REG - North American IT - Annual Financial Report
05/04/2024 07:00
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RNS Number : 3877J North American Income Trust (The) 05 April 2024
THE NORTH AMERICAN INCOME TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 JANUARY 2024
Legal Entity Identifier (LEI): 5493007GCUW7G2BKY360
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)
-1.6% -0.9%
2023 +9.6% 2023 +12.4%
Revenue return per share Dividends per share
12.0p 11.7p
2023 12.2p 2023 11.0p
Net asset value per Ordinary share Total assets(C)
317.8p £475.7m
2023 337.2p 2023 £513.4m
Dividend yield(AD) Ongoing charges(A)
4.0% 0.99%
2023 3.60% 2023 0.93%
(A) Considered to be an Alternative Performance Measure..
(B) Includes dividends reinvested.
(C) Total Assets define as per the Statement of Financial Position less
current liabilities.
(D) Calculated as the dividend for the year divided by the year end share
price.
Financial Calendar, Dividends and Highlights
Annual General Meeting (Edinburgh) 21 June 2024
Half year end 31 July 2024
Payment dates of quarterly dividends for financial year ending 31 January 2025 August 2024
October 2024
January 2025
May 2025
Financial year end 31 January 2025
Dividends
Rate xd date Record date Payment date
1st Interim dividend 2024 2.60p 20 July 2023 21 July 2023 4 August 2023
2nd Interim dividend 2024 2.60p 12 October 2023 13 October 2023 27 October 2023
3rd Interim dividend 2024 2.60p 28 December 2023 29 December 2023 19 January 2024
4th interim dividend 2024 3.90p 11 April 2024 12 April 2024 3 May 2024
Total dividends 2024 11.70p
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
Final dividend 2023 3.50p 4 May 2023 5 May 2023 12 June 2023
Total dividends 2023 11.00p
Highlights
31 January 2024 31 January 2023 % change
Total assets £475.7m £513.4m -7.3
Equity shareholders' funds £436.5m £472.9m -7.7
Share price (mid market) 289.00p 306.00p -5.6
Net asset value per Ordinary share 317.78p 337.21p -5.8
Discount (difference between share price and net asset value)(AB) (9.1%) (9.3%)
Net gearing (A) (4.1%) (2.9%)
Dividends and earnings
Revenue return per share 11.95p 12.21p -2.1
Dividends per share 11.70p 11.00p +6.4
Dividend yield (based on year end share price)(A) 4.0% 3.6%
Dividend cover(A) 1.02 1.11
Revenue reserves per share
Prior to payment of fourth interim dividend 16.06 N/A
After payment of fourth interim dividend 12.16 N/A
Prior to payment of third interim and final dividends N/A 17.57p
After payment of third interim and final dividends N/A 11.57p
Operating costs
Ongoing charges(A) 0.99% 0.93%
(A) Considered to be an Alternative Performance Measure.
(B) Including undistributed revenue.
Strategic Report
Chair's Statement
Market Review
Macroeconomic uncertainty prevailed during the Company's financial year to 31
January 2024. Investors were particularly focused on monetary policy
developments, geopolitical tensions and the uncertainty surrounding the
possibility of either a recession or a soft landing for the US economy.
Against this backdrop, the Company's net asset value (NAV) total return per
share (which includes dividends reinvested) decreased by 1.6% in sterling
terms compared to a 2.6% rise in the total return of the Company's primary
reference index, the Russell 1000 Value Index, in sterling terms. The
Company's share price total return fell by 0.9% as the Company's discount to
NAV narrowed marginally to 9.1%, from 9.3% at the previous year end.
The investment trust sector, in general, experienced a widening of discounts
over much of 2023, exacerbated by global uncertainty and higher interest rates
available for cash which in turn led to increased activity in the sector in an
effort to realise shareholder value. The Company uses its shareholder
authority to buyback its own shares seeking to limit discount volatility and
also provide liquidity in the Company's shares while signalling our confidence
in the intrinsic value of the Company's portfolio.
Even with the volatility witnessed in financial markets, US equities recorded
gains over the year, with growth stocks significantly outperforming value
stocks. The Investment Manager's Review goes into further detail on
performance.
The US Federal Reserve (the "Fed") continued with its monetary tightening
measures in the first half of the financial year, with the central bank
increasing the target range for the federal funds rate to 5.25%-5.50%, a level
unseen in over two decades. In the latter half of the financial year, the Fed
maintained interest rates and the messaging turned more dovish as price
pressures reduced, fuelling expectations of monetary easing. However, annual
core inflation remained above the Fed's 2% target, while conflicts in the
Middle East and Ukraine increased the risk of an uptick in inflation and, at
the end of 2023, the Fed signalled that it would proceed cautiously.
On a positive note, the US economy remained strong and avoided the widely
anticipated recession after the Fed's prolonged period of monetary tightening,
as well as the banking sector failures that occurred earlier in 2023. The US
government reached an agreement in June 2023 to suspend its debt ceiling,
thereby avoiding a government shutdown, which helped markets. As the financial
year progressed, investors embraced the likelihood of a soft landing for the
economy, as opposed to a recession. Nevertheless, as I allude to in the
Outlook section, the Board and Manager are well aware that macroeconomic
uncertainty continues, especially with the ongoing conflicts in the Middle
East and Ukraine and the upcoming US election.
Performance
The Company's portfolio underperformed its reference benchmark in sterling
terms over the year to 31 January 2024. Stock selection, mainly in the
materials sector, weighed on performance relative to the Russell 1000 Value
Index, the primary reference index. Sector allocation, especially in the
industrials sector, was also negative.
For more details on performance, refer to the Investment Manager's review.
The Board monitors portfolio performance regularly and receives quarterly
reports from the Manager on portfolio changes and the decisions behind them.
Revenue Account
The Company's equity portfolio generated £17.1 million in revenue during the
financial year, close to the £17.8 million in the previous year. Options
continue to be part of the portfolio and represented 17.2% of the Company's
total gross income, whilst corporate bonds accounted for only 2.6%. The
Company's revenue return per ordinary share dipped marginally to 12.0 pence
compared to last year's 12.2 pence.
Dividend
The Board remains committed to the Company's progressive dividend policy and
extending the track record of thirteen consecutive years of dividend growth.
The Board declared, on 28 March 2024, a fourth interim dividend of 3.9 pence
per share, resulting in total dividends for the year ended 31 January 2024 of
11.7 pence per share (2023 - 11.0p) and representing annual growth of 6.4%.
The fourth interim dividend will be paid on 3 May 2024 to shareholders on the
register on 12 April 2024 (ex-dividend date: 11 April 2024).
In reaching its decision on dividends, the Board always balances the wish to
increase the amount distributed to shareholders with the recognition that
currency can have a variable impact on earnings per share. The Investment
Manager's continued efforts to build the revenue reserve, which stands at over
one year's cover, gives comfort that at times of stress the Company can dip
into this reserve to maintain the dividend.
Management of Premium and Discount
The Company's share price ended the year at 289.0 pence, a 9.1% discount to
the total NAV of 317.8 pence. This compares to a 9.3% discount at the end of
the 2023 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 9.0% and
15.0%.
During the year, 2,882,402 shares were bought back and cancelled at an average
price of 275 pence and an average discount of 11.5%. The total cost was £8.0
million. Since 31 January 2024, the Company has bought back an additional
1,187,253 Ordinary shares at a cost of £3.3m.
Gearing
The Board believes that the sensible use of gearing should enhance returns to
our shareholders over the longer term. The Company benefits from its long-term
financing agreements totalling US$50 million with MetLife which comprise two
loans of US$25 million with terms of 10 and 15 years. These are fixed at 2.7%
and 3.0% per annum expiring in December 2030 and 2035 respectively. Net
gearing at 31 January 2024 stood at 4.1% (2023: 2.9%).
Promotional Activity
During the last year we have continued to work with our Manager to strengthen
and modernise our marketing efforts. We aim to keep all shareholders informed
and updated on their investment, 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 X (previously
Twitter) or register for email updates here: northamericanincome.co.uk/signup
The Board also notes the announcement by abrdn plc, in December 2023, that it
had commenced a programme whereby it would purchase shares in the Company
equivalent to six months' management fees; as at the date of approval of this
report, 254,476 shares had been purchased by the Manager at an aggregate cost
of £727,000.
Environmental, Social and Governance ("ESG") Matters
The Investment Manager continues to engage regularly with the portfolio's
holdings to understand their processes, prospects and reports, including on
matters related to environmental, social and governance issues. More
information regarding the Manager's approach to ESG integration in Equities
can be found in the published Annual Report.
Board Activity
In May 2023, the Board was pleased to travel to North America and meet with
the Investment Manager and local experts, including analysts, senior
management and economists. Directors also met with one of the investee
companies which provided a deeper level of engagement than can be attained in
the board room. The benefit of these face-to-face meetings is evident in the
follow-up afterwards. Since our visit, the Board has focused in particular on
performance attribution reporting and the Board keeps under review the most
appropriate reference index against which to measure the performance of the
Company. We also continue to receive updates on people change within the wider
abrdn investment team and developments in these areas are being monitored with
interest.
Also, during the year, Directors took the opportunity to meet with investors
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 by email to: northamericanincome@abrdn.com
(mailto:northamericanincome@abrdn.com) .
In the Interim Report, I announced my intention to retire as a Director of the
Company at the conclusion of the forthcoming Annual General Meeting ("AGM"),
having served for nine years. Since then, the Board has been reviewing its
succession planning, and undertook a thorough process to appoint the next
Chair. This involved the appointment of a committee to consider the skills
required for the role and whether the Board had any suitable internal
candidates or whether an external search was required in this instance.
Charles Park put himself forward as an internal candidate and the committee,
excluding Charles Park, considered his suitability for the role as Chair.
Charles Park has been a strong contributor since he joined the Board in 2017
and has significant business experience and understanding of the Company that
make him a preferred candidate for the role. The committee therefore
unanimously recommended the appointment of Charles Park as the Chair, with
effect from the conclusion of the AGM on 21 June 2024. We are delighted that
he has agreed to accept the role. Patrick Edwardson has agreed to step up to
become the Senior Independent Director with effect from the same date.
In view of these changes in the Board composition, the Board plans to conduct
an external process to appoint a new independent Non-Executive Director. The
intention is that the successful candidate will be appointed later this year
and an announcement will be made to the London stock exchange in due course.
As usual, towards the end of the year, the Board undertook its board
evaluation. Whilst the Board does not currently consider it appropriate to
utilise an external agent for this process, due to the current size and
composition of the Board, the approach is kept under review. The results of
the board evaluation are outlined in the Statement of Corporate Governance in
the published Annual Report.
Outlook
At the time of writing, investors expect the Fed to end its rate-hiking cycle
and begin monetary easing in 2024. This is despite the Fed's somewhat
conservative tone as its favoured measure of annual inflation, the core
Personal Consumption Expenditures Price Index, remained above 2%.
Additionally, conflict in the Middle East has increased the risk of a
resurgence in inflation, due to possible oil-supply disruptions and rising
shipping costs.
While a robust US economy helped the country to avoid a recession in 2023, the
risk has not completely gone. The Board and Investment Manager believe that a
mild recession or soft landing remain in the balance. Meanwhile, the upcoming
US election may add to market volatility, as investors remain focused on
potential changes to government policies. Added to this, geopolitical issues
elsewhere in the world could affect the global economy and financial markets
in general.
It is pleasing therefore to note that the Investment Manager has designed the
Company's portfolio to include financially robust companies with strong
income-generating potential and sound governance practices. The investment
team continues to review the portfolio and seek opportunities to ensure its
ability to withstand any volatility surrounding the forthcoming US
Presidential election, as well as a possible economic downturn, as it seeks to
protect against downside risks. The Company has made progressive annual
dividend payments for thirteen consecutive years, including the period through
the Covid-19 pandemic. The Board continues to remain positive on the
strategy's ability to face turbulent times together with the sustainability of
the Company's income and the comfort of the revenue reserve which has been
built up to the equivalent of over one year's full dividend.
Annual General Meeting ("AGM") and Online Shareholder Presentation
AGM & Continuation Vote
The Company's AGM will be held at 12.00 Noon on 21 June 2024, at the Manager's
offices at 1 George Street, Edinburgh, EH2 2LL and, as ever, the Board would
welcome your attendance.
The Company is required to hold a continuation vote every three years and the
next one is at the forthcoming AGM. The Directors will be voting in favour of
continuation and would encourage shareholders to do likewise in the belief
that the Company has a successful long-term investment formula. The Board
continues to believe that the Company's investment objective of seeking to
provide above average dividend income and capital growth from investment in a
diversified portfolio of North American securities remains relevant for
shareholders and new investors alike. Our history of annual dividend increases
since 2011 means that we are included in the Association of Investment
Companies 'Next Generation Dividend Heroes' listing and we hope that this
progression continues.
Online Shareholder Presentation
In order to encourage as much interaction as possible with our shareholders,
there will also be an online shareholder presentation at 2.00p.m. on 10 June
2024. 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. As with last year, 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 online event are
available via the website.
Shareholders are also encouraged to submit questions, in advance of both the
online shareholder presentation and the AGM, to the following email address:
northamericanincome@abrdn.com (mailto: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. 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.
Dame Susan Rice
Chair
4 April 2024
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 predominantly of
S&P 500 US equities.
Reference Index
The Board reviews performance against the index which it considers to be the
most relevant, the Russell 1000 Value Index, together with peer group
comparators (in sterling terms). 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 this index. The Board also compares performance against the
S&P 500 Index whilst having regard to the very different make-up of this
index and its inclusion of many of the fast growing tech companies which often
do not pay dividends.
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. The
Investment Manager seeks companies that are well-positioned in their sector
with strong balance sheets and cash generation and proven management through
various economic cycles.
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 index The Board reviews the Company's NAV and share price total return performance
against the Russell 1000 Value Index (in sterling terms). Performance graphs
and tables are provided in the published 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 in the published 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 in the published 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 above.
(A) Considered to be an Alternative Performance Measure.(.)
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 emerging risks, such as 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 risks facing the Company relate to the Company's investment activities and
the Board. The Board monitors adherence to these guidelines and receives
include market risk (comprising interest rate risk and other price risk), regular reports from the Manager which include performance reporting. The
liquidity risk and credit risk. The Company is exposed to variations in share Board regularly reviews these guidelines to ensure they remain appropriate.
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 have an adverse Details on financial risks, including market price volatility, inflation,
effect on shareholders' funds. Any debt securities that may be held by the interest rates, liquidity and foreign currency risks and the controls in place
Company will be affected by general changes in interest rates that will in to manage these risks are provided in note 18 to the financial statements.
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 heightened risks arising from geopolitical
developments including stock market instability and economic effects or the
The Company is exposed to stock market volatility or illiquidity that could potential impact on the operations of the third-party suppliers, including the
result from major market shocks due to a national or global crisis such as a Manager.
pandemic, war, natural disaster, geopolitical developments or similar. There
could also be the resulting impact of disruption on the operations of the The Manager reviews the investment risks arising from these macro developments
Company and its service providers, temporarily or for prolonged duration. 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 the Company through the current challenges.
The Manager has disaster recovery and business continuity arrangements in
place to ensure that it is able to continue to service its clients, including
investment trusts. The Board monitors third party risk management frameworks
through updates from the Manager.
Income and Dividend Risk The Board monitors this risk through the regular review of detailed revenue
forecasts and considers the current and forecast level of income at each
The ability of the Company to pay dividends and any future dividend growth meeting.
will depend primarily on the timing and level of income received from its
investments (which may be affected by currency movements, exchange controls or The Company has built up its revenue reserves over recent years which provides
withholding taxes imposed by jurisdictions in which the Company invests). flexibility in future years, should the dividend environment become
Accordingly, there is no guarantee that the Company's dividend income challenging.
objective will continue to be met and the amount of the dividends paid to
Ordinary shareholders 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. This audit as well as independently audited third party control reports.
includes accounting, financial or custody errors, IT failures, fraud or cyber
risk, unforeseen natural disasters and other operational failures by the The Manager monitors the control environment and quality of services provided
manager, depositary or custodian. 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, Consumer Duty, accounting standards, The Manager provides six-monthly reports to the Audit Committee on its
investment trust regulations, the Listing Rules, Disclosure Guidance and internal control systems, which monitor compliance with relevant
Transparency Rules and Prospectus Rules) could result in fines, loss of regulations. In addition, the Board will use the services of its
reputation, reduced demand for the Company's shares and potentially loss of an professional advisers when necessary, to monitor compliance with regulatory
advantageous tax regime. 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. Gearing has the effect of accentuating market falls and market gains. covenants. As at 31 January 2024 the Company had £39.2 million of borrowings
The ability of the Company to meet its financial obligations, or an increase and net gearing was 4.1% at the year end. More details are provided in the
in the level of gearing, could result in the Company becoming over-geared or Alternative Performance Measures.
unable to take advantage of potential opportunities and result in a loss of
value to the Company's shares.
Discount volatility The Company's share price, NAV and discount are monitored daily by the
Manager. When there is a significant discount and it is deemed to be in the
Investment company shares can trade at discounts to their underlying net asset best interest of shareholders, the Manager will exercise discretion to
values (NAV), although they can also trade at premia. undertake share buybacks, within authorities set by the Board. The Board
monitors the discount level of the Company's shares and monitors the level of
share buybacks, within shareholder authorities.
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
geopolitical tensions, such as Russia's invasion of Ukraine, conflict in the
Middle East, ongoing tension between the US and China or other changes which
could have an adverse impact on stock markets and the Company's portfolio.
The Board is also conscious of the elevated threat posed by climate change and
continues to monitor, through reporting from the Investment Manager, the
potential risk that the portfolio investments may fail to adapt to the
requirements imposed by climate change. The investment portfolio primarily
consists of listed equities and corporate bonds and the quoted market (being
bid) price is expected to reflect market participants' view of climate change
risk so the impact of climate change is not considered to be material to the
financial statements. Further details relating to the Manager's Approach to
ESG Integration in Equities, including consideration of the impact of climate
change, can be found in the published Annual Report..
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, third
parties 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
managers are based in abrdn's US offices and regularly present at these
meetings either by video conference or in person when visiting the UK.
The Board encourages all shareholders to attend and participate in the
Company's AGM and shareholders may 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 Chair offers to meet with shareholders on at least
an annual basis. The Chair also held a live webinar ahead of the 2023 AGM,
taking questions with the Investment Manager. This was made available on the
Company's website for shareholders to access.
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 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 May 2023. 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 below and details of the Board's
relationship with the Manager and other third party providers, including
oversight, is provided in the Directors' Report in the published Annual
Report.
Key decisions and actions during the year ended 31 January 2024, 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. There were no changes made to the Board composition during
the financial year. However, as announced in the 2023 Interim Report, as part
of the Board's orderly succession plan, Dame Susan Rice will retire from the
Board at the conclusion of the 2024 AGM and will be succeeded by Charles Park,
who has served on the Board since 2017. Patrick Edwardson will succeed Charles
Park as Senior Independent Director. A search process will be conducted later
this year for a new Director, which will have due regard to the benefits of
diversity.
Marketing strategy
The Board continued to engage with investors directly this year. This included
meeting with investors, along with the fund manager, and the Company's second
webinar in May 2023, where shareholders had a chance to ask questions prior to
exercising their proxy votes for the 2023 AGM. In addition, the Board worked
with the Manager on key performance indicators for marketing services and
additional means for targeted promotion of the Company.
Dividends paid to shareholders
During the year, the Board implemented the revised dividend payment policy
approved by shareholders at the 2023 AGM. Accordingly, four interim dividends
have been proposed for the financial year ending 31 January 2024 (see above
for details) and paid at more even quarterly intervals throughout the year.
The Board recognises the importance of dividends to shareholders and the
importance of receiving a regular income over the long-term.
Share buybacks
During the year the Board bought back 2.9m Ordinary shares for cancellation.
This provided a small accretion to the NAV and a degree of liquidity to the
market in an effort to manage the discount to the NAV per share.
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 and in the context of the wider market environment. As explained in
more detail in the Strategic Report, during the year, the Board reviewed
portfolio and NAV performance against a reference benchmark and other peers on
a regular basis.
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. The Company's next continuation vote is scheduled for the forthcoming
AGM in June 2024.
Board Diversity
The Board recognises the importance of having a range of skilled, experienced
individuals with appropriate knowledge in order to allow the Board to fulfil
its obligations.
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.
Modern Slavery Act
Due to the nature of the Company's business, being a company that does not
offer goods and services to customers, the Board considers that it is not
within the scope of the Modern Slavery Act 2015 because it has no turnover.
The Company is therefore not required to make a slavery and human trafficking
statement. The Board also considers the Company's supply chains, dealing
predominantly with professional advisers and service providers in the
financial services industry, to be low risk in relation to this matter.
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. These tools allow
it to look at the overall carbon footprint of its 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.
Task Force for Climate-Related Financial Disclosures ("TCFD")
Under Listing Rule 15.4.29(R), the Company, as a closed ended investment
company, is exempt from complying with the TCFD. The Manager has, however,
produced a product level report on the Company in accordance with the FCA's
rules and guidance regarding the disclosure of climate-related financial
information consistent with TCFD Recommendations and Recommended Disclosures.
The product level report on the Company is available on the Manager's website
at: invtrusts.co.uk.
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 to be put to
shareholders at the AGM in June 2024. The Directors recommend that
shareholders vote to approve the resolution, and that the Company should
continue in existence.
- The principal risks detailed in the strategic 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 the portfolio 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 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 stock market 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 2024
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) -0.9 +40.0 +30.4
Net asset value per share(B) -1.6 +35.6 +34.9
Russell 1000 Value Index (in sterling terms) +2.6 +40.5 +61.0
S&P 500 Index (in sterling terms) 16.8 +47.4 +101.5
(A) Cumulative return
(B) Considered to be an Alternative Performance Measure.
Ten Year Financial Record
Year to 31 January 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Per share (p)
Net revenue return(A) 6.54 7.15 7.98 8.42 10.04 11.42 11.79 10.28 12.21 11.95
Dividends(A) 6.00 6.60 7.20 7.80 8.50 9.50 10.00 10.30 11.00 11.70
As at 31 January
Net asset value per share(A) (p) 187.8 187.1 264.7 275.5 280.4 288.9 262.5 318.8 337.2 317.8
Shareholders' funds (£'000) 309,273 280,644 379,101 391,649 398,657 413,948 375,416 448,463 472,891 436,479
(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
US share prices, as measured by the Company's primary reference index, the
Russell 1000 Value Index, rose in local-currency terms over the year to 31
January 2024 albeit by less in sterling terms as the pound strengthened
against the US dollar by 3.4%.
Faced with a relatively resilient and robust economy, including a strong
labour market, the US Federal Reserve (Fed) continued to tighten monetary
policy through 2023. The Fed raised interest-rates by 25 basis points (bps) at
each of its meetings between February and May, with the last increase in July
2023 taking the target range for the Fed funds rate to 5.25-5.50%, the highest
level since 2001. At its January 2024 meeting, after eleven rate increases
since March 2022, the Fed finally removed the tightening bias from its
statement. That said, it aims to keep policy restrictive and proceed carefully
for now, continuing with its data-dependent approach as it awaits more
transparency over underlying macroeconomic trends. However, given the
sustained fall in the Fed's targeted inflation measure, three rate cuts - as
forecast by committee members in December's 'dot plot' - are still possible in
2024. There could also be further easing to come in 2025 and 2026.
US stock markets rose steadily over most of the period, even shaking off
turmoil in the banking sector in March 2023, when two regional banks, Silicon
Valley Bank and Signature Bank, collapsed. In particular, investor sentiment
was helped by the long-awaited news in May of an agreement to raise the US
debt ceiling. Investor concern that interest rates would stay higher for
longer led to stocks weakening in August through to October. However, equities
then rebounded notably towards the end of the year as these fears eased due to
more encouraging inflation trends.
Over the year to 31 January 2024, growth-focused stocks performed relatively
well. In particular, there was a strong performance from the technology
sector, especially artificial intelligence-related companies, such as NVIDIA,
Microsoft and Alphabet. During the year to 31 January 2024, the top seven (or
"Magnificent Seven") technology stocks contributed nearly 65% of the total
return of the S&P 500 Index. These stocks are more sensitive to the
prospect of monetary tightening coming to an end, which will lower the
discount rate applied to these long duration assets.
The communication services, technology and industrials sectors were the
strongest performers within the Russell 1000 Value index, while the utilities,
materials and energy sectors were the primary market laggards for the period.
Performance
The Company returned -1.6% per share on a net asset value basis in sterling
terms for the year ended 31 January 2024, underperforming the 2.6% return of
the Russell 1000 Value Index. The revenue account remained healthy,
maintaining a level of cover established in prior years.
At a sector level, the main detractor from the Company's performance was the
materials sector due to negative stock selection. The second-largest detractor
was the industrials sector due to stock selection and, to a lesser extent, an
underweight exposure.
The largest individual stock detractors from performance included:
- agricultural sciences company, FMC Corporation, a producer of
crop-protection chemicals, suffered from inventory destocking which forced
management to materially reduce its guidance. The weakness was derived from
farmers over-ordering crop inputs after being unable to procure supplies in
2022 due to supply-chain disruptions.
- Pharmaceutical firm, Bristol-Myers Squibb ("Bristol-Myers"),
underperformed due to a combination of new US government pricing measures
affecting the pharmaceutical industry and a pipeline that has not yet received
full approval for launching new drugs.
- Drugstore chain CVS Health was another weak performer as it
contended with rising patient utilisation in its managed care segment and
investors debated the cost of its acquisition of Oak Street Health, a provider
of value-based care to the Medicare population.
On the positive side, the two largest contributors to the Company's
performance at the sector level were energy and technology due to stock
selection.
At a stock level, the largest individual contributors included:
- Semiconductor supplier Broadcom performed strongly, alongside
other companies with artificial intelligence (AI) exposure, after reports
indicated a significant increase in demand for AI solutions. Broadcom
subsequently reported earnings that confirmed these improving demand trends.
- Phillips 66, the oil refiner, discussed options to improve
operational performance, along with various strategic alternatives, with
activist investor Elliot Management ("Elliot"). Elliot established a $1
billion position in Phillips 66, will nominate two new board members, and
publicly outlined a strategy to unlock shareholder value.
- Comcast, the telecommunications conglomerate, also fared well
after reporting earnings that were better
than expected. The company was able to offset the loss of broadband
subscribers with higher pricing, while the theme parks division continues to
experience robust growth.
The top five contributors and bottom five contributors over the year ended 31
January 2024 are detailed below
Top Five Stock Contributors %* Bottom Five Stock Contributors %*
Broadcom Inc 1.6 FMC Corporation -2.4
Philips66 1.1 Meta Platforms Inc. # -1.4
Pfizer Inc 0.5 Bristol-Myers Squibb Company -1.2
Comcast Corporation 0.4 CVS Health Corporation -0.7
Merck & Co 0.4 Gaming and Leisure Properties Inc. -0.5
*% relates to the percentage contribution to return relative to the Reference
Index (Russell 1000 Value Index).
# not owned by the Company.
Portfolio activity
The Company's investments continue to align with our high-quality stock
selection process, which emphasises generating consistent cash flow. However,
market volatility created opportunities to add quality companies into the
portfolio at compelling prices.
We initiated positions in five companies during the year.
- the leading renewable energy and utility company NextEra Energy:
NextEra Energy owns Florida Power & Light Company, the US's largest
regulated electric utility, serving more than 12 million people. The utility
business is high quality due to the large backlog of growth projects combined
with a constructive regulatory environment allowing for relatively high
returns. The company also owns NextEra Energy Resources, which is the world's
largest generator of renewable energy from wind and solar assets as well as a
leader in battery storage. Altogether, NextEra Energy combines two excellent
businesses that support peer-leading earnings growth, along with a secure
dividend.
- Genuine Parts Company, a leading global distributor of automotive
and industrial replacement parts. The company has a track record of consistent
execution and prudent capital allocation, which has driven its profitable
growth. It has established itself as a premier supplier of automotive
aftermarket parts, led by its flagship NAPA brand.
- Beverage firm Keurig Dr Pepper has products in both the cold
drinks segment (led by the flagship Dr Pepper brand) and, following the merger
with Keurig, in coffee. Keurig is the dominant player in the single-serve
coffee segment. Historically, the cold drinks business has grown in line with,
or above, the market, benefiting from the company's strength in (non-cola)
flavours and its status as a preferred distributor and acquiror of niche
brands.
- Essential Utilities, a diversified utility with two-thirds of its
earnings from the water business and one-third from the gas business. In the
short run, the gas business should grow faster given the infrastructure
upgrades required. However, the water business should grow at a comparable
pace over the intermediate term due to several small acquisition opportunities
given that around 85% of the country is served by small, privately-run
municipal operations.
- The energy infrastructure company Enbridge, a premier midstream
company that operates one of the most advantaged oil pipeline networks in
North America, with a strong collection of natural gas infrastructure and
utility assets and a growing renewable energy platform. The company's
diversified asset portfolio generates predictable cash flows thanks to its
regulated and long-term contracts with customers.
We sold out of five companies during the year.
- Home Depot: as we believe higher interest rates, elevated
inflation and the resumption of student loan payments will prove to be large
headwinds for the consumer, pressuring earnings estimates over time.
- Clothing company, VF Corporation. Despite having a portfolio of
well-admired brands like Vans, The North Face, Timberland, Supreme, and
Dickies, the company has faced multiple setbacks due to its poor execution.
- Hannon Armstrong Sustainable Infrastructure Capital, after
concluding the stock would remain under pressure in a higher-for-longer
interest-rate environment, with investors becoming increasingly concerned that
higher funding costs would negatively affect the company's return profile.
- CI Financial, given the company's management has become more
aggressive from a capital deployment perspective, with an acceleration in
buybacks and the rapid acquisition of US wealth management businesses. While
strategically sound, these actions are raising leverage at a time of higher
interest rates.
- Energy infrastructure firm TC Energy, using the proceeds to fund
our investment in competitor Enbridge. Factors primarily outside TC Energy's
control have created delays on new projects and put upward pressure on costs,
negatively affecting project-level returns.
Within the Company's corporate bond portfolio, we initiated several positions
over the year to take advantage of more attractive valuations, as yields
climbed higher due to further monetary tightening together with concerns over
what an economic slowdown could mean for the instruments' credit quality. We
exited some other positions as the valuation of these bonds traded above what
we deemed to be their fair value. We continue to work closely with abrdn's
fixed income specialists to monitor credits and market conditions for new
opportunities and to manage downside risk.
Dividend growth
The Company's holdings continued to build upon an established track record of
dividend growth during the review period, with several companies announcing
double-digit increases. Semiconductor suppliers Broadcom and Analog Devices
boosted their payouts by 14% and 13%, respectively. Insurance provider AIG
Group increased its dividend by 13%. Derivatives exchange operator CME Group,
renewable energy company NextEra Energy, and healthcare provider CVS each
raised their quarterly dividend payouts by 10%.
Additionally, two holdings in the portfolio announced special dividend
payments to shareholders during the review period. Derivatives exchange
operator CME Group declared an annual variable dividend of US$5.25 per share
in December 2023. The company uses this approach to facilitate paying out all
cash that it generates over the year beyond a minimum threshold.
Gaming-focused REIT Gaming and Leisure Properties Inc. declared a special
earnings and profits cash dividend of $0.25 per share.
Outlook
US economic growth has been resilient, benefiting from several factors such as
unwinding supply-chain pressures, falling energy prices, and higher
productivity growth. Despite tighter credit conditions and greatly reduced
household savings, we believe the chances of a soft landing versus a mild
recession are becoming more balanced as inflation subsides.
We believe the underlying companies in the portfolio are well positioned to
manage through potential election year volatility and, equally important, we
feel comfortable with the current valuations of these companies. The
underlying cash flows and balance sheets remain strong and thus we expect
continued dividend growth prospects for 2024.
The portfolio's sector exposure is modestly defensive and we continue to seek
all-weather companies, where macro tailwinds are not needed for growth.
Fran Radano
abrdn Inc.
4 April 2024
Ten Largest Investments
As at 31 January 2024
MetLife CVS Health
MetLife provides individual insurance, employee benefits, and financial CVS Health provides health care and
services with operations throughout the United States and the regions of Latin
retail pharmacy services. The company
America, Europe, and
offers prescription medications, beauty, personal care, cosmetics, and health
Asia Pacific. care products as well as pharmacy benefit management, disease management and
administrative services.
Medtronic Merck & Co
Medtronic develops therapeutic and diagnostic medical products for a wide Merck & Co. is a global health care company that delivers health solutions
range of conditions, diseases and disorders. through its prescription medicines, vaccines, biological therapies, animal
health, and consumer care products, which it markets directly and through its
joint ventures. The company has operations in pharmaceutical, animal health,
and consumer care.
Gaming & Leisure Properties Baker Hughes
Gaming and Leisure Properties Baker Hughes provides oilfield products and services. The company
owns and leases casinos and other entertainment facilities.
engages in surface logging, drilling, pipeline operations, petroleum
engineering, and fertilizer solutions, as well as offers gas turbines, valves,
actuators, pumps, flow meters, generators and motors. Baker Hughes serves oil
and gas industries worldwide.
American International Group ("AIG") L3 Harris Technologies
American International Group. is an international insurance organisation L3 Harris Technologies is an aerospace and defence technology innovator. The
serving commercial, institutional and individual customers. AIG provides company designs, develops, and manufactures radio communications products and
property-casualty insurance, life insurance, and retirement services. systems, including single channel ground and airborne radio systems.
Citigroup Comcast
Citigroup. is a diversified financial services holding company that provides a Comcast provides media and television broadcasting services. The company
broad range of financial services to consumer and corporate customers. The offers video streaming, television programming, high-speed Internet, cable
company services include investment banking, retail brokerage, corporate television and communication services. Comcast serves customers worldwide.
banking, and cash management products and services. Citigroup serves customers
globally.
List of Investments
As at 31 January 2024
Valuation Total Valuation
2024 assets 2023
Company Industry classification £'000 % £'000
MetLife Insurance 21,774 4.6 20,166
CVS Health Health Care Providers & Services 21,024 4.4 21,498
Medtronic Health Care Equipment & Supplies 20,623 4.3 13,596
Merck & Co Pharmaceuticals 19,917 4.2 20,939
Gaming & Leisure Properties Specialised REITs 17,924 3.9 17,402
Baker Hughes Energy Equipment & Services 17,904 3.8 23,204
American International Group ("AIG") Insurance 16,375 3.4 15,406
L3 Harris Technologies Aerospace & Defence 16,366 3.4 13,959
Citigroup Banks 15,438 3.2 14,846
Comcast Media 14,619 3.1 19,178
Ten largest investments 181,964 38.3
Emerson Electric Electrical Equipment 14,407 3.0 14,657
Philip Morris Tobacco 14,268 3.0 16,935
Air Products & Chemicals Chemicals 14,056 3.0 7,810
Broadcom Semiconductors & Semiconductor Equipment 13,899 2.9 11,880
Phillips 66 Oil, Gas & Consumable Fuels 13,599 2.9 16,290
Bristol-Myers Squibb Pharmaceuticals 13,432 2.8 20,654
Keurig Dr Pepper Beverages 12,344 2.6 -
Restaurant Brands International Hotels, Restaurants & Leisure 12,263 2.6 13,048
Cogent Communications Diversified Telecommunication 12,125 2.5 13,924
Genuine Parts Distributors 12,113 2.5 -
Twenty largest investments 314,470 66.1
JPMorgan Chase & Co. Banks 11,638 2.4 7,958
Analog Devices Semiconductors & Semiconductor Equipment 11,329 2.4 15,321
Omega Healthcare Investors Health Care REITs 10,248 2.2 19,131
PNC Financial Services Banks 9,499 2.0 13,438
Cisco Systems Communications Equipment 9,457 2.0 13,837
Coca-Cola Beverages 9,343 1.9 7,471
CMS Energy Multi-Utilities 8,977 1.9 12,832
FMC Chemicals 8,826 1.9 13,517
Enbridge Oil, Gas & Consumable Fuels 8,363 1.8 -
CME Group Capital Markets 7,274 1.5 7,892
Thirty largest investments 409,424 86.1
Essential Utilities Water Utilities 7,040 1.5 -
Nextera Energy Electric Utilities 6,906 1.5 -
Royal Bank of Canada Banks 6,899 1.4 7,483
OneMain Consumer Finance 5,981 1.3 8,760
AbbVie Biotechnology 5,164 1.1 12,001
Texas Instruments Semiconductors & Semiconductor Equipment 5,029 1.0 5,758
CCO Holdings 7.375% 03/03/31 Media 1,429 0.3 -
CCO Holdings 4.75% 01/02/32 Media 1,408 0.3 1,447
Venture Global Calcasie 8.375% 01/06/31 Oil, Gas & Consumable Fuels 1,389 0.3 -
NRG Energy 3.625% 15/02/1 Multi-Utilities 765 0.2 726
Forty largest investments 451,434 95.0
Venture Global Calcasie 6.25% 15/01/30 Oil, Gas & Consumable Fuels 708 0.2 746
Viatris 2.7% 22/06/30 Pharmaceuticals 708 0.1 706
NCL 5.875% 15/02/27 Consumer Discretionary 698 0.1 682
Venture Global Calcasie 3.875% 01/11/33 Oil, Gas & Consumable Fuels 693 0.1 717
Graphic Packaging 3.75% 01/02/30 Packaging & Containers 691 0.1 693
Total investments 454,932 95.6
Net current assets 20,745 4.4
Total assets 475,677 100.0
Geographical/Sector Analysis
Geographic Analysis
As at 31 January 2024
2024 2023
Equity Fixed interest Total Equity Fixed interest Total
Country % % % % % %
Canada 6.1 - 6.1 8.4 - 8.4
USA 92.0 1.9 93.9 90.1 1.5 91.6
98.1 1.9 100.0 98.5 1.5 100.0
Investment Case Studies
Phillips 66
Phillips 66 is a diversified energy company formed in 2012 after
ConocoPhillips separated its upstream and downstream operations. The company's
portfolio consists of Midstream, Refining, Chemicals, Renewable Fuels, and
Retail businesses. More simply, Phillips 66 processes, transports, stores, and
markets fuels and refined products globally via its twelve refiners, 72,000
miles of pipelines, and over 8,000 retail locations.
Over the past decade management has focused on optimising the company's
portfolio by divesting non-core assets, investing in higher growth businesses,
and improving operational efficiency. Together, these initiatives have better
positioned the company competitively, including improving profitability,
reducing earnings volatility, and allowing for greater shareholder returns. At
this point, after years of investment and portfolio reshaping, the company has
completed many of these initiatives and is now considered one of the largest
and most integrated energy companies globally. This level of integration and
scale is unique within the energy complex creating competitive advantages that
are difficult to replicate. Despite the progress, Phillips 66 recently
embarked on another iteration of continuous improvement that we believe will
add shareholder value over the long-term.
While many view the energy transition as a risk, Phillips 66 has taken a
proactive approach in addressing these concerns. The company has spent several
billion dollars on environmental protection and alternative energy projects
since 2015. This includes the "Rodeo Renewed" project in California which will
convert a traditional refinery into one of the largest renewable fuel
facilities in the world. At the same time, management has established
long-term GHG emission reduction targets with interim goals to track the
company's progress. There are several other partnerships, initiatives, and
projects helping position the company for a lower carbon future, thereby
increasing our confidence in the long-term sustainability of the company's
business model.
JPMorgan Chase & Co
JPMorgan Chase & Co. ("JPMorgan") is a leading financial services firm
with nearly $4 trillion in assets, over $300 billion of common equity, and
more than 300,000 employees around the globe. In 2023, JPMorgan generated over
$158 billion in net revenues and earned a 17% return on its common equity,
translating into $50 billion of net income, an increase of 32% from 2022.
JPMorgan has the largest retail deposit share in the United States, is the
largest US credit card issuer, and is amongst the largest investment banks in
the world.
Between 2004 and 2022, a period that included the global financial crisis and
COVID-19, JPMorgan grew its tangible book value per share at a compound annual
growth rate of 9%, nearly twice the rate of its five largest peers, a
testament to its diversified business model, fortress balance sheet, and
best-in-class management team. In 2023, tangible book value per share grew an
additional 18% driven by record high earnings, demonstrating JPMorgan's
ability to navigate a complicated macro-economic environment and the
conclusion of the Federal Reserves' aggressive interest rate tightening cycle.
In the spring of 2023, JPMorgan engineered a win-win rescue of First Republic
Bank, partnering with the Federal Deposit Insurance Corporation to acquire the
assets and deposits of the bank after the failure of Silicon Valley Bank
sparked contagion in the regional banking industry as a result of rapidly
rising interest rates. The acquisition helped stem the crisis and added a
valuable franchise focused on affluent customers to the fold.
In 2021, JPMorgan unveiled its Sustainable Development Target goal to finance
and facilitate $2.5 trillion to support sustainable development and address
climate change through the end of 2030. The bank is off to a strong start,
having achieved $482 billion through the end of 2022, including $176 billion
in green initiatives, $204 billion in development finance in emerging
economies, and $102 billion of community development in developed markets. In
addition, JPMorgan utilises a Carbon Assessment Framework to include climate
considerations in its business decision making in order to support the global
goal of net-zero emissions by 2050.
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 2024 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 2024 may be
found below. Details of dividends for the year to 31 January 2024 can be found
above.
Share Capital and Rights attaching to the Company's Shares
At 31 January 2024, the Company's capital structure consisted of 137,352,347
Ordinary shares of 5p each (2023 - 140, 234,749 Ordinary shares of 5p each).
During the year to 31 January 2024, the Company bought back 2,882,402 Ordinary
shares for cancellation. Since 1 February 2024, 1,187,253 Ordinary shares have
been repurchased for cancellation.
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.
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 2024 are shown in note 5.
Depositary Agreement
The Company has appointed BNP Paribas Trust Corporation UK Limited ("BNPP") as
its depositary.
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").
Directors
Details of the Directors of the Company who were in office during the year to
31 January 2024 and up to the date of this report are shown on the Company's
website. Dame Susan Rice is the Chair and Charles Park is the Senior
Independent Director.
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 2024 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 in the published Annual Report.
Substantial Interests
As at 31 January 2024 the Company had received notification or was aware of
the following interests in its Ordinary shares:
Shareholder Number of shares held % held
Rathbone Brothers 15,650,873 11.4
Interactive Investor 13,549,192 9.9
RBC Brewin Dolphin 9,058,737 6.6
1607 Capital Partners 7,161,186 5.2
Hargreaves Lansdown 7,112,843 5.2
Canaccord Genuity Wealth Management 6,852,060 5.0
Allspring Global Investments 5,575,262 4.1
Charles Stanley 4,876,459 3.6
EFG Harris Allday 4,480,436 3.3
WM Thomson 4,379,920 3.2
In the period between 31 January 2024 and 4 April 2024, the Company was
notified that Canaccord Genuity Wealth Management held 6,834,528 shares (5.0%
of shares in issue) as at 15 March 2024 and 6,802,785 (5.0% of the shares in
issue) as at 20 March 2024. There have been no other changes to the above
interests in the Company's shares notified as at 4 April 2024.
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. Based on feedback from major shareholders, the Directors consider
that it is reasonable to assume that the continuation vote will be passed at
the AGM to be held in June 2024 and therefore that the Company will continue
in existence.
The Board has considered the impact of geopolitical developments and believes
that there will be a limited resulting financial impact on the Company's
portfolio, its 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 in the published Annual Report.
Among the resolutions being put at the Annual General Meeting ("AGM") of the
Company to be held on 21 June 2024 at 12.00 Noon, the following resolutions
will be proposed as special business:
(i) Aggregate fees payable to Directors
The Board carried out a review of the level of Directors' fees during the
financial year. The resulting increases, which were effective from 1 February
2024, are detailed in the Directors' Remuneration Report in the published
Annual Report.
In view of these increases in fees, and in order to ensure that the Board has
ongoing flexibility to manage succession planning and attract candidates of
appropriate expertise and calibre to the role, Resolution 3, an ordinary
resolution, will seek shareholders' approval to increase the maximum aggregate
limit of remuneration of the Directors each year in respect of their services
as Directors from £175,000 to £250,000. Whilst the Board does not intend to
rely on this increase, it is believed to be necessary and appropriate, in line
with peer companies, and will be a more appropriate cap for the foreseeable
future.
(ii) Continuation of the Company
Resolution 10, which is an ordinary resolution, will, if approved, allow the
Company to continue as an investment trust company.
(iii) Section 551 Authority to Allot Shares
Resolution 11, 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 £2,246,724 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 2025 or, if earlier, at the conclusion of the AGM to be held
in 2025 (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.
(iv) Dis-application of Pre-emption Provisions
Resolution 12, 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 £680,825 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 2025 or, if earlier, at the conclusion
of the AGM to be held in 2025. 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.
(v) Share Repurchases
Resolution 13, 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 0.04% of the
existing issued Ordinary share capital of the Company.
By order of the Board
abrdn Holdings Limited
Secretary, Edinburgh
4 April 2024
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 accounting 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 2024
Statement of Comprehensive Income
Year ended 31 January 2024 Year ended 31 January 2023
Revenue Capital Total Revenue Capital Total
Note £'000 £'000 £'000 £'000 £'000 £'000
Net (losses)/gains on investments 11 - (25,504) (25,504) - 28,105 28,105
Net currency gains/(losses) 3 - 1,375 1,375 - (1,557) (1,557)
Income 4 21,952 620 22,572 22,295 731 23,026
Investment management fee 5 (894) (2,088) (2,982) (947) (2,209) (3,156)
Administrative expenses 7 (943) - (943) (854) - (854)
Return before finance costs and taxation 20,115 (25,597) (5,482) 20,494 25,070 45,564
Finance costs 6 (368) (858) (1,226) (354) (825) (1,179)
Return before taxation 19,747 (26,455) (6,708) 20,140 24,245 44,385
Taxation 8 (3,079) 614 (2,465) (3,014) 447 (2,567)
Return after taxation 16,668 (25,841) (9,173) 17,126 24,692 41,818
Return per Ordinary share (pence) 10 11.95 (18.53) (6.58) 12.21 17.60 29.81
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 are an integral part of the financial statements.
Statement of Financial Position
As at As at
31 January 2024 31 January 2023
Note £'000 £'000
Fixed assets
Investments at fair value through profit or loss 11 454,932 486,940
Current assets
Prepayments and accrued income 12 846 784
Other debtors 12 105 1,891
Cash at bank and in hand 21,285 26,699
22,236 29,374
Creditors: amounts falling due within one year
Other creditors 13 (1,491) (2,880)
(1,491) (2,880)
Net current assets 20,745 26,494
Total assets less current liabilities 475,677 513,434
Creditors: amounts falling due after more than one year
Senior Loan Notes 14 (39,198) (40,543)
Net assets 436,479 472,891
Capital and reserves
Called up share capital 15 6,868 7,012
Share premium account 51,806 51,806
Capital redemption reserve 15,748 15,604
Capital reserve 340,003 373,828
Revenue reserve 22,054 24,641
Total shareholders' funds 436,479 472,891
Net asset value per Ordinary share (pence) 16 317.78 337.21
The financial statements were approved and authorised for issue by the Board
on 4 April 2024 and were signed on its behalf by:
Dame Susan Rice
Director
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Equity
For the year ended 31 January 2024
Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 1 February 2023 7,012 51,806 15,604 373,828 24,641 472,891
Buyback of Ordinary shares (144) - 144 (7,984) - (7,984)
Return after taxation - - - (25,841) 16,668 (9,173)
Dividends paid (see note 9) - - - - (19,255) (19,255)
Balance at 31 January 2024 6,868 51,806 15,748 340,003 22,054 436,479
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
The accompanying notes are an integral part of the financial statements.
Statement of Cash Flows
Year ended Year ended
31 January 2024 31 January 2023
Note £'000 £'000
Operating activities
Net return before taxation (6,708) 44,385
Adjustments for:
Net losses/(gains) on investments 11 25,410 (27,997)
Net (gains)/losses on foreign exchange transactions (1,375) 1,557
Decrease/(increase) in dividend income receivable 12 (60) (54)
Increase in fixed interest income receivable 12 (2) (134)
(Decrease)/increase in derivatives 13 (102) 240
Decrease/(increase) in other debtors 12 155 (146)
(Decrease)/increase in other creditors 13 (53) 129
Tax on overseas income 8 (2,465) (2,567)
Amortisation of senior loan note expenses 6 - 5
Accretion of fixed income book cost 11 (94) (1)
Net cash inflow from operating activities 14,706 15,417
Investing activities
Purchases of investments (140,765) (186,765)
Sales of investments 147,854 199,772
Net cash generated from investing activities 7,089 13,007
Financing activities
Equity dividends paid 9 (19,255) (16,138)
Buyback of Ordinary shares (7,984) (1,252)
Net cash used in financing activities (27,239) (17,390)
(Decrease)/increase in cash and cash equivalents (5,444) 11,034
Analysis of changes in cash and cash equivalents during the year
Opening balance 26,699 13,875
Effect of exchange rate fluctuation on cash held 3 30 1,790
(Decrease)/increase in cash as above (5,444) 11,034
Closing balance 21,285 26,699
Represented by:
Cash at bank and in hand 21,285 26,699
The accompanying notes are an integral part of the financial statements.
Notes to the Financial Statements
For the year ended 31 January 2024
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 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. Based on feedback from major shareholders, the Directors consider
that it is reasonable to assume that the continuation vote will be passed at
the AGM to be held in June 2024 and therefore that the Company will continue
in existence.
The Board has considered the impact of geopolitical developments and believes
that there will be a limited resulting financial impact on the Company's
portfolio, its 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 on 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 closing
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 2024
may not be available at the time of any future distribution due to movements
between 31 January 2024 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. For written options, where exercised,
losses are treated as a realised loss, including where it is a component of
the cost paid to acquire underlying securities on a written contract.
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 gains/(losses)
2024 2023
£'000 £'000
Gains on cash held 30 1,790
Gains/(losses) on Senior Loan Notes 1,345 (3,347)
1,375 (1,557)
4. Income
2024 2023
£'000 £'000
Income from overseas listed investments
Dividend income 14,879 15,570
REIT income 2,817 2,816
Interest income from investments 567 167
18,263 18,553
Other income from investment activity
Traded option premiums 3,781 4,170
Deposit interest 528 303
4,309 4,473
Total income 22,572 23,026
During the year, the Company was entitled to premiums totalling £3,781,000
(2023 - £4,170,000) in exchange for entering into option contracts. At the
year end there were 6 (2023 - 5) open positions, valued at a liability of
£162,000 (2023 - liability of £264,000) as disclosed in note 13. Losses
realised on the exercise of derivative transactions are disclosed in note 11.
5. Investment management fee
2024 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management fee 894 2,088 2,982 947 2,209 3,156
Management services are provided by abrdn Fund Managers Limited ("aFML"). 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. 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 £755,000 (2023 - £810,000). The fee is
allocated 30% to revenue and 70% to capital (2023 - 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
2024 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Bank interest paid 33 76 109 1 2 3
Senior Loan Notes 333 778 1,111 351 819 1,170
Amortised Senior Loan Note issue expenses 2 4 6 2 4 6
368 858 1,226 354 825 1,179
7. Administrative expenses
2024 2023
£'000 £'000
Directors' fees 155 131
Registrar's fees 85 104
Custody and bank charges 25 25
Secretarial fees 147 129
Auditors' remuneration:
- fees payable to the Company's auditor for the audit of the annual report 55 40
Promotional activities 216 215
Printing, postage and stationery 33 29
Fees, subscriptions and publications 66 57
Professional fees 45 37
Depositary charges 44 46
Other expenses 72 41
943 854
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 £147,000 (2023 - £129,000). The balance due at the year end
was £12,000 (2023 - £22,000).
During the year £216,000 (2023 - £215,000) was paid to aFML in respect of
promotional activities for the Company and the balance due at the year end was
£73,000 (2023 - £72,000).
With the exception of Auditors' remuneration for the statutory audit, all of
the expenses above include irrecoverable VAT where applicable. The Auditors'
remuneration for the statutory audit excludes VAT amounting to £11,000 (2023
- £8,000).
8. Taxation
2024 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
(a) Analysis of charge/(credit) for the year
UK corporation tax 462 - 462 292 - 292
Double tax relief (330) - (330) (292) - (292)
Overseas tax suffered 2,240 93 2,333 2,458 109 2,567
Tax relief to capital 707 (707) - 556 (556) -
Total tax charge/(credit) for the year 3,079 (614) 2,465 3,014 (447) 2,567
(b) Factors affecting the tax charge/(credit) for the year. The UK corporation tax
rate is 24% (2023 - 19%). The tax charge for the year is higher (2023 - lower)
than the corporation tax rate. The differences are explained in the following
table.
2024 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Net return before taxation 19,747 (26,455) (6,708) 20,140 24,245 44,385
Corporation tax at 24% (2023 - 19%) 4,739 (6,349) (1,610) 3,827 4,607 8,434
Effects of:
Non-taxable overseas dividends (3,571) (149) (3,720) (2,958) (139) (3,097)
Irrecoverable overseas withholding tax 2,240 93 2,333 2,458 109 2,567
Expenses not deductible for tax purposes 1 - 1 - - -
Double tax relief (330) - (330) (293) - (293)
Excess management expenses - - - (20) 20 -
Non-taxable losses/(gains) on investments - 6,121 6,121 - (5,340) (5,340)
Non-taxable currency gains/(losses) - (330) (330) - 296 296
Total tax charge/(credit) 3,079 (614) 2,465 3,014 (447) 2,567
(c) Provision for deferred taxation
At the year end there is no unrecognised deferred tax asset (2023 - £nil) in
relation to surplus management expenses.
9. Dividends
2024 2023
£'000 £'000
Amounts recognised as distributions to equity holders in the year:
3rd interim dividend for 2023 of 2.5p per share (2022 - 2.5p) 3,506 3,517
Final dividend for 2023 of 3.5p per share (2022 - 4.0p) 4,902 5,609
1st interim dividend for 2024 of 2.6p per share (2023 - 2.5p) 3,642 3,506
2nd interim dividend for 2024 of 2.6p per share (2023 - 2.5p) 3,621 3,506
3rd interim dividend for 2024 of 2.6p per share 3,584 -
19,255 16,138
The fourth interim dividend was unpaid at the year end. Accordingly, this has
not 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 £16,668,000
(2023 - £17,126,000).
2024 2023
£'000 £'000
1st interim dividend for 2024 of 2.6p per share (2023 - 2.5p) 3,642 3,506
2nd interim dividend for 2024 of 2.6p per share (2023 - 2.5p) 3,621 3,506
3rd interim dividend for 2024 of 2.6p per share (2023 - 2.5p) 3,584 3,506
4th interim dividend for 2024 of 3.9p per share (2023 - nil) 5,314 -
Proposed final dividend for 2024 of nil per share (2023 - 3.5p) - 4,902
16,161 15,420
The cost of the fourth interim dividend for 2024 is based on 136,243,680
Ordinary shares in issue, being the number of Ordinary shares in issue at the
date of this report.
10. Return per Ordinary share
2024 2023
£'000 p £'000 p
Based on the following figures:
Revenue return 16,668 11.95 17,126 12.21
Capital return (25,841) (18.53) 24,692 17.60
Total return (9,173) (6.58) 41,818 29.81
Weighted average number of Ordinary shares in issue 139,474,109 140,284,541
11. Investments at fair value through profit or loss
2024 2023
£'000 £'000
Investments at fair value through profit or loss
Opening book cost 438,891 425,863
Opening investment holdings gains 48,049 45,111
Opening fair value 486,940 470,974
Analysis of transactions made during the year
Purchases at cost 139,531 184,369
Sales proceeds received (146,223) (196,401)
(Losses)/gains on investments(A) (25,410) 27,997
Accretion of fixed income book cost 94 1
Closing fair value 454,932 486,940
Closing book cost 432,315 438,891
Closing investment holdings gains 22,617 48,049
Closing fair value 454,932 486,940
Listed on overseas stock exchanges 454,932 486,940
Net (losses)/gains on investments
(Losses)/gains on investments(A) (25,410) 27,997
Investment holding (losses)/gains on traded options(B) (94) 108
(25,504) 28,105
(A) Includes losses realised on the exercise of traded options of £3,204,000
(2023 - £6,511,000) 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 £3,781,000 (2023 -
£4,170,000) per note 4.
(B) Options associated are derivative liabilities at the year end.
The Company received £146,223,000 (2023 - £196,401,000) from investments
sold in the year. The book cost of these investments when they were purchased
was £146,201,000 (2023 - £171,343,000). 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 net
(losses)/gains on investments in the Statement of Comprehensive Income. The
total costs were as follows:
2024 2023
£'000 £'000
Purchases 65 44
Sales 107 140
172 184
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: amounts falling due within one year
2024 2023
£'000 £'000
Accrued income 829 769
Prepayments 17 15
Other debtors 76 231
Amounts due from brokers 29 1,660
951 2,675
13. Creditors: amounts falling due within one year
2024 2023
£'000 £'000
Amounts due to brokers 210 1,444
Investment management fee payable 755 810
Traded option contracts 162 264
Interest payable 127 131
Other creditors 237 231
1,491 2,880
14. Senior Loan Notes
Creditors: amounts falling due after more than one year
2024 2023
£'000 £'000
2.70% Senior Loan Notes - 10 years 19,632 20,307
2.96% Senior Loan Notes - 15 years 19,632 20,307
Unamortised Loan Note issue expenses (66) (71)
39,198 40,543
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 2024 was
£36,256,000 (2023 - £38,579,000) comprising £18,277,000 (2023 -
£19,278,000) in respect of the 10 years 2.70% Senior Loan Note and
£17,979,000 (2023 - £19,301,000) 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
2024 2023
£'000 £'000
Allotted, called-up and fully paid:
Opening balance 7,012 7,034
Ordinary shares bought back in the year (144) (22)
137,352,347 (2023 - 140,234,749) Ordinary shares of 5p each 6,868 7,012
During the year 2,882,402 (2023 - 441,185) Ordinary shares of 5p each were
repurchased by the Company at a total cost, including transaction costs, of
£7,984,000 (2023 - £1,252,000).
Subsequent to the year end, 1,108,667 Ordinary shares of 5p each have been
repurchased by the Company at a total cost of £3,206,000.
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:
2024 2023
Net assets attributable £436,479,000 £472,891,000
Number of Ordinary shares in issue(A) 137,352,347 140,234,749
Net asset value per share 317.78p 337.21p
(A) 2024 Includes 72,747 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
2023 differences movement flows 2024
£'000 £'000 £'000 £'000 £'000
Cash and short term deposits 26,699 30 - (5,444) 21,285
Debt due after more than one year (40,543) 1,345 - - (39,198)
(13,844) 1,375 - (5,444) (17,913)
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)
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 £3,781,000
(2023 - £4,170,000). Positions closed during the year realised a loss of
£3,204,000 (2023 - £6,511,000). The largest position in derivative contracts
held during the year at any given time was £454,000 (2023 - £542,000). The
Company had 6 (2023 - 5) open positions in derivative contracts at 31 January
2024 valued at a liability of £162,000 (2023 - £264,000) 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 2024 are shown in note 14 to the financial statements.
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 2024 Years % £'000 £'000 £'000
Assets
Sterling - - - 4,892 -
US Dollar 6.93 5.59 8,489 16,392 418,918
Canadian Dollar - - - 1 27,525
Total assets 8,489 21,285 446,443
Liabilities
Loan Notes 21/12/30 - US$25,000,000 6.89 2.70 19,599 - -
Loan Notes 21/12/35 - US$25,000,000 11.89 2.96 19,599 - -
Total liabilities 39,198 - -
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 21/12/30 - US$25,000,000 7.89 2.70 20,272 - -
Loan Notes 21/12/35 - US$25,000,000 12.90 2.96 20,271 - -
Total liabilities 40,543 - -
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 2024 would increase/decrease by £213,000 (2023 -
decrease/increase by £267,000). 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 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 2024 would have increased/decreased by £45,493,000 (2023 -
increase/decrease of £48,694,000) 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 2024 was as
follows:
2024 2023
Statement of Statement of
Financial Maximum Financial Maximum
Position exposure Position exposure
£'000 £'000 £'000 £'000
Non-current assets
Quoted bonds 8,489 8,489 7,141 7,141
Current assets
Amount due from brokers 29 29 1,660 1,660
Dividends receivable 829 829 603 603
Interest receivable 17 17 166 166
Other debtors and prepayments 76 76 246 246
Cash and short-term deposits 21,285 21,285 26,699 26,699
30,725 30,725 36,515 36,515
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 2024 and
31 January 2023:
2024 2023
£'000 £'000
B+ 708 682
BB+ 1,401 2,898
BB 2,845 693
BB- 2,837 2,162
BBB- 698 706
8,489 7,141
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 2024 Note £'000 £'000 £'000 £'000
Financial assets at fair value through profit or loss
Quoted equities a) 446,443 - - 446,443
Quoted bonds b) - 8,489 - 8,489
446,443 8,489 - 454,932
Financial liabilities at fair value through profit or loss
Derivatives c) - (162) - (162)
Net fair value 446,443 8,327 - 454,770
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
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 £36,256,000
(2023 - £38,579,000), 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 £39,198,000 (2023 - £40,543,000).
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 in the published 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.
2024 2023
NAV per Ordinary share a 317.78p 337.21p
Share price b 289.00p 306.00p
Discount (a-b)/a 9.1% 9.3%
Dividend cover
Dividend cover measures the revenue return per share divided by total
dividends per share, expressed as a ratio.
2024 2023
Revenue return per share a 11.95p 12.21p
Dividends per share b 11.70p 11.00p
Dividend cover a/b 1.02 1.11
Dividend yield
Dividend yield is calculated using the Company's annual dividend per Ordinary
share divided by the share price, expressed as a percentage.
2024 2023
Annual dividend per Ordinary share a 11.70p 11.00p
Share price b 289.00p 306.00p
Dividend yield a/b 4.0% 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.
2024 2023
Borrowings (£'000) a 39,198 40,543
Cash (£'000) b 21,285 26,699
Amounts due to brokers (£'000) c 210 1,444
Amounts due from brokers (£'000) d 29 1,660
Shareholders' funds (£'000) e 436,479 472,891
Net gearing (a-b+c-d)/e 4.1% 2.9%
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.
2024 2023
Investment management fees (£'000) 2,982 3,156
Administrative expenses (£'000) 943 854
Less: non recurring charges (A) (£'000) - (8)
Ongoing charges (£'000) 3,925 4,002
Average net assets (£'000) 439,152 458,929
Ongoing charges ratio (excluding look-through costs) 0.89% 0.87%
Look-through costs(B) 0.10% 0.06%
Ongoing charges ratio (including look-through costs) 0.99% 0.93%
(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 2024 NAV Price
Opening at 1 February 2023 a 337.2p 306.0p
Closing at 31 January 2024 b 317.8p 289.0p
Price movements c=(b/a)-1 -5.8% -5.6%
Dividend reinvestment(A) d 4.2% 4.7%
Total return c+d -1.6% -0.9%
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%
(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 is not the Company's statutory accounts for the
year ended 31 January 2024. The statutory accounts for the year ended 31
January 2023 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 2024 or 31 January 2023 but is derived from
those accounts.
Statutory accounts for 31 January 2023 have been delivered to the registrar of
companies, and those for 31 January 2024 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 2024 were
approved by the Directors on 4 April 2024.
The Company's Annual General Meeting will be held at 12 Noon on 21 June 2024
in the offices of abrdn plc, 1 George Street, Edinburgh EH2 2LL.
The Annual Report will be posted to shareholders in April 2024 and will be
available from the Company's website: www.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
Secretaries
END
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