Schroder Inc Growth - Final Results
26/10/2023 07:00
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RNS Number : 3229R Schroder Income Growth Fund PLC 26 October 2023
ANNUAL REPORT AND ACCOUNTS
Schroder Income Growth Fund plc (the "Company") hereby submits its final
results for the year ended 31 August 2023.
The Company's annual report and accounts for the year ended 31 August 2023 are
also being published in hard copy format and an electronic copy will shortly
be available to download from the Company's
webpages www.schroders.co.uk/incomegrowth
(http://www.schroders.co.uk/incomegrowth) . Please click on the following
link to view the document:
http://www.rns-pdf.londonstockexchange.com/rns/3229R_1-2023-10-25.pdf
(http://www.rns-pdf.londonstockexchange.com/rns/3229R_1-2023-10-25.pdf)
Enquiries:
Shilla Pindoria
Schroder Investment Management Limited
Tel: 020 7658 6000
Highlights for the year ended 31 August 2023
* Dividend per share for the year rose by 4.6% to 13.80p (31 August 2022:
13.20p), reflecting the Company's principal objective of delivering real
income growth in excess of inflation - marking the 28th consecutive year of
dividend growth.
* NAV total return increased by 4.03% to 220.6p (31 August 2022: 211.7p), whilst
NAV per share rose to 4.2% (31 August 2022: 2.7%) despite a volatile period
for UK equity markets, although underperformed versus the FTSE All-Share
Index.
* The Company renewed its £30m revolving credit facility with SMBC for a
further year, effective from 22 September 2023.
* Earnings per share fell by 5.9% to 13.14p due to reduced dividends from mining
shares and corporate management pivoting from special dividends towards share
buybacks.
* Six new holding were added to the portfolio including Glencore and XPS
Pensions with seven existing holdings sold. Exposure to property was reduced
whilst exposure to international banks was increased.
* As at 31 August 2023, the Company held £1.56m in cash.
* The Manager will report on the year ended 31 August 2023 and outline views on
the future direction of the portfolio, in a webinar on 20 November 2023 at
2pm.
* The Company's Annual General Meeting (AGM) will be held at 12:30pm on
Wednesday, 13 December 2023 at Schroders' offices.
Chairman's Statement
I am pleased to present the first set of annual results of Schroder Income
Growth Fund plc since becoming Chairman in December 2022. Rising interest
rates and sluggish global growth have made navigating equity markets a
challenging task during the year. Your Manager has not allowed these
distractions to alter their fundamental and well tested investment philosophy.
Revenue and dividends
Despite difficult conditions, your Company was able to increase your dividend
for the 28th year running. Dividends per share for the year of 13.80p
represent a 4.6% increase on the previous year, in accordance with the
Company's objective to increase the dividend in line with inflation over the
longer term. In this respect we define the medium term as five years and the
longer term as ten.
Earnings per share fell by 5.9% to 13.14p. The dividend of 13.80p was 95.2%
covered by earnings. After payment of the fourth interim dividend on
3 November 2023, the revenue reserve will be £7.5 million, representing
10.80p per ordinary share or over nine months of the annual dividend. The
ability to smooth income by judicious use of revenue reserves remains a
particular advantage of investment trusts over open ended funds.
Income earned by the Company came under pressure during the year for two main
reasons. Firstly, lower commodity prices led to a notable reduction in
earnings and dividends from mining shares. Secondly corporate managements
pivoted from special dividends towards share buybacks thus reducing income for
the market and your Company. The reduction in earnings per share masks very
strong dividend growth across many stocks held in the portfolio.
In tandem with much higher inflation the Company was consequently unable to
increase the dividend in real terms this year without drawing heavily on
reserves. Such outcomes have arisen from time to time in the last 28 years of
our history. Despite this, we have continued to fulfil the primary objective
of 'real growth of income' above the levels of inflation over the longer term.
Performance
During a volatile period for UK equity markets the Company returned 4.2% in
net asset value total returns. Share price total returns over the period were
-3.0% as compares to a return of 5.2% for the FTSE All-Share total return
index. A bias towards medium and smaller sized companies, whose returns lagged
those of the larger FTSE100, detracted from short term performance but have
added significant value over the longer term. For more details of performance
please refer to the Manager's Review.
Share price performance and discount to NAV
The Company's share price discount to NAV averaged 1.60% during the year but
widened towards the latter part of the year to end at 8.9%. Whilst the Company
did not buy back any shares during the year, your Board continues to monitor
the discount closely and will take appropriate action as required.
Gearing
The Company has renewed its £30 million revolving credit facility with
Sumitomo Mitsui Banking Corporation Europe Limited ("SMBC") for a further year
effective from 22 September 2023. The average gearing level over the year was
12.01% and at the end of the Company's financial year the level of gearing was
13.7%.
Annual General Meeting
The AGM will be held at 12.30pm on Wednesday, 13 December 2023 at Schroders'
offices at 1 London Wall Place, London EC2Y 5AU. Your Board strongly
encourages shareholders to attend and participate in the meeting. Shareholders
will also be able to hear a presentation from the Manager and light
refreshments will be served. Please note that all voting will be by poll and
we encourage all shareholders to exercise their votes by means of registering
them with the Company's registrar ahead of the meeting, online or by
completing paper proxy forms, and to appoint the Chairman of the meeting as
their proxy. Information on voting can be found in the Notice of Meeting on
pages 75 to 78. In the event that shareholders have a question for your Board,
please email amcompanysecretary@schroders.com in advance of the AGM.
Changes to the Articles of Association
One of the resolutions that will be proposed at the AGM is an amendment to the
Company's Articles of Association (the "Articles") to allow for flexibility to
hold shareholder meetings (wholly or partially) by electronic means. This will
allow your Board to hold hybrid or virtual meetings when in the best interests
of shareholder safety, for example, in the event of a future pandemic. The
amendments will not prevent the Company from holding physical meetings and the
Board's intention and strong preference is always to hold a physical general
meeting when safe and practical to do so.
Other amendments primarily relate to changes in law and regulation and
developments in market practice since the Articles were last adopted. Further
details can be found in the Director's Report and a summary of all the changes
being introduced can be found in the Annual General Meeting - Recommendations
section on pages 72 to 74.
Results Webinar
Please join the Manager for a webinar in which they will report on the year
ended 31 August 2023 and outline their thoughts on the future direction of
the portfolio. The presentation will be followed by a live Q&A session.
The webinar will take place on 20 November 2023 at 2pm. Register for the
event at https://registration.duuzra.com/form/SCF2023.
Outlook
Many of the challenges the Company has faced look set to continue into the
year ahead. Concerns surrounding inflation and interest rate rises have been a
feature of the last year. It seems likely that interest rates will stay higher
for longer to help bring inflation into line with Bank of England's and other
Central Banks' targets. Concerns over fiscal sustainability have broadened
from the UK to the US and Europe leading to falls in government bond markets
and consequent pressure on equities.
The UK market continues to face negative investor sentiment, relative to
Global and European markets, and investor outflows have been a drag on UK
market returns. In addition, geopolitical risks understandably remain front of
mind for investors. Such sentiment also creates significant opportunities for
the Company over the longer term. The de-rating of UK smaller and medium sized
companies is a prime example of this, and it is pleasing to see your Manager
actively taking advantage of the valuation dislocations. Company managements
seem to agree their shares are good value with a shift towards buybacks and
away from dividends.
We cannot ignore the reality that higher interest rates allow savers with an
income target choice from a wider range of investments. The abiding feature of
equities though is that their profits and dividends grow over the long term in
nominal and real terms, a factor sometimes ignored when looking at shorter
term cash rates.
For investors real returns matter particularly in periods of rising inflation
and interest rates. This is why the principal aim of the Company is to
increase income above the rate of inflation over the medium and longer term.
We remain committed to paying an increasing annual dividend and grow income
adjusted for inflation over the long term, and I am pleased that we have been
able to deliver such increases for 28 years. Whilst we utilised the Company's
reserves on this occasion, they remain strong, having added to them in the
previous financial year. We continue to monitor the income from the portfolio
and remain committed to the sustainability of the Company's dividend.
Whilst it is disappointing the Company's performance over the last year has
lagged the broader UK market we are confident in your Manager and their
abilities to deploy their investment approach and exploit the market
inefficiencies to drive returns over the long term. We base such confidence on
the record since Sue Noffke and her team took over managing the portfolio in
2011. In that period the share price total return performance of 126.47% and
the NAV total return of 128.46% are both well ahead of the FTSE All-Share
Index total return of 103.50%. Investment performance will fluctuate with
market cycles but we, as your Board, are focused on ensuring the Company
continues to meet its investment objectives over the long term.
Ewen Cameron Watt
Chairman
25 October 2023
Manager's Review
The net asset value total return in the 12 months to 31 August 2023 was 4.2%.
This compares to 5.2% from the FTSE All Share Total Return Index. The share
price return was -3.0%. The AIC UK Equity Income median return was 4.4% over
the period. It is disappointing to report that your Company's return lagged
these comparators over the 12 month period.
Revenue after tax for your Company fell by 5.9% compared to the same period
last year. The decline was the result of a fall in income received and a rise
in the cost of gearing, as interest costs reflected higher average interest
rates in the latest 12 months compared to those in the prior period.
Total income for the Company fell 3.6% compared to the same period last year,
due to three factors. The principal reason was a halving of total income from
the mining sector. Lower commodity prices, compared to their peak levels of
2021/22, led to a marked reduction in earnings and dividends from the
companies in this sector from the extraordinarily high level of the prior two
years. Ordinary dividends were lower whilst special dividends, which had been
material in the prior period, were absent except for a small special dividend
payment by Glencore. Your Company had less invested in the mining sector
during the last 12 months compared to the prior period, on the belief that we
had passed the peak for the commodity cycle. Whilst the fall in mining sector
income had been anticipated, the Company was not able to offset the full
reduction despite income from banks holdings increasing by over 50% and from
oils by over 30%.
The second reason was the non-payment of a dividend by the insurance company
Direct Line Group due to disappointing operating performance, detailed in the
performance section. Your Company exited its position in the stock.
Lastly some changes to dividend dates for a few holdings meant being paid in
September rather than August this year, resulting in some income being shifted
from this period into the Company's next financial year. Contributions to your
Company's income from special dividends peaked in the 12-month period to
August 2021 and has fallen back, in each of the past two years, to levels that
appear normal in historical terms.
Additional factors weighing on income in the year was the split of
GlaxoSmithKline into two businesses, the biopharma company, rebasing its
dividend to free up funds for investment in research and development.
Dividends were around one quarter below their level of the prior period.
Gambling company 888 did not pay a dividend in the period as the company
prioritised balance sheet leverage resulting from the purchase of William
Hill's UK assets. Additionally, movements in dividend dates impacted three of
the holdings which last year paid dividends in August and this year switched
to September - asset manager M&G, Asian life insurance business
Prudential, and student property company, Empiric.
On the positive side a diverse range of holdings saw dividends grow
significantly, at more than 20%. Oil majors, Shell and BP, continued to build
back their dividend payments to shareholders after the cuts of two years ago.
Asian oriented banks, HSBC and Standard Chartered, saw particularly strong
growth while domestic bank NatWest Group and financial services infrastructure
business TP ICAP also grew robustly. Several of your Company's holdings in the
consumer discretionary area rewarded shareholders with excellent dividend
growth as their businesses flourished following the pandemic disruptions -
Whitbread and Hollywood Bowl saw dividends double and triple respectively,
with strong growth from studios and broadcaster ITV and luxury goods company
Burberry. Double digit dividend increases were received from domestic bank
Lloyds, investment company 3i, financial services provider XPS Pensions, power
utilities companies SSE and Drax and infrastructure and construction company
Balfour Beatty.
Elsewhere more stable companies - information providers RELX and Pearson,
distribution services business Bunzl, retailer Pets at Home, utility company
National Grid, GP patient practice business Assura, defence services business
QinetiQ, engineering group Spectris, and insurance company Legal & General
all increased dividends by mid to high single digits. Companies in the
portfolio with low or no dividend growth are typically in a growth phase such
as pharmaceuticals company AstraZeneca, telecoms company BT and sustainable
technologies company Johnson Matthey, or they have switched preference to
share buy backs over dividends as a way of rewarding shareholders, an example
of this is food retailer Tesco.
A feature of the market, particularly evident in the mining, banks and oils
sectors, has been a trend to favour share buy backs in capital allocation
decisions. With resulting dividend payments spread over reduced share counts,
this approach, all other things equal, improves the sustainability, and
growth, of income for these more cyclical sectors which are particularly
sensitive to the economic cycle. Companies and their boards must determine
whether the price paid for shares in conducting a share buyback offer
attractive returns when benchmarked against other uses of capital, such as
investment in projects, research and development, staff, facilities or
acquisitions. Several other companies across a range of industries are
conducting share buybacks including food retailer Tesco, budget hotel operator
Whitbread, luxury fashion house Burberry, consumer goods company Unilever,
infrastructure and construction firm Balfour Beatty, TP ICAP and information
companies RELX and Pearson. Some 17 of your Company's 43 holdings conducted
share buy backs over the period.
At a market level we believe a total shareholder yield in excess of 6%
represents an attractive level in absolute terms, relative to other equity
markets and other assets - including bonds and cash(1).
(1)Total shareholder yield is the sum of a stock's dividend yield (paid over
previous twelve months less any special dividends) and the percentage of net
share buybacks over the previous twelve months.
Market background
While global economic activity has generally surprised to the upside in 2023,
inflation has been stronger and stickier than had been assumed. Central Banks
around the world continued to raise interest rates during the period which has
pushed up bond yields towards historic averages from the abnormally low levels
seen in the post Global Financial Crisis era. In the second half of the
period, bond and equity markets have been looking for signs that inflation is
under sufficient control for central banks to signal the monetary tightening
is done.
At the start of the period in September 2022 UK gilts suffered an especially
sharp decline, along with Sterling, leading to stresses in the pensions and
fixed income market (LDI) which was driven by the Truss/Kwarteng 'mini
budget'. This resulted in Bank of England intervention, criticism from outside
authorities including the US government and the International Monetary Fund
(IMF), and another change in the UK's Prime Minister and Chancellor. UK bond
and stock markets did eventually calm down after many of the policies
announced by Kwarteng were subsequently reversed by the new Chancellor, Jeremy
Hunt, in his Autumn statement promising the country would tighten its belt in
future.
Further afield China loosened its pandemic restrictions, although the boost to
economic activity was underwhelming and China has fallen short of original
expectations with issues in the real estate sector weighing on activity and
confidence. The collapse of Silicon Valley Bank (SVB) in the US in March
raised concerns particularly over US regional banks that are subject to less
regulation than their global peers. Subsequently in Europe, troubled lender
Credit Suisse was subject to an emergency takeover from rival UBS in a deal
brokered by the Swiss authorities. Enthusiasm for Artificial Intelligence (AI)
drove huge gains in select areas of the US market as investors poured money
into the technology sector.
Portfolio performance
Disappointingly the NAV total return underperformed the FTSE All-Share Index.
Your Company generated a total return of 4.2% over the 12-month period against
5.2% for the FTSE All-Share Index. Portfolio performance was insufficient to
offset the higher cost of gearing in the period. A bias towards medium and
smaller sized companies, whose returns lagged behind those of the larger
FTSE100, detracted from performance.
At a sector level the main driver of negative relative returns was stock
selection in industrials. Your Company did not own the strongly performing
stocks in this sector. Aerospace and defence companies, Rolls Royce, Melrose
and BAE Systems, rose as orderbooks strengthened with a strong post covid
recovery in civil and defence aerospace end markets. CRH benefitted from a
re-rating of the shares in advance of its move to relist on the US stock
exchange, whilst Ashtead continued to experience robust demand for equipment
rental in the USA.
Additionally having more exposure in basic materials than in the benchmark
index detracted from performance with weakness in commodity prices,
particularly precious metals, impacting holdings in miner Anglo American and
sustainability solutions company Johnson Matthey. Anglo American suffered from
a combination of weaker commodity prices and operational difficulties, now
resolved. Your Manager continues to find the diversified exposure to forward
facing metals and valuation of the business attractive. Lower precious metals
prices weighed on Johnson Matthey whilst increased investment across areas of
the group have hit profits. New management has begun to execute its strategy
and your Manager is encouraged that Standard Industries, a US activist
industrial investor, has increased its stake in the business (announced in
September 2023) to 10% from its original 5% stake in April 2022.
Property companies suffered the ructions of bond markets in the autumn of 2022
as yields rose sharply. Assura was the largest individual detractor in the
period. The shares suffered as bond yields rose and the market fretted about
the higher costs of refinancing debt. BT weighed on performance as the market
worried about a range of issues from the near-term cash flow impact of
significant broadband investment, the impact of higher bond yields on the
large company pension scheme and a change in CEO. The incoming CEO has been an
independent director on the board of BT for 2 years and is likely to hit the
ground running. The group has potential levers to demonstrate value and the
valuation of the shares remains compelling. Your Company's position in Direct
Line, now sold, was a significant drag on performance over the period. The
impact of adverse weather and significant claims inflation was detrimental to
profits and capital leading to the company forgoing payment of a dividend
until profits and capital have been restored.
Positioning in the two consumer sector positions contributed positively to
performance by owning less than the market in consumer staples and owning more
than the market in consumer discretionary sectors. Staples companies
underperformed over the period as they experienced an unwind of the pandemic
boost to volumes of cigarettes and alcohol as well as a headwind to profits
from currency moves over the period as the pound staged a part recovery from
the lows of September 2022. Not owning British American Tobacco, Imperial
Brands or international drinks company Diageo, all of which were weak, was
positive for your Company. Consumer discretionary stocks performed strongly as
they recovered from the sharp selloff in the summer and early autumn of 2022
on fears over domestic politics and economic prospects and in the face of a
mounting cost of living crisis and higher costs of servicing mortgages. Many
of your Company's holdings are resilient businesses offering consumers good
value for money and they have gained market share in recent years from weaker
competitors exiting the market. Your Company's material positions in
Whitbread, Hollywood Bowl and Pets at Home, as well as financial investment
group 3i (whose main asset is European value for money retailer Action) all
had strong operating and share price performances.
Five top/bottom relative performers
Weight Relative
Portfolio relative to performance
weight index Impact
(%)(1) (%)(1) (%)(2) (%)(3)
British American Tobacco 0.0 -2.9 -23.3 +0.8
Hollywood Bowl 2.0 2.0 40.2 +0.7
Diageo 0.0 -3.5 -17.0 +0.6
3i Group 1.9 1.2 64.2 +0.6
Whitbread 2.2 1.9 35.5 +0.6
Weight Relative
Portfolio relative to performance
weight index Impact
(%)(1) (%)(1) (%)(2) (%)(3)
Assura 1.7 1.6 -30.6 -0.7
BT Group 2.6 2.2 -23.3 -0.6
Rolls Royce 0.0 -0.5 183.4 -0.5
Direct Line 0.9 0.8 -26.5 -0.5
Johnson Matthey 2.1 1.9 -21.0 -0.5
Source: Schroders, FactSet, for Schroder Income Growth investment portfolio,
12 months to end August 2023.
1 Average weights over the period.
2 Total return of the stock relative to the FTSE All-Share TR over the period.
3 Contribution to performance relative to the FTSE All-Share TR. The
securities shown above are for illustrative purposes only and are not to be
considered a recommendation to buy or sell.
Portfolio activity
Your Manager has continued to review the portfolio for opportunities to add
new investments for attractive medium term total returns, augment existing
holdings at compelling levels or exit those where share prices are fully
valued or where the investment case and conviction has weakened. During the
12-month period, six new holdings were added to your Company and seven were
sold.
At a sector level, the principal changes to your Company were a reduction in
exposure to property and additions to existing positions in banks and
utilities. Your Manager sold out of purpose-built student accommodation (PBSA)
provider Unite Group in September, prior to the significant rise in government
bond (gilt) yields arising from the LDI fallout of the UK's autumn statement,
viewing the valuation of the shares as close to fair value. Positions in
fellow PBSA company, Empiric Student Property, and Assura, were reduced later
in the period. Large diversified international bank HSBC was considered
attractive given the likelihood of higher for longer interest rates, the
stock's low valuation, both relative to history and in absolute terms, the
strong capital position and attractive dividend yield together with additional
capital returns, in the form of share buy backs. Your Company added to its
existing positions in regulated electricity network and renewables company SSE
and to electricity and gas transmission and distribution business National
Grid. Both businesses have attractive growth pathways investing for the energy
transition in renewable electricity in the former and in the electricity grid
in both the UK and USA in the latter. Additionally, their dividend yields, and
future dividend growth are attractive characteristics.
Whilst maintaining your Company's commodity sector exposures overall your
Manager made changes to its preferences within the oil and mining areas. The
Company established a new holding in BP through a part reduction in the
Company's large position in fellow oil major Shell. At its 2022 results, BP
signalled its ambition to grow its dividend, extend share buy backs whilst
accelerating investments into both low carbon energy and fossil fuels, and
reduce debt. Your Manager believes there is scope for Shell to follow a
similar strategy but opted to introduce diversity by owning both companies.
The Company sold iron ore producer Rio Tinto and reduced its position in Anglo
American, subsequently investing the proceeds into a new holding in
diversified miner Glencore. Your Manager is attracted to Glencore's asset mix
of forward-facing minerals which are well positioned to benefit as the world
moves to decarbonise energy and industry. Extensive research has been
conducted on the company, particularly around ethics, governance, climate and
social risks. Additionally, several engagements were conducted to understand
better the business strategy and the firm's commitment to cultural change
associated with the settlement of bribery and corruption fines from the
Department of Justice and Senior Fraud Office authorities. Your Manager
believes that there is sufficient evidence of culture change and commitment to
further improvements which, taken together justifies a position in the
portfolio. Rio Tinto was exited due to a view of the greater risks and costs
associated with the development of a new iron ore facility in Simandou,
Guinea.
Your Company sold out of private assets investment manager Petershill,
reinvesting the proceeds into peer Intermediate Capital, which it believes is
higher quality and more attractively valued. The holding in National Express
(now Mobico) was exited on concerns over availability and cost inflation
pressures of bus drivers, together with a stretched balance sheet. Direct Line
Insurance was sold in two stages, the first following a disappointing trading
update, the remainder following the full year results, and the subsequent
announcement of forgoing a dividend. Part of the proceeds were invested in
topping up its position in global asset management company M&G. Your
Company exited its holding in the mid cap recruitment company SThree, which
focuses on the permanent and flexible contract roles in STEM areas across
Europe and the US, as in the near term it sees more headwinds as the post
Covid hiring has begun to normalise, especially in the company's core areas of
technology and healthcare. Your Company also sold its allocation to consumer
healthcare business Haleon following its split from GlaxoSmithKline as it was
a small holding with a low dividend yield.
Your Manager saw upside potential from ITV's strong cash generation and
longer-term digital initiatives and added a new holding in the media group. A
new position was also established in Victrex, a world leader in high
performance polymer solutions for a range of industrial and medical device
applications. The company has strong pricing power, growth potential and
balance sheet. Food producer Cranswick has industry leading capabilities and
continues to invest at pace into a broad range of growth opportunities for
attractive returns. The shares have derated over the past three years whilst
the business has grown, expanded new facilities (pork and poultry), developed
new capabilities (breaded chicken) and diversified into new areas (pet foods).
A new holding was established in XPS Pensions, a leading pensions consulting
and administration business with significant organic growth opportunities as
it takes share in a large addressable market, the shares offer an attractive
and growing dividend yield.
Your Manager continues to add to existing holdings on share price weakness
when there is conviction in the investment case, in line with the investment
process. Research into other potential investments is conducted continuously,
along with risk/reward assessments versus existing portfolio holdings, in a
healthy competition for capital. Your Manager is genuinely excited about the
companies in the portfolio and see exceptional opportunities within the market
to deliver growth in capital and income.
Outlook
Global economic activity in 2023 has surprised on the upside, leading to
higher and more stubborn inflation than anticipated by both global Central
Banks and markets. However, inflation has moderated from its peak levels.
Higher for longer interest rates are now seen as necessary to bring inflation
down towards the targets and forecasts of Central Banks. Central Banks are
currently at or close to peak rates as the impact of significant rate rises
over the past two years, which always work with a lag, appears to be taking
effect, cooling both activity and inflation. In addition to economic risks,
there are political risks that include a US election and likely a UK election
in 2024, ongoing geopolitical tensions between the USA and China, and
unresolved conflict between Russia and Ukraine. While the risks of a recession
may have diminished, they have not entirely disappeared.
Investing in the UK equity market is not the same as investing in the UK
economy. Listed UK equities include a wide array of international firms, many
of which are global leaders in their fields and derive the majority of their
revenues from overseas. In fact, 77% of FTSE All Share revenues come from
outside the UK. However, the negative narrative surrounding the UK economy has
heavily impacted investor sentiment in the UK equity market, leading to an
acceleration of outflows from the market into mainly global equities and other
asset classes.
Since the Brexit vote in 2016, the UK has gained a reputation as a problematic
economy among major economies, with political instability generating
uncertainty about the nation's future and a lack of confidence from both
domestic and overseas investors. However, the economic performance of the UK
has been better than feared. While Brexit has weakened supply potential, the
UK economy has broadly kept pace with the trends seen across advanced
economies over the past seven years. Recent revisions to UK economic data
challenge the prevailing view that the UK lags behind all other major
industrial economies (the G7) in its economic performance since the Covid
pandemic. UK business investment has also been picking up more recently,
having initially stalled after the UK's vote to leave the EU and the aftermath
of the pandemic. Recent data continues to exceed expectations, and UK
corporates have strong balance sheets and liquidity to increase investment
spending.
Sentiment towards UK equities has remained very negative, with persistent
outflows weighing on market valuations. This has heavily impacted the absolute
and relative valuations of listed UK companies, particularly those in the
small and medium-sized (SMID) sectors. There has been a significant de-rating
of medium and smaller-sized companies over the past two years, both in
absolute terms and relative to the largest FTSE 100 companies, due to selling
pressures from outflows. However, SMID companies have traditionally outgrown
larger companies in the UK and have delivered attractive total returns that
have kept pace with the best returns from global equity markets over the long
term. The convergence of valuations between SMID and large-cap areas presents
a mispriced opportunity.
Negative sentiment has resulted in aggregate valuations of UK equities at
multi-year lows. Total shareholder yields are high in absolute terms, relative
to other equity markets and other assets, including bonds and cash. Companies
across the market, including those in your portfolio, are particularly active
in buying back their own shares, as they see compelling returns from investing
in their businesses at current prices. Small and medium-sized stocks are
subject to ongoing bid activity from overseas and private equity-backed
entities. These low valuations are unlikely to persist indefinitely, and there
is currently a broad set of investment opportunities within the UK equity
market that may well be considered bargains in the future.
Fading political uncertainty, combined with a reassessment of economic
performance on growth and inflation, could support a revision of the negative
narrative on UK risk assets and be one of the catalysts to address the
market's persistent undervaluation. Investing in a market that remains
significantly out of favour with investors provides a plethora of
opportunities across the market spectrum, which should provide patient
investors with highly attractive returns in the medium term.
Sue Noffke
Portfolio Manager
Schroder Investment Management Limited
25 October 2023
Business Review
Principal risks and uncertainties
The Board, through its delegation to the Audit and Risk Committee, is
responsible for the Company's system of risk management and internal control
and for reviewing its effectiveness. The Board has adopted a detailed matrix
of principal risks affecting the Company's business as an investment trust and
has established associated policies and processes designed to manage and,
where possible, mitigate those risks, which are monitored by the Audit and
Risk Committee on an ongoing basis. This system assists the Board in
determining the nature and extent of the risks it is willing to take in
achieving the Company's strategic objectives. Both the principal risks and the
monitoring system are also subject to robust assessment at least annually. The
last assessment took place in October 2023.
During the year, the Board discussed and monitored a number of risks which
could potentially impact the Company's ability to meet its strategic
objectives. The Board received updates from the Manager, Company Secretary and
other service providers on emerging risks that could affect the Company. The
Board was mindful of the following emerging risks during the year; the ongoing
conflict in Ukraine, rising inflation and interest rates, the threat of a UK
recession and increasing energy prices. These risks were not seen as new
principal or emerging risks but those that exacerbate existing risks and have
been incorporated in the market risks section in the table below.
Political risk includes the impact of geopolitical risk, regional tensions,
trade wars and sanctions against companies. The Board continued to monitor the
Russian invasion of Ukraine and its impact on political tensions, supply
chains, interest rates and in particular higher inflation in the UK and
globally. The Board is also mindful that changes to financial and public
policy could impact the Company in the future. Climate change risk includes
how climate change could affect the Company's investments, and potentially
shareholder returns. The Board notes that the Manager has integrated ESG
considerations, including climate change, into the investment process. The
Board will continue to monitor this. The Board considers that both political
risks and climate risks referred to above are covered in the table below under
economic and market risks and ESG and climate change risks respectively.
Although the Board believes that it has a robust framework of internal control
in place this can provide only reasonable, and not absolute, assurance against
material financial misstatement or loss and is designed to manage, not
eliminate, risk. Actions taken by the Board and, where appropriate, its
Committees, to manage and mitigate the Company's principal risks and
uncertainties are set out in the table below.
The "Change" column on the right highlights at a glance the Board's assessment
of any increases or decreases in risk during the year after mitigation and
management. The arrows show the risks as increased, decreased or unchanged.
Risk Mitigation and management Change
Strategic Unchanged
The Company's investment objectives may become out of line with the The Board holds a separate annual strategy meeting to consider the Company's
requirements of investors, resulting in a wide discount of the share price to strategy and performance, the appropriateness of the Company's investment
underlying NAV per share. remit together with opportunities and threats to its business. Share price
relative to NAV per share is monitored at quarterly board meetings and the use
of buy back authorities is considered on a regular basis.
The marketing and distribution activity is actively reviewed and there is
proactive engagement with shareholders.
The Company holds a continuation vote every five years on whether the Company
should continue in its current form. Shareholders will have the opportunity to
vote on the continuation of the Company at its AGM in 2025.
The Company's cost base could become uncompetitive, particularly in light of The ongoing competitiveness of all service provider fees is subject to Unchanged
open- ended alternatives. periodic benchmarking against its competitors.
Annual consideration of management fee levels.
Investment management Unchanged
The Manager's investment strategy, if inappropriate, may result in the Company Review of the Manager's compliance with the agreed investment restrictions,
underperforming the market and/or peer group companies, leading to the Company investment performance and risk against investment objectives and strategy;
and its objectives becoming unattractive to investors. relative performance; the portfolio's risk profile; and appropriate strategies
employed to mitigate any negative impact of substantial changes in markets.
Annual review of the ongoing suitability of the Manager, including resources
and key personnel risk.
Economic and market Increased
The Company is exposed to the effect of market fluctuations due to the nature The risk profile of the portfolio is considered and appropriate strategies to The increased risk reflects the continuing geopolitical concerns globally as
of its business. A significant fall in equity markets could have an adverse mitigate any negative impact of substantial changes in markets are discussed well as higher inflation, interest rate rises and the ongoing economic impact
impact on the market value of the Company's underlying investments. with the Manager. of these. The Board continues to monitor these macro events on a regular
basis.
The portfolio will normally be fairly fully invested and as such will
therefore inevitably be exposed to economic and market risk. Changes in
general economic and market conditions, such as currency exchange rates,
interest rates, inflation rates, industry conditions, tax laws, political
events and trends can substantially and adversely affect the value of
investments. Market risk includes the potential impact of events which are
outside the Company's control, such as pandemics, civil unrest and wars. There are inherent risks involved in stock selection. The Manager is
experienced and has a long track record in successfully investing in public
equity holdings.
The Manager monitors the impact of foreign currency movements on the portfolio
and is able to rebalance the portfolio towards stocks which are less impacted
by changes in foreign currency exchange rates if required.
Custody Unchanged
Safe custody of the Company's assets may be compromised through control The depositary reports on the safe custody of the Company's assets, including
failures by the depositary. cash and portfolio holdings, which are independently reconciled with the
Manager's records.
The review of audited internal controls reports covering custodial
arrangements is undertaken.
An annual report from the depositary on its activities, including matters
arising from custody operations is reviewed.
Gearing Increased
The Company utilises a credit facility. This arrangement increases the funds Gearing is monitored and strict restrictions on borrowings are imposed: The loan was renewed in September 2023 for a further year. Borrowing remains
available for investment through borrowing. While this has the potential to gearing continues to operate within pre-agreed limits so as not to exceed 25% expensive in the current falling market environment However, the Manager
enhance investment returns in rising markets, in falling markets the impact of shareholders' funds. optimises the use of gearing to maximise the return to its equity shareholders
could be detrimental to performance. through appropriate borrowing levels.
Accounting, legal and regulatory Unchanged
In order to continue to qualify as an investment trust, the Company must The confirmation of compliance with relevant laws and regulations by key
comply with the requirements of section 1158 of the Corporation Tax Act 2010. service providers.
Breaches of the UK Listing Rules, the Companies Act or other regulations with Shareholder documents and announcements, including the Company's published
which the Company is required to comply, could lead to a number of detrimental annual report are subject to stringent review processes.
outcomes.
Procedures have been established to safeguard against disclosure of inside
information.
Service provider Unchanged
The Company has no employees and has delegated certain functions to a number Service providers are appointed subject to due diligence processes and with
of service providers, principally the Manager, depositary and registrar. clearly-documented contractual arrangements detailing service expectations.
Failure of controls and poor performance of any service provider could lead to
disruption, reputational damage or loss.
Regular reports are provided by key service providers and the quality of
services provided are monitored.
Audited internal controls reports from key service providers, including
confirmation of business continuity arrangements, are reviewed annually.
Cyber Increased
The Company's service providers are all exposed to the risk of cyber attacks. Service providers report on cyber risk mitigation and management at least The evolving nature of cyber attacks remains prevalent across the industry.
Cyber attacks could lead to loss of personal or confidential information or annually, which includes confirmation of business continuity capability in the While the risk of financial loss is probably small, the risk of reputational
disrupt operations event of a cyber attack. damage and loss of sensitive information continues to be significant.
In addition, the Board received presentations from the Manager, the registrar
and the safekeeping agent and custodian on cyber risk.
ESG and climate change Unchanged
The failure of the Manager to identify ESG issues, including the impact of The Manager's ESG policies, including those relating to climate change, which
climate change, could impact shareholder returns due to valuation issues in have been adopted by the Company, are fully integrated into the investment
investee companies and the Company's shares becoming less attractive to process, as set out in the Strategic Report. Investments are valued at fair
investors. value and reflect market participants' views of ESG and climate change risk on
the Company's portfolio investments. The Manager regularly reports to the
Board on ESG and climate change matters, including engagement with investee
companies. Any investor feedback is also taken into consideration by the
Board.
Risk assessment and internal controls review by the Board
Risk assessment includes consideration of the scope and quality of the systems
of internal control operating within key service providers, and ensures
regular communication of the results of monitoring by such providers to the
Audit and Risk Committee, including the incidence of significant control
failings or weaknesses that have been identified at any time and the extent to
which they have resulted in unforeseen outcomes or contingencies that may have
a material impact on the Company's performance or condition.
No significant control failings or weaknesses were Identified from the Audit
and Risk Committee's ongoing risk assessment which has been in place
throughout the financial year and up to the date of this report. The Board is
satisfied that it has undertaken a detailed review of the risks facing the
Company.
A full analysis of the financial risks facing the Company is set out in note
19 to the accounts on pages 65 to 69.
Viability statement
The Directors have assessed the viability of the Company over a five year
period, taking into account the Company's position at 31 August 2023 and the
potential impacts of the principal risks and uncertainties it faces for the
review period. The Directors have assessed the Company's operational
resilience and they are satisfied that the Company's outsourced service
providers will continue to operate effectively.
A period of five years has been chosen as the Board believes that this
reflects a suitable time horizon for strategic planning, taking into account
the investment policy, liquidity of investments, potential impact of economic
cycles, nature of operating costs, dividends and availability of funding.
In its assessment of the viability of the Company, the Directors have
considered each of the Company's principal risks and uncertainties detailed on
pages 24 to 26 and in particular the impact of a significant fall in UK equity
markets on the value of the Company's investment portfolio. The Directors have
considered the Company's income and expenditure projections and the fact that
the Company's investments comprise readily realisable securities which can be
sold to meet funding requirements if necessary and on that basis consider that
five years is an appropriate time period. The Directors also considered the
beneficial tax treatment the Company is eligible for as an investment trust.
If changes to these taxation arrangements were to be made it would affect the
viability of the Company to act as an effective investment vehicle.
Whilst the Company's Articles of Association require that a proposal for the
continuation of the Company be put forward at the AGM in 2025, the Directors
have no present reason to believe such a resolution will not be passed by
shareholders.
The Directors also considered a stress test in which the Company's NAV dropped
by 50% and noted that, based on the assumptions in the test, the Company would
continue to be viable over a five year period. Based on the Company's
processes for monitoring operating costs, the Board's view that the Manager
has the appropriate depth and quality of resource to achieve superior returns
in the longer term, the portfolio risk profile, limits imposed on gearing,
counterparty exposure, liquidity risk and financial controls, the Directors
have concluded that there is a reasonable expectation that the Company will be
able to continue in operation and meet its liabilities as they fall due over
the five year period of their assessment.
Going concern
The Directors have assessed the principal risks, the impact of the emerging
risks and uncertainties and the matters referred to in the viability
statement. The Board have considered climate risk, political risk and external
market factors in their assessment. Based on the work the Directors have
performed, they have not identified any material uncertainties relating to
events or conditions that, individually or collectively, may cast significant
doubt on the Company's ability to continue as a going concern for the period
assessed by the Directors, being the period to 30 November 2024 which is at
least 12 months from the date the financial statements were authorised for
issue.
By order of the Board
Schroder Investment Management Limited
Company Secretary
25 October 2023
Statement of Directors' Responsibilities in respect of the Annual Report and
Accounts
The Directors are responsible for preparing the annual report, and the
financial statements in accordance with applicable law and regulation.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have prepared the financial
statements in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards and applicable law). 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 the return or loss of the Company for that period. In
preparing these financial statements, the Directors are required to:
- select suitable accounting policies and then apply them
consistently;
- state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and explained in the
financial statements;
- make judgements and accounting estimates that are reasonable
and prudent; and
- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will continue in
business.
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 the financial statements and the Directors'
Remuneration Report comply with the Companies Act 2006.
The Directors are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
The Manager is responsible for the maintenance and integrity of the Company's
webpages. Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation in other
jurisdictions.
The Directors consider that the annual report and accounts, taken as a whole,
are fair, balanced and understandable and provide the information necessary
for shareholders to assess the Company's position and performance, business
model and strategy.
Directors' Statement
Each of the Directors, whose names and functions are listed on pages 30 and
31, confirm that to the best of their knowledge:
- the Company's financial statements, which have been prepared
in accordance with United Kingdom Generally Accepted Accounting Practice
(United Kingdom Accounting Standards, comprising FRS 102 "The Financial
Reporting Standard applicable in the UK and Republic of Ireland" and
applicable law), give a true and fair view of the assets, liabilities,
financial position and 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 Company, together with
a description of the principal risks and uncertainties that it faces.
By order of the Board
Ewen Cameron Watt
Chairman
25 October 2023
Income Statement
for the year ended 31 August 2023
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on investments held at fair value through profit or loss - 326 326 - (16,596) (16,596)
Net foreign currency losses - - - - (1) (1)
Income from investments 10,560 - 10,560 10,954 1,707 12,661
Other interest receivable and similar income 90 - 90 8 - 8
Gross return/(loss) 10,650 326 10,976 10,962 (14,890) (3,928)
Investment management fee (422) (633) (1,055) (527) (527) (1,054)
Administrative expenses (552) - (552) (523) - (523)
Net return/(loss) before finance costs and taxation 9,676 (307) 9,369 9,912 (15,417) (5,505)
Finance costs (546) (821) (1,367) (202) (202) (404)
Net return/(loss) before taxation 9,130 (1,128) 8,002 9,710 (15,619) (5,909)
Taxation - - - (13) - (13)
Net return/(loss) after taxation 9,130 (1,128) 8,002 9,697 (15,619) (5,922)
Return/(loss) per share (pence) 13.14 (1.62) 11.52 13.96 (22.49) (8.53)
The "Total" column of this statement is the profit and loss account of the
Company. The "Revenue" and "Capital" columns represent supplementary
information prepared under guidance issued by The Association of Investment
Companies. The Company has no other items of other comprehensive income, and
therefore the net return after taxation is also the total comprehensive income
for the year.
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the year.
Statement of Changes in Equity
for the year ended 31 August 2023
Called-up Capital Warrant Share
share Share redemption exercise purchase Capital Revenue
capital premium reserve reserve reserve reserves reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
At 31 August 2021 6,946 9,449 2,011 1,596 34,936 153,859 11,118 219,915
Issue of new shares - - - - - - - -
Net (loss)/return on ordinary activities - - - - - (15,619) 9,697 (5,922)
Dividends paid in the year - - - - - - (8,893) (8,893)
At 31 August 2022 6,946 9,449 2,011 1,596 34,936 138,240 11,922 205,100
Net (loss)/return on ordinary activities - - - - - (1,128) 9,130 8,002
Dividends paid in the year - - - - - - (9,170) (9,170)
At 31 August 2023 6,946 9,449 2,011 1,596 34,936 137,112 11,882 203,932
Statement of Financial Position
at 31 August 2023
2023 2022
£'000 £'000
Fixed assets
Investments held at fair value through profit or loss 229,714 230,497
Current assets
Debtors 2,557 2,737
Cash at bank and in hand 1,560 2,305
4,117 5,042
Current liabilities
Creditors: amounts falling due within one year (29,899) (30,439)
Net current liabilities (25,782) (25,397)
Total assets less current liabilities 203,932 205,100
Net assets 203,932 205,100
Capital and reserves
Called-up share capital 6,946 6,946
Share premium 9,449 9,449
Capital redemption reserve 2,011 2,011
Warrant exercise reserve 1,596 1,596
Share purchase reserve 34,936 34,936
Capital reserves 137,112 138,240
Revenue reserve 11,882 11,922
Total equity shareholders' funds 203,932 205,100
Net asset value per share (pence) 293.58 295.26
These accounts were approved and authorised for issue by the Board of
Directors on 25 October 2023 and signed on its behalf by:
Ewen Cameron Watt
Chairman
Notes to the accounts for the year ended 31 August 2023
1. Accounting Policies
(a) Basis of accounting
Schroder Income Growth Fund plc ("the Company") is registered in England and
Wales as a public company limited by shares. The Company's registered office
is 1 London Wall Place, London EC2Y 5AU.
The accounts are prepared in accordance with the Companies Act 2006, United
Kingdom Generally Accepted Accounting Practice ("UK GAAP"), in particular in
accordance with Financial Reporting Standard (FRS) 102 "The Financial
Reporting Standard applicable in the UK and Republic of Ireland", and with the
Statement of Recommended Practice "Financial Statements of Investment Trust
Companies and Venture Capital Trusts" (the "SORP") issued by the Association
of Investment Companies in July 2022. All of the Company's operations are of a
continuing nature.
The accounts have been prepared on a going concern basis under the historical
cost convention, as modified by the revaluation of investments and derivative
financial instruments held at fair value through profit or loss. The directors
believe that the Company has adequate resources to continue operating until 30
November 2024, which is at least 12 months from the date of approval of these
accounts. In forming this opinion, the directors have taken into
consideration: the controls and monitoring processes in place; the Company's
low level of debt and other payables; the low level of operating expenses,
comprising largely variable costs which would reduce pro rata in the event of
a market downturn; and that the Company's assets comprise cash and readily
realisable securities quoted in active markets. The directors have considered
the impact of climate change risk and emerging risk and have concluded that
there was no further impact of climate change to be taken into account as the
investments are valued based on market pricing. Further details of directors'
considerations regarding this are given in the Chairman's Statement, Portfolio
Managers' Review, Going Concern Statement, Viability Statement and under the
Principal Risks and uncertainties in the Strategic Report.
The Company has not presented a statement of cash flows, as it is not required
for an investment trust which meets certain conditions; in particular that
substantially all of the Company's investments are highly liquid and carried
at market value.
The accounts are presented in sterling and amounts have been rounded to the
nearest thousand.
The accounting policies applied to these accounts are consistent with those
applied in the accounts for the year ended 31 August 2022.
Other than the Director's assessment of going concern, no significant
judgements, estimates or assumptions have been required in the preparation of
the accounts for the current or preceding financial year.
(b) Valuation of investments
The Company's investments are classified as fair value through profit and loss
in accordance with FRS 102. Upon initial recognition the investments are
measured at the transaction price, excluding expenses incidental to purchase
which are written off to capital at the time of acquisition. Subsequently the
investments are valued at fair value, which are quoted bid prices for
investments traded in active markets. Fair value gains or losses are
recognised in the capital column of the Income Statement.
All purchases and sales are accounted for on a trade date basis.
(c) Accounting for reserves
Gains and losses on sales of investments, and the management fee or finance
costs allocated to capital, are included in the Income Statement and dealt
with in capital reserves within "Gains and losses on sales of investments".
Increases and decreases in the valuation of investments held at the year end,
are included in the Income Statement and dealt with in capital reserves within
"Investment holding gains and losses".
Foreign exchange gains and losses on cash and deposit balances are included in
the Income Statement and in capital reserves within "Gains and losses on sales
of investments".
(d) Income
Dividends receivable from equity shares are included in revenue on an
ex-dividend basis except where, in the opinion of the Board, the dividend is
capital in nature, in which case it is included in capital.
Dividends from overseas companies are included gross of any withholding tax.
Where the Company has elected to receive scrip dividends in the form of
additional shares rather than in cash, the amount of the cash dividend
foregone is recognised in revenue. Any excess in the value of the shares
received over the amount of the cash dividend is recognised in capital.
Deposit interest outstanding at the year end is calculated and accrued on a
time apportionment basis using market rates of interest.
(e) Expenses
All expenses are accounted for on an accruals basis. Expenses are allocated
wholly to revenue with the following exceptions:
- The management fee is allocated 40% to revenue and 60% to
capital in line with the Board's expected long-term split of revenue and
capital return from the Company's investment portfolio.
- Expenses incidental to the purchase and sale of an investment
are written off to capital at the time of acquisition or disposal. These
expenses are commonly referred to as transaction costs and comprise brokerage
commission and stamp duty. Details of transaction costs are given in note 10
on page 61.
(f) Finance costs
Finance costs, including any premiums payable on settlement or redemption and
direct issue costs, are accounted for on an accruals basis using the effective
interest method in accordance with FRS 102.
Finance costs are allocated 40% to revenue and 60% to capital in line with the
Board's expected long-term split of revenue and capital return from the
Company's investment portfolio.
(g) Financial instruments
Cash at bank and in hand may comprise cash and demand deposits which are
readily convertible to a known amount of cash and are subject to insignificant
risk of changes in value.
Other debtors and creditors do not carry any interest, are short-term in
nature and are accordingly stated at nominal value, with debtors reduced by
appropriate allowances for estimated irrecoverable amounts.
Bank loans and overdrafts are initially measured at transaction price and,
subsequently at amortised cost. They are recorded at the proceeds received net
of direct issue costs.
(h) Taxation
The tax charge for the year is based on amounts expected to be received or
paid.
Deferred tax is accounted for in accordance with FRS 102.
Deferred tax is provided on all timing differences that have originated but
not reversed by the accounting date.
Deferred tax liabilities are recognised for all taxable timing differences but
deferred tax assets are only recognised to the extent that it is probable that
taxable profits will be available against which those timing differences can
be utilised.
Deferred tax is measured at the tax rate which is expected to apply in the
periods in which the timing differences are expected to reverse, based on tax
rates that have been enacted or substantively enacted at the accounting date
and is measured on an undiscounted basis.
(i) Value added tax ("VAT")
Expenses are disclosed inclusive of the related irrecoverable VAT.
(j) Foreign currency
In accordance with FRS 102, the Company is required to determine a functional
currency, being the currency in which the Company predominantly operates. The
Board has determined that sterling is the Company's functional currency and
the presentational currency of the accounts.
Transactions denominated in foreign currencies are converted at actual
exchange rates as at the date of the transaction. Monetary assets, liabilities
and investments held at fair value, denominated in foreign currencies at the
year end are translated at the rates of exchange prevailing at the year end.
(k) Dividends payable
Dividends on equity shares are recognised as a deduction of equity when the
liability to pay the dividends arises.
Consequently, interim dividends are recognised when paid and final dividends
when approved in the general meeting.
2. Gains/(losses) on investments held at fair value through profit
or loss
2023 2022
£'000 £'000
Gains on sales of investments based on historic cost 1,242 6,923
Amounts recognised in investment holding gains and losses in the previous year (2,196) (10,239)
in respect of investments sold in the year
(Losses) on sales of investments based on the carrying value at the previous (954) (3,316)
balance sheet date
Net movement in investment holding gains and losses 1,280 (13,280)
Gains/(losses) on investments held at fair value through profit or loss 326 (16,596)
3. Income
2023 2022
£'000 £'000
Income from investments:
UK dividends 8,763 9,406
UK special dividends 196 496
Overseas dividends 1,538 909
Scrip dividends 63 143
10,560 10,954
Other interest receivable and similar income:
Deposit interest 90 8
90 8
Total income 10,650 10,962
Capital:
Special dividends allocated to capital - 1,707
4. Investment management fee
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Management fee 422 633 1,055 527 527 1,054
The basis for calculating the management fee is set out in the Directors'
Report on page 32.
5. Administrative expenses
2023 2022
£'000 £'000
Administration expenses 374 350
Directors' fees 122 119
Auditor's remuneration for the audit of the Company's financial statements(1) 56 54
552 523
(1)Includes £9,000 (2022: £9,000) irrecoverable VAT.
6. Finance costs
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Interest on bank loans and overdrafts 546 821 1,367 202 202 404
7. Taxation
(a) Analysis of charge in the year:
2023 2022
£'000 £'000
Irrecoverable overseas tax - 13
Tax charge for the year - 13
(b) Factors affecting tax charge for the year
The tax assessed for the year is lower (2022: higher) than the Company's
applicable rate of corporation tax for the year of 21.5% (2022: 19.0%).
The factors affecting the current tax charge for the year are as follows:
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Net gain/return on ordinary activities before taxation 9,130 (1,128) 8,002 9,710 (15,619) (5,909)
Net gain/return on ordinary activities before taxation multiplied by the 1,962 (243) 1,719 1,845 (2,968) (1,123)
Company's applicable rate of corporation tax for the year of 21.5% (2022:
19.0%)
Effects of:
Capital return/loss on investments - (70) (70) - 3,153 3,153
Income not chargeable to corporation tax (2,181) - (2,181) (1,978) (324) (2,302)
Unrelieved expenses 219 313 532 133 139 272
Irrecoverable overseas tax - - - 13 - 13
Tax charge for the year - - - 13 - 13
(c) Deferred taxation
The Company has an unrecognised deferred tax asset of £9,207,000 (2022:
£8,589,000) based on a main rate of corporation tax of 25% (2022: 25%). In
its 2021 budget, the UK government announced that the main rate of corporation
tax (for all profits except ring fence profits) for the fiscal year beginning
on 1 April 2023 would increase to 25%.
The deferred tax asset has arisen due to the cumulative excess of deductible
expenses over taxable income. Given the composition of the Company's
portfolio, it is not likely that this asset will be utilised in the
foreseeable future and therefore no asset has been recognised in the accounts.
Given the Company's status as an Investment Trust Company, no provision has
been made for deferred tax on any capital gains or losses arising on the
revaluation or disposal of investments.
8. Dividends
(a) Dividends paid and declared
2023 2022
£'000 £'000
2022 fourth interim dividend of 5.7p (2021: 5.3p) 3,959 3,682
First interim dividend of 2.5p (2022: 2.5p) 1,737 1,737
Second interim dividend of 2.5p (2022: 2.5p) 1,737 1,737
Third interim dividend of 2.5p (2022: 2.5p) 1,737 1,737
Total dividends paid in the year 9,170 8,893
2023 2022
£'000 £'000
Fourth interim dividend declared of 6.3p (2022: 5.7p) 4,376 3,959
All dividends paid and declared to date have been paid, or will be paid, out
of revenue profits.
(b) Dividends for the purposes of Section 1158 of the Corporation
Tax Act 2010 ("Section 1158")
The requirements of Section 1158 are considered on the basis of dividends
declared in respect of the financial year as shown below. The revenue
available for distribution by way of dividend for the year is £9,130,000
(2022: £9,697,000).
2023 2022
£'000 £'000
First interim dividend of 2.5p (2022: 2.5p) 1,737 1,737
Second interim dividend of 2.5p (2022: 2.5p) 1,737 1,737
Third interim dividend of 2.5p (2022: 2.5p) 1,737 1,737
Fourth interim dividend of 6.3p (2022: 5.3p) 4,376 3,959
Total dividends of 13.80p (2022: 13.20p) per share 9,587 9,170
9. Return/(loss) per share
2023 2022
£'000 £'000
Revenue return 9,130 9,697
Capital loss (1,128) (15,619)
Total return/(loss) 8,002 (5,922)
Weighted average number of ordinary shares in issue during the year 69,463,343 69,463,343
Revenue return per share 13.14p 13.96p
Capital loss per share (1.62)p (22.49)p
Total return/gain per share 11.52p (8.53)p
10. Investments held at fair value through profit or loss
2023 2022
£'000 £'000
Opening book cost 207,135 187,930
Opening investment holding gains 23,362 46,881
Opening fair value 230,497 234,811
Analysis of transactions made during the year
Purchases at cost 57,193 69,738
Sales proceeds (58,302) (57,456)
Gains/(losses) on investments held at fair value 326 (16,596)
Closing fair value 229,714 230,497
Closing book cost 207,268 207,135
Closing investment holding gains 22,446 23,362
Closing fair value 229,714 230,497
All investments are listed on a recognised stock exchange.
Sales proceeds amounting to £58,302,000 (2022: £57,456,000) were receivable
from disposal of investments in the year. The book cost of these investments
when they were purchased was £57,059,000 (2022: £50,533,000). These
investments have been revalued over time and until they were sold any
unrealised gains/losses were included in the fair value of the investments.
The following transaction costs, comprising stamp duty and brokerage
commission were incurred during the year:
2023 2022
£'000 £'000
On acquisitions 236 352
On disposals 30 24
266 376
11. Debtors
2023 2022
£'000 £'000
Dividends and interest receivable 2,537 2,718
Taxation recoverable 5 5
Other debtors 15 14
2,557 2,737
The directors consider that the carrying amount of debtors approximates to
their fair value.
12. Creditors: amounts falling due within one year
2023 2022
£'000 £'000
Bank loan 29,500 30,000
Other creditors and accruals 399 439
29,899 30,439
The bank loan comprises £29.5 million (2022: £30 million) drawn down on the
Company's revolving credit facility with SMBC Bank International plc. The
facility was extended for a further year, effective 22 September 2023.
The facility is unsecured but is subject to covenants and restrictions which
are customary for a facility of this nature, all of which have been complied
with during the year. Further details of this facility are given in note
19(a)(i).
The Directors consider that the carrying amount of creditors falling due
within one year approximates to their fair value.
13. Called-up share capital
2023 2022
£'000 £'000
Ordinary shares allotted, called-up and fully paid:
Ordinary shares of 10p each
Opening balance of 69,463,343 (2022: 69,463,343) shares 6,946 6,946
Total of 69,463,343 (2022: 69,463,343) shares 6,946 6,946
14. Reserves
Year ended 31 August 2023
Capital reserves
Gains and Investment
Capital Warrant Share losses on holding
Share redemption exercise purchase sales of gains and Revenue
premium(1) reserve(1) reserve(1) reserve(2) investments(2) losses(3) reserve(4)
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Opening balance 9,449 2,011 1,596 34,936 114,878 23,362 11,922
Gains on sales of investments based on the carrying value at the previous - - - - (954) - -
balance sheet date
Net movement in investment holding gains and losses - - - - - 1,280 -
Transfer on disposal of investments - - - - 2,196 (2,196) -
Management fee and finance costs allocated to capital - - - - (1,454) - -
Dividends paid - - - - - - (9,170)
Retained revenue for the year - - - - - - 9,130
Closing balance 9,449 2,011 1,596 34,936 114,666 22,446 11,882
Year ended 31 August 2022
Capital reserves
Gains and Investment
Capital Warrant Share losses on holding
Share redemption exercise purchase sales of gains and Revenue
premium(1) reserve(1) reserve(1) reserve(2) investments(2) losses(3) reserve(4)
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Opening balance 9,449 2,011 1,596 34,936 106,978 46,881 11,118
Losses on sales of investments based on the carrying value at the previous - - - - (3,316) - -
balance sheet date
Net movement in investment holding gains and losses - - - - - (13,280) -
Transfer on disposal of investments - - - - 10,239 (10,239) -
Realised exchange gains on currency balances - - - - (1) - -
Management fee and finance costs allocated to capital - - - - (729) - -
Special dividends allocated to capital - - - - 1,707 - -
Dividends paid - - - - - - (8,893)
Retained revenue for the year - - - - - - 9,697
Closing balance 9,449 2,011 1,596 34,936 114,878 23,362 11,922
The Company's Articles of Association permit dividend distributions out of
realised capital profits.
(1)These reserves are not distributable.
(2)These are realised (distributable) capital reserves which may be used to
repurchase the Company's own shares or distributed as dividends.
(3)This reserve comprises holding gains on liquid investments (which may be
deemed to be realised) and other amounts which are unrealised. An analysis has
not been made between those amounts that are realised (and may be distributed
as dividends or used to repurchase the Company's own shares) and those that
are unrealised.
(4)The revenue reserve may distributed as dividends or used to repurchase the
Company's own shares.
15. Net asset value per share
2023 2022
Net assets attributable to shareholders (£'000) 203,932 205,100
Shares in issue at the year end 69,463,343 69,463,343
Net asset value per share 293.58p 295.26p
16. Transactions with the Manager
Under the terms of the AIFM Agreement, the Manager is entitled to receive a
management fee. Details of the basis of the calculation are given in the
Directors' Report on page 32. Any investments in funds managed or advised by
the Manager or any of its associated companies are excluded from the assets
used for the purpose of the calculation and therefore incur no fee.
The management fee payable in respect of the year ended 31 August 2023
amounted to £1,055,000 (2022: £1,054,000) of which £259,000 (2022:
£259,000) was outstanding at the year end.
Effective from 1 March 2021, the Manager is entitled to receive a further fee
to cover administration and company secretarial costs. The secretarial fee
payable for the year amounted to £180,000 (2022: £180,000) including VAT, of
which £45,000 (2022: £45,000) was outstanding at the year end.
No Director of the Company served as a director of any member of the Schroder
Group at any time during the year.
17. Related party transactions
Details of the remuneration payable to Directors are given in the Directors'
Remuneration Report on pages 42 to 44 and details of directors' shareholdings
are given in in the Directors' Remuneration Report on page 44. Details of
transactions with the Manager are given in note 16 above. There have been no
other transactions with related parties during the year (2022: nil).
18. Disclosures regarding financial instruments measured at fair value
The Company's financial instruments within the scope of FRS 102 that are held
at fair value comprise its investment portfolio.
FRS 102 requires financial instruments to be categorised into a hierarchy
consisting of the three levels below.
Level 1 - valued using unadjusted quoted prices in active markets for
identical assets.
Level 2 - valued using observable inputs other than quoted prices included
within Level 1.
Level 3 - valued using inputs that are unobservable.
Details of the valuation techniques used by the Company are given in note
1(b).
At 31 August 2023, all investments in the Company's portfolio are categorised
as Level 1 (2022: same).
19. Financial instruments' exposure to risk and risk management
policies
The Company's objectives are set out on the inside front cover of this report.
In pursuing these objectives, the Company is exposed to a variety of financial
risks that could result in a reduction in the Company's net assets or a
reduction in the profits available for dividends.
These financial risks include market risk (comprising interest rate risk and
other price risk), liquidity risk and credit risk. The directors' policy for
managing these risks is set out below. The Board coordinates the Company's
risk management policy. The Company has no significant direct exposure to
foreign exchange risk on monetary items. The objectives, policies and
processes for managing the risks and the methods used to measure the risks
that are set out below, have not changed from those applying in the
comparative year.
The Company's classes of financial instruments may comprise the following:
- investments in equity shares which are held in accordance with
the Company's investment objectives;
- short-term debtors, creditors and cash arising directly from
its operations; and
- loans drawn on a facility, the purpose of which are to assist
with financing the Company's operations.
(a) 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 two elements: interest rate risk and other price risk. Information
to enable an evaluation of the nature and extent of these two elements of
market risk is given in parts (i) and (ii) of this note, together with
sensitivity analyses where appropriate. The Board reviews and agrees policies
for managing these risks and these policies have remained unchanged from those
applying in the comparative year. The Manager assesses the exposure to market
risk when making each investment decision and monitors the overall level of
market risk on the whole of the investment portfolio on an ongoing basis.
(i) Interest rate risk
Interest rate movements may affect the level of income receivable on cash
deposits and the interest payable on variable rate borrowings when interest
rates are re-set.
Management of interest rate risk
Liquidity and borrowings are managed with the aim of increasing returns to
shareholders. The board's policy is to permit gearing up to 25% where gearing
is defined as borrowings used for investment purposes, less cash, expressed as
a percentage of net assets. Any amount drawn on the facility would normally be
for a one month period, at the end of which the drawdown may be rolled over,
adjusted or repaid, and the interest rate is re-set. These amounts have been
included in the analysis below, although the exposure to interest rate changes
is not significant as any drawings can be repaid at the end of the one month
period under the terms of this flexible arrangement.
The Company has arranged a £5m overdraft facility with HSBC Bank plc, this
was not utilised during the current or comparative year.
Interest rate exposure
The exposure of financial assets and financial liabilities to floating
interest rates, giving cash flow interest rate risk when rates are re-set, is
shown below:
2023 2022
£'000 £'000
Exposure to floating interest rates:
Cash at bank and in hand 1,560 2,305
Creditors falling due within one year: bank loan (29,500) (30,000)
Total exposure (27,940) (27,695)
Cash balances earn interest at a floating rate based on the Sterling Overnight
Index Average (2022: Sterling Overnight Index Average).
The Company extended its £30 million credit facility with SMBC Bank
International plc for a further year, effective from 22 September 2023.
Interest payable is calculated at the aggregate of the compounded daily Risk
Free Rate ("RFR"), plus a margin. Amounts are normally drawn down on the
facility for a one month period, at the end of which it may be rolled over or
adjusted. At 31 August 2023, the Company had drawn down £29.5 million (2022:
£30 million), for a one month period at an interest rate of 5.91% (2022:
2.52%) per annum.
The above year end amounts are not representative of the exposure to interest
rates during the current or comparative year as the level cash balances and
drawings on the facility have fluctuated. The maximum and minimum exposure
during the year was as follows:
2023 2022
£'000 £'000
Minimum debit interest rate exposure during the year - net debt (21,727) (17,972)
Maximum debit interest rate exposure during the year - net debt (27,940) (27,695)
Interest rate sensitivity
The following table illustrates the sensitivity of the return after taxation
for the year and net assets to a 1.5% (2022: 1.5%) increase or decrease in
interest rates in regards to the Company's monetary financial assets and
financial liabilities. This level of change is considered to be a reasonable
illustration based on observation of current market conditions. The
sensitivity analysis is based on the Company's monetary financial instruments
held at the balance sheet date which are exposed to interest rate movements,
with all other variables held constant.
2023 2022
1.5% increase 1.5% decrease 1.5% increase 1.5% decrease
in rate in rate in rate in rate
£'000 £'000 £'000 £'000
Income statement - return after taxation
Revenue return (154) 154 (145) 145
Capital return (266) 266 (270) 270
Total return after taxation (420) 420 (415) 415
Net assets (420) 420 (415) 415
Given the increase in the UK interest rates, the interest rate sensitivity has
been updated to 1.5%. The prior year disclosure has been updated to 1.5% to
show a direct comparison in the sensitivity. In the prior year report, the
sensitivity was calculated using 1.0%, which was representative of the market
at 31 August 2022. As disclosed in the prior year annual report, an increase
of 1.0% reduced total return after taxation by £277,000 (a decrease of 1.0%
had an equal and opposite effect).
In the opinion of the directors, this sensitivity analysis may not be
representative of the Company's future exposure to interest rate changes as
the level of cash balances and drawings on the facility will fluctuate.
(ii) Other price risk
Market price risk includes changes in market prices, other than those arising
from interest rate risk, which may affect the value of investments.
Management of market price risk
The Board meets on at least four occasions each year to consider the asset
allocation of the portfolio and the risk associated with particular industry
sectors. The investment management team has responsibility for monitoring the
portfolio, which is selected in accordance with the Company's investment
objective and seeks to ensure that individual stocks meet an acceptable
risk/reward profile.
Market price risk exposure
The Company's total exposure to changes in market prices at 31 August
comprised the following:
2023 2022
£'000 £'000
Investments held at fair value through profit or loss 229,714 230,497
The above data is broadly representative of the exposure to market price risk
during the year.
Concentration of exposure to market price risk
An analysis of the Company's investments is given on page 14. The portfolio
principally comprises securities of companies listed on the London Stock
Exchange and accordingly there is a concentration of exposure to economic
conditions in the UK. However it should be noted that many of these companies
conduct much of their business overseas. Furthermore, up to 20% of the
portfolio may be listed on overseas stock exchanges.
Market price risk sensitivity
The following table illustrates the sensitivity of the return after taxation
for the year and net assets to an increase or decrease of 20% (2022: 20%) in
the fair values of the Company's investments. This level of change is
considered to be a reasonable illustration based on observation of current
market conditions. The sensitivity analysis is based on the Company's exposure
through equity investments and includes the impact on the management fee but
assumes that all other variables are held constant.
2023 2022
20% increase 20% decrease 20% increase 20% decrease
in fair value in fair value in fair value in fair value
£'000 £'000 £'000 £'000
Income statement - return after taxation
Revenue return (83) 83 (104) 104
Capital return 45,819 (45,819) 45,996 (45,996)
Total return after taxation and net assets 45,736 (45,736) 45,892 (45,892)
Change in net asset value 22.4% (22.4%) 22.4% (22.4%)
(b) Liquidity risk
This is the risk that the Company will encounter difficulty in meeting its
obligations associated with financial liabilities that are settled by
delivering cash or another financial asset.
Management of liquidity risk
Liquidity risk is not significant as the Company's assets comprise mainly
readily realisable securities, which can be sold to meet funding requirements
if necessary. The facility is also available to provide liquidity at short
notice. The Board's policy is for the Company to remain fully invested in
normal market conditions. The facility may be used to manage working capital
requirements and to gear the Company as appropriate.
Liquidity risk exposure
Contractual maturities of financial liabilities, based on the earliest date on
which payment can be required are as follows:
2023 2022
Three months Three months
or less Total or less Total
£'000 £'000 £'000 £'000
Creditors: amounts falling due within one year
Securities purchased awaiting settlement - - - -
Other creditors and accruals 399 399 424 424
Bank loan - including interest 29,645 29,645 30,063 30,063
30,044 30,044 30,487 30,487
(c) Credit risk
Credit risk is the risk that the failure of the counterparty to a transaction
to discharge its obligations under that transaction could result in loss to
the Company.
Management of credit risk
This risk is not significant and is managed as follows:
Portfolio dealing
The Company invests in markets that operate a "Delivery Versus Payment"
settlement process which mitigates the risk of losing the principal of a trade
during settlement. The Manager continuously monitors dealing activity to
ensure best execution, which involves measuring various indicators including
the quality of trade settlement and incidence of failed trades. Counterparties
must be pre-approved by the Manager's credit committee.
Exposure to the Custodian
The custodian of the Company's assets is HSBC Bank plc which has long-term
Credit Ratings of AA- with Fitch and Aa3 with Moody's. The Company's
investments are held in accounts which are segregated from the custodian's own
trading assets. If the custodian were to become insolvent, the Company's right
of ownership of its investments is clear and they are therefore protected.
However the Company's cash balances are all deposited with the custodian as
banker and held on the custodian's balance sheet. Accordingly, in accordance
with usual banking practice, the Company will rank as a general creditor to
the custodian in respect of cash balances.
Credit risk exposure
The following amounts shown in the Statement of Financial Position, represent
the maximum exposure to credit risk at the current and comparative year end.
2023 2022
Balance Maximum Balance Maximum
sheet exposure sheet exposure
£'000 £'000 £'000 £'000
Fixed assets
Investments held at fair value through profit or loss 229,714 - 230,497 -
Current assets
Debtors - dividends and interest receivable and other debtors 2,557 2,557 2,737 2,737
Cash at bank and in hand 1,560 1,560 2,305 2,305
233,831 4,117 235,539 5,042
No debtors are past their due date and none have been written down or deemed
to be impaired.
(d) Fair values of financial assets and financial liabilities
All financial assets and liabilities are either carried at fair value or the
amount in the Statement of Financial Position is a reasonable approximation of
fair value.
20. Capital management policies and procedures
The Company's objectives, policies and processes for managing capital are
unchanged from the preceding year.
The Company's debt and capital structure comprises the following:
2023 2022
£'000 £'000
Debt
Bank loan 29,500 30,000
Equity
Called-up share capital 6,946 6,946
Reserves 196,986 198,154
203,932 205,100
Total debt and equity 233,432 235,100
The Company's capital management objectives are to ensure that it will
continue as a going concern and to maximise the return to its equity
shareholders through an appropriate level of gearing.
The Board's policy is to permit gearing up to 25% where gearing is defined as
borrowings used for investment purposes, less cash, expressed as a percentage
of net assets.
2023 2022
£'000 £'000
Borrowings used for investment purposes, less cash 27,940 27,695
Net assets 203,932 205,100
Gearing 13.7% 13.5%
The Board, with the assistance of the Manager, 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
Manager's views on the market;
- the need to buy back the Company's own shares for cancellation
or to hold in treasury, which takes into account the share price discount;
- the opportunities for issues of new shares; and
- the amount of dividend to be paid, in excess of that which is
required to be distributed.
Status of announcement
2022 Financial Information
The figures and financial information for 2022 are extracted from the
published Annual Report and Accounts for the year ended 31 August 2022 and do
not constitute the statutory accounts for that year. The 2022 Annual Report
and Accounts have been delivered to the Registrar of Companies and included
the Report of the Independent Auditors which was unqualified and did not
contain a statement under either section 498(2) or section 498(3) of the
Companies Act 2006.
2023 Financial Information
The figures and financial information for 2023 are extracted from the Annual
Report and Accounts for the year ended 31 August 2023 and do not constitute
the statutory accounts for the year. The 2023 Annual Report and Accounts
include the Report of the Independent Auditors which is unqualified and does
not contain a statement under either section 498(2) or section 498(3) of the
Companies Act 2006. The 2023 Annual Report and Accounts will be delivered to
the Registrar of Companies in due course.
Neither the contents of the Company's webpages nor the contents of any website
accessible from hyperlinks on the Company's webpages (or any other website) is
incorporated into, or forms part of, this announcement.
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