Annual Financial Report
25/05/2023 07:00
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RNS Number : 5565A Shires Income PLC 25 May 2023
SHIRES INCOME PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MARCH 2023
Legal Entity Identifier (LEI): 549300HVCIHNQNZAYA89
The Company
Shires Income PLC (the "Company") is an investment trust. Its Ordinary shares
are listed on the premium segment of the London Stock Exchange.
Investment Objective
The Company's investment objective is to provide shareholders with a high
level of income, together with the potential for growth of both income and
capital from a diversified portfolio substantially invested in UK equities but
also in preference shares, convertibles and other fixed income securities.
Benchmark
The Company's benchmark is the FTSE All-Share Index (total return).
Website
Up to date information can be found on the Company's website:
www.shiresincome.co.uk
COMPANY OVERVIEW - FINANCIAL HIGHLIGHTS
Net asset value per Ordinary share total return(A) Share price total return(A)
-2.2% -5.5%
2022 +11.4% 2022 +18.4%
Benchmark index total return Earnings per share (revenue)
+2.9% 14.83p
2022 +13.0% 2022 14.21p
Dividends per Ordinary share Dividend yield(A)
14.20p 5.7%
2022 13.80p 2022 4.9%
(A) Alternative Performance Measure.
For further information, please contact:
Luke Mason (0207 463 5971)
Stephanie Hocking (0207 463 6403)
abrdn Fund Managers Limited
Financial Calendar and Highlights
Financial Calendar
Online Shareholder Presentation 22 June 2023
Annual General Meeting 6 July 2023
Expected payment dates of quarterly dividends 28 July 2023
27 October 2023
26 January 2024
26 April 2024
Half year end 30 September 2023
Expected announcement of results for the six months ending 30 September 2023 November 2023
Financial year end 31 March 2024
Expected announcement of results for year ending May 2024
31 March 2024
Highlights
31 March 2023 31 March 2022
Total assets £98,864,000 £104,819,000
Shareholders' funds £79,913,000 £85,819,000
Market capitalisation(A) £77,411,000 £85,987,000
Net asset value per Ordinary share 257.92p 278.29p
Share price 250.00p 279.00p
(Discount)/premium to NAV (cum-income)(C) (3.1)% 0.3%
Net gearing(C) 22.2% 20.4%
Dividend and earnings
Revenue return per share(D) 14.83p 14.21p
Dividend per share(E) 14.20p 13.80p
Dividend cover(C) 1.04 1.03
Revenue reserves(F) £7,040,000 £6,705,000
Dividend yield(C) 5.7% 4.9%
Operating costs
Ongoing charges ratio (excluding look-through costs)(C) 1.03% 0.98%
Ongoing charges ratio (including look-through costs)(C) 1.17% 1.14%
(A) Represents the number of Ordinary shares in issue in the Company
multiplied by the Company's share price.
(B) Net asset value per Ordinary share is calculated after the repayment of
the capital paid up on Cumulative Preference shares (see note 16).
(C) Considered to be an Alternative Performance Measure.
(D) Measures the revenue earnings for the year divided by the weighted average
number of Ordinary shares in issue (see Statement of Comprehensive Income).
(E) The figures for dividend per share reflect the years in which they were
earned (see note 9).
(F) The revenue reserve figure does not take account of payment of the third
interim or final dividend amounting to £2,415,000 (2022 - £2,281,000)
combined.
Chairman's Statement
The year to 31 March 2023 proved to be another challenging year on many
levels. The conflict between Russia and Ukraine continued to impact the
geo-political landscape, and the cost of living crisis deepened, with higher
food and energy costs, in addition to rising inflation, higher interest rates
and UK Government instability. Despite the impact of these factors on global
equity markets, the UK market showed some resilience, with the FTSE All-Share
Index returning 2.9% for the year.
Performance
Against this challenging economic backdrop, the Company's NAV performance for the year, on a total return basis, was -2.2%, an under performance of 5.1% compared to the FTSE All-Share Index benchmark return.
The Company's share price performance was also behind the benchmark, with a total return of -5.5% for the year.
While we did see strong performance from a number of holdings in the equity
portfolio, the main detractors from performance were the preference share
portfolio and the Company's holding in abrdn Smaller Companies Income Trust
plc ("ASCIT"). I am pleased to report, however, that the portfolio continues
to produce a high level of income, with the Company's revenue return per share
exceeding returns of previous years.
Full details of performance for the year and portfolio activity are contained
in the Investment Manager's Review.
Earnings and Dividends
The Company's revenue earnings per share for the year were 14.83p, compared to
14.21p last year, an increase of 4.4%, which is illustrative of the strong
recovery we have continued to see since the declines experienced during the
Covid-19 pandemic.
The Company has paid three interim dividends of 3.20p per Ordinary share
(2022: 3.20p). The Board is proposing a final dividend of 4.60p per Ordinary
share (2022: 4.20p), which will be paid on 28 July 2023 to shareholders on the
register on 7 July 2023. This final dividend brings total Ordinary share
dividends for the year to 14.20p per share, an increase of 2.9% compared to
last year. Based on the year end share price of 250p, this equates to a
dividend yield of 5.7%.
With the total dividends for the year covered by earnings, revenue reserves
will stand at 1.05 times the current annual Ordinary share dividend cost. This
allows the Company to support future dividend payments in times of economic
difficulty. In addition, the Company also has the flexibility to pay dividends
from its realised capital reserves, although the Board has no current
intention of making use of this flexibility. Subject to unforeseen
circumstances, it is proposed to continue during this financial year to pay
three quarterly interim dividends of 3.20p each per Ordinary share and, as in
previous years, the Board will decide on next year's final dividend having
reviewed the full year results, taking into account the general outlook for
the portfolio's investment income at that time.
Premium/(Discount)
At the end of the year, the Company's Ordinary shares were trading at a
discount of 3.1% to the NAV per share (including income) compared to a premium
of 0.3% at the end of the previous year. The average discount for the year was
1.0%. Despite ending the year on a small discount, the Company did enjoy
periods where its shares traded at a premium to NAV and, as a result, in
response to investor demand, we were able to issue 145,000 new Ordinary shares
on a non-dilutive basis.
The Board and Manager monitor the premium/discount of the Company's shares on
an ongoing basis and the Board will seek to renew the appropriate share
issuance and share buyback authorities at the Annual General Meeting.
Gearing
The Company's gearing level (net of cash) was 22.2% as at 31 March 2023,
compared to 20.4% at the end of the previous year, with the difference due to
a lower amount of cash being held at the year end and a slightly lower net
asset value compared to last year.
In May 2022, the Board made the decision, given the uncertain interest rate
outlook, to renew the £20 million loan facility held with Scotia Bank Europe
PLC, ahead of its maturity date of September 2022, which we believe proved to
be the correct approach to take as interest rates continued to rise.
A new £20 million loan facility was therefore entered into with The Royal
Bank of Scotland International Limited, London Branch, on 3 May 2022 for a
five-year tenure.
£10 million of the new loan facility was drawn down for five years and fixed
at an all-in interest rate of 3.903%. £9 million of the facility was drawn
down on a short-term basis and can be repaid without incurring any financial
penalties. The proceeds of the new loan were used to repay and cancel in full
the Company's previous loan facilities with Scotia Bank Europe PLC. The
Company's total borrowings were therefore unchanged following the
re-financing.
Given the economic volatility we have seen since that time, the Board is
pleased to have renewed the Company's debt early and for a longer tenure, in
order to provide certainty over the funding cost in such an uncertain
environment. As in previous years, the Board takes the view that the
borrowings are notionally invested in the less volatile fixed income part of
the portfolio which generates a high level of income, giving the Investment
Manager greater ability to invest in a range of equity stocks with various
yields. The Board believes that this combination should help enable the
Company to achieve a high and potentially growing level of dividend, but also
deliver some capital appreciation to shareholders.
Board Composition
Following the appointment of Helen Sinclair as a Director in February 2022 and
the retirement of Marian Glen at the AGM in July 2022, the Board is comprised
of four independent Directors, two women and two men, all with a wide range of
skills and relevant experience to oversee the Company's affairs. The Board
regularly reviews its composition, with succession planning an important part
of its deliberations. In accordance with the AIC Code of Corporate Governance,
all Directors are standing for re-appointment at this year's AGM.
Environmental, Social and Governance ("ESG")
Shareholders will note in this Annual Report that there is a wealth of
information provided by the Investment Manager on its ESG approach, which
continues to be a fundamental part of its investment process.
The Board endorses the level of focus the Investment Manager places on ESG,
which entails significant levels of engagement with company management focused
upon both the reduction of risk but also potentially enhanced returns.
abrdn Smaller Companies Income Trust plc ("ASCIT)
As I have mentioned above, detractors from performance over the year included
the Company's holding in ASCIT. This holding represented 7.8% of the portfolio
at the year end and therefore its performance compared against the FTSE
All-Share Index had a meaningful impact on the Company's own performance for
the year. Shires, as a 13.6% shareholder in ASCIT, has been discussing for
some time whether Shires' smaller company exposure could be delivered more
efficiently and with less volatility.
In October 2022, the Board and its adviser, JPMorgan Cazenove, and after
consultation with abrdn, put forward in their opinion what was a constructive
and compelling proposal to the board of ASCIT and its advisers. This proposal
envisaged consolidating the companies whilst maintaining small cap exposure
and concentrating on providing above average income from a diversified
portfolio of UK quoted securities, which is in line with Shires' existing
investment objective.
Following this approach, the Board of ASCIT announced on 13 February 2023 that
it was conducting a strategic review and we were pleased to note that the
ASCIT discount partially narrowed following this announcement. We look forward
to hearing the outcome of the review shortly and to a resolution of the
current uncertainty surrounding that company, with an outcome that is
favourable to all shareholders.
Annual General Meeting ("AGM") and Online Shareholder Presentation
The Company's AGM will take place at 12 noon on Thursday 6 July 2023 at
Wallacespace Spitalfields, 15-25 Artillery Lane, London E1 7HA, and will be
followed by lunch. As well as the formal business of the meeting, the
Investment Manager will provide a short presentation on the Company and there
will be an opportunity for shareholders to ask questions of the Manager and
the Board. We do hope you are able to join us.
Irrespective of whether you are able to attend, we do encourage all
shareholders to complete and return the Proxy Form enclosed with the Annual
Report to ensure that your votes are represented at the meeting. If you hold
your shares in the Company via a share plan or a platform and would like to
attend and / or vote at the AGM, then you will need to make arrangements with
the administrator of your share plan or platform. For this purpose, investors
who hold their shares in the Company via the abrdn Investment Plan for
Children, Share Plan or ISA will find a Letter of Direction enclosed.
Shareholders are encouraged to complete and return their Proxy Forms / Letters
of Direction in accordance with the instructions.
Given the popularity of our Online Shareholder Presentation in previous years,
we have decided to hold another online presentation this year, in addition to
the AGM. This will be held at 10.00am on Thursday 22 June 2023. A presentation
will be given by the Investment Manager, and those in attendance will be given
the opportunity to ask questions of the Chairman and Investment Manager both
during the presentation and in advance.
Full details on how to register for the event can be found at:
bit.ly/Shires-Income-PLC (http://bit.ly/Shires-Income-PLC)
Details are also contained on the Company's website. Should you be unable to
attend the online event, it will be made available on the Company's website
shortly afterwards. For those wishing to submit questions in advance, you can
do this at the following email address: shires.income@abrdn.com
(mailto:shires.income@abrdn.com)
Outlook
With the challenges I outlined in my opening remarks still very much present,
and likely to continue for some time, the Board is pleased to see that the
Company's equity portfolio performance on the whole remains robust and, as
outlined in the Investment Manager's Review, given greater stability in fixed
income markets, we expect the preference share portfolio to show some recovery
in the coming months while still continuing to provide a reliable and high
source of income.
In this environment, good stock selection is key, together with a focus on
maintaining the Company's income objective, both of which the Investment
Manager has a strong track-record of delivering. The Board remains confident
that the diverse sources of income in the portfolio and the flexibility to
invest in both growth and value equities will continue to deliver the income
and capital growth objectives of the Company over the longer term.
Robert Talbut
Chairman
24 May 2023
Overview of Strategy
Business Model
The business of the Company is that of an investment company which qualifies
as an investment trust for tax purposes. The Directors do not envisage any
change in this activity in the foreseeable future.
Investment Objective
The Company's investment objective is to provide shareholders with a high
level of income, together with the potential for growth of both income and
capital, from a diversified portfolio substantially invested in UK equities
but also in preference shares, convertibles and other fixed income securities.
Investment Policy
In pursuit of its objective, the Company's policy is to invest principally in
the ordinary shares of UK quoted companies, and in preference shares,
convertibles and other fixed income securities with above average yields.
The Company generates income primarily from ordinary shares, preference
shares, convertibles and other fixed income securities. It also generates
income by writing call and put options on shares owned, or shares the Company
would like to own. By doing so, the Company generates premium income.
Risk Diversification
In order to ensure adequate diversification, the Board sets absolute limits on
maximum holdings and exposures in the portfolio from time to time. These
limits do not form part of the investment policy and can be changed or
overridden with Board approval. The current limits are disclosed under the
heading "Board Investment Limits" below.
Gearing
The Directors are responsible for determining the gearing strategy of the
Company. Gearing is used with the intention of enhancing long-term returns.
Gearing is subject to a maximum equity gearing level of 35% of net assets at
the time of drawdown. Any borrowing, except for short-term liquidity
purposes, is used for investment purposes.
Delivering the Investment Policy
The Directors are responsible for determining the investment objective and
investment policy of the Company, although any significant changes are
required to be approved by shareholders at a general meeting. Day-to-day
management of the Company's assets has been delegated, via the Alternative
Investment Fund Manager (the "AIFM"), to the Investment Manager.
Board Investment Limits
In order to ensure adequate diversification, the Board has set absolute limits
on maximum holdings and exposures in the portfolio at the time of acquisition.
These can only be overridden with Board approval. The current limits include
the following:
- Maximum 10% of total assets invested in the equity securities of
overseas companies;
- Maximum 7.5% of total assets invested in the securities of one
company (excluding abrdn Smaller Companies Income Trust plc);
- Maximum 5% of quoted investee company's ordinary shares
(excluding abrdn Smaller Companies Income Trust plc); and
- Maximum 10% of total assets invested directly in AIM holdings.
The Board assesses on a regular basis with the Manager the applicability of
these investment limits, the use of gearing and risk diversification, whilst
aiming to meet the overall investment objectives of the Company.
Preference Shares
The Company also invests in preference shares, primarily to enhance the income
generation of the Company. The majority of these investments are in large
financial institutions. Issue sizes are normally relatively small and the
underlying securities are relatively illiquid by comparison with the equity
component of the portfolio. A maximum of 7.5% of total assets may be invested
in the preference shares of any one company. In addition, the Company cannot
hold more than 10% of any investee company's preference shares.
Traded Options Contracts
The Company enters into traded option contracts, primarily to enhance the
income generation of the Company. The risks associated with these option
contracts are managed through the principal guidelines below, which operated
in the year under review:
- Call options written to be covered by stock;
- Put options written to be covered by net current
assets/borrowing facilities;
- Call options not to be written on more than 10% of the equity
portfolio; and
- Put options not to be written on more than 10% of the equity
portfolio.
Benchmark
In assessing its performance, the Company compares its returns with the
returns of the FTSE All-Share Index (total return).
Promoting the Success of the Company
The Board's statement below describes how the Directors have discharged their
duties and responsibilities over the course of the financial year under
section 172 (1) of the Companies Act 2006 and how they have promoted the
success of the Company for the benefit of the members as a whole.
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 shown in the table below:
KPI Description
Performance against benchmark index The Board measures performance over the medium to long-term, on a total return
basis against the benchmark index - the FTSE All-Share Index (total return).
Share price performance The Board monitors the performance of the Company's share price on a total
return basis.
Premium/discount to NAV The premium/discount relative to the NAV per share represented by the share
price is closely monitored by the Board. The Board also monitors trading
activity in the Company's shares on a regular basis.
Revenue return per Ordinary share The Board monitors the Company's net revenue return (earnings per share).
Dividend per share The Board monitors the Company's annual dividends per Ordinary share and the
extent to which dividends are covered by current net revenue and revenue
reserves.
Ongoing charges The Board monitors the Company's operating costs carefully. Some of the
operating costs are fixed whilst the most significant cost, being the
investment management fee, is variable depending on the net asset value of the
Company.
Principal and Emerging Risks and Uncertainties
The Board carries out a regular review of the risk environment in which the
Company operates, changes to that environment and to individual risks. The
Board also identifies emerging risks which might impact on the Company. During
the year, the most significant risks were inflation and increasing interest
rates and the resultant volatility that this created in global stock markets.
In addition, the conflict in Ukraine has created geo-political uncertainty
which has further increased market risk premia and volatility.
There are a number of other risks which, if realised, could have a material
adverse effect on the Company and its financial condition, performance and
prospects. The Board has carried out a robust assessment of the Company's
principal and emerging risks, which include those that would threaten its
business model, future performance, solvency, liquidity or reputation and has
endeavoured to find means of mitigating those risks, wherever practical.
The principal risks and uncertainties faced by the Company are reviewed by the
Audit Committee in the form of a risk matrix. The assessment of risks and
their mitigation continues to be an area of significant focus for the Audit
Committee.
The Board also regularly identifies and evaluates newly emerging risks, for
example the impact of climate change, and monitors these closely, as
appropriate for the Company. The impact of climate change is not considered to
be material to the financial statements as the entire investment portfolio
consists of listed equities and preference shares and the market price is
expected to reflect market participants' view of climate change risk.
The principal risks and uncertainties facing the Company at the current time,
together with a description of the mitigating actions the Board has taken, are
set out in the table below.
The principal risks associated with an investment in the Company's shares are
published monthly in the Company's factsheet and they can be found in the
pre-investment disclosure document ("PIDD") published by the Manager, both of
which are available on the Company's website.
Description Mitigating Actions
Strategic objectives and investment policy - a lack of demand for the The Board formally reviews the Company's objectives and strategies for
Company's shares due to its objectives becoming unattractive to investors, or achieving them on an annual basis, or more regularly if appropriate.
a negative perception of investment trusts, could result in a widening of the
discount of the share price to its underlying NAV and a fall in the value of The Board is cognisant of the importance of regular communication with
its shares. shareholders and knowledge of what encourages investment in the Company.
Directors attend meetings with shareholders where practical, host the Annual
General Meeting as a forum for shareholder contact and regularly discuss
shareholder investment behaviour with the Manager, including trends on
investment platforms and shareholder themes. The Board reviews shareholder
feedback through reports provided by the Manager's Investor Relations team and
also receives feedback from the Company's Stockbroker.
The Board and Manager keep the level of discount under constant review, as
well as changes to the Company's shareholder register.
Investment performance - The Board meets the Manager on a regular basis and keeps investment
performance under close review. This includes performance attribution by
performance of the portfolio when measured against sector and stock, and liquidity analysis, as well as the degree of
the benchmark. diversification in the portfolio and income sustainability through examination
of forward income projections.
Representatives of the Investment Manager attend all Board meetings and a
detailed formal appraisal of the abrdn Group is carried out annually by the
Management Engagement Committee.
The Board sets, and monitors, the investment restrictions and guidelines, and
receives regular reports which include performance reporting on the
implementation of the investment policy, the investment process, risk
management and application of the guidelines.
Investment risk within the portfolio is managed in four ways:
- Adherence by the Investment Manager to the investment
process in order to minimise investments in poor quality companies and/or
overpaying for investments.
- Diversification of investment - seeking to invest in a
wide variety of companies with strong balance sheets and the earnings power to
pay increasing dividends. In addition, investments are diversified by sector
in order to reduce the risk of a single large exposure. The Company invests
mainly in equities and preference shares.
- Adherence by the Investment Manager to the investment
limits set by the Board.
- Examination of changes to the portfolio and emerging
investment themes, including relative to benchmark constituents.
Investment in UK smaller companies
In order to gain exposure to a higher growth sector, rather than holding a
number of smaller companies' shares, the Company invests indirectly into this
part of the equity market through one holding in abrdn Smaller Companies
Income Trust plc, which is also managed by the Manager. Given its size
(representing 7.8% of the Company's portfolio as at 31 March 2023) the
Directors regularly review this holding, including its liquidity. All of the
directors of abrdn Smaller Companies Income Trust plc are independent of
Shires Income plc. The Manager does not charge any management fee in respect
of the amount of the Company's assets attributable to this holding.
Investment in preference shares
The Company has longstanding holdings in a number of preference shares with no
fixed redemption dates (representing 21.6% of the Company's portfolio as at 31
March 2023). The Directors regularly review these investments, which are held
primarily to enhance the income generation of the Company. By their nature,
their price movements will be subject to a number of factors, including
prevailing and changing interest rates, and, in normal market conditions, will
tend to respond less to pricing movements in equity markets. Issue sizes of
these preference shares are normally relatively small and with associated low
secondary market liquidity by comparison with the equity component of the
portfolio. The Board also considers the long-term nature of these investments
and the impact of any potential changes on duration on the portfolio and its
returns, as well as the sustainability of the dividends paid.
Failure to maintain, and grow the dividend over the longer term - The Directors review detailed income forecasts at each Board meeting and
discuss the Investment Manager's outlook for dividends. The Company has
the level of the Company's dividends and future dividend growth will depend on revenue reserves which it can draw upon should there be a shortfall in revenue
the performance of the returns in a year, and also has the ability to pay dividends from realised
underlying portfolio. capital reserves. The Board regularly reviews forward net revenue projections
and takes into account revenue reserves in setting quarterly dividend levels.
Share price and shareholder relations - the adoption of an inappropriate The Board monitors the Company's Ordinary share price relative to the NAV per
marketing strategy, failure to address shareholder concerns or other factors, share and keeps the level of premium or discount at which the Company's shares
including the setting of an unattractive strategic investment proposition, trade under review. The Board also keeps the investment objective and policy
changing investor sentiment and investment underperformance, may lead to a under review and holds an annual strategy meeting where it reviews investor
decrease in demand for the Company's shares and a widening of the difference relations reports and updates from the Manager and the Company's Stockbroker.
between the share price and the NAV per share.
The Directors are updated at each Board meeting on the composition of, and any
movements in, the shareholder register, which is retail investor dominated.
The Board annually agrees a marketing and communications programme and budget
with the Manager, and receives updates regularly on both marketing and
investor relations.
The Board has a close focus on investor platform activity which has been the
dominant change over recent years in how retail investors choose to acquire
and hold their shares. This includes contact with the platform operators
through the Manager.
Gearing - a fall in the value of the Company's investment portfolio could be The Board sets the gearing limits within which the Investment Manager can
exacerbated by the impact of gearing. It could also result in a breach of loan operate. Gearing levels and compliance with loan covenants are monitored on an
covenants and the forced sale ongoing basis by the Manager and at regular Board meetings, or between
scheduled Board meetings if required. In the event of a possible impending
of investments. covenant breach, appropriate action would be taken to reduce borrowing levels.
The financial covenants attached to the Company's borrowings currently provide
for significant headroom. The maximum equity gearing level is 35% of net
assets at the time of drawdown, which constrains the amount of gearing that
can be invested in equities which are more volatile than the fixed interest
part of the portfolio. The use of gearing has been an important facilitator of
the income returns from the portfolio, particularly in financing the high
yield preference share proportion of the portfolio which has historically
provided significant dividend income for the Company.
The Company's gearing includes a revolving credit facility which can be
reduced without any significant financial penalties for early repayment and at
relatively short notice.
Accounting and financial reporting - inadequate controls over financial record At each Board meeting, the Board reviews management accounts and receives a
keeping and forecasting could result in inaccurate financial reporting, the report from the Administrator, detailing any breaches during the period under
Company being unable to meet its financial obligations or inability to pay a review. The Company's annual financial statements are audited. The Audit
dividend, losses to the Company and impact its ability to continue trading as Committee receives bi-annual compliance and internal reports from the Manager
a going concern. and meets a representative from its Internal Audit team on at least an annual
basis and discusses any findings and recommendations relevant to the Company.
Regulatory and governance - failure to comply with relevant laws and The Board and Manager monitor changes in government policy and legislation
regulations could result in fines, loss of reputation and potentially loss of which may have an impact on the Company, and the Audit Committee monitors
an advantageous tax regime. compliance with regulations by reviewing internal control reports from the
Manager. There is also a regular review of adherence to governance guidelines
that affect investment companies and how the Company is meeting existing or
proposed guidelines.
The Board is kept aware of proposed changes to laws and regulations, considers
the changes and applies them as appropriate, if they are not already being
met.
From time to time the Board employs external advisers to advise on specific
regulatory and governance matters.
Operational - the Company is dependent on third parties for the provision of The Board receives reports from the Manager on its internal controls and risk
all systems and services (in particular, those of the abrdn Group) and any management processes and receives assurances from the Manager and all its
control failures and gaps in their systems and services, including in relation other significant service providers on at least an annual basis, including on
to cyber security, could result in a loss or damage to the Company. matters relating to operational resilience and cyber security. Written
agreements are in place with all third party service providers. The Manager
monitors closely the control environments and quality of services provided by
third parties, including those of the Depositary and Custodian, through
service level agreements, regular meetings and key performance indicators.
Exogenous risks such as health, social, financial, economic, climate and At any given time, the Company has sufficient cash resources to meet its
geo-political - the financial impact of such risks, associated with the operating requirements. In common with most commercial operations, exogenous
portfolio or the Company itself, could result in losses to the Company. risks over which
the Company has no control are always a risk. The Company does what it can to
address these risks where possible and to try and meet the Company's
investment objectives.
The Board is supportive of the Investment Manager's approach to environmental,
social and governance ("ESG") risks and welcomes its active engagement with
company management. Through this activity, the Investment Manager aims to
identify and manage the exposure to such risks over time.
The financial and economic risks associated with the Company include market
risk, liquidity risk and credit risk, all of which the Investment Manager
seeks to mitigate. Further details of the steps taken to mitigate the
financial risks associated with the portfolio are set out in note 18 to the
financial statements.
External Agencies
In addition to the services provided to the Company by the abrdn Group, the
Board has contractually delegated certain services to external service
suppliers, including: depositary services (which include the safekeeping of
the Company's assets) (BNP Paribas Trust Corporation UK Limited) and share
registration services (Equiniti Limited). Each of these services was entered
into after full and proper consideration by the Board of the quality and cost
of services offered. In addition, day-to-day accounting and administration
services are provided, through delegation by the Manager, by BNP Paribas
Securities Services.
Promotional Activities
The Board recognises the importance of promoting the Company to prospective
investors both for improving liquidity and enhancing the rating of the
Company's shares. The Board believes one effective way to achieve this is
through subscription to, and participation in, the promotional programme run
by the abrdn Group on behalf of a number of investment trusts under its
management. The Company's financial contribution to the programme is matched
by the abrdn Group. The Company also supports the Manager's investor
relations programme which involves regional roadshows to existing and
potential shareholders, promotional and public relations campaigns. The
Manager's promotional and investor relations teams report to the Board on a
quarterly basis giving analysis of the promotional activities as well as
updates on the shareholder register and any changes in the make up of that
register.
The purpose of the promotional and investor relations programmes is both to
communicate effectively with existing shareholders and to gain new
shareholders, with the aim of improving liquidity and enhancing the value and
rating of the Company's shares. Communicating the long-term attractions of the
Company is key. The promotional programme includes commissioning independent
paid for research on the Company, most recently from Kepler Trust
Intelligence. A copy of the latest research note is available from the
Company's website.
Environmental, Social and Human Rights Issues
The Company has no employees as the Board has delegated the day-to-day
management and administrative functions to the Manager. There are therefore no
disclosures to be made in respect of employees or environmental matters.
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. In any event, the Board 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.
Environmental, Social and Governance ("ESG") Matters
The Board is supportive of the Investment Manager's approach to ESG issues,
including climate change, and welcomes its active engagement with company
management.
The UK Stewardship Code and Proxy Voting
The Company supports the UK Stewardship Code, and seeks to play its role in
supporting good stewardship of the companies in which it invests.
Responsibility for actively monitoring the activities of portfolio companies
has been delegated by the Board to the Manager which has sub-delegated that
authority to the Investment Manager. abrdn plc is a tier 1 signatory of the UK
Stewardship Code which aims to enhance the quality of engagement by investors
with investee companies in order to improve their socially responsible
performance and the long-term investment return to shareholders. While
delivery of stewardship activities has been delegated to the Manager, the
Board acknowledges its role in setting the tone for the effective delivery of
stewardship on the Company's behalf.
The Board has also given discretionary powers to the Manager to exercise
voting rights on resolutions proposed by the investee companies within the
Company's portfolio. The Manager reports on a quarterly basis on stewardship
(including voting) issues.
Global Greenhouse Gas Emissions
The Company has no greenhouse gas emissions to report from its operations, nor
does it have responsibility for any other emissions producing sources under
the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations
2013.
Under Listing Rule 15.4.29(R), the Company, as a closed ended investment
company, is exempt from complying with the Task Force on Climate-related
Financial Disclosures.
Viability Statement
The Board considers the Company, with no fixed life, to be a long-term
investment vehicle but, for the purposes of this viability statement, has
decided that three years is an appropriate period over which to report,
irrespective of any exogenous risks that the Company may face. The Board
considers that this period reflects a balance between a longer-term investment
horizon, the inherent uncertainties within equity markets and the specifics of
a closed-end investment company where its central purpose is different from
other listed commercial and industrial companies.
In assessing the viability of the Company over the review period, the
Directors have focused upon the following factors:
- The principal risks and uncertainties detailed above and the
steps taken to mitigate these risks.
- The ongoing relevance of the Company's investment objective.
- The liquidity of the Company's portfolio. The majority of the
portfolio is invested in readily realisable listed securities.
- The level of ongoing expenses. The Company's annual expenses,
excluding the cost of the dividend, are expected to continue to be covered by
annual investment income.
- The level of gearing. This is closely monitored and stress
testing is carried out by the Manager. The financial covenants attached to the
Company's borrowings provide for significant headroom.
- Regulatory or market changes.
- The robustness of the operations of the Company's third party
service providers.
In making its assessment, the Board has considered that there are other
matters that could have an impact on the Company's prospects or viability in
the future, including the current events in Ukraine, economic shocks,
significant stock market volatility, the emerging risk of climate change, and
changes in regulation or investor sentiment, including on income propensities.
Taking into account the Company's current position and the potential impact of
its principal risks and uncertainties and emerging risks, the Directors have 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 approval of
this Report.
Outlook
The Board's view on the general outlook for the Company can be found in the
Chairman's Statement whilst the Investment Manager's views on the outlook for
the portfolio are included in its statement below.
On behalf of the Board
Robert Talbut
Chairman
24 May 2023
Promoting the Success of the Company
How the Board Meets its Obligations Under Section 172 of the Companies Act
The Board is required to describe to the Company's shareholders how the
Directors have discharged their duties and responsibilities over the course of
the financial year under section 172 (1) of the Companies Act 2006 (the
"Section 172 Statement"). The Board provides below an explanation of how the
Directors have promoted the success of the Company for the benefit of its
members as a whole, taking into account, amongst other things, the likely
long-term consequences of decisions, the need to foster business relationships
with all stakeholders and the impact of the Company's operations on the
environment.
The Purpose of the Company and Role of the Board
The purpose of the Company is to act as an investment vehicle to provide, over
time, financial returns (both income and capital) to its shareholders.
Investment trusts, such as the Company, are long-term investment vehicles and
are typically externally managed, have no employees, and are overseen by an
independent non-executive board of directors.
The Board, which, at the year end, comprised four independent non-executive
Directors with a broad range of skills and experience across all major
functions that affect the Company, retains responsibility for taking all
decisions relating to the Company's investment objective and policy, gearing,
corporate governance and strategy, and for monitoring the performance of the
Company's service providers.
The Board's philosophy is that the Company should operate in a transparent
culture where all parties are treated with respect and provided with the
opportunity to offer practical challenge and participate in positive debate
which is focused on the aim of achieving the expectations of shareholders and
other stakeholders alike. The Board reviews the culture and manner in which
the Manager and Investment Manager operate at its regular meetings and
receives regular reporting and feedback from the other key service providers.
The Board is very conscious of the ways it promotes the Company's culture and
ensures as part of its regular oversight that the integrity of the Company's
affairs is foremost in mind in the way that the activities are managed and
promoted. The Board works very closely with the Manager and Investment Manager
in reviewing how stakeholder issues are handled, ensuring good governance and
responsibility in managing the Company's affairs, as well as visibility and
openness in how the affairs are conducted.
The Company's main stakeholders have been identified as its shareholders, the
Manager/Investment Manager, service providers, investee companies, its debt
provider and, more broadly, the community at large and
the environment.
How the Board Engages with Stakeholders
The Board considers its stakeholders at Board meetings and receives feedback
on the Manager's interactions
with them.
The Board and Manager also continue to consider how best to engage with
private investors who invest through platforms, not least to increase voting
participation at general meetings of the Company.
Stakeholder How We Engage
Shareholders Shareholders are key stakeholders and the Board places great importance on
communication with them. The Board welcomes all shareholders' views and aims
to act fairly between all shareholders. The Company's shareholder register is
retail dominated and the Manager and Company's Stockbroker regularly meet with
current and prospective shareholders to discuss performance. Shareholder
feedback is discussed by the Directors at each Board meeting. The Company
subscribes to the Manager's investor relations programme in order to
maintain communication channels with shareholders.
Regular updates are provided to shareholders through the Annual Report,
Half-Yearly Report, monthly factsheets, Company announcements, including daily
NAV announcements, and through the Company's website. The Company's Annual
General Meeting provides a forum, both formal and informal, for shareholders
to meet and discuss issues with the Directors and Manager. The Board
encourages as many shareholders as possible to attend the Company's Annual
General Meeting and to provide feedback on the Company. In addition to the
Annual General Meeting, there will be an Online Shareholder Presentation again
this year following a favourable response in the past to this informal on-line
event. The Board welcomes contact with shareholders and has put in place ways
of receiving shareholder questions and responding to them. During the year,
the Investment Manager held meetings with a number of the Company's larger
shareholders to update them on the Company and to receive any feedback or
concerns.
The Board is keen to have increased shareholder voting at general meetings of
the Company and reviews ways in which there can be greater communication with
the largely private investor shareholder base.
Manager/Investment Manager The Investment Manager's Review details the key investment decisions taken
during the year. The Investment Manager has continued to manage the Company's
assets in accordance with the mandate agreed with the Company, with the
oversight of the Board.
The Board regularly reviews the Company's performance against its investment
objective and undertakes an annual strategy review meeting to ensure that the
Company is positioned well for the future delivery of its objective for its
shareholders. The Board receives presentations from the Investment Manager at
every Board meeting to help it to exercise effective oversight of the
Investment Manager and the Company's strategy.
The Board, through the Management Engagement Committee, formally reviews the
performance of the Manager and Investment Manager at least annually.
Service Providers The Board seeks to maintain constructive relationships with the Company's
suppliers either directly or through the Manager with regular communications
and meetings.
The Management Engagement Committee conducts an annual review of the
performance, terms and conditions of the Company's main service providers to
ensure they are performing in line with Board expectations, undertaking their
responsibilities and providing value for money.
Investee Companies Responsibility for actively monitoring the activities of portfolio companies
has been delegated by the Board to the Manager which has sub-delegated that
authority to the Investment Manager.
The Board has also given discretionary powers to the Manager to exercise
voting rights on resolutions proposed by the investee companies within the
Company's portfolio. The Manager reports on a quarterly basis on stewardship
(including voting) issues. Through engagement and exercising voting rights,
the Investment Manager actively works with companies to improve corporate
standards, transparency and accountability.
The Board monitors investments made and divested and questions the rationale
for investment and voting decisions made.
Debt Provider On behalf of the Board, the Manager maintains a positive working relationship
with the provider of the Company's loan facility, and provides regular updates
to the Board on business activity and compliance with its loan covenants.
Gearing is an important component of the Company's capital structure.
Environment and Community The Board and Manager are committed to investing in a responsible manner and
the Investment Manager embeds Environmental, Social and Governance ("ESG")
considerations into its research and analysis as part of the investment
decision-making process.
Specific Examples of Stakeholder Consideration During the Year
The Board is fully engaged in both oversight and the general strategic
direction of the Company. During the year, the Board's main strategic
discussions focussed around income management, with a portfolio consisting of
equities, fixed interest securities, options and exposure to UK smaller
companies through abrdn Smaller Companies Income Trust plc, a closed-end
investment company. The impact of inflation and increasing interest rates was
factored into these discussions.
While the importance of giving due consideration to the Company's stakeholders
is not a new requirement, and is considered during every Board decision, the
Directors were particularly mindful of stakeholder considerations during the
following decisions undertaken during the year ended 31 March 2023.
Management of the Portfolio
The Investment Manager's Review details the key investment decisions taken
during the year. The overall shape and structure of the investment portfolio
is an important factor in delivering the Company's stated investment
objective.
The Board held its annual strategy meeting during the year at which it
considered a number of factors, including the overall shape and composition of
the portfolio, any feedback from shareholders and the Company's Stockbroker,
and medium term revenue forecasts.
During the year, the Board, through the Management Engagement Committee,
decided that the continuing appointment of the Manager was in the best
interests of shareholders.
Dividend
Following the payment of the final dividend for the year, of 4.6p per Ordinary
share, total dividends for the year will amount to 14.2p per Ordinary share,
representing a dividend yield of 5.7% based on the share price of 250p at the
end of the financial year. This is in accordance with the Company's objective
to provide shareholders with a high level of income.
In deciding on the level of dividend for the year, the Board took into account
the revenue earnings per Ordinary share for the year, forecast revenues for
subsequent years and the level of revenue reserves.
Through meetings with shareholders and feedback from the Manager and the
Company's Stockbroker, the Board remains conscious of the importance that
shareholders place on the level, and sustainability, of dividends paid by the
Company.
Online Shareholder Presentation
As explained in the Chairman's Statement, to encourage and promote interaction
and engagement with the Company's shareholders, the Board has again decided to
hold an interactive Online Shareholder Presentation which will be held at
10.00am on 22 June 2023. At the presentation, shareholders will receive
updates from the Chairman and Investment Manager and there will be an
interactive question and answer session. The online presentation is being held
ahead of the AGM in order to allow shareholders to submit their proxy votes
prior to the meeting.
Shareholder Engagement and Communication
During the year, through a mechanism provided by the Companies Act 2006, the
Company wrote to a number of shareholders who hold their shares indirectly
through retail platforms, to advise them how to register for updates relating
to the Company and notifications of communications with shareholders.
The Company has a large retail shareholder base and the Board is keen to
communicate with as many shareholders as possible and to encourage and
increase voting participation at general meetings.
On behalf of the Board
Robert Talbut
Chairman
24 May 2023
Performance
Performance (Total Return)
1 year 3 year 5 year
% return % return % return
Net asset value(A) -2.2 +45.9 +24.3
Share price(A) (based on mid-market) -5.5 +46.9 +24.9
FTSE All-Share Index +2.9 +47.4 +27.9
(A) Considered to be an Alternative Performance Measure.
All figures are for total return and assume re-investment of net dividends
excluding transaction costs.
Source: abrdn plc, Morningstar & Factset
Analysis of Total Return Performance
Gross assets total return -0.3
Total NAV return per share -2.2
Total return on FTSE All-Share Index 2.9
Relative performance of NAV compared to FTSE All-Share Index -5.1
Dividends
Rate per share XD date Record date Payment date
First interim dividend 3.20p 6 October 2022 7 October 2022 28 October 2022
Second interim dividend 3.20p 5 January 2023 6 January 2023 27 January 2023
Third interim dividend 3.20p 6 April 2023 11 April 2023 28 April 2023
Proposed final dividend 4.60p 6 July 2023 7 July 2023 28 July 2023
2022/23 14.20p
First interim dividend 3.20p 7 October 2021 8 October 2021 29 October 2021
Second interim dividend 3.20p 6 January 2022 7 January 2022 28 January 2022
Third interim dividend 3.20p 7 April 2022 8 April 2022 29 April 2022
Proposed final dividend 4.20p 7 July 2022 8 July 2022 29 July 2022
2021/22 13.80p
Ten Year Financial Record
Year to 31 March 2014 2015 2016 2017 2018 2019 2020 2021* 2022* 2023*
Revenue available for ordinary dividends (£'000) 3,789 3,877 3,617 3,925 4,106 3,920 3,961 3,796 4,379 4,584
Per share (p)
Net revenue earnings 12.6 12.9 12.1 13.1 13.7 13.1 13.0 12.3 14.2 14.8
Net dividends paid/proposed 12.00 12.25 12.25 12.75 13.00 13.20 13.20 13.20 13.80 14.20
Net total earnings 26.0 23.1 (17.8) 54.5 9.4 10.3 (45.4) 68.2 29.5 (6.6)
Net asset value 248.4 259.5 229.4 271.6 268.2 265.5 207.4 262.4 278.3 257.9
Share price (mid-market) 252.3 252.0 202.0 243.3 260.0 267.0 200.5 248.0 279.0 250.0
Shareholders' funds (£m) 78.7 77.8 68.8 81.5 80.5 80.1 63.9 80.9 85.8 79.9
* Net asset value per share is calculated after the repayment of the capital
paid up on Cumulative Preference shares (see note 16).
Cumulative Performance
Rebased to 100 at 31 March 2013
As at 31 March 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Net asset value 100.0 106.0 110.7 97.9 115.9 114.4 113.3 88.5 112.0 118.7 110.0
Net asset value total return(A) 100.0 111.5 122.3 113.8 141.6 146.3 152.2 124.7 167.1 186.1 181.9
Share price performance 100.0 108.3 108.2 86.7 104.4 111.6 114.6 86.1 106.4 119.7 107.3
Share price total return(A) 100.0 114.0 119.6 101.1 128.9 144.7 156.2 123.1 161.5 191.2 180.7
Benchmark performance 100.0 105.2 108.4 100.4 118.0 115.2 117.7 91.9 113.3 123.9 123.0
Benchmark total return(A) 100.0 108.8 116.0 111.4 135.9 137.6 146.3 119.3 151.2 170.9 175.9
(A) Total return figures are based on reinvestment of net income.
Investment Manager's Review
Portfolio Strategy
We take a long term approach to investing, believing that whilst there might
be volatility in the short and even medium term, share prices will ultimately
reflect the fundamental value of a company. Consequently, there has been no
change to our approach to the construction of the portfolio during the year
under review. The Company's investment portfolio is invested in equities and
preference shares. At the year-end 78.4% of the portfolio was invested in
equities and 21.6% was invested in preference shares.
Equity Market Review
Global equity markets fell over the 12 month period to 31 March 2023, with the
MSCI World Index down by around 9% in US Dollar terms. While that marks a poor
return for global equities, it could have been worse, with the index down by
22% in mid-October last year. Since then, we have seen a recovery in
valuations and the financial year has ended with markets in a more optimistic
mood.
Market direction over the year was dominated by macroeconomic factors, with
the interplay between inflation, economic growth, and central bank policy
setting the tone for equities. At the start of the Company's financial year,
from April to June, the direction of travel continued very much as it was in
the first quarter of 2022. Inflation expectations were increasing, driven by
post-Covid tightness in many markets and exacerbated by the start of the
Russia-Ukraine conflict. Indeed, some of the economic data was historic, with
US inflation reaching a 40 year high and UK unemployment a 48 year low. This
resulted in more hawkish central bank policy and rising interest rate
expectations, with the clear impact of higher discount rates translating into
lower equity valuations across the market, but especially in higher growth
sectors. Investors also worried that higher interest rates would lead to a
recession and, although the impact from Covid-19 had reduced significantly
compared to the prior year, China's zero-Covid policy continued to weigh on
global economic growth.
In July, there was some respite, with global equities increasing by almost 10%
in a month - although even this did not quite offset the declines seen in the
prior month. The increase came despite the ongoing and increasing fears of a
recession and a warning at the start of the month from the Bank of England
that the economic outlook for the UK had "deteriorated materially", matching
similar comments from the International Monetary Fund ("IMF"). This view of
underlying economic weakness was supported by data, with inflation continuing
to rise and GDP growth slowing. UK consumer confidence in June remained at its
lowest level since records began in 1974. The UK also faced increased
political uncertainty as Prime Minister Boris Johnson finally announced his
resignation. Despite the weak macro backdrop, corporate earnings results were
generally strong at the half year stage, with many cyclical companies beating
reduced expectations. Throughout the course of the year, fundamental corporate
earnings remained robust, with limited signs of weakness.
July proved to be a false dawn for equity markets, however, with continued
high levels of inflation pushing central banks to double down on more hawkish
messaging and on interest rate rises. The Federal Reserve implemented a large
0.75% rise in interest rates, while the Bank of England raised interest rates
by 0.5% at its September meeting. A few days later, UK Chancellor Kwarteng's
mini-budget surprised investors with widespread unfunded tax cuts, which were
partially reversed in early October. The £45 billion package prompted a wave
of selling in bond and currency markets, driving gilt yields higher. The IMF
warned that it did not recommend "large and untargeted" measures and that the
proposals could fuel inflation and inequality. The 10-year gilt yield finished
the month above 4% and the Bank of England was forced to launch emergency
measures to stabilise markets, delaying a planned gilt sale and committing to
buy up to £65 billion of gilts over a 13-day period. After the end of the
period, the turmoil caused by the budget forced Prime Minister Liz Truss to
resign, setting a record for the shortest premiership in history, at 45 days.
After a strong start to the year, the summer months also saw commodity price
pull back. The combination of recession fears and resilient production from
Russia meant that the oil price declined, with the West Texas Intermediate
benchmark back under $80 per barrel, having peaked at over $120 per barrel as
recently as June. At the same time, a period of warmer and windier weather led
to a pullback in European natural gas prices, mitigating a major source of
concern for the European economy since the Russian invasion of Ukraine.
The US economy outperformed expectations, reporting annualised growth of 2.6%
in the third quarter, having been in a technical recession during the first
half of the year. In the UK, Gilt markets settled after the volatility arising
from the mini-Budget. In particular, government bond prices rose as former
chancellor Rishi Sunak succeed Liz Truss as Prime Minister and quickly
implemented a more pragmatic fiscal policy.
Equity markets turned more positive in October, as investors became optimistic
that central banks could slow the pace of future interest rate increases. The
US was one of the top-performing markets, with the Dow Jones Industrial
Average posting its best monthly gain since 1987, having risen for four
consecutive weeks. Markets rose again in November, as US data showed
decelerating inflation, adding to investor expectations for a change in
Federal Reserve policy. Markets also responded positively to the announcement
from the Chinese government that it would start to ease Covid-19 restrictions.
That optimism reversed slightly in December as recession fears increased and
the relaxation of Covid-19 restrictions in China led to a spike in cases, yet
this concern was relatively short lived. 2022 closed with more interest rate
rises: the Federal Reserve, European Central Bank, Swiss Central Bank and Bank
of England all raised interest rates by 0.50% in their December meetings. The
moves marked a deceleration in the pace of monetary tightening, however, and
equities recovered into the calendar year end, helped by better than expected
macro data.
The first quarter of 2023 saw continued volatility in equity markets, yet
despite some marked swings, all major asset classes except the US Dollar and
commodities delivered positive returns - a contrast to 2022 which was a rare
year when both bonds and equities declined. The quarter started with a
'risk-on' mood due to better than expected economic data and falling recession
worries, as gas prices fell in Europe and there were signs of a rapid
reopening in China, with no persistent rise in infections, and a resilient US
consumer sector. This led to short covering and a rebound in economically
sensitive sectors, especially Consumer Discretionary. However, it also drove a
resurgence in inflation pressures and incrementally hawkish rhetoric from
central banks.
Market dynamics reversed sharply in March, with the collapse of Silicon Valley
Bank in the US and the subsequent issues with Credit Suisse in Europe. This
led to a 'risk-off' environment, with bonds rising and risk assets falling.
Equities, especially in Europe, bore the brunt of the pain given the higher
exposure of that region's banking sector to the economy and equity markets
relative to the US. Still, signs that the crisis was under control as we moved
through March meant that risk assets reversed direction again. Strong
underlying fundamentals of the banking sector supported the view that Silicon
Valley Bank and Credit Suisse were exceptions rather than the start of a
broader sector issue.
Over the course of the 12 month period, UK equities performed relatively well
compared to other global markets. The FTSE All-Share Index delivered a total
return of 2.9% and the large cap FTSE 100 Index returned 5.2%. The performance
was better than the US S&P 500 index returning -8.1% and the MSCI Europe
Index at 3.9%. Generally, the weighting of the UK market towards more
defensive and less growth-orientated sectors has worked in its favour during a
period of rising interest rates. It is also notable, however, that in a time
of flat/falling equity markets, a higher dividend yield enhances total return
noticeably.
With the dominant theme for the year being one of rising interest rates,
sector leadership in the UK market remained more with the value-orientated
sectors, despite these being more economically sensitive. Energy was the top
performing sector, with gains largely concentrated in the first part of the
year. Consumer Discretionary and Industrials also performed well, despite
rising recession concerns. At the other end of the spectrum, the Property
sector performed particularly poorly, falling by around 30%. UK property
companies have operated with higher levels of leverage than most sectors, and
so rising interest rates put pressure on returns at the same time that their
ability to grow rental yield is constrained by demand. Materials were also
weak, with the boost from China reopening not enough to offset a pull-back in
valuations earlier in the year.
Investment Performance
Over the year ended 31 March 2023, the Net Asset Value ("NAV") of the
Company declined by 2.2% on a total return basis. This compares to the
benchmark FTSE All-Share Index total return of 2.9%. The under performance was
concentrated in two areas: the preference share portfolio and the holding in
abrdn Smaller Companies Income Trust ("ASCIT"). The preference shares
declined in value by 10.2% and detracted 3.0% from performance - we discuss
the reasons for this in more detail below. The ASCIT share price declined by
almost 12% (in total return terms) over twelve months, even following the
re-rating of its shares after its announcement of a strategic review, and
contributed around 1% of the under performance.
This under performance should largely be expected in the investment
environment we saw during the year. Rising interest rates benefit less
growth-orientated investments and smaller companies as an asset class
under-performed larger companies during the year. Furthermore, ASCIT follows a
momentum strategy, which is disadvantaged in such an environment.
Within the core equity portfolio, there were a number of very strong
performers. These included a number of recent purchases. Games Workshop Group
(+58%) recovered well after our investment, as did Vistry Group (+35%),
NatWest (+29%), Hiscox (+25%), Oxford Instruments (+19%) and Smith &
Nephew (+14%). Energy stocks continued to be strong contributors to overall
performance, with BP (+42%) and TotalEnergies (+31%) standing out.
TotalEnergies was also an example of a European holding in the portfolio that
performed well. Novo-Nordisk (+52%) continued to deliver upgrades to revenue
as new product launches beat expectations, while Kone (+20%), Nordea (+18%),
AXA (+18%) and Engie (+13%) all delivered positive returns. Another trend we
benefited from (and which seems to be only increasing) was the rise in bids
for UK listed companies, reflecting the discount many trade at compared to
international peers. Euromoney Institutional Investor (+48%) and Wood Group
(+24%) were subject to bids in the year.
Some other positions did not work out as well as we had hoped. The most
concentrated under performance came in the Real Estate sector, with the impact
of rising yields dragging down asset values and increasing interest costs.
Sirius Real Estate (-41%), Urban Logistics (-29%), Supermarket Income REIT
(-21%) and Assura (-17%) all under performed in share price terms although the
underlying businessess continued to perform as expected.
The number of companies missing our expectations on underlying performance was
small, although there were some notable disappointments. Marshalls (-52%) had
two profit warnings after failing to offset the slow down in consumer demand
for its products. Direct Line Insurance (-45%) was impacted by a high level of
claims inflation in the winter months, putting its capital ratio under
pressure and leading to a cut in the dividend. Close Brothers (-19%) disclosed
a write down to the value of a recent acquisition. In each case we have
retained the holding, and in the cases of Marshalls and Close Brothers
increased the positions - we see these as strong long term businesses which
will regain lost value over time. In the case of Direct Line Insurance, signs
that the pricing cycle is improving cause us to hold on to the position for
now.
Gearing and Preference Share Portfolio
As stated above, the preference shares declined in value in the year. This
performance is very much as expected - during a period of rapidly rising
interest rates we would expect the bond like characteristics of preference
shares to mean they decline in value. Our view on the long term attractions of
the preference shares has not changed. Firstly, it is unlikely that we will
see a period of such rapid rises in interest rates repeated this cycle -
indeed it is more likely that interest rates will eventually decline, acting
as a tailwind for the valuations of the preference shares. Secondly, the
attraction of these instruments is their high, dependable yield. This has not
changed and the preference share portfolio offered a forward yield of almost
7.5% at the year end.
Gearing (net of cash) increased during the year, from 20.4% to 22.2%. The
gearing is notionally invested in the preference share portfolio. At the year
end these securities had a value of £20.9 million, exceeding the net
indebtedness which stood at £17.8 million.
Revenue Account
Revenue earnings per share increased by 4.4% over the year to 14.83p (2022:
14.21p). This continues the strong recovery we have seen in dividends since
the Covid-19 pandemic. The Company aims to invest in companies with the
ability to grow dividends over time and it is encouraging to see revenue
growth delivered. This is an important target for the Company.
The following table details the Company's main sources of income over the last
five years.
2023 2022 2021 2020 2019
% % % % %
Ordinary dividends 62.8 66.5 57.2 60.0 58.5
Preference dividends 29.1 26.9 33.2 31.0 34.4
abrdn Smaller Companies Income Trust 6.6 5.2 5.7 5.4 4.9
Fixed interest and bank interest 0.2 - - 0.3 0.2
Traded option premiums 1.3 1.4 3.9 3.3 2.0
Total 100.0 100.0 100.0 100.0 100.0
Total income (£'000s) 5,673 5,239 4,529 4,807 4,712
Portfolio Activity
Changes to the portfolio during the year were, as ever, driven by fundamental
analysis and by our views on the merits of individual companies. However, it
is useful to try to explain some trends behind our trading activity over the
course of the year. In the prior year, there was a clear move to add value to
the portfolio, reflecting our view that the growth premium in equities was too
high and that interest rates were likely to rise. In this financial year, the
main drivers, such as they are, were different - although we retain a slight
preference for value within the portfolio, we have been looking to add income
and quality. Our broad view is that market levels look high and the economic
outlook is uncertain. In this scenario we see income as an increasingly
important part of total return and have been taking action to enhance this.
In April 2022, we initiated a position in Supermarket Income REIT. The company
invests in supermarket real estate, with long term tenancy agreements and
inflation linked pricing. This provides a reliable, and defensive, source of
income, with a 5% headline yield and with the inflation linkage making
cashflows reliable through the cycle. We sold out of one position in the
month. Last year's purchase of the Schroders-Non Voting shares was based on a
view that the discount of that instrument to the voting shares was too wide
and would close over time. The announcement in March 2022 that the company
would combine the two lines of shares caused the discount to close, resulting
in a 29% increase in the value of our holding. With the investment case having
played out we chose to move on to other ideas.
During July, we started a new position in Legal & General. The share price
had fallen given concerns about how rising rates impact credit quality. In our
view, Legal & General has a secure outlook and actually benefits from
rising interest rates through its stronger Solvency 2 position (a measure of
balance sheet strength for insurance companies). This means the dividend, with
an 8% dividend yield, is secure and the company can continue to grow, using an
integrated approach and, for example, through its strong market position in
bulk annuities. We see it as an undervalued company that should deliver
resilient income through cycle.
To fund this trade, we sold out of a number of positions. Fortum had performed
poorly due to its exposure to Russia and the risks to the business from higher
European gas prices. While we think much of the risk is in the price,
uncertainty remained very high and we could find similarly high yields which
are likely to be more secure, so chose to move on. We also sold United
Utilities, which held up well as a source of defensive exposure, but looked
fairly priced. We also sold out of Euromoney Institutional Investor following
a bid for the company at a reasonably attractive price.
During the third quarter of 2022 we introduced three new holdings. The first
of these was lift manufacturer Kone, listed in Finland. The shares had
de-rated on China growth concerns and looked attractively valued given the
quality of the business with a very secure balance sheet. The weighting of
earnings to recurring service revenue should make it resilient and 4.4%
dividend yield is a premium to the market.
We also started a new position in French utility Engie. The implementation of
a power price cap in Europe above market expectations and the company's
business plan provides confidence in the dividend at an attractive yield of
approximately 8%. The company also has an attractive long term renewable
growth story.
The third new position was in reinsurer Hiscox, started after a positive
meeting with the management team. After weak performance post-2019 a confident
new CEO has put the balance sheet in a strong position and has sorted out
legacy issues in the portfolio. The company is well positioned for better
underwriting conditions and higher investment returns, both of which should
drive strong earnings growth in the next few years. Hiscox is also less at
risk from inflation concerns than its peers. The shares trade on an attractive
valuation and US retail has the potential to be a much larger business if it
can deliver as management expects. Its forward yield is marginally above the
market level with the ability to grow.
We sold out of two positions, both of which were inherited as spin outs from
other holdings and were subscale in the portfolio. Haleon was spun out of
GlaxoSmithKline and has an attractive end market position, but high debt and
litigation risk combined with a low dividend yield make it less appropriate
for this portfolio. We also sold out of Woodside Energy, another subscale
inherited position from BHP, after it went ex-dividend.
We started new positions in two companies in October. The first was medical
services company Smith & Nephew. The stock has de-rated to 12x earnings,
well below its long term average of 17x, but has a new CEO with a credible
plan to fix the business. A 3% dividend yield is not large but has potential
to grow over time and the company remains a potential take out candidate at
this valuation. Income is likely to be defensive and relatively insulated from
macro turbulence.
We also started a new position in Games Workshop Group. The shares have
de-rated, but it has all the characteristics of a quality company with a high
return on capital, a net cash balance sheet and a very strong track record of
growth. Recent dividend increases provide reassurance on the commitment to
distribute excess cash and the business should be resilient through any
recession. Longer term, growth potential comes from expansion in foreign
markets and consistent product roll out to a loyal customer base.
After a review of the property sector in October, we decided to focus our
exposure. We consequently reduced the number of holdings within the sector,
selling out of Sirius Real Estate, Assura and SuperMarket Income REIT. In each
case, we see a risk to income from higher interest rates which may compress
margins and lead to lower cash generation.
During November, we sold out of Entain. This has been a long term holding in
the portfolio, with a positive return over that period. However, we see less
chance of the company paying a material dividend in the near term and there is
a high degree of uncertainty on growth and regulation in the US, meaning it is
not a natural holding in the portfolio. We therefore choose to move on. The
proceeds were used to start a new position in Dechra Pharmaceuticals, the
veterinary pharmaceutical business. We sold out of this company in April 2021,
but given its recent under performance it now looks good value again, with the
earnings multiple 35% lower and the dividend yield 65% higher than when we
sold. The quality characteristics remain very much in place, with strong
barriers to entry and structural growth in end markets, and recent deals have
built out the research pipeline to support future earnings growth.
During January we started two new positions. The first was in XP Power. The
company designs and produces power supply products, often used in highly
sensitive manufacturing processes. It has 4% yield and the potential to
deliver attractive growth, with the current valuation at less than a 14x
earnings multiple, reflecting some cyclical weakness and recent legal costs.
Recent downgrades should now be close to an end and resolution of supply chain
issues and litigation could be positive catalysts for the company within our
investment time horizon.
Secondly, we started a new position in Dr. Martens. The iconic shoe brand is
currently delivering steady top line growth, with more to play for in emerging
markets and the potential for margins to improve as the sales mix shifts away
from wholesale. The shares have de-rated on issues around a change in the
company's US distribution centre which have hit profits in the short term. We
believe this is an opportunity to buy a solid brand with earnings growth from
market expansion and the direct to consumer mix shift, which delivers 4x
higher margins than wholesale over the next five years. The current multiple
of 8x earnings is an opportunity to buy for the long term in our view and a 4%
dividend yield (which is very well covered) is attractive for the portfolio.
It is also a diversifier, given our underweight exposure to the Fashion and
Consumer Discretionary sectors.
In March, we made a number of portfolio adjustments to enhance income. In the
Mining sector, we exited BHP and continued to reduce the weighting to Rio
Tinto, reflecting our view that a recovery in Chinese demand is now largely
priced in to the share price. We continued to reinvest some proceeds in Anglo
American. We also topped up the position in Diversified Energy which has been
weak on lower US gas prices, despite being well hedged - the yield of 15% is
well covered and very attractive in our view. We started a new position in
HSBC. The shares have pulled back in response to the recent "banking crisis"
but we see the company as a natural beneficiary of a flight to quality for
deposits and of reduced competition in the attractive Asian wealth market
following the UBS purchase of Credit Suisse. The dividend is now well on its
way to recovering to pre-Covid levels and the 8% yield is highly attractive
given exposure to growing Asian markets. We funded the purchase with a small
reduction in the holding in Standard Chartered - the move helps diversify the
portfolio's exposure to banks and enhances income.
Finally, we sold out of the position in Kone - a purchase form earlier in the
year. The shares had risen by 15% in a flat market since we purchased them in
September, providing an attractive annualised return. We now see the company
as more fairly valued so have taken profits and are moving on, hopefully to
better ideas.
Stewardship and ESG
We believe that, as long term owners of the businesses in which we are
invested, it is not sufficient merely to seek out assets that we believe to be
undervalued. It is also incumbent upon us to take a proactive approach to our
stewardship of these companies. Therefore, we engage extensively with our
investee companies. We have attended a range of meetings with chairmen,
non-executive directors and other stakeholders. Topics covered have included
the composition of boards, environmental and social issues, and remuneration.
Risk is a very broad subject that is interpreted in varying manners by
different companies. However, by engaging on this subject we secure a deeper
understanding of how the boards of our investee companies perceive and seek to
manage these issues. Such interactions also enable us to push for improved
disclosure and better management practices and, on occasion, different
decisions where appropriate. We have had conversations regarding companies'
financing choices. We find that it is always worthwhile communicating our
preference for conservatively structured balance sheets that place a company's
long term fortunes ahead of possible short term share price gains. Such
activity is by its nature time consuming but we regard it as an integral
aspect of our role as long term investors.
Consideration of Environmental, Social and Governance ("ESG") factors forms an
important part of our process. Whilst the management of the Company's
investments is not undertaken with any specific instructions to exclude
certain asset types or classes, we embed ESG into the portfolio and sector
specific research on all positions in the portfolio as part of the investment
process. ESG investment is about active engagement with the goal of improving
the performance of assets held by the Company. We aim to make the best
possible investments for the Company by understanding the whole picture of the
companies invested in - before, during and after an investment is made. That
includes understanding the ESG risks and opportunities they present, and how
these could affect longer-term performance and valuation. With in excess of
1,000 investment professionals and more than 50 ESG specialists, we are able
to take account of ESG factors in our company research, stock selection and
portfolio construction. ESG considerations underpin all investment activities.
Outlook
After the first quarter of 2023, anyone hoping for calmer markets after a
turbulent 2022 would have been disappointed, with a sharp equity rally to
start the year followed by a banking "crisis" which has hopefully largely
passed by already. It has been a surprising start to the year in two ways.
Firstly, fundamentals have so far been better than expected, with economic
data proving resilient, A recession has so far been avoided and consensus
forecasts have been upgraded from outright bearish to just slightly gloomy.
Company results have proved to be better than expected, particularly in more
cyclical areas of the market, with retailers and industrial companies rallying
in recent months.
That should all support higher equity markets, but the second surprise in our
view is that equities have risen as strongly as they have done. While the
fundamentals have been less bad than feared, valuations already looked
generous and it is notable that the market now prices in the lowest equity
risk premium for many years once we account for impact of higher interest
rates and slower profit growth based on consensus forecasts.
Interest rate expectations continue to drive the market direction, and we
should not expect a pivot from central banks soon - falling energy costs have
helped confidence rebound, but core inflation remains stubbornly high
globally. Wage growth continues to surprise to the upside and, until this
adjusts, central banks are unlikely to risk the rate cuts the market seems to
be expecting. A correction in market levels is therefore likely in our view,
especially as Q1 earnings could be a source of downgrades given that aggregate
company margins remain close to all-time highs, something that should simply
not persist with higher interest charges and wage inflation.
How do we reflect this outlook in the portfolio? The focus on quality
companies and the generation of resilient income remains to the fore and
becomes more important than ever. In a period where equity market returns
could pause after an unprecedented run since the global financial crisis,
income is likely to be a more important part of total return.
It is also worth noting that not all parts of the equity market are equally
valued: the UK market remains at a record discount to other developed markets.
In the last month we have started to see this reflected in a notable increase
in acquisitions of UK listed companies (Wood Group and Dechra Pharmaceuticals
are examples within the portfolio that have been bid for in the last few
months). Unless the valuation gap closes, this is likely to continue and could
be an additional tailwind, especially for UK companies with genuine barriers
to entry and scarcity value which is underappreciated in public markets. For
overseas investors, the need to deliver growth and margin improvement as
organic opportunities reduce will likely compel further deals. So overall, a
focus on income and stock selection is more important than ever as we look to
generate returns.
Iain Pyle and Charles Luke
abrdn Investments Limited
24 May 2023
Investment Portfolio - Equities
As at 31 March 2023
Valuation Total Valuation
2023 portfolio 2022
Company FTSE All-Share Index Sector £'000 % £'000
abrdn Smaller Companies Income Trust Closed End Investments 7,534 7.8 9,041
AstraZeneca Pharmaceuticals and Biotechnology 4,136 4.3 4,264
Shell Oil, Gas and Coal 3,931 4.0 2,997
BP Oil, Gas and Coal 3,184 3.3 2,339
Anglo American Industrial, Metals and Mining 2,748 2.8 -
SSE Electricity 2,661 2.7 2,537
Diageo Beverages 2,566 2.7 2,744
Diversified Energy Oil, Gas and Coal 2,499 2.6 2,665
British American Tobacco Tobacco 1,913 2.0 2,424
Energean Oil, Gas and Coal 1,894 2.0 1,733
Ten largest investments 33,066 34.2
TotalEnergies Oil, Gas and Coal 1,839 1.9 2,068
National Grid Gas, Water and Multiutilities 1,726 1.7 1,846
Standard Chartered Banks 1,526 1.6 2,643
Unilever Personal Care, Drug and Grocery Stores 1,378 1.4 1,136
Imperial Brands Tobacco 1,351 1.4 1,167
Novo-Nordisk Pharmaceuticals and Biotechnology 1,272 1.3 894
Inchcape Industrial Support Services 1,226 1.3 1,060
Chesnara Life Insurance 1,222 1.3 1,674
Rio Tinto Industrial, Metals and Mining 1,152 1.2 2,152
Prudential Life Insurance 1,149 1.2 1,427
Twenty largest investments 46,907 48.5
Marshalls Construction and Materials 1,123 1.2 654
Intermediate Capital Group Investment Banking and Brokerage Services 1,078 1.1 -
M&G Investment Banking and Brokerage Services 1,051 1.1 1,428
NatWest Banks 1,042 1.1 625
OSB Finance and Credit Services 995 1.0 933
Hiscox Non-life Insurance 982 1.0 -
Engie Gas, Water and Multiutilities 981 1.0 -
Balfour Beatty Construction and Materials 967 1.0 668
Vodafone Telecommunications Service Providers 939 1.0 1,658
Howden Joinery Retailers 938 1.0 1,166
Thirty largest investments 57,003 59.0
AXA Non-life Insurance 906 0.9 821
HSBC Banks 903 0.9 -
Morgan Sindall Construction and Materials 883 0.9 1,262
Coca-Cola HBC Beverages 859 0.9 621
Mondi General Industrials 855 0.9 919
GSK Pharmaceuticals and Biotechnology 835 0.9 1,203
Oxford Instruments Electronic and Electrical Equipment 833 0.9 45
Close Brothers Banks 810 0.8 1,071
Telecom Plus Telecommunications Service Providers 754 0.8 1,608
Legal & General Life Insurance 734 0.7 -
Forty largest investments 65,375 67.6
Bawag Banks 722 0.7 714
XP Power Electronic and Electrical Equipment 713 0.7 -
Direct Line Insurance Non-life Insurance 705 0.7 1,146
Dr. Martens Personal Goods 673 0.7 -
Games Workshop Leisure Goods 654 0.7 -
Wood Oil, Gas and Coal 648 0.7 524
Ashmore Investment Banking and Brokerage Services 641 0.7 676
Telenor Telecommunications Service Providers 584 0.6 767
Drax Electricity 578 0.6 747
Softcat Software and Computer Services 563 0.6 402
Fifty largest investments 71,856 74.3
Bodycote Industrial Engineering 553 0.6 688
RS Group Industrial Support Services 549 0.6 848
Vistry Group Household Goods and Home Construction 549 0.6 -
Dechra Pharmaceuticals Pharmaceuticals and Biotechnology 533 0.6 -
Nordea Banks 522 0.5 480
Smith & Nephew Medical Equipment and Services 475 0.5 -
Urban Logistics Real Estate Investment Trusts 403 0.4 598
Redrow Household Goods and Home Construction 320 0.3 351
Total equity investments 75,760 78.4
Purchases and/or sales of portfolio holdings effected during the year result
in 2023 and 2022 values not being directly comparable.
Investment Portfolio - Other Investments
As at 31 March 2023
Valuation Total Valuation
2023 portfolio 2022
Company £'000 % £'000
Preference shares(A)
Ecclesiastical Insurance Office 8 5/8% 5,512 5.7 5,936
Royal & Sun Alliance 7 3/8% 4,437 4.6 5,220
General Accident 7.875% 3,654 3.8 4,364
Santander 10.375% 3,616 3.7 4,491
Standard Chartered 8.25% 2,900 3.0 3,737
R.E.A. Holdings 9% 776 0.8 968
Total Preference shares 20,895 21.6
Total Investments 96,655 100.0
(A) None of the preference shares listed above have a fixed redemption date.
Purchases and/or sales of portfolio holdings effected during the year result
in 2023 and 2022 values not being directly comparable.
Distribution of Assets and Liabilities
Movement during the year
Valuation at Gains/ Valuation at
31 March 2022 Purchases Sales (losses) 31 March 2023
£'000 % £'000 £'000 £'000 £'000 %
Listed investments
Equities 77,709 90.5 16,513 (16,199) (2,263) 75,760 94.8
Preference shares 24,716 28.8 - - (3,821) 20,895 26.2
Total investments 102,425 119.3 16,513 (16,199) (6,084) 96,655 121.0
Current assets 2,656 3.1 2,559 3.2
Current liabilities (19,262) (22.4) (9,350) (11.7)
Non-current liabilities - - (9,951) (12.5)
Net assets 85,819 100.0 79,913 100.0
Net asset value per Ordinary share 278.3p 257.9p
Directors' Report (extract)
The Directors present their report and audited financial statements for the
year ended 31 March 2023.
Results and Dividends
The financial statements for the year ended 31 March 2023 are contained below.
Dividends paid and proposed for the year amounted to 14.20p per Ordinary
share.
First, second and third interim dividends for the year, each of 3.20p per
Ordinary share, were paid on 28 October 2022, 27 January 2023 and 28 April
2023 respectively. The Directors recommend a final dividend of 4.60p per
Ordinary share, payable on 28 July 2023 to shareholders on the register on 7
July 2023. The ex-dividend date is 6 July 2023. Under UK-adopted international
accounting standards the third interim and final dividends will be accounted
for in the financial year ended 31 March 2024. A resolution in respect of the
final dividend will be proposed at the forthcoming Annual General Meeting.
Investment Trust Status
The Company is registered as a public limited company (registered in England
and Wales No. 00386561) and is an investment company within the meaning of
Section 833 of the Companies Act 2006. The Company has been approved by HM
Revenue & Customs as an investment trust subject to it 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 April 2012. The
Directors are of the opinion that the Company has conducted its affairs for
the year ended 31 March 2023 so as to enable it to comply with the ongoing
requirements for investment trust status.
Individual Savings Accounts
The Company satisfies 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.
Capital Structure
During the year the Company issued 145,000 Ordinary shares of 50p each under
its non pre-emptive allotment authority, raising £374,000 in aggregate on a
non-dilutive basis. The issued Ordinary share capital at 31 March 2023
consisted of 30,964,580 Ordinary shares of 50p each and 50,000 3.5% Cumulative
Preference Shares of £1 each.
Voting Rights
Each Ordinary and Cumulative Preference share carries one vote at general
meetings of the Company. The Cumulative Preference shares carry a right to
receive a fixed rate of dividend and, on a winding up of the Company, to the
payment of such fixed cumulative preferential dividends to the date of such
winding up and to the repayment of the capital paid up on such shares in
priority to any payment to the holders of the Ordinary shares.
The Ordinary shares, excluding any treasury shares, carry a right to receive
dividends and, on a winding up or other return of capital, after meeting the
liabilities of the Company, the surplus assets will be paid to Ordinary
shareholders in proportion to their shareholdings.
There are no restrictions on the transfer of Ordinary or Cumulative Preference
shares in the Company other than certain restrictions which may from time to
time be imposed by law.
Management Agreement
The Company has appointed abrdn Fund Managers Limited ("aFML"), a wholly owned
subsidiary of abrdn plc, as its alternative investment fund manager. aFML has
been appointed to provide investment management, risk management,
administration, company secretarial services and promotional activities to the
Company. The Company's portfolio is managed by abrdn Investments Limited by
way of a group delegation agreement in place between aFML and abrdn
Investments Limited. In addition, aFML has sub-delegated administrative and
company secretarial services to abrdn Holdings Limited and promotional
activities to abrdn Investments Limited. Details of the management fee and
fees payable for promotional activities are shown in notes 4 and 5 to the
financial statements.
The management agreement is terminable on not less than six months' notice. In
the event of termination by the Company on less than the agreed notice period,
compensation is payable to the Manager in lieu of the unexpired notice period.
Substantial Interests
As at 31 March 2023, the following interests in the issued Ordinary share
capital of the Company had been disclosed in accordance with the requirements
of the FCA's Disclosure Guidance and Transparency Rules:
Shareholder Number of Ordinary shares held % of Ordinary shares held
abrdn Retail Plans(A) 5,986,289 19.3
(A) Non-beneficial interest
There have been no changes notified to the Company between the year end and
the date of approval of
this Report.
Directors
Marian Glen retired as a Director on 6 July 2022. At the end of the year the
Board comprised four non-executive Directors, each of whom is considered by
the Board to be independent of the Company and the Manager.
The Directors attended scheduled Board and Committee meetings during the year
ended 31 March 2023 as follows (relevant meetings in brackets):
Director Board Audit Committee Management Engagement Committee Remuneration Committee
Robert Talbut 5 (5) 2 (2) 1 (1) 1 (1)
Robin Archibald 5 (5) 2 (2) 1 (1) 1 (1)
Marian Glen(A) 2 (2) 1 (1) - (-) - (-)
Jane Pearce 5 (5) 2 (2) 1 (1) 1 (1)
Helen Sinclair 5 (5) 2 (2) 1 (1) 1 (1)
(A) Retired 6 July 2022
The Board meets more frequently when business needs require and has regular
dialogue between formal Board meetings, including with the Manager. There were
two additional Board meetings and a number of committee meetings during the
year, including to approve the new loan facility.
Under the terms of the Company's Articles of Association, Directors must
retire and be subject to appointment at the first Annual General Meeting after
their appointment by the Board, and be subject to re-appointment every three
years thereafter. Directors with more than nine years' service are subject to
annual re-appointment. However, the Board has decided that all Directors will
seek annual re-appointment after initial appointment to the Board.
Each of Helen Sinclair, Robin Archibald, Robert Talbut and Jane Pearce will
seek re-appointment at the Annual General Meeting.
The Board believes that all the Directors seeking re-appointment remain
independent of the Manager and free from any relationship which could
materially interfere with the exercise of their judgement on issues of
strategy, performance, resources and standards of conduct. The Board believes
that each Director has the requisite high level and range of business,
investment and financial experience which enables the Board to provide clear
and effective leadership, oversight and proper governance of the Company.
Following formal performance evaluations, the performance of each of the
Directors seeking re-appointment continues to be effective. Each Director has
demonstrated commitment to the role and the Board is satisfied that their
individual performances contribute to the long-term sustainable success of the
Company. All of the Directors have demonstrated that they have sufficient time
and commitment to fulfil their directorial roles with the Company. The Board
therefore recommends the re-appointment of each of the Directors at the Annual
General Meeting.
Board's Policy on Tenure
In normal circumstances, it is the Board's expectation that Directors will not
serve beyond the Annual General Meeting following the ninth anniversary of
their appointment. However, the Board takes the view that independence of
individual Directors is not necessarily compromised by length of tenure on the
Board and that continuity and experience can add significantly to the Board's
strength. The Board believes that recommendation for re-election should be on
an individual basis following a rigorous review which assesses the
contribution made by the Director concerned, but also taking into account the
need for regular refreshment and diversity, as well as providing continuity of
experience of the Company.
It is the Board's policy that the Chairman of the Board will not normally
serve as a Director beyond the Annual General Meeting following the ninth
anniversary of his appointment to the Board. However, this may be extended in
certain circumstances including the facilitation of effective succession
planning and the development of a diverse Board. In such a situation the
reasons for the extension will be fully explained to shareholders and a
timetable for the departure of the Chairman clearly set out.
The Role of the Chairman and Senior Independent Director
The Chairman is responsible for providing effective leadership to the Board,
by setting the tone of the Company, demonstrating objective judgement and
promoting a culture of openness and debate. The Chairman facilitates the
effective contribution and encourages active engagement by each Director. In
conjunction with the Company Secretary, the Chairman ensures that Directors
receive accurate, timely and clear information to assist them with effective
decision-making. The Chairman acts upon the results of the Board evaluation
process by recognising strengths and addressing any weaknesses and also
ensures that the Board engages with major shareholders and that all Directors
understand shareholder views.
The Senior Independent Director acts as a sounding board for the Chairman and
acts as an intermediary for other Directors, when necessary. Working closely
with the other Directors, the Senior Independent Director takes responsibility
for an orderly succession process for the Chairman, and leads the annual
appraisal of the Chairman's performance. The Senior Independent Director is
also available to shareholders to discuss any concerns they may have.
Directors' and Officers' Liability Insurance
The Company maintains insurance in respect of Directors' and Officers'
liabilities in relation to their acts on behalf of the Company. In addition,
the Company has entered into a separate deed of indemnity with each of the
Directors reflecting the scope of the indemnity in the Articles of
Association. Under the Articles of Association, each Director is 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 or her in the proper execution
of his or her duties in relation to the affairs of the Company.
Management of Conflicts of Interest
The Board has a procedure in place to deal with a situation where a Director
has a conflict of interest. As part of this process, each Director prepares a
list of other positions held and all other conflict situations that may need
to be authorised either in relation to the Director concerned or his or her
connected persons. The Board considers each Director's situation and decides
whether to approve any conflict, taking into consideration what is in the best
interests of the Company and whether the Director's ability to act in
accordance with his or her wider duties is affected. Each Director is required
to notify the Company Secretary of any potential, or actual, conflict
situations that will need authorising by the Board. Authorisations given by
the Board are reviewed at each Board meeting.
No Director has a service contract with the Company although all Directors are
issued with letters of appointment, which may be amended from time to time to
reflect regulatory and other changes. Other than the deeds of indemnity
referred to above and the Directors' letters of appointment, there were no
contracts during, or at the end of the year, in which any Director was
interested.
The Company has a policy of conducting its business in an honest and ethical
manner. The Company takes a zero-tolerance approach to bribery and corruption
and has procedures in place that are proportionate to the Company's
circumstances to prevent them. The Manager also adopts a group-wide
zero-tolerance approach and has its own detailed policy and procedures in
place to prevent bribery and corruption. Copies of the Manager's anti-bribery
and corruption policies are available on its website.
In relation to the corporate offence of failing to prevent tax evasion, it is
the Company's policy to conduct all business in an honest and ethical manner.
The Company takes a zero-tolerance approach to facilitation of tax evasion
whether under UK law or under the law of any foreign country and is committed
to acting professionally, fairly and with integrity in all its business
dealings and relationships.
Board Diversity
The Board recognises the importance of having a range of skilled and
experienced individuals with the right knowledge represented on the Board in
order to allow it to fulfil its obligations. The Board also recognises the
benefits and is supportive of the principle of diversity in its recruitment of
new Board members. The Board will not display any bias for age, gender, race,
sexual orientation, socio-economic background, religion, ethnic or national
origins or disability in considering the appointment of its Directors. In view
of its size, the Board will continue to ensure that all appointments are made
on the basis of merit against the specification prepared for each appointment.
In doing so, the Board will take account of the targets set out in the FCA's
Listing Rules, which are set out in the tables below.
As an externally managed investment company, the Board employs no executive
staff, and therefore does not have a chief executive officer or a chief
financial officer, both of which are deemed Senior Board Positions by the FCA.
However, the Directors considers the chairmen of the Board committees to be
Senior Board Positions and the following disclosures are made on this basis.
Other Senior Board Positions recognised by the FCA are the Chairman of the
Board and Senior Independent Director.
The Board has resolved that the Company's year end date is the most
appropriate date for disclosure purposes. The following information has been
provided by each Director through the completion of questionnaires. There
have been no changes since the year end.
Board Gender as at 31 March 2023
Number of Board members Percentage of the Board Number of senior positions on the Board Number in executive management Percentage of executive management
Men 2 50% 4 (B) n/a n/a
Women 2 50% (A) 1 (CD) n/a n/a
Not specified/prefer not to say - - - n/a n/a
(A) Meets target of at least 40% as set out in LR 9.8.6R (9)(a)(i)
(B) Chairman of the Board, Senior Independent Director, Chairman of the Audit
Committee & Chairman of the Management Engagement Committee
(C) Chairman of the Remuneration Committee
(D) Meets target of at least 1 as set out in LR 9.8.6R (9)(a)(ii)
Board Ethnic Background as at 31 March 2023
Number of Board members Percentage of the Board Number of senior positions on the Board Number in executive management Percentage of executive management
White British or other White 4 100% 5 n/a n/a
(including minority-white groups)
Other ethnic group -(E) - - n/a n/a
Not specified/prefer not to say - - - n/a n/a
(E) Does not meet target of at least 1 as set out in LR 9.8.6R (9)(a)(iii)
In relation to the ethnic diversity of the Board, the Directors recognise that
this does not meet the target set out in the Listing Rules, as shown in the
table above. The Directors will take this into account when making future
Board appointments.
Corporate Governance
The Company is committed to high standards of corporate governance and the
Board is accountable to the Company's shareholders for good governance. The
Board has considered the principles and provisions of the AIC Code of
Corporate Governance as published in February 2019 (the "AIC Code"). The AIC
Code addresses the principles and provisions set out in the UK Corporate
Governance Code as published by the FRC in July 2018 (the "UK Code"), as well
as setting out additional provisions on issues that are of specific relevance
to investment trusts.
The Board considers that reporting against the principles and provisions of
the AIC Code, which has been endorsed by the FRC, provides more relevant
information to shareholders than if it had adopted the UK Code. The AIC Code
is available on the AIC's website: theaic.co.uk. It includes an explanation of
how the AIC Code adapts the principles and provisions set out in the UK Code
to make them relevant for investment trusts.
The Board confirms that, during the year, the Company complied with the
principles and provisions of the AIC Code.
Further details of the Company's compliance with the AIC Code can be found on
its website.
Going Concern
The Company's assets consist mainly of equity shares in companies listed on
the London Stock Exchange. The Board has performed stress testing and
liquidity analysis on the portfolio and considers that, in most foreseeable
circumstances, the majority of the Company's investments are realisable within
a relatively
short timescale.
The Board has set limits for borrowing and regularly reviews actual exposures,
cash flow projections and compliance with banking covenants, including the
headroom available. At the year end, the Company had a £20 million loan
facility which is due to mature in May 2027.
Having taken these factors into account, the Directors believe that the
Company has adequate resources to continue in operational existence for the
foreseeable future and has the ability to meet its financial obligations as
they fall due for the period to 30 June 2024, which is at least twelve months
from the date of approval of this Report. For these reasons, they continue to
adopt the going concern basis of accounting in preparing the financial
statements.
Accountability and Audit
Each Director confirms that, so far as he or she is aware, there is no
relevant audit information of which the Company's Auditor is unaware, and they
have taken all the steps that they could reasonably be expected to have taken
as Directors in order to make themselves aware of any relevant audit
information and to establish that the Company's Auditor is aware of that
information.
Independent Auditor
The Company's Auditor, Ernst & Young LLP, has indicated its willingness to
remain in office. The Board will place resolutions before the Annual General
Meeting to re-appoint Ernst & Young LLP as Auditor for the ensuing year
and to authorise the Directors to determine its remuneration.
Relations with Shareholders
The Directors place a great deal of importance on communications with
shareholders. Shareholders and investors may obtain up to date information on
the Company through its website and the Manager's information service.
The Board's policy is to communicate directly with shareholders and their
representative bodies without the involvement of the management group
(including the Company Secretary or the Manager) in situations where direct
communication is required, and representatives from the Manager meet with
major shareholders on at least an annual basis in order to gauge their views.
In addition, the Company Secretary only acts on behalf of the Board, not the
Manager, and there is no filtering of communication. At each Board meeting the
Board receives full details of any communication from shareholders to which
the Chairman responds personally as appropriate.
Directors make themselves available to attend meetings with the Company's
largest shareholders and meet other shareholders at the Annual General Meeting
and, as explained in the Chairman's Statement, the Company will hold an Online
Shareholder Presentation in advance of the Annual General Meeting this year
including the opportunity for an interactive question and answer session.
The notice of the Annual General Meeting is, where practicable, sent out at
least 20 working days in advance of the meeting. All shareholders have the
opportunity to put questions to the Board and Manager at the meeting. Further
details regarding the arrangements for this year's Annual General Meeting and
separate Online Shareholder Presentation are set out in the Chairman's
Statement.
Annual General Meeting
The Annual General Meeting will be held at Wallacespace Spitalfields, 15-25
Artillery Lane, London E1 7HA on Thursday 6 July 2023 at 12 noon.
By order of the Board
abrdn Holdings Limited
Company Secretary
1 George Street
Edinburgh EH2 2LL
24 May 2023
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and the
financial statements, in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year, and under that law they have chosen to prepare the financial
statements in accordance with UK-adopted international accounting standards.
The financial statements are required by law to give a true and fair view of
the state of affairs of the Company and of the profit or loss of the Company
for that period.
In preparing these financial statements, the Directors are required to:
- select suitable accounting policies in accordance with IAS 8
'Accounting Policies, Changes in Accounting Estimates and Errors' and then
apply them consistently;
- make judgments and estimates that are reasonable and prudent;
- present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable information;
- provide additional disclosures when compliance with the specific
requirements in UK-adopted international accounting standards is insufficient
to enable users to understand the impact of particular transactions, other
events and conditions on the Company's financial position and financial
performance;
- state whether the financial statements have been prepared in
accordance with UK-adopted international accounting standards subject to any
material departures disclosed and explained in the notes to the financial
statements; 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 proper accounting records that
disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that the financial statements comply with
the Companies Act 2006. They 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 Statement of Corporate Governance that comply 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, but not
for the content of any information included on the website that has been
prepared or issued by third parties. Legislation in the UK governing the
preparation and dissemination of financial statements may differ from
legislation in
other jurisdictions.
The Board confirms that to the best of its knowledge:
· the financial statements have been prepared in accordance with applicable
accounting standards and give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company;
· in the opinion of the Directors, the Annual Report taken as a whole, is
fair, balanced and understandable and it provides the information necessary to
assess the Company's position and performance, business model and strategy;
and
· the Strategic Report and Directors' Report include 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 the
Company faces.
On behalf of the Board
Robert Talbut
Chairman
24 May 2023
Statement of Comprehensive Income
Year ended Year ended
31 March 2023 31 March 2022
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains on investments at fair value 11 - (6,084) (6,084) - 5,048 5,048
Currency gains - 39 39 - 3 3
Income 3
Dividend income 5,586 - 5,586 4,974 - 4,974
Interest income 7 - 7 - - -
Scrip dividends - - - 194 - 194
Traded option premiums 73 - 73 71 - 71
Money market interest 7 - 7 - - -
5,673 (6,045) (372) 5,239 5,051 10,290
Expenses
Management fee 4 (207) (207) (414) (212) (212) (424)
Administrative expenses 5 (417) - (417) (440) - (440)
Finance costs 7 (363) (363) (726) (135) (135) (270)
(987) (570) (1,557) (787) (347) (1,134)
Profit/(loss) before taxation 4,686 (6,615) (1,929) 4,452 4,704 9,156
Taxation 8 (102) - (102) (73) - (73)
Profit/(loss) attributable to equity holders of the Company 4,584 (6,615) (2,031) 4,379 4,704 9,083
Earnings per Ordinary share (pence) 10 14.83 (21.39) (6.57) 14.21 15.27 29.48
The Company does not have any income or expense that is not included in profit
for the year, and therefore the "Profit for the year" is also the "Total
comprehensive income for the year", as defined in IAS 1 (revised).
The total column of this statement represents the Statement of Comprehensive
Income of the Company, prepared in accordance with UK adopted International
Accounting Standards. The revenue and capital columns are supplementary to
this and are prepared under guidance published by the Association of
Investment Companies.
All items in the above statement derive from continuing operations.
The accompanying notes are an integral part of these financial statements.
Balance Sheet
As at As at
31 March 2023 31 March 2022
Notes £'000 £'000
Non-current assets
Ordinary shares 75,760 77,709
Preference shares 20,895 24,716
Securities at fair value 11 96,655 102,425
Current assets
Other receivables 12 1,383 1,173
Cash at bank 1,176 1,483
2,559 2,656
Creditors: amounts falling due within one year
Other payables (350) (262)
Short-term borrowings (9,000) (19,000)
13 (9,350) (19,262)
Net current liabilities (6,791) (16,606)
Total assets less current liabilities 89,864 85,819
Non-current liabilities
Long-term borrowings 13 (9,951) -
Net assets 79,913 85,819
Share capital and reserves
Called-up share capital 14 15,532 15,460
Share premium account 21,411 21,109
Capital reserve 15 35,930 42,545
Revenue reserve 7,040 6,705
Equity shareholders' funds 79,913 85,819
Net asset value per Ordinary share (pence) 16 257.92 278.29
The financial statements were approved by the Board of Directors and
authorised for issue on 24 May 2023 and were signed on its behalf by:
Robert Talbut
Chairman
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Equity
Year ended 31 March 2023
Share
Share premium Capital Revenue
capital account reserve reserve Total
Note £'000 £'000 £'000 £'000 £'000
As at 31 March 2022 15,460 21,109 42,545 6,705 85,819
Issue of Ordinary shares 72 302 - - 374
(Loss)/profit for the year - - (6,615) 4,584 (2,031)
Equity dividends 9 - - - (4,249) (4,249)
As at 31 March 2023 15,532 21,411 35,930 7,040 79,913
Year ended 31 March 2022
Share
Share premium Capital Revenue
capital account reserve reserve Total
£'000 £'000 £'000 £'000 £'000
As at 31 March 2021 15,447 21,052 37,841 6,517 80,857
Issue of Ordinary shares 13 57 - - 70
Profit for the year - - 4,704 4,379 9,083
Equity dividends 9 - - - (4,191) (4,191)
As at 31 March 2022 15,460 21,109 42,545 6,705 85,819
The Company has aggregate realised and distributable reserves of £35,925,000
as at 31 March 2023 (2022 - £33,931,000), comprising capital reserve -
realised of £28,885,000 (2022 - £27,226,000) and a revenue reserve of
£7,040,000 (2022 - £6,705,000).
The accompanying notes are an integral part of these financial statements.
Cash Flow Statement
Year ended Year ended
31 March 2023 31 March 2022
£'000 £'000
Net cash inflow from operating activities
Dividend income received(A) 5,478 4,809
Interest income received 7 -
Options premium received 71 71
Interest received from money market funds 7 -
Management fee paid (415) (512)
Other cash expenses (432) (417)
Cash generated from operations 4,716 3,951
Interest paid (684) (280)
Overseas tax paid (184) (91)
Net cash inflows from operating activities 3,848 3,580
Cash flows from investing activities
Purchases of investments(A) (16,518) (13,372)
Sales of investments 16,199 9,739
Net cash outflow from investing activities (319) (3,633)
Cash flows from financing activities
Equity dividends paid (4,249) (4,191)
Issue of Ordinary shares 374 70
Loan repayment (19,000) -
Loan drawdown 19,000 -
Net cash outflow from financing activities (3,875) (4,121)
Decrease in cash and cash equivalents (346) (4,174)
Reconciliation of net cash flow to movements in cash and cash equivalents
Decrease in cash and cash equivalents as above (346) (4,174)
Net cash and cash equivalents at start of year 1,483 5,654
Effect of foreign exchange rate changes 39 3
Net cash and cash equivalents at end of year 1,176 1,483
(A) Non-cash dividends during the year comprised scrip dividends of £nil
(2022 - £194,000).
(B) Cash flows are net of repayment of loan from Scotiabank Europe PLC and a
drawdown of the short and long term loan from Royal Bank of Scotland
International Limited.
Notes to the Financial Statements
For the year ended 31 March 2023
1. Principal activity.
The Company is a closed-end investment company, registered in England and
Wales No. 00386561, with its Ordinary shares listed on the London Stock
Exchange.
2. Accounting policies
(a) Basis of accounting. The financial statements of the Company have been
prepared in accordance with UK adopted International Accounting Standards
("IAS").
In preparing these financial statements the Directors have considered the
impact of climate change risk as an emerging risk and have concluded that it
does not have a material impact on the Company's investments. In line with
IFRS investments are valued at fair value, which for the Company are quoted
bid prices for investments in active markets at the Balance Sheet date and
therefore reflect market participants view of climate change risk.
The Company's financial statements are presented in sterling, which is also
the functional currency as it is the currency in which shares are issued and
expenses are generally paid. All values are rounded to the nearest thousand
pounds (£'000) except when otherwise indicated.
Where presentational guidance set out in the Statement of Recommended Practice
("SORP"): 'Financial Statements of Investment Trust Companies and Venture
Capital Trusts' issued by the Association of Investment Companies ("AIC"), is
consistent with the requirements of IAS, the Directors have sought to prepare
the financial statements on a basis compliant with the recommendations of the
SORP issued in July 2022.
Going concern. The Company's assets consist mainly of equity shares in
companies listed on the London Stock Exchange. The Board has performed stress
testing and liquidity analysis on the portfolio and considers that, in most
foreseeable circumstances, the majority of the Company's investments are
realisable within a relatively short timescale. The Board has set limits for
borrowing and regularly reviews actual exposures, cash flow projections and
compliance with banking covenants, including the headroom available. At the
year end, the Company had a £20 million loan facility which is due to mature
in May 2027. Having taken these factors into account, the Directors believe
that the Company has adequate resources to continue in operational existence
for the foreseeable future and has the ability to meet its financial
obligations as they fall due for the period to 30 June 2024, which is at least
twelve months from the date of approval of this Report. For these reasons,
they continue to adopt the going concern basis of accounting in preparing the
financial statements.
Significant accounting judgements, estimates and assumptions. The preparation
of financial statements requires the use of certain significant accounting
judgements, estimates and assumptions which requires management to exercise
its judgement in the process of applying the accounting policies and are
continually evaluated. The Directors do not consider there to be any
significant judgement and estimates within the financial statements for the
year ended 31 March 2023. Special dividends are assessed and credited to
capital or revenue according to their circumstances.
New and amended accounting standards and interpretations. At the date of
authorisation of these financial statements, the following amendments to
Standards and Interpretations were assessed to be relevant and are all
effective for annual periods beginning on or after 1 January 2022 but are
considered to not have a material impact on the financial statements:
- IAS 37 (provisions, Contingent Liabilties and Contingent Assets), IFRS 9
(Financial Instruments), IFRS 16 Amendments (Annual improvements 2018-2020),
and IFRS 3 Amendments (Conceptual Framework)
Future amendments to standards and interpretations. At the date of
authorisation of these financial statements, the following amendments to
Standards and Interpretations were assessed to be relevant and are all
effective for annual periods beginning on or after 1 January 2023;
- IAS 1 Amendments (Non-current Liabilities with Covenants) (effective from
1 January 2024)
The Company intends to adopt the Standards and Interpretations in the
reporting period when they become effective and the Board does not anticipate
that the adoption of these Standards and Interpretations in future periods
will materially impact the Company's financial results in the period of
initial application although there may be revised presentations to the
Financial Statements and additional disclosures.
(b) Investments. All investments are evaluated and managed on a fair value basis
and are therefore classified as FVTPL ("Fair Value Through Profit or Loss").
Investments are recognised and de-recognised at the trade date where a
purchase or sale is under a contract whose terms require delivery within the
timeframe established by the market concerned, and are measured at fair value.
For listed investments, this is deemed to be bid market prices or closing
prices for SETS (London Stock Exchange's electronic trading service) stocks
sourced from the London Stock Exchange.
Gains and losses arising from the changes in fair value are included in net
profit or loss for the period as a capital item. Transaction costs are treated
as a capital cost.
(c) Income. Dividend income from equity investments, including preference shares,
which have a discretionary dividend, is recognised when the shareholders'
rights to receive payment have been established, normally the ex-dividend
date. Special dividends are allocated to revenue or capital based on their
individual merits.
If a scrip dividend is taken in lieu of a cash dividend, the net amount of the
cash dividend declared is credited to the revenue account. Any excess in the
value of the shares received over the amount of the cash dividend foregone is
recognised as capital.
Interest from deposits, interest from debt securities, and income from
preference shares which do not have a discretionary dividend are accounted for
on an accruals basis.
The premium received from traded options is recognised in the revenue column
of the Statement of Comprehensive Income.
(d) Expenses. All expenses are accounted for on an accruals basis. In respect of
the analysis between revenue and capital items presented within the Statement
of Comprehensive Income, all expenses have been presented as revenue items
except those where a connection with the maintenance or enhancement of the
value of the investments held can be demonstrated. Accordingly, the management
fee and finance costs have been allocated 50% to revenue and 50% to capital,
in order to reflect the Directors' expected long-term view of the nature of
the future investment returns of the Company.
(e) Borrowings. Both short-term and long-term borrowings, which comprise interest
bearing bank loans are initially recognised at cost, being the fair value of
the consideration received, net of any issue expenses and subsequently
measured at amortised cost using the effective interest method. The finance
costs, being the difference between the net proceeds of borrowings and the
total amount of payments that require to be made in respect of those
borrowings, are amortised over the life of the borrowings.
(f) 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 expenditure that are taxable or
deductible in other years and it further excludes items that are never taxable
or deductible. The Company has no liability for current tax.
Deferred tax is recognised in respect of all temporary differences at the
Balance Sheet date, where transactions or events that result in an obligation
to pay more tax in the future or right to pay less tax in the future have
occurred at the Balance Sheet date. 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 temporary
differences can be deducted. Deferred tax assets and liabilities are measured
at the rates applicable to the legal jurisdictions in which they arise, using
tax rates that are expected to apply at the date the deferred tax position is
unwound.
Owing to the Company's status as an investment trust, and the intention to
continue meeting the conditions required to obtain approval in the foreseeable
future, the Company has not provided deferred tax on any capital gains and
losses arising on the revaluation or disposal of investments.
(g) Foreign currencies. Monetary assets and liabilities, comprising current
assets, current liabilities and non-current liabilities and non-monetary
assets comprising non-current assets held at fair value which are denominated
in foreign currencies are converted into sterling at the rate of exchange
ruling at the reporting date. Transactions during the year in foreign
currencies are converted at the rate of exchange ruling at the transaction
date. Gains or losses on monetary assets and liabilities arising from a change
in exchange rates subsequent to the date of a transaction are included as a
currency gain or loss in revenue or capital column of the Statement of
Comprehensive Income, depending on whether the gain or loss is of a revenue or
capital nature. Non-monetary assets that are measured at fair value and gains
or losses arising from a change in exchange rates subsequent to the date of a
transaction are included as a gain or loss on investments in the capital
column of the Statement of Comprehensive Income.
(h) Derivatives. The Company may enter into certain derivatives (e.g. traded
options). Traded option contracts are restricted to writing out-of-the-money
options with a view to generating income. Premiums received on traded option
contracts are recognised as income evenly over the period from the date they
are written to the date when they expire or are exercised or assigned. Losses
on any movement in the fair value of open contracts at the year end and on the
exercise of the contracts are recorded in the capital column of the Statement
of Comprehensive Income as they arise.
(i) Cash and cash equivalents. Cash and cash equivalents comprise cash in hand and
at banks and short-term deposits with an original maturity of less than 90
days.
(j) Other receivables. Financial assets classified as loans and receivables are
held to collect contractual cash flows and give rise to cash flows
representing solely payments of principal and interest. As such they are
measured at amortised cost. Other receivables do not carry any interest, they
have been assessed for any expected credit losses over their lifetime due to
their short-term nature.
(k) Other payables. Payables are non-interest bearing and are stated at their
undiscounted cash flows.
(l) Dividends payable. Final dividends are recognised from the date on which they
are approved by shareholders. Interim dividends are recognised when paid.
(m) 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 share
capital comprising Ordinary shares of 50p per share. This reserve is not
distributable.
Capital reserve. This reserve reflects any realised gains or losses in the
period together with any unrealised increases and decreases that have been
recognised in the Statement of Comprehensive Income. These include gains and
losses from foreign currency exchange differences. Additionally, expenses,
including finance costs, are charged to this reserve in accordance with (d)
above.
The capital reserve, to the extent that the gains are deemed realised, is
distributable, including by way of dividend.
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 is distributable, including by way of dividend.
(n) Segmental reporting. The Directors are of the opinion that the Company is
engaged in a single segment of business activity, being investment business.
Consequently, no business segmental analysis is provided.
3. Income
2023 2022
£'000 £'000
Income from listed investments
UK dividend income 4,784 4,198
Overseas dividend income 802 776
Interest from investment in money market funds 7 -
Scrip dividends - 194
5,593 5,168
Other income from investment activity
Deposit interest 7 -
Traded option premiums 73 71
Total income 5,673 5,239
4. Management fees
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Management fees 207 207 414 212 212 424
The management fee is based on 0.45% per annum up to £100 million and 0.40%
over £100 million, by reference to the net assets of the Company and
including any borrowings up to a maximum of £30 million, and excluding
commonly managed funds, calculated monthly and paid quarterly. The fee is
allocated 50% to revenue and 50% to capital. The management agreement is
terminable on not less than six months' notice. The total of the fees paid and
payable during the year to 31 March 2023 was £414,000 (2022 - £424,000) and
the balance due to abrdn Fund Managers Limited ("aFML") at the year end was
£105,000 (2022 - £107,000). The Company held an interest in a commonly
managed investment trust, abrdn Smaller Companies Income Trust plc, in the
portfolio during the year to 31 March 2023 (2022 - same). The value
attributable to this holding is excluded from the calculation of the
management fee payable by the Company.
5. Administrative expenses
2023 2022
£'000 £'000
Directors' remuneration 134 126
Auditor's remuneration: fees payable to the Company's Auditor for the audit of 53 45
the Company's annual accounts
Promotional activities 40 65
Professional fees 19 40
Directors' & Officers' liability insurance 10 7
Trade subscriptions 27 26
Share plan costs 18 22
Registrar's fees 39 43
Printing, postage and stationery 31 26
Custody fees 7 6
Other administrative expenses 39 34
417 440
The management agreement with aFML also provides for the provision of
promotional activities, which aFML has delegated to abrdn Investments Limited.
The total fees payable under the management agreement in relation to
promotional activities were £40,000 (2022 - £65,000) with a balance due to
aFML at the the year end of £10,000 (2022 - £10,000). The Company's
management agreement with aFML also provides for the provision of company
secretarial and administration services to the Company. No separate fee is
charged to the Company in respect of these services, which have been delegated
to abrdn Holdings Limited.
6. Directors' remuneration
The Company had no employees during the year (2022 - none). No pension
contributions were paid for Directors (2022 - £nil).
7. Finance costs
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
On bank loans 363 363 726 135 135 270
8. Taxation
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
(a) Analysis of the charge for the year
Overseas tax 102 - 102 73 - 73
Total tax charge 102 - 102 73 - 73
(b) Factors affecting the tax charge for the year. The tax assessed for the year
is lower than the effective rate of corporation tax in the UK. The differences
are explained in the reconciliation below:
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Profit before taxation 4,686 (6,615) (1,929) 4,452 4,704 9,156
Corporation tax at an effective rate of 19% (2022 - 19%) 890 (1,257) (367) 846 894 1,740
Effects of:
Non-taxable UK dividend income (903) - (903) (830) - (830)
Excess management expenses not utilised 162 108 270 131 66 197
Overseas withholding tax 102 - 102 73 - 73
Non-taxable overseas dividends (149) - (149) (147) - (147)
Losses/(gains) on investments not taxable - 1,156 1,156 - (959) (959)
Gains on currency movements - (7) (7) - (1) (1)
Total tax charge 102 - 102 73 - 73
At 31 March 2023 the Company had surplus management expenses and loan
relationship debits with a tax value of £7,572,000 based on a corporation tax
rate of 25% (2022 - £7,217,000 based on a corporation tax rate of 25%) in
respect of which a deferred tax asset has not been recognised. This is because
the Company is not expected to generate taxable income in a future period in
excess of the deductible expenses of that future period and, accordingly, it
is unlikely that the Company will be able to reduce future tax liabilities
through the use of existing surplus expenses.
9. Dividends
2023 2022
£'000 £'000
Amounts recognised as distributions to equity holders in the period:
Third interim dividend for 2022 of 3.20p (2021 - 3.00p) per share 986 924
Final dividend for 2022 of 4.20p (2021 - 4.20p) per share 1,294 1,293
First two interim dividends for 2023 totalling 6.40p (2022 - 6.40p) per share 1,982 1,972
Refund of unclaimed dividends from previous periods (15) -
4,247 4,189
3.5% Cumulative Preference shares 2 2
Total 4,249 4,191
The third interim dividend of 3.20p for the year to 31 March 2023, which was
paid on 28 April 2023, and the proposed final dividend of 4.60p for the year
to 31 March 2023, payable on 28 July 2023, have not been included as
liabilities in these financial statements.
Set out below are the total Ordinary dividends payable 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:
2023 2022
£'000 £'000
Three interim dividends for 2023 totalling 9.60p (2022 - 9.60p) per share 2,973 2,959
Proposed final dividend for 2023 of 4.60p (2022 - 4.20p) per share 1,424 1,294
4,397 4,253
The amount reflected above for the cost of the proposed final dividend for
2023 is based on 30,964,580 Ordinary shares, being the number of Ordinary
shares in issue at the date of this Report.
10. Earnings per Ordinary share
2023 2022
£'000 £'000
Earnings per Ordinary share are based on the following figures:
Revenue return 4,584 4,379
Capital return (6,615) 4,704
Total return (2,031) 9,083
Weighted average number of Ordinary shares 30,919,854 30,812,251
During the year there were no (2022 - same) potentially dilutive shares in
issue.
11. Non-current assets - Securities at fair value
2023 2022
Listed Listed
investments investments
£'000 £'000
Opening book cost 87,106 80,380
Opening investment holdings gains 15,319 13,165
Opening valuation 102,425 93,545
Purchases 16,513 13,554
Sales - proceeds (16,199) (9,722)
(Losses)/gains on investments (6,084) 5,048
Total investments held at fair value through profit or loss 96,655 102,425
2023 2022
Listed Listed
investments investments
£'000 £'000
Closing book cost 89,610 87,106
Closing investment holdings gains 7,045 15,319
Total investments held at fair value through profit or loss 96,655 102,425
2023 2022
(Losses)/gains on investments £'000 £'000
Net realised gains on sales of investments(A) 2,210 2,984
Cost of call options exercised (20) (90)
Net realised gains on sales 2,190 2,894
Movement in fair value of investments (8,274) 2,171
Cost of put options assigned - (17)
(6,084) 5,048
(A) Includes losses realised on the exercise of traded options of £20,000
(2022 - £107,000) which are reflected in the capital column of the Statement
of Comprehensive Income.
The cost of exercising of call options and assigning put options is the
difference between the market price of the underlying shares and the strike
price of the options. The premiums earned on options expired, exercised or
assigned of £73,000 (2022 - £71,000) have been dealt with in the revenue
account.
The movement in the fair value of traded option contracts has been calculated
in accordance with the accounting policy stated in note 2(h) and has been
charged to the capital reserve.
The Company received £16,199,000 (2022 - £9,722,000) from investments sold
in the period. The book cost of these investments when they were purchased was
£14,009,000 (2022 - £6,828,000). 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.
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 losses on investments in the
Statement of Comprehensive Income. The total costs on purchases of investments
in the year was £78,000 (2022 - £59,000). The total costs on sales of
investments in the year was £11,000 (2022 - £6,000). 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.
At 31 March 2023 the Company held the following investments comprising more
than 3% of the class of share capital held:
Class
Country of Number of Class of held
Company Incorporation shares held shares held %
abrdn Smaller Companies Income Trust plc Scotland 3,013,726 Ordinary 13.6
Ecclesiastical Insurance Office England 4,240,000 8 5/8% Cum Pref 4.0
Royal & Sun Alliance England 4,350,000 7 3/8% Cum Pref 3.5
General Accident Scotland 3,548,000 7.875% Cum Pref 3.2
12. Other receivables
2023 2022
£'000 £'000
Accrued income and prepayments 1,381 1,173
Option contract premium 2 -
1,383 1,173
None of the above amounts are overdue.
13. Current liabilities
2023 2022
£'000 £'000
Short-term bank loan 9,000 19,000
Amount due to brokers - 5
Other creditors 350 257
9,350 19,262
Included above are the following amounts owed to aFML for management and
savings scheme services and for the promotion of the Company.
2023 2022
£'000 £'000
Other creditors 123 159
2023 2022
Non-current liabilities £'000 £'000
Long-term bank loan 10,000 -
Loan arrangement fees (49) -
9,951 -
On 3 May 2022, the Company entered into a new five year £20 million loan
facility with The Royal Bank of Scotland International Limited, London Branch.
£10 million of the new loan facility has been drawn down and fixed at an
all-in interest rate of 3.903% until 30 April 2027. £9 million of the
facility has been drawn down on a short-term basis at an all-in interest rate
of 5.577%, maturing 3 April 2023. The proceeds of the new loan were used to
repay and cancel in full the Company's previous loan facility with Scotiabank
Europe PLC.
The terms of The Royal Bank of Scotland International Limited facility contain
covenants that consolidated gross borrowings do not exceed 33% of the adjusted
portfolio value ("Securities at fair value" per the Balance Sheet adjusted for
any ineligible investments) at any time, the number of eligible investments
shall not be less than 30 at any time and the portfolio value shall at all
times be equal to or more than £40 million. The Company met these covenants
during the year and following the year end.
The arrangement expenses incurred on the drawdown of the loan will be
amortised over the term of the loan.
14. Called up share capital
2023 2022
Number £'000 Number £'000
Authorised
Ordinary shares of 50 pence each 39,800,000 19,900 39,800,000 19,900
3.5% Cumulative Preference shares of £1 each 100,000 100 100,000 100
20,000 20,000
Allotted, called up and fully paid Ordinary shares of 50 pence each:
Balance brought forward 30,819,580 15,410 30,794,580 15,397
Ordinary shares issued 145,000 72 25,000 13
Balance carried forward 30,964,580 15,482 30,819,580 15,410
Allotted, called up and fully paid 3.5% Cumulative Preference shares of £1
each:
Balance brought forward and carried forward 50,000 50 50,000 50
15,532 15,460
During the year the Company issued 145,000 (2022 - 25,000) Ordinary shares of
50p each for proceeds of £374,000 (2022 - £70,000).
Each Ordinary and Cumulative Preference share carries one vote at general
meetings of the Company. The Cumulative Preference shares are considered to be
equity. They have no fixed redemption date, carry a right to receive a fixed
rate of dividend and, on a winding up of the Company, to the payment of such
fixed cumulative preferential dividends to the date of such winding up and to
the repayment of the capital paid up on such shares in priority to any payment
to the holders of the Ordinary shares.
The Ordinary shares, excluding any treasury shares, carry a right to receive
dividends and, on a winding up or other return of capital, after meeting the
liabilities of the Company, the surplus assets will be paid to Ordinary
shareholders in proportion to their shareholdings.
There are no restrictions on the transfer of Ordinary or Cumulative Preference
shares in the Company other than certain restrictions which may from time to
time be imposed by law.
15. Capital reserve
2023 2022
£'000 £'000
At 31 March 2022 42,545 37,841
Net gains on sales of investments during year 2,190 2,894
Movement in fair value (decreases)/increases of investments (8,274) 2,154
Management fees (207) (212)
Interest on bank loans (363) (135)
Currency gains 39 3
At 31 March 2023 35,930 42,545
The capital reserve includes gains of £7,045,000 (31 March 2022 - gains of
£15,319,000), which relate to the revaluation of investments held at the
reporting date.
16. Net asset value per Ordinary share
The net asset value per share and the net assets attributable to the Ordinary
shareholders at the year end were as follows:
2023 2022
Net assets per Balance Sheet £79,913,000 £85,819,000
3.5% Cumulative Preference shares of £1 each £50,000 £50,000
Attributable net assets £79,863,000 £85,769,000
Number of Ordinary shares in issue 30,964,580 30,819,580
Net asset value per share 257.92p 278.29p
17. Analysis of changes in financial liabilities during the year
At At
31 March Cash Other 31 March
2022 flows movements(A) 2023
Financing activities £'000 £'000 £'000 £'000
Debt due within one year (19,000) 10,000 - (9,000)
Debt due after more than one year - (10,000) 49 (9,951)
(19,000) - 49 (18,951)
At At
31 March Cash Other 31 March
2021 flows movements(A) 2022
Financing activities £'000 £'000 £'000 £'000
Debt due within one year (9,000) - (10,000) (19,000)
Debt due after more than one year (9,999) - 9,999 -
(18,999) - (1) (19,000)
(A) The other movements column represents the amortisation of the loan
arrangement fees (2022 - movement in maturity profile and amortisation of loan
arrangement fees).
18. Financial instruments
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 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.
The Company may also, subject to Board approval, 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 3, the premium
received and fair value changes in respect of options written in the year were
£73,000 (2022 - £71,000). Positions closed during the year realised a loss
of £20,000 (2022 - £107,000). The largest position in derivative contracts
held during the year at any given time was £40,000 (2022 - £26,000). The
Company had no open positions in derivative contracts at 31 March 2023 (2022 -
nil).
The Board has delegated the risk management function in relation to financial
instruments to abrdn Fund Managers Limited ("aFML") under the terms of its
management agreement with aFML (further details of which are included under
note 4). 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 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 given their relatively low value.
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 Group (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 Limited, which is responsible
for ensuring that the Company is managed within the terms of its investment
guidelines and the limits set out in its pre-investment disclosures to
investors (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 Group's Internal Audit Department is independent of the Risk Division and
reports directly to the Group's CEO and to 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 Manager 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 Group's CEO. 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 corporate governance structure is supported by several committees
to assist the board of directors of abrdn, 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.
(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 convertibles and preference shares;
- the level of income receivable on cash deposits; and
- 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 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. The fixed rate facilities
are used to finance opportunities at low rates and, the revolving and
uncommitted facilities to provide flexibility in the short-term. Current bank
covenants state that the gross borrowings will not exceed one-third of
adjusted portfolio value.
The Board reviews the value of investments in preference shares on a regular
basis.
Interest rate profile. The interest rate risk profile of the portfolio of
financial assets and liabilities (excluding ordinary shares) at the Balance
Sheet date was as follows:
Weighted
average
period Weighted
for which average
rate is interest Fixed Floating
fixed rate rate rate
As at 31 March 2023 Years % £'000 £'000
Assets
UK preference shares - 8.49 20,895 -
Cash and cash equivalents - 3.97 - 1,176
Total assets 20,895 1,176
Liabilities
Short-term bank loans 0.01 5.58 (9,000) -
Long-term bank loans 4.01 3.90 (9,951) -
Total liabilities (18,951) -
Weighted
average
period Weighted
for which average
rate is interest Fixed Floating
fixed rate rate rate
As at 31 March 2022 Years % £'000 £'000
Assets
UK preference shares - 8.50 24,716 -
Cash and cash equivalents - 0.01 - 1,483
Total assets 24,716 1,483
Liabilities
Short-term bank loans 0.27 1.55 (19,000) -
Total liabilities (19,000) -
The weighted average interest rate is based on the current yield of each
asset, weighted by its market value. The weighted average interest rate on
bank loans is based on the interest rate payable, weighted by the total value
of the loans.
The cash assets consist of cash deposits on call earning interest at
prevailing market rates.
The UK preference shares assets have no maturity date.
Short-term debtors and creditors (with the exception of bank loans) have been
excluded from the above tables.
Interest rate sensitivity. The sensitivity analyses below have been determined
based on the exposure to interest rates for non-derivative instruments at the
Balance Sheet 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 200 basis points higher or lower and all other
variables were held constant, the Company's:
- profit before tax for the year ended 31 March 2023 would increase/decrease
by £24,000 (2022 - £30,000). This is mainly attributable to the Company's
exposure to interest rates on its floating rate cash balances. These figures
have been calculated based on cash positions at each year end.
- the capital return would decrease/increase by £3,342,000 (2022 -
increase/decrease by £6,810,000) using VaR ("Value at Risk") analysis based
on 100 observations of monthly VaR computations of fixed interest portfolio
positions at each year end.
Currency risk. A small proportion of the Company's investment portfolio is
invested in overseas securities whose values are subject to fluctuation due to
changes in exchange rates.
Management of the risk. The revenue account is subject to currency
fluctuations arising on dividends received in foreign currencies and,
indirectly, due to the impact of foreign exchange rates upon the profits of
investee companies. The Company does not hedge this currency risk. The Company
does not have any exposure to foreign currency liabilities. No currency
sensitivity analysis has been prepared as the Company considers any impact to
be immaterial to the financial statements.
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 sector. The allocation of assets to specific
sectors 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 recognised stock exchanges.
Price sensitivity. If market prices at the Balance Sheet date had been 20%
higher or lower while all other variables remained constant, the profit before
tax attributable to Ordinary shareholders for the year ended 31 March 2023
would have increased/decreased by £15,152,000 (2022 - increase/decrease of
£15,542,000). This is based on the Company's portfolio of Ordinary shares
held at each year end.
(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.
Short-term flexibility is achieved through the use of loan facilities, details
of which can be found in note 13. Under the terms of the loan facility, the
Manager provides the lender with loan covenant reports on a monthly basis, to
provide the lender with assurance that the terms of the facility are not being
breached. The Manager will also review the credit rating of a lender on a
regular basis.
The Board imposes borrowing limits to ensure gearing levels are appropriate to
market conditions and reviews these on a regular basis. Borrowings comprise a
revolving loan facility and a fixed term loan facility. The Board has imposed
a maximum equity gearing level of 35% which constrains the amount of gearing
that can be invested in equities which, in normal market conditions, are more
volatile than the preference shares within the portfolio. Details of
borrowings at 31 March 2023 are shown in note 13.
Maturity profile. The maturity profile of the Company's financial liabilities
at the Balance Sheet date, with amounts undiscounted and order by contractual
maturity, was as follows:
Within Within More than
1 year 1-5 years 5 years
At 31 March 2023 £'000 £'000 £'000
Trade and other payables (350) - -
Short-term bank loans (9,044) - -
Long-term bank loans (392) (11,262) -
(9,786) (11,262) -
Within Within More than
1 year 1-5 years 5 years
At 31 March 2022 £'000 £'000 £'000
Trade and other payables (262) - -
Short-term bank loans (19,086) - -
(19,348) - -
(iii) Credit risk. This is the risk of 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. The risk is managed as follows:
- where the Investment Manager makes an investment in a bond, corporate or
otherwise, the credit rating of the issuer is taken into account so as to
minimise the risk to the Company of default;
- 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 large number of brokers,
whose credit-standing is reviewed periodically by the investment 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 Group's Compliance carries out periodic reviews of the
Custodian's operations and reports its findings to the abrdn Group's Risk
Management Committee and to the Board of the Company. This review will also
include checks on the maintenance and security of investments held;
- transactions involving derivatives and other arrangements wherein the
creditworthiness of the entity acting as broker or counterparty to the
transaction is likely to be of sustained interest are subject to rigorous
assessment by the Investment Manager of the credit worthiness of that
counterparty. The Company's aggregate exposure to each such counterparty is
monitored regularly by the Board; and
- cash is held only with reputable banks with high quality external credit
enhancements.
It is the Investment Manager's policy to trade only with A- and above (Long
Term rated) and A-1/P-1 (Short Term rated) counterparties.
None of the Company's financial assets is secured by collateral or other
credit enhancements.
Credit risk exposure. In summary, compared to the amounts in the Balance
Sheet, the maximum exposure to credit risk at 31 March 2023 and 31 March 2022
was as follows:
2023 2022
Balance Maximum Balance Maximum
Sheet exposure Sheet exposure
£'000 £'000 £'000 £'000
Non-current assets
Quoted preference shares at fair value through profit or loss 20,895 20,895 24,716 24,716
Current assets
Accrued income 1,363 1,363 1,158 1,158
Option contract premium 2 2 - -
Cash and cash equivalents 1,176 1,176 1,483 1,483
23,436 23,436 27,357 27,357
None of the Company's financial assets is past its due date.
Fair value of financial assets and liabilities. The fair value of the
long-term loan has been calculated at £9,097,000 as at 31 March 2023 (2022 -
none) compared to an accounts value in the financial statements of £9,951,000
(2022 - none) (note 13). The fair value of each loan is 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 and currency. The loan is considered to be
classed as a Level 2 liability under IFRS 13. The carrying values of fixed
asset investments are stated at their fair values, which have been determined
with reference to quoted market prices. Traded options contracts are valued at
fair value which have been determined with reference to quoted market values
of the contracts. The contracts are tradeable on a recognised exchange. For
all other short-term debtors and creditors, their book values approximate to
fair values because of their short-term maturity.
19. Fair value hierarchy
IFRS 13 'Financial Value Measurement' 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 levels:
Level 1: quoted prices (unadjusted) in active markets for identical assets or
liabilities;
Level 2: inputs other than quoted prices included within Level 1 that are
observable for the assets or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices); and
Level 3: inputs for the asset or liability that are not based on observable
market data (unobservable inputs).
The financial assets and liabilities measured at fair value in the Balance
Sheet are grouped into the fair value hierarchy at 31 March 2023 as follows:
Level 1 Level 2 Level 3 Total
Note £'000 £'000 £'000 £'000
Financial assets at fair value through profit or loss
Quoted investments a) 96,655 - - 96,655
Net fair value 96,655 - - 96,655
Level 1 Level 2 Level 3 Total
As at 31 March 2022 Note £'000 £'000 £'000 £'000
Financial assets at fair value through profit or loss
Quoted investments a) 102,425 - - 102,425
Net fair value 102,425 - - 102,425
a) Quoted investments. The fair value of the Company's quoted investments has
been determined by reference to their quoted bid prices at the reporting date.
Quoted investments included in Fair Value Level 1 are actively traded on
recognised stock exchanges.
20. Capital management policies and procedures
The Company's capital management objectives are:
- to ensure that the Company will be able to continue as a going concern; and
- to maximise the return to its equity shareholders through an appropriate
balance of equity capital and debt.
The capital of the Company consists of equity, comprising issued capital,
reserves and retained earnings.
The Board monitors and reviews the broad structure of the Company's capital.
This review includes the nature and planned level of gearing, which takes
account of the Investment Manager's views on the market and the extent to
which revenue in excess of that which is required to be distributed should be
retained. The Company is not subject to any externally imposed capital
requirements.
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.
Transactions with the Manager. The Company has an agreement with the abrdn
Group for the provision of management, secretarial, accounting and
administration services and for the carrying out of promotional activities in
relation to the Company. Details of transactions during the year and balances
outstanding at the year end are disclosed in notes 4 and 5.
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 IAS 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)/premium to net asset value per Ordinary share
The difference between the share price and the net asset value per Ordinary
share expressed as a percentage of the net asset value per Ordinary share.
2023 2022
Share price (p) a 250.00 279.00
NAV per Ordinary share (p) b 257.92 278.29
(Discount)/premium (a-b)/a (3.1%) 0.3%
Dividend Cover
Dividend cover measures the revenue return per share divided by total
dividends per share, expressed as a ratio.
2023 2022
Revenue return per share a 14.83p 14.21p
Dividends per share b 14.20p 13.80p
Dividend cover a/b 1.04x 1.03x
Dividend Yield
The annual dividend divided by the share price, expressed as a percentage.
2023 2022
Annual dividend per Ordinary share (p) a 14.20p 13.80p
Share price (p) b 250.00p 279.00p
Dividend yield a/b 5.7% 4.9%
Net Gearing
Net gearing measures total borrowings less cash and cash equivalents divided
by shareholders' funds, expressed as a percentage. Under AIC reporting
guidance, cash and cash equivalents includes net amounts due to and from
brokers at the period end as well as cash and short-term deposits.
2023 2022
Borrowings (£'000) a 18,951 19,000
Cash (£'000) b 1,176 1,483
Amounts due to brokers (£'000) c - 5
Amounts due from brokers (£'000) d - -
Shareholders' funds (£'000) e 79,913 85,819
Net gearing (a-b+c-d)/e 22.2% 20.4%
Ongoing Charges Ratio
The ongoing charges ratio has been calculated in accordance with guidance
issued by the AIC as the total of investment management fees and
administrative expenses and expressed as a percentage of the average net asset
values throughout the year.
2023 2022
Investment management fees (£'000) 414 424
Administrative expenses (£'000) 417 440
Less: non-recurring charges(A) (£'000) - (17)
Ongoing charges (£'000) 831 847
Average net assets (£'000) 80,617 86,114
Ongoing charges ratio (excluding look-through costs) 1.03% 0.98%
Look-through costs(B) 0.14% 0.16%
Ongoing charges ratio (including look-through costs) 1.17% 1.14%
(A) Comprises promotional acitivity fees not expected 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 amongst other things,
includes the cost of borrowings and transaction costs.
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 March 2023 NAV Price
Opening at 1 April 2022 a 278.29p 279.00p
Closing at 31 March 2023 b 257.92p 250.00p
Price movements c=(b/a)-1 -7.3% -10.4%
Dividend reinvestment(A) d 5.1% 4.9%
Total return c+d -2.2% -5.5%
Share
Year ended 31 March 2022 NAV Price
Opening at 1 April 2021 a 262.41p 248.00p
Closing at 31 March 2022 b 278.29p 279.00p
Price movements c=(b/a)-1 6.1% 12.5%
Dividend reinvestment(A) d 5.3% 5.9%
Total return c+d +11.4% +18.4%
(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 Annual Financial Report
The Annual General Meeting will be held at Wallacespace Spitalfields, 15-25
Artillery Lane, London E1 7HA on Thursday 6 July 2023 at 12 noon.
The Annual Financial Report Announcement is not the Company's statutory
accounts. The above results for the year ended 31 March 2023 are an abridged
version of the Company's full accounts, which have been approved and audited
with an unqualified report. The 2022 and 2023 statutory accounts received
unqualified reports from the Company's auditor and did not include any
reference to matters to which the auditor drew attention by way of emphasis
without qualifying the reports, and did not contain a statement under S.498 of
the Companies Act 2006. The financial information for 2022 is derived from the
statutory accounts for 2022 which have been delivered to the Registrar of
Companies. The 2023 accounts will be filed with the Registrar of Companies in
due course.
The Annual Report and Accounts will be posted to shareholders and copies will
be available from the registered office of the Manager and on the Company's
website, www.shiresincome.co.uk (http://www.shiresincome.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.
By order of the Board
abrdn Holdings Limited
Company Secretary
24 May2023
* Neither the Company's website nor the content of any website accessible from
hyperlinks on the Company's website (or any other website) is (or is deemed to
be) incorporated into, or forms (or is deemed to form) part of this
announcement.
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