and which can be sold to meet funding
commitments if necessary. The Board has set gearing limits and regularly
reviews actual exposures, cash flow projections and compliance with banking
covenants. The Company replaced its Long-Term Financing Agreement in December
2020. The Company undertakes a continuation vote every three years. The last
continuation vote was passed at the AGM held in June 2021 with 98.6% of votes
in favour. The Board has considered the impact of recent market events, such
as geopolitical developments and believes that there will be a limited
resulting financial impact on the Company's operational resources and
existence. Given that the Company's portfolio comprises primarily "Level One"
assets (listed on a recognisable exchange and realisable within a short
timescale), and the Company's relatively low level of gearing, the Company has
the ability to raise sufficient funds so as to remain within its debt
covenants and pay expenses. Taking the above factors into consideration, the
Directors have a reasonable expectation that the Company has adequate
financial resources to continue in operational existence for the foreseeable
future and for at least twelve months from the date of this Report.
Accordingly, the Board continues to adopt the going concern basis in preparing
the financial statements.
Significant estimates and judgements. Disclosure is required of judgements and
estimates made by management in applying the accounting policies that have a
significant effect on the financial statements. There are no significant
estimates or judgements which impact these financial statements.
(b) Income. Income from investments, including taxes deducted at source, is
included in revenue by reference to the date on which the investment is quoted
ex dividend. Special dividends are credited to capital or revenue, according
to the circumstances. The fixed returns on debt instruments are recognised
using the time apportioned accruals basis and the discount or premium on
acquisition is amortised or accreted on a straight line basis.
Interest receivable from cash and short-term deposits is recognised the time
apportioned accruals basis.
(c) Expenses. All expenses are accounted for on an accruals basis and are charged
to the Statement of Comprehensive Income. Expenses are charged against revenue
except as follows:
- transaction costs on the acquisition or disposal of investments are charged
to capital in the Statement of Comprehensive Income;
- expenses are charged to capital where a connection with the maintenance or
enhancement of the value of the investments can be demonstrated. In this
respect, the investment management fee is allocated 30% to revenue and 70% to
capital to reflect the Company's investment policy and prospective income and
capital growth.
(d) Taxation. The tax payable is based on the taxable profit for the year. Taxable
profit differs from net profit as reported in the Statement of Comprehensive
Income because it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are never taxable
or deductible (see note 8 for a more detailed explanation). The Company has no
liability for current tax.
Deferred taxation is provided on all timing differences, that have originated
but not reversed at the Statement of Financial Position date, where
transactions or events that result in an obligation to pay more or a right to
pay less tax in future have occurred at the Statement of Financial Position
date, measured on an undiscounted basis and based on enacted tax rates. 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 future
reversal of the underlying timing differences can be deducted. Timing
differences are differences arising between the Company's taxable profits and
its results as stated in the financial statements which are capable of
reversal in one or more subsequent periods.
Owing to the Company's status as an investment trust company, and the
intention to continue to meet the conditions required to obtain approval for
the foreseeable future, the Company has not provided deferred tax on any
capital gains and losses arising on the revaluation or disposal of
investments.
(e) Investments. The Company has chosen to apply the recognition and measurement
provisions of IAS 39 Financial Instruments: Recognition and Measurement and
investments have been designated upon initial recognition at fair value
through profit or loss. Investments are recognised and de-recognised at trade
date where a purchase or sale is under a contract whose terms require delivery
within the time frame established by the market concerned, and are initially
measured at fair value. Subsequent to initial recognition, investments are
measured at fair value. For listed investments, this is deemed to be bid
market prices. Gains and losses arising from changes in fair value and
disposals are included as a capital item in the Statement of Comprehensive
Income and are ultimately recognised in the capital reserve.
(f) Borrowings. Monies borrowed to finance the investment objectives of the
Company are stated at the amount of the net proceeds immediately after issue
plus cumulative finance costs less cumulative payments made in respect of the
debt. The finance costs of such borrowings are accounted for on an accruals
basis using the effective interest rate method and are charged 30% to revenue
and 70% to capital to reflect the Company's investment policy and prospective
income and capital growth.
(g) Dividends payable. Interim and final dividends are recognised in the period in
which they are paid.
(h) Nature and purpose of reserves
Share premium account. The balance classified as share premium includes the
premium above nominal value from the proceeds on issue of any equity capital
comprising Ordinary shares of 5p. This reserve is not distributable.
Capital redemption reserve. The capital redemption reserve is used to record
the amount equivalent to the nominal value of any of the Company's own shares
purchased and cancelled in order to maintain the Company's capital. This
reserve is not distributable.
Capital reserve. This reserve reflects any gains or losses on realisation of
investments in the period along with any changes in fair values of investments
held that have been recognised in the Statement of Comprehensive Income. The
costs of share buybacks for treasury are also deducted from this reserve. This
reserve is distributable although the amount that is distributable is complex
to determine and is not necessarily the full amount of the reserve as
disclosed within these financial statements.
Revenue reserve. This reserve reflects all income and costs which are
recognised in the revenue column of the Statement of Comprehensive Income. The
revenue reserve represents the amount of the Company's reserves distributable
by way of dividend. The amount of the revenue reserve as at 31 January 2023
may not be available at the time of any future distribution due to movements
between 31 January 2023 and the date of distribution.
(i) Foreign currency. Assets and liabilities in foreign currencies are translated
at the rates of exchange ruling on the Statement of Financial Position date.
Transactions involving foreign currencies are converted at the rate ruling on
the date of the transaction. Gains and losses on the realisation of foreign
currencies are recognised in the Statement of Comprehensive Income and are
then transferred to the capital reserve.
(j) Traded options. The Company may enter into certain derivative contracts (e.g.
writing traded options). Option contracts are accounted for as separate
derivative contracts and are therefore shown in other assets or other
liabilities at their fair value. The initial fair value is based on the
initial premium which is received/paid on inception. The premium is recognised
in the revenue column over the life of the contract period. Losses on any
movement in the fair value of open contracts at the year end realised and on
the exercise of the contracts are recorded in the capital column of the
Statement of Comprehensive Income.
In addition, the Company may enter into derivative contracts to manage market
risk and gains or losses arising on such contracts are recorded in the capital
column of the Statement of Comprehensive Income.
(k) Cash and cash equivalents. Cash and cash equivalents comprise cash at bank.
3. Net currency losses
2023 2022
£'000 £'000
Gains on cash held 1,790 298
Losses on Senior Loan Notes (3,347) (856)
(1,557) (558)
4. Income
2023 2022
£'000 £'000
Income from overseas listed investments
Dividend income 15,570 13,424
REIT income 2,816 2,218
Interest income from investments 167 112
18,553 15,754
Other income from investment activity
Traded option premiums 4,170 3,890
Deposit interest 303 -
4,473 3,890
Total income 23,026 19,644
During the year, the Company was entitled to premiums totalling £4,170,000
(2022 - £3,890,000) in exchange for entering into option contracts. At the
year end there were 5 (2022-2) open positions, valued at a liability of
£264,000 (2022 - liability of £24,000) as disclosed in note 13. Losses
realised on the exercise of derivative transactions are disclosed in note 11.
5. Investment management fee
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management fee 947 2,209 3,156 910 2,123 3,033
Management services are provided by abrdn Fund Managers Limited ("aFML"). With
effect from 1 May 2021 the management fee has been charged at 0.75% of net
assets up to £250 million, 0.6% between £250 million and £500 million, and
0.5% over £500 million, payable quarterly. Prior to this the management fee
was charged at 0.75% of net assets up to £350 million, 0.6% between £350
million and £500 million and 0.5% over £500 million, payable quarterly. Net
assets equals gross assets after deducting current liabilities and borrowings
and excluding commonly managed funds. The balance due to aFML at the year end
was £810,000 (2022 - £773,000). The fee is allocated 30% to revenue and 70%
to capital (2022 - same).
The management agreement between the Company and the Manager is terminable by
either party on three months' notice. In the event of a resolution being
passed at the AGM to wind up the Company the Manager shall be entitled to
three months' notice from the date the resolution was passed. In the event of
termination on not less than the agreed notice period, compensation is payable
in lieu of the unexpired notice period.
6. Finance costs
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Bank interest paid 1 2 3 2 5 7
Senior Loan Notes 351 819 1,170 313 730 1,043
Amortised Senior Loan Note issue expenses 2 4 6 1 2 3
354 825 1,179 316 737 1,053
7. Administrative expenses
2023 2022
£'000 £'000
Directors' fees 131 129
Registrar's fees 104 51
Custody and bank charges 25 27
Secretarial fees 129 120
Auditor's remuneration:
- fees payable to the Company's auditor for the audit of the annual report 40 31
Promotional activities 215 177
Printing, postage and stationery 29 31
Fees, subscriptions and publications 57 51
Professional fees 37 55
Depositary charges 46 43
Other expenses 41 20
854 735
Secretarial and administration services are provided by abrdn Fund Managers
Limited ("aFML") under an agreement which is terminable on three months'
notice. The fee is payable monthly in advance and based on an index-linked
annual amount of £129,000 (2022 - £120,000). The balance due at the year end
was £22,000 (2022 - £20,000).
During the year £215,000 (2022 - £177,000) was paid to aFML in respect of
promotional activities for the Company and the balance due at the year end was
£72,000 (2022 - £18,000).
With the exception of Auditor's remuneration for the statutory audit, all of
the expenses above include irrecoverable VAT where applicable. The Auditor's
remuneration for the statutory audit excludes VAT amounting to £8,000 (2022 -
£6,000).
8. Taxation
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
(a) Analysis of charge for the year
UK corporation tax 292 - 292 152 - 152
Double tax relief (292) - (292) (152) - (152)
Overseas tax suffered 2,458 109 2,567 2,067 91 2,158
Tax relief to capital 556 (556) - 454 (454) -
Corporation tax prior year adjustment - - - 1 - 1
Total tax charge for the year 3,014 (447) 2,567 2,522 (363) 2,159
(b) Factors affecting the tax charge for the year. The UK corporation tax rate is
19% (2022 - 19%). The tax charge for the year is lower (2022 - lower) than the
corporation tax rate. The differences are explained in the following table.
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Net return before taxation 20,140 24,245 44,385 17,079 78,952 96,031
Corporation tax at 19% (2022 - 19%) 3,827 4,607 8,434 3,245 15,001 18,246
Effects of:
Non-taxable overseas dividends (2,958) (139) (3,097) (2,550) (115) (2,665)
Irrecoverable overseas withholding tax 2,458 109 2,567 2,067 91 2,158
Expenses not deductible for tax purposes - - - 1 - 1
Double tax relief (293) - (293) (152) - (152)
Corporation tax prior year adjustment - - - 1 - 1
Excess management expenses (20) 20 - (90) 90 -
Non-taxable gains on investments - (5,340) (5,340) - (15,536) (15,536)
Non-taxable currency losses - 296 296 - 106 106
Total tax charge 3,014 (447) 2,567 2,522 (363) 2,159
(c) Provision for deferred taxation
At the period end there is no unrecognised deferred tax asset (2022 - £nil)
in relation to surplus management expenses.
9. Dividends
2023 2022
£'000 £'000
Amounts recognised as distributions to equity holders in the year:
3rd interim dividend for 2022 of 2.5p per share (2021 - 1.9p) 3,517 2,718
4th interim dividend for 2022 of 4.0p per share (2021 - 4.5p) 5,609 6,408
1st interim dividend for 2023 of 2.5p per share (2022 - 1.9p) 3,506 2,693
2nd interim dividend for 2023 of 2.5p per share (2022 - 1.9p) 3,506 2,676
16,138 14,495
The third interim dividend and proposed final dividend were unpaid at the year
end. Accordingly, neither have been included as a liability in these financial
statements.
The table below sets out the total dividends paid and proposed in respect of
the financial year, which is the basis on which the requirements of Sections
1158-1159 of the Corporation Tax Act 2010 are considered. The revenue
available for distribution by way of dividend for the year is £17,126,000
(2022 - £14,557,000).
2023 2022
£'000 £'000
1st interim dividend for 2023 of 2.5p per share (2022 - 1.9p) 3,506 2,693
2nd interim dividend for 2023 of 2.5p per share (2022 - 1.9p) 3,506 2,676
3rd interim dividend for 2023 of 2.5p per share (2022 - 2.5p) 3,506 3,517
Proposed final dividend for 2023 of 3.5p per share (2022 - 4.0p) 4,908 5,609
15,426 14,495
The cost of the proposed final dividend for 2023 is based on 140,234,749
Ordinary shares in issue, being the number of Ordinary shares in issue at the
date of this report.
10. Return per Ordinary share
2023 2022
£'000 p £'000 p
Based on the following figures:
Revenue return 17,126 12.21 14,557 10.28
Capital return 24,692 17.60 79,315 56.00
Total return 41,818 29.81 93,872 66.28
Weighted average number of Ordinary shares in issue 140,284,541 141,265,873
11. Investments at fair value through profit or loss
2023 2022
£'000 £'000
Investments at fair value through profit or loss
Opening book cost 425,863 395,289
Opening investment holdings gains 45,111 8,972
Opening fair value 470,974 404,261
Analysis of transactions made during the year
Purchases at cost 184,369 195,379
Sales proceeds received (196,401) (210,378)
Gains on investments(A) 27,997 81,710
Accretion of fixed income book cost 1 2
Closing fair value 486,940 470,974
Closing book cost 438,891 425,863
Closing investment holdings gains 48,049 45,111
Closing fair value 486,940 470,974
Listed on overseas stock exchanges 486,940 470,974
Net gains on investments
Gains on investments(A) 27,997 81,710
Investment holding gains on traded options(B) 108 56
28,105 81,766
(A) Includes losses realised on the exercise of traded options of £6,511,000
(2022 - £3,250,000) which are reflected in the capital column of the
Statement of Comprehensive Income in accordance with accounting policy 2(j).
Premiums received from traded options totalled £4,170,000 (2022 -
£3,890,000) per note 4.
(B) Options associated are derivative liabilities at the year end.
The Company received £196,401,000 (2022 - £210,378,000) from investments
sold in the year. The book cost of these investments when they were purchased
was £171,343,000 (2022 - £164,807,000). 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.
Transaction costs. During the year expenses were incurred in acquiring or
disposing of investments classified as fair value through profit or loss.
These have been expensed through capital and are included within gains on
investments in the Statement of Comprehensive Income. The total costs were as
follows:
2023 2022
£'000 £'000
Purchases 44 81
Sales 140 142
184 223
The above transaction costs are calculated in line with the AIC SORP. The
transaction costs in the Company's Key Information Document are calculated on
a different basis and in line with the PRIIPs regulations.
12. Debtors and prepayments
2023 2022
£'000 £'000
Dividends receivable 603 549
Interest receivable 166 32
Other debtors 246 100
Amount due from brokers 1,660 5,031
2,675 5,712
13. Creditors: amounts falling due within one year
2023 2022
£'000 £'000
Amounts due to brokers 1,444 3,840
Investment management fee payable 810 773
Traded option contracts 264 24
Interest payable 131 120
Other creditors 231 150
2,880 4,907
14. Senior Loan Notes
Creditors: amounts falling due after more than one year
2023 2022
£'000 £'000
2.70% Senior Loan Notes - 10 years 20,307 18,634
2.96% Senior Loan Notes - 15 years 20,307 18,634
Unamortised Loan Note issue expenses (71) (77)
40,543 37,191
On 21 December 2020 the Company issued a US$25 million 10 years Senior Loan
Note at an annualised interest rate of 2.70% and a US$25 million 15 years
Senior Loan Note at an annualised interest rate of 2.96%. The Loan Notes are
unsecured and unlisted. Interest is payable in half yearly instalments in June
and December and the Loan Notes are due to be redeemed at par on 21 December
2030 and 21 December 2035. The Company has complied with the Senior Loan Note
Purchase Agreement covenant throughout the period since issue that the ratio
of net assets to gross borrowings must be greater than 3.5:1, that net assets
will not be less than £200,000,000, and that the total number of Listed
Assets is to be more than 35.
The total fair value of the Senior Loan Notes at 31 January 2023 was
£38,579,000 (2022 - £41,348,000) comprising £19,278,000 (2022 -
£20,065,000) in respect of the 10 years 2.70% Senior Loan Note and
£19,301,000 (2022 - £21,283,000) in respect of the 15 years 2.96% Senior
Loan Note. The fair value of the Senior Loan Notes has been determined by
aggregating the expected future cash flows for that loan discounted at a rate
comprising the borrower's margin plus an average of market rates applicable to
loans of a similar period of time.
15. Called up share capital
2023 2022
£'000 £'000
Allotted, called-up and fully paid:
Opening balance 7,034 7,151
Ordinary shares bought back in the year (22) (117)
140,234,749 (2022 - 140,675,934) Ordinary shares of 5p each 7,012 7,034
During the year 441,185 (2022 - 2,353,212) Ordinary shares of 5p each were
repurchased by the Company at a total cost, including transaction costs, of
£1,252,000 (2022 - £6,330,000).
Subsequent to the year end, no Ordinary shares of 5p each have been
repurchased by the Company.
16. Net asset value per Ordinary share
The net asset value per share and the net assets attributable to the Ordinary
shareholders at the year end were as follows:
2023 2022
Net assets attributable £472,891,000 £448,463,000
Number of Ordinary shares in issue(A) 140,234,749 140,675,934
Net asset value per share 337.21p 318.79p
(A) 2022 Includes 66,395 Ordinary shares bought back prior to the year end
which had not yet settled.
17. Analysis of changes in net debt
At At
1 February Currency Non-cash Cash 31 January
2022 differences movement flows 2023
£'000 £'000 £'000 £'000 £'000
Cash and short term deposits 13,875 1,790 - 11,034 26,699
Debt due after more than one year (37,191) (3,347) (5) - (40,543)
(23,316) (1,557) (5) 11,034 (13,844)
At At
1 February Currency Non-cash Cash 31 January
2021 differences movement flows 2022
£'000 £'000 £'000 £'000 £'000
Cash and short term deposits 9,239 298 - 4,338 13,875
Debt due after more than one year (36,336) (856) 1 - (37,191)
(27,097) (558) 1 4,338 (23,316)
A statement reconciling the movement in net funds to the net cash flow has not
been presented as there are no differences from the above analysis.
18. Financial instruments and risk management
The Company's investment activities expose it to various types of financial
risk associated with the financial instruments and markets in which it
invests. The Company's financial instruments, other than derivatives, comprise
securities and other investments, cash balances, loans and debtors and
creditors that arise directly from its operations; for example, in respect of
sales and purchases awaiting settlement, and debtors for accrued income.
Subject to Board approval, the Company also has the ability to enter into
derivative transactions, in the form of traded options, for the purpose of
enhancing income returns and portfolio management. During the year, the
Company entered into certain derivative contracts. As disclosed in note 4, the
premium received in respect of options written in the year was £4,170,000
(2022 - £3,890,000). Positions closed during the year realised a loss of
£6,511,000 (2022 - £3,250,000). The largest position in derivative contracts
held during the year at any given time was £542,000 (2022 - £613,000). The
Company had 5 (2022 - 2) open positions in derivative contracts at 31 January
2023 valued at a liability of £264,000 (2022 - £24,000) as disclosed in note
13.
The Board has delegated the risk management function to the Manager under the
terms of its management agreement with aFML (further details which are
included under note 5). The Board regularly reviews and agrees policies for
managing each of the key financial risks identified with the Manager. The
types of risk and the Manager's approach to the management of each type of
risk, are summarised below. Such an approach has been applied throughout the
year and has not changed since the previous accounting period. The numerical
disclosures exclude short-term debtors and creditors.
Risk management framework. The directors of aFML collectively assume
responsibility for aFML's obligations under the AIFMD including reviewing
investment performance and monitoring the Company's risk profile during the
year.
aFML is a fully integrated member of the abrdn plc group of companies
(referred to as "the Group"), which provides a variety of services and support
to aFML in the conduct of its business activities, including in the oversight
of the risk management framework for the Company. The AIFM has delegated the
day to day administration of the investment policy to abrdn Inc., which is
responsible for ensuring that the Company is managed within the terms of its
investment guidelines and the limits set out in FUND 3.2.2R (details of which
can be found on the Company's website). The AIFM has retained responsibility
for monitoring and oversight of investment performance, product risk and
regulatory and operational risk for the Company.
The AIFM conducts its risk oversight function through the operation of the
Group's risk management processes and systems which are embedded within the
Group's operations. The Group's Risk Division supports management in the
identification and mitigation of risks and provides independent monitoring of
the business. The Division includes Compliance, Business Risk, Market Risk,
Risk Management and Legal. The team is headed up by the Group's Chief Risk
Officer, who reports to the Chief Executive Officer of the Group. The Risk
Division achieves its objective through embedding the Risk Management
Framework throughout the organisation using the Group's operational risk
management system ("SHIELD").
The Group's Internal Audit Department is independent of the Risk Division and
reports directly to the Group's Chief Executive Officer and the Audit
Committee of the Group's Board of Directors. The Internal Audit Department is
responsible for providing an independent assessment of the Group's control
environment.
The Group's corporate governance structure is supported by several committees
to assist the board of directors of abrdn plc, its subsidiaries and the
Company to fulfil their roles and responsibilities. The Group's Risk Division
is represented on all committees, with the exception of those committees that
deal with investment recommendations. The specific goals and guidelines on the
functioning of those committees are described on the committees' terms of
reference.
Risk management. The main risks the Company faces from its financial
instruments are (i) market risk (comprising interest rate risk, currency risk
and price risk), (ii) liquidity risk and (iii) credit risk.
The Board regularly reviews and agrees policies for managing each of these
risks. The Manager's policies for managing these risks are summarised below
and have been applied throughout the year. The numerical disclosures exclude
short-term debtors and creditors, other than for currency disclosures.
(i) Market risk. The fair value or future cash flows of a financial instrument
held by the Company may fluctuate because of changes in market prices. This
market risk comprises three elements - interest rate risk, currency risk and
other price risk.
Interest rate risk. Interest rate movements may affect:
- the fair value of the investments in fixed interest rate securities;
- the level of income receivable on cash deposits;
- interest payable on the Company's variable rate borrowings.
Management of the risk. The possible effects on fair value and cash flows that
could arise as a result of changes in interest rates are taken into account
when making investment and borrowing decisions.
The Board reviews on a regular basis the values of the fixed interest rate
securities.
The Board imposes borrowing limits to ensure gearing levels are appropriate to
market conditions and reviews these on a regular basis. Borrowings comprise
fixed rate, revolving and uncommitted facilities. Details of borrowings at 31
January 2023 are shown in note 14 on page 79 of the 2023 Annual Report.
Interest risk profile. The interest rate risk profile of the portfolio of
financial instruments at the Statement of Financial Position date was as
follows:
Weighted
average
period for Weighted Non-
which average Fixed Floating interest
rate is fixed interest rate rate rate bearing
At 31 January 2023 Years % £'000 £'000 £'000
Assets
Sterling - - - 4,599 -
US Dollar 7.50 4.36 7,141 22,221 439,091
Canadian Dollar - - - (121) 40,708
Total assets 7,141 26,699 479,799
Liabilities
Loan Notes- US$25,000,000 7.89 2.70 20,272 - -
Loan Notes- US$25,000,000 12.90 2.96 20,271 - -
Total liabilities 40,543 - -
Weighted
average
period for Weighted Non-
which average Fixed Floating interest
rate is fixed interest rate rate rate bearing
At 31 January 2022 Years % £'000 £'000 £'000
Assets
Sterling - - - 4,982 -
US Dollar 8.00 7.00 1,642 8,711 423,051
Canadian Dollar - - - 182 46,281
Total assets 1,642 13,875 469,332
Liabilities
Loan Notes- US$25,000,000 9.00 3.00 18,596 - -
Loan Notes- US$25,000,000 14.00 3.00 18,595 - -
Total liabilities 37,191 - -
The weighted average interest rate is based on the current yield of each
asset, weighted by its market value.
The floating rate assets consist of cash deposits at prevailing market rates.
The non-interest bearing assets represent the equity element of the portfolio.
Short-term debtors and creditors have been excluded from the above tables.
Financial Liabilities. The company has fixed rate borrowings by way of its
senior loan notes, details of which can be found in note 14.
Interest rate sensitivity. The sensitivity analyses below have been determined
based on the exposure to interest rates for both derivative and non-derivative
instruments at the Statement of Financial Position date and the stipulated
change taking place at the beginning of the financial year and held constant
throughout the reporting period in the case of instruments that have floating
rates.
If interest rates had been 100 basis points higher or lower (based on current
parameter used by Manager's Investment Risk Department on risk assessment) and
all other variables were held constant, the Company's revenue return for the
year ended 31 January 2023 would increase/decrease by £267,000 (2022 -
decrease/increase by £139,000). This is mainly attributable to the Company's
exposure to interest rates on its floating rate cash balances.
In the opinion of the Directors, the above sensitivity analyses are not
representative of the year as a whole, since the level of exposure changes
frequently as part of the interest rate risk management process used to meet
the Company's objectives. The risk parameters used will also fluctuate
depending on the current market perception.
Foreign currency risk. The Company's portfolio is invested mainly in US quoted
securities and the Statement of Financial Position can be significantly
affected by movements in foreign exchange rates.
Management of the risk. It is not the Company's policy to hedge this risk on a
continuing basis but the Company may, from time to time, match specific
overseas investment with foreign currency borrowings. A significant proportion
of the Company's borrowings, as detailed in note 14, are denominated in
foreign currency. Foreign currency risk exposure by currency denomination is
detailed under Interest Risk Profile.
The revenue account is subject to currency fluctuation arising on overseas
income. The Company does not hedge this currency risk.
Foreign currency sensitivity. There is no sensitivity analysis included as the
Company's significant foreign currency financial instruments are in the form
of equity investments, and they have been included within the other price risk
sensitivity analysis so as to show the overall level of exposure.
Price risk. Price risks (ie changes in market prices other than those arising
from interest rate or currency risk) may affect the value of the quoted
investments.
Management of the risk. It is the Board's policy to hold an appropriate spread
of investments in the portfolio in order to reduce the risk arising from
factors specific to a particular country or sector. The allocation of assets
to international markets and the stock selection process, as detailed on page
94, both act to reduce market risk. The Manager actively monitors market
prices throughout the year and reports to the Board, which meets regularly in
order to review investment strategy. The investments held by the Company are
listed on various stock exchanges.
Price risk sensitivity. If market prices at the Statement of Financial
Position date had been 10% higher or lower while all other variables remained
constant, the return attributable to Ordinary shareholders for the year ended
31 January 2023 would have increased/decreased by £48,694,000 (2022 -
increase/decrease of £47,097,000) and equity reserves would have
increased/decreased by the same amount.
(ii) Liquidity risk. This is the risk that the Company will encounter difficulty in
meeting obligations associated with financial liabilities.
Management of the risk. Liquidity risk is not considered to be significant as
the Company's assets comprise mainly readily realisable securities, which can
be sold to meet funding commitments if necessary.
(iii) Credit risk. This is failure of the counterparty to a transaction to discharge
its obligations under that transaction that could result in the Company
suffering a loss.
Management of the risk
- where the Manager makes an investment in a bond, corporate or otherwise, the
credit ratings of the issuer are taken into account so as to manage the risk
to the Company of default;
- investments in quoted bonds are made across a variety of industry sectors so
as to avoid concentrations of credit risk;
- transactions involving derivatives are entered into only with investment
banks, the credit rating of which is taken into account so as to minimise the
risk to the Company of default;
- investment transactions are carried out with a number of brokers, whose
credit-standing is reviewed periodically by the Manager, and limits are set on
the amount that may be due from any one broker;
- the risk of counterparty exposure due to failed trades causing a loss to the
Company is mitigated by the review of failed trade reports on a daily basis.
In addition, both stock and cash reconciliations to the custodian's records
are performed on a daily basis to ensure discrepancies are investigated on a
timely basis. The Manager's Compliance department carries out periodic reviews
of the custodian's operations and reports its finding to the Manager's Risk
Management Committee;
- cash is held only with reputable banks with acceptable credit quality. It is
the Manager's policy to trade only with A- and above (Long Term rated) and
A-1/P-1 (Short Term rated) counterparties.
Credit risk exposure. In summary, compared to the amounts in the Statement of
Financial Position, the exposure to credit risk at 31 January 2023 was as
follows:
2023 2022
Statement of Statement of
Financial Maximum Financial Maximum
Position exposure Position exposure
£'000 £'000 £'000 £'000
Non-current assets
Quoted bonds 7,141 7,141 1,642 1,642
Current assets
Amount due from brokers 1,660 1,660 5,031 5,031
Dividends receivable 603 603 549 549
Interest receivable 166 166 32 32
Other debtors and prepayments 246 246 100 100
Cash and short-term deposits 26,699 26,699 13,875 13,875
36,515 36,515 21,229 21,229
None of the Company's financial assets are secured by collateral or other
credit enhancements.
Credit ratings. The table below provides a credit rating profile using
Standard and Poors credit ratings for the quoted bonds at 31 January 2023 and
31 January 2022:
2023 2022
£'000 £'000
B+ 682 -
BB+ 2,898 -
BB 693 897
BB- 2,162 745
BBB- 706 -
7,141 1,642
Fair values of financial assets and financial liabilities. The book value of
cash at bank and bank loans and overdrafts included in these financial
statements approximate to fair value because of their short-term maturity.
Investments held as dealing investments are valued at fair value. The carrying
values of fixed asset investments are stated at their fair values, which have
been determined with reference to quoted market prices. For all other
short-term debtors and creditors, their book values approximate to fair values
because of their short-term maturity.
19. Capital management policies and procedures
The investment objective of the Company is to provide investors with above
average dividend income and long term capital growth through active management
of a portfolio consisting predominately of S&P 500 US equities.
The capital of the Company consists of bank borrowings and equity comprising
issued capital, reserves and retained earnings. The Company manages its
capital to ensure that it will be able to continue as a going concern while
maximising the return to shareholders through the optimisation of the debt and
equity balance.
The Board monitors and reviews the broad structure of the Company's capital on
an ongoing basis. This review includes:
- the planned level of gearing which takes into account the Investment
Manager's views on the market;
- the level of equity shares in issue; and
- the extent to which revenue in excess of that which is required to be
distributed should be retained.
The Company's objectives, policies and processes for managing capital are
unchanged from the preceding accounting period.
Details of the Company's gearing facilities and financial covenants are
detailed in note 14 of the financial statements.
20. Fair value hierarchy
FRS 102 requires an entity to classify fair value measurements using a fair
value hierarchy that reflects the significance of the inputs used in making
the measurements. The fair value hierarchy has the following classifications:
Level 1: unadjusted quoted prices in an active market for identical assets or
liabilities that the entity can access at the measurement date.
Level 2: inputs other than quoted prices included within Level 1 that are
observable (ie developed using market data) for the asset or liability, either
directly or indirectly.
Level 3: inputs are unobservable (ie for which market data is unavailable) for
the asset or liability.
The financial assets and liabilities measured at fair value in the Statement
of Financial Position are grouped into the fair value hierarchy at the
reporting date as follows:
Level 1 Level 2 Level 3 Total
As at 31 January 2023 Note £'000 £'000 £'000 £'000
Financial assets at fair value through profit or loss
Quoted equities a) 479,799 - - 479,799
Quoted bonds b) - 7,141 - 7,141
479,799 7,141 - 486,940
Financial liabilities at fair value through profit or loss
Derivatives c) - (264) - (264)
Net fair value 479,799 6,877 - 486,676
Level 1 Level 2 Level 3 Total
As at 31 January 2022 Note £'000 £'000 £'000 £'000
Financial assets at fair value through profit or loss
Quoted equities a) 469,332 - - 469,332
Quoted bonds b) - 1,642 - 1,642
469,332 1,642 - 470,974
Financial liabilities at fair value through profit or loss
Derivatives c) - (24) - (24)
Net fair value 469,332 1,618 - 470,950
a) Quoted equities. The fair value of the Company's investments in quoted
equities has been determined by reference to their quoted bid prices at the
reporting date. Quoted equities included in Fair Value Level 1 are actively
traded on recognised stock exchanges.
b) Quoted bonds. The fair value of the Company's investments in quoted bonds has
been determined by reference to their quoted bid prices at the reporting date.
Investments categorised as Level 2 are not considered to trade in active
markets.
c) Derivatives. The Company's investment in exchange traded options have been
fair valued using quoted prices and have been classified as Level 2 as they
are not considered to trade in active markets.
The fair value of the senior loan notes has been calculated as £38,579,000
(2022 - £41,348,000), determined by aggregating the expected future cash
flows for that loan discounted at a rate comprising the borrower's margin plus
an average of market rates applicable to loans of a similar period of time,
compared to carrying amortised cost of £40,543,000 (2022 - £37,191,000).
21. Related party transactions
Directors' fees and interests. Fees payable during the year to the Directors
and their interests in shares of the Company are disclosed within the
Directors' Remuneration Report on page 52 of the 2023 Annual Report.
Transactions with the Manager. The Company has an agreement with the Manager
for the provision of investment management, secretarial, accounting and
administration and promotional activity services.
Details of transactions during the year and balances outstanding at the year
end are disclosed in notes 5 and 7.
Alternative Performance Measures
Alternative performance measures are numerical measures of the Company's
current, historical or future performance, financial position or cash flows,
other than financial measures defined or specified in the applicable financial
framework. The Company's applicable financial framework includes FRS 102 and
the AIC SORP. The Directors assess the Company's performance against a range
of criteria which are viewed as particularly relevant for closed-end
investment companies.
Discount to net asset value
The discount is the amount by which the share price is lower than the net
asset value per share with debt at fair value, expressed as a percentage of
the net asset value with debt at fair value.
2023 2022
NAV per Ordinary share (p) a 337.21p 318.79p
Share price (p) b 306.00p 283.00p
Discount (a-b)/a 9.3% 11.2%
Dividend cover
Dividend cover measures the revenue return per share divided by total
dividends per share, expressed as a ratio.
2023 2022
Revenue return per share a 12.21p 10.28p
Dividends per share b 11.00p 10.30p
Dividend cover a/b 1.11 1.00
Dividend yield
Dividend yield is calculated using the Company's annual dividend per Ordinary
share divided by the share price, expressed as a percentage.
2023 2022
Annual dividend per Ordinary share (p) a 11.00p 10.30p
Share price (p) b 306.00p 283.00p
Dividend yield a/b 3.6% 3.6%
Net gearing
Net gearing measures total borrowings less cash and cash equivalents divided
by shareholders' funds, expressed as a percentage. Under AIC reporting
guidance cash and cash equivalents includes net amounts due to and from
brokers at the period end as well as cash and short-term deposits.
2023 2022
Borrowings (£'000) a 40,543 37,191
Cash (£'000) b 26,699 13,875
Amounts due to brokers (£'000) c 1,444 3,840
Amounts due from brokers (£'000) d 1,660 5,031
Shareholders' funds (£'000) e 472,891 448,463
Net gearing (a-b+c-d)/e 2.9% 4.9%
Ongoing charges ratio
Ongoing charges ratio is considered to be an alternative performance measure.
The ongoing charges ratio has been calculated in accordance with guidance
issued by the AIC which is defined as the total of investment management fees
and administrative expenses and expressed as a percentage of the average daily
net asset values with debt at fair value published throughout the year.
2023 2022
Investment management fees (£'000) 3,156 3,033
Administrative expenses (£'000) 854 735
Less: non recurring charges (A) (£'000) (8) (10)
Ongoing charges (£'000) 4,002 3,758
Average net assets (£'000) 458,929 429,283
Ongoing charges ratio (excluding look-through costs) 0.87% 0.88%
Look-through costs(B) 0.06% 0.07%
Ongoing charges ratio (including look-through costs) 0.93% 0.95%
(A) Professional services considered unlikely to recur.
(B) Calculated in accordance with AIC guidance issued in October 2020 to
include the Company's share of costs of holdings in investment companies on a
look-through basis.
The ongoing charges ratio provided in the Company's Key Information Document
is calculated in line with the PRIIPs regulations which includes finance costs
and transaction charges.
Total return
NAV and share price total returns show how the NAV and share price has
performed over a period of time in percentage terms, taking into account both
capital returns and dividends paid to shareholders. Share price and NAV total
returns are monitored against open-ended and closed-ended competitors, and the
Reference Index, respectively.
Share
Year ended 31 January 2023 NAV Price
Opening at 1 February 2022 a 318.8p 283.0p
Closing at 31 January 2023 b 337.2p 306.0p
Price movements c=(b/a)-1 5.8% 8.1%
Dividend reinvestment(A) d 3.8% 4.3%
Total return c+d +9.6% +12.4%
Share
Year ended 31 January 2022 NAV Price
Opening at 1 February 2021 a 262.5p 234.0p
Closing at 31 January 2022 b 318.8p 283.0p
Price movements c=(b/a)-1 21.5% 20.9%
Dividend reinvestment d 4.2% 4.7%
Total return c+d +25.7% +25.6%
(A) NAV total return involves investing the net dividend in the NAV of the
Company with debt at fair value on the date on which that dividend goes
ex-dividend. Share price total return involves reinvesting the net dividend in
the share price of the Company on the date on which that dividend goes
ex-dividend.
ADDITIONAL NOTES TO THE ANNUAL FINANCIAL REPORT
This Annual Financial Report announcement is not the Company's statutory
accounts for the year ended 31 January 2023. The statutory accounts for the
year ended 31 January 2022 received an audit report which was unqualified.
The financial information set out above does not constitute the company's
statutory accounts for the years ended 31 January 2023 or 2022 but is derived
from those accounts. Statutory accounts for 2022 have been delivered to the
registrar of companies, and those for 2023 will be delivered in due course.
The auditor has reported on those accounts; their reports were (i)
unqualified, (ii) did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of the
Companies Act 2006.
The statutory accounts for the financial year ended 31 January 2023 were
approved by the Directors on 4 April 2023 but will not be filed with the
Registrar of Companies until after the Company's Annual General Meeting which
is to be held at 2.00 pm on 8 June 2023.
The Annual Report will be posted to shareholders later in April 2023 and
additional copies will be available from the Manager (Investor Helpline - Tel.
0808 00 0040) or by download from the Company's webpage
(northamericanincome.co.uk (http://www.northamericanincome.co.uk) )
Please note that past performance is not necessarily a guide to the future and
that the value of investments and the income from them may fall as well as
rise. Investors may not get back the amount they originally invested.
For The North American Income Trust plc
abrdn Holdings Limited, Company Secretary
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
or visit
www.rns.com (http://www.rns.com/)
.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
. END FR NKQBDABKDQQK