Invesco Perpetual Select Trust plc
Annual Financial Report Announcement
Year Ended 31 May 2016
.
FINANCIAL PERFORMANCE
CUMULATIVE TOTAL RETURNS TO 31 MAY 2016
UK Equity Portfolio
|
ONE
YEAR |
THREE
YEARS |
FIVE
YEARS |
| Net Asset Value |
–1.4% |
34.7% |
90.4% |
| Share Price |
–2.2% |
25.1% |
97.5% |
| FTSE All-Share Index |
–6.3% |
9.6% |
31.2% |
Global Equity Income Portfolio
The name and objective of this Portfolio were changed with effect from 30 November 2011.
|
SINCE
30 NOVEMBER 2011 |
ONE
YEAR |
THREE
YEARS |
FIVE
YEARS |
| Net Asset Value |
71.3% |
–0.2% |
23.8% |
51.8% |
| Share Price |
84.4% |
–2.8% |
22.2% |
57.8% |
| MSCI World Index (£) |
67.8% |
0.7% |
25.7% |
55.1% |
Balanced Risk Portfolio
The name and objective of this Portfolio were changed with effect from 8 February 2012. The strategy followed for the last four years since 8 February 2012 is substantially different to the strategy in place prior to that date. The five year figures below are presented for consistency.
|
SINCE
8 FEBRUARY 2012 |
ONE
YEAR |
THREE
YEARS |
FIVE
YEARS |
| Net Asset Value |
19.1% |
–0.3% |
9.5% |
9.6% |
| Share Price |
31.0% |
–2.1% |
7.4% |
13.6% |
| 3 month LIBOR +5% pa |
24.3% |
5.6% |
16.7% |
28.4% |
Managed Liquidity Portfolio
|
ONE
YEAR |
THREE
YEARS |
FIVE
YEARS |
| Net Asset Value |
–0.1% |
0.0% |
1.3% |
| Share Price |
–0.9% |
0.0% |
1.5% |
Source: Thomson Reuters Datastream.
YEAR END NET ASSET VALUE, SHARE PRICE AND DISCOUNT
SHARE CLASS |
NET ASSET
VALUE
(PENCE) |
SHARE
PRICE
(PENCE) |
DISCOUNT/
(PREMIUM) |
| UK Equity |
164.3 |
162.5 |
1.1% |
| Global Equity Income |
159.2 |
156.0 |
2.0% |
| Balanced Risk |
122.8 |
119.3 |
2.9% |
| Managed Liquidity |
103.1 |
101.0 |
2.1% |
.
CHAIRMAN’S STATEMENT
The Company
The Company’s investment objective is to provide shareholders with a choice of investment strategies and policies, each intended to generate attractive risk-adjusted returns.
The Company’s share capital comprises four share classes: UK Equity Shares, Global Equity Income Shares, Balanced Risk Shares and Managed Liquidity Shares, each of which has its own separate portfolio of assets and attributable liabilities.
The investment objectives and policies of all of the Portfolios are set out on pages 28 to 31.
The Company enables shareholders to adjust their asset allocation to reflect their view of prevailing market conditions. As set out on the inside of the front cover, shareholders have the opportunity to convert between share classes, free of capital gains tax, every three months.
Performance
The NAV total return of the UK Equity Portfolio over the year was –1.4%, which compares with the total return of –6.3% posted by the FTSE All-Share Index.
The NAV total return of the Global Equity Income Portfolio over the year was –0.2%, compared with the MSCI World Index (£) net return of +0.7%.
The Balanced Risk Portfolio returned –0.3% compared with the total return of +5.6% for its benchmark of 3 months LIBOR plus 5% per annum.
The Managed Liquidity Portfolio performance continued to be affected by the ongoing low interest environment, with an NAV total return of –0.1%.
The UK Equity Portfolio performed well over the year, although the second half represented a period of slight underperformance as more cyclical companies recovered. The small outperformance recorded by the Global Equity Income Portfolio in the first half was reversed for similar reasons. The portfolio managers’ reports go into considerable detail about the sources of performance. The Balanced Risk Portfolio, however, performed well once its strategic position in commodities, which had hampered performance in the first half, recovered from the oversold position to which pessimism about growth had driven it.
From a competitive point of view the performance of the Balanced Risk Portfolio is interesting. Elsewhere in this report (page 19) you will find the analysis of contribution to return over a variety of periods. This makes clear the scale of the drag from commodities as they plunged by as much as in the Great Depression of the early 1930s. It also shows the contribution made by the portfolio manager’s tactical allocations, which have been very helpful. Your Board regularly reviews the performance of this strategy against other funds and managers who are aiming to produce the same outperformance of cash benchmarks with relatively low volatility. These include some closed end funds, some hedge funds and ’absolute return’ funds. Within this universe the Balanced Risk Portfolio’s performance since its inception looks very respectable and ahead of several well known competitors even though at 31 May 2016 its return since the strategy was adopted just over four years ago of 19.1% was behind that of our objective, over the same period, of 24.3%. Very recent performance has lifted the return since inception to 25.4%, which is very slightly ahead of our objective. This objective, was set to represent a smoothed, lower volatility, version of the risk premium that theoretically ought to be achievable from equities over cash returns. This remains an attractive aim and I am pleased that, despite a severe stress test in the last year, the Balanced Risk Portfolio was close to its target return since inception at the year end and has subsequently exceeded it.
The uninspiring returns for the four portfolios over the year disguise very marked swings in asset prices. A low point for commodities and commodity producers was reached in February. At those levels very many commodities were trading below even their short term marginal costs of production with consequent cash losses and looming defaults, especially in the energy sector. Slightly better economic numbers, particularly from China, caused a very marked turn around in markets, erasing most of the previous underperformance by commodity producers, banks and emerging markets. Conversely, those who had concentrated on equities with more mundane virtues were left gasping for breath.
The political environment has produced some surprises while failing to resolve some of its longer term problems, in the Middle East in particular. The selection of Donald Trump as the Republican candidate for the US Presidency was not ultimately a surprise, though it would have been a few months earlier. The vote by the UK in its referendum to leave the European Union was, however, a considerable surprise and therefore a shock to markets.
Outlook
Little has changed in the general economic outlook. Monetary policy remains very easy and real interest rates are extremely and anomalously low, and often negative even for long-dated paper. The risks of dislocation still seem to be weighted towards deflation though there has been a welcome, though small, rise in US real wages. However, the extreme and generalised fear that led to the lows in February does seem to have abated. It has, however, now been replaced by considerable uncertainty following the British decision to vote to leave the European Union. At present, all that can sensibly be said about the economy is that it is extremely likely to lead to lower growth for the UK and probably the rest of the EU for several years while the UK itself may well suffer a near term recession as consumers delay spending and investment is also postponed. Politics in the UK have at times in the last three months been an absurd blend of farce and tragedy, though the appointment of Theresa May as Prime Minister has resolved the turmoil in the governing Conservative party even if there is still a lack of certainty over the resolution of the detail surrounding the implementation of “Brexit”. However, the absence of an effective opposition remains a problem, especially because it fosters a sense of disenfranchisement in a significant part of the electorate.
Meantime the US Presidential election looms over us. It is clear that it will be a contest between Hillary Clinton and Donald Trump. The latter represents a threat to the liberal world order should he be elected. If he is, one can only hope that the dysfunctional US political system will continue in that way.
The European Union remains a troubled area and subject to potential shocks. It is possible that it has already passed a peak of achievable integration whatever its leaders desire and that therefore the long term future of the Euro must be in doubt because of the vast gulf in competitiveness that it spans among the member countries.
Events in Turkey and Nice have yet again demonstrated that the conflicts raging in the Middle East have the ability to inflict terrible damage, both human and political, well outside the immediate area. The ramifications and the likelihood of further disruption make any predictions very hazardous, except perhaps to suggest that no resolution is in sight.
From an investment point of view we must continue to invest within our equity portfolios in companies that offer growing dividends generated by free cash flow on reasonable valuations. This is not easy but our portfolio managers have shown long term skill in achieving it. Balanced Risk, as discussed earlier, represents an attractive way of achieving relatively stable returns in the absolute return category, with an extremely credible management team in Atlanta.
Management Fee Arrangements
As announced in May this year, the Directors have negotiated an improvement in the investment management fees payable on the Managed Liquidity portfolio. These reduce from an annual rate of 0.25% to 0.12% of net assets from 1 June 2016. No changes are being made to the fees on the Company’s other portfolios.
The Board
Last year I reported that the Board considered it was time that it expanded in view of the need to provide for succession and to enhance the Board’s balance of skills, experience, knowledge and diversity. The Board commenced this process with the appointment of Victoria Muir as a Director of the Company with effect from 1 July 2015 and we expect to appoint another new Director this year.
David Rosier, who is currently serving his ninth year on the Board will retire at the conclusion of the AGM in October. I would like to take this opportunity to record my thanks to David for his contributions to the Board’s stewardship of the Company over the years.
Auditor
In the Audit Committee Report in last year’s annual financial report Sir Michael Bunbury indicated that in view of EU legislation and pending UK regulation the Committee was intending to initiate an audit tender process and it has now done so. In the spirit of the new rules, Ernst & Young LLP, who have audited the Company since its launch and also audited its predecessor, Merrill Lynch Asset Allocator plc, ruled themselves out of participating in the process. The culmination of the exercise was that the Committee recommended to the Board that we invite Grant Thornton LLP to be the Company’s auditor, which we have done, and a resolution proposing the appointment of Grant Thornton LLP as the Company’s auditor for the year to 31 May 2017 and authorising the Audit Committee to determine their remuneration has consequently been included in the notice for the forthcoming AGM.
Dividends
As I explained in my statement last year and have expanded on subsequently in the half yearly financial report and successive dividend announcements, the past year saw the implementation of the Board’s new dividend policy whereby for both UK Equity and Global Equity Income shares, dividends were paid by way of three equal interim dividends declared in July, October and January with a larger ‘wrap-up’ fourth interim declared in April. We set targets for each of these, being that the four dividends in respect of the financial year ending 31 May 2016 should amount to at least 6.15p per UK Equity share and at least 6p per Global Equity Income share. I also said that these dividend targets might require a contribution from capital. It transpired that this was necessary and the targets were achieved with contributions of approximately 0.3p per share to the UK Equity dividends and 0.5p to the Global Equity Income dividends. We intend to continue with this policy and have set the same targets for the year ending 31 May 2017.
It continues to be the case that in order to maximise the capital return on the Balanced Risk Shares, the Directors only intend to declare dividends on the Balanced Risk Shares to the extent required, having taken into account the dividends paid on the other Share classes, to maintain the Company’s status as an investment trust.
For the Managed Liquidity Shares it remains the Directors’ intention to distribute substantially all net revenues earned shortly before conversion dates but, in consequence of the continued very low interest rates prevailing, the cumulative retained net revenue of the Managed Liquidity Portfolio continues to be minimal and, in view of the administrative costs, the Directors have not declared any dividends on the Managed Liquidity Shares since 18 April 2012.
Discount Policy
The Company adopted a discount control policy for all four share classes in January 2013, whereby the Company offers to issue or buy back shares of all classes with a view to maintaining the share price of the Shares at close to their respective net asset values. The policy has been successful to date and the level of share buy backs since its adoption has been modest. The ongoing implementation of this policy is dependent upon the Company’s authority to buy back shares, and the Directors’ authority to issue shares on a non pre-emptive basis, being renewed at general meetings of the Company.
Share Capital Movements
During the year to 31 May 2016, the Company sold from treasury 550,000 UK Equity Shares and 1,120,000 Global Equity Income Shares and purchased and placed in treasury 90,000 Balanced Risk Shares and 150,000 Managed Liquidity Shares. No Shares were cancelled from treasury. Since the year end the Company has purchased and placed in treasury 150,000 UK Equity shares and 250,000 Global Equity Income Shares. The Board intends to use the Company’s buy back and issuance authorities when this will benefit existing shareholders as a whole and to operate the discount control policy mentioned above, and will ask shareholders to renew the authorities as and when appropriate.
Share Class Conversions
The Company enables shareholders to adjust their asset allocation to reflect their views of prevailing market conditions. Shareholders have the opportunity to convert their holdings of Shares into any other class of Share, without incurring any tax charge (under current legislation). The conversion dates for the forthcoming year are as follows: 1 August 2016; 1 November 2016; 1 February 2017; and 2 May 2017. Should you wish to convert shares at any of these dates, conversion forms, which are available on the Manager’s website at www.invescoperpetual.co.uk/investmenttrusts, or CREST instructions must be received at least 10 days before the relevant conversion date.
Annual General Meeting (‘AGM’)
The business of the AGM is summarised in the Directors’ Report on pages 52 and 53. The meeting will be held at Invesco’s city office, 6th Floor, 125 London Wall, London EC2Y 5AS at 11.30am on 4 October 2016 and shareholders are cordially invited to attend. Refreshments will be provided. The Board recommends that shareholders vote in favour of all resolutions as each of the Directors intend to do in respect of their own Shares.
Patrick Gifford
Chairman
28 July 2016
.
STRATEGIC REPORT
UK EQUITY SHARE PORTFOLIO
MANAGER’S REPORT
Investment Objective
The investment objective of the UK Equity Portfolio is to provide shareholders with an attractive real long-term total return by investing primarily in UK quoted equities.
Market and Economic Review
The year under review produced a return of –6.3% for the UK equity market, as measured by the FTSE All-Share index (total return).
Stock market sentiment over the 12 months proved volatile and was largely driven by concerns over a slowing Chinese economy and the global economic outlook, the actions of central banks and by movements in commodity prices. The market started the period in a negative mood, on growing concerns over the impact of the strengthening US dollar on emerging market debt and the deflationary impact of a possible devaluation of the Chinese Renminbi.
The first increase in US interest rates for seven years saw a calendar year-end rally by equities, but the start of 2016 saw the FTSE All-Share index fall back sharply to a multi-year low. Commodity prices hit ten year lows, and oil and mining companies cut profit guidance and, in some cases, dividends. Volatility moderated as oil and metals prices showed some recovery and the ECB cut interest rates in the eurozone to zero and stepped up the pace of quantitative easing. Nevertheless, worries persisted over the profitability of banks in a zero interest rate world. Janet Yellen, Chairman of the US Federal Reserve, provided a boost to equities in March by stating that the US central bank should proceed cautiously with interest rate rises, causing a welcome weakening in the US dollar. Concerns over the outcome of the UK referendum weighed on stock market sentiment as the period drew to a close.
Portfolio Performance
On a total return basis, the Net Asset Value of the UK Equity share class fell by 1.4% during the 12 months to the end of May 2016, compared to a fall of 6.3% in the FTSE All-Share index.
Portfolio Strategy and Review
Against a highly volatile market back drop, the key contributors to the Company’s outperformance of its benchmark index were the holdings in the tobacco sector. All four of Reynolds American, British American Tobacco, Imperial Brands and Altria delivered strongly positive returns over the period under review, with Reynolds’ shares rising by over 55%. Reynolds concluded the purchase of US tobacco company Lorillard in June 2015 and the company is beginning to see the benefits of this acquisition, with cost and revenue synergies emerging from the process of integration. Dividend growth and profit margins remain healthy across all the tobacco majors, in spite of the continuing volume decline, driven by product innovation, tobacco quality improvements and cost rationalisation.
Also contributing strongly to performance were certain of the investments in the financials sector. In March, London Stock Exchange announced a “merger of equals” with Deutsche Boerse and saw its shares rise to a record high. Earlier in the period, Amlin, a Lloyd’s insurance market investment vehicle, agreed to a takeover from Japanese company Mitsui, resulting in a significant uplift to its share price. The share prices of Beazley and Hiscox, also in the non-life insurance sector, both rose on the back of positive results and amid growing takeover speculation.
The portfolio continues to avoid any exposure to banks, where dividend prospects are still uncertain, and mining companies, where the medium term outlook for metals prices is still problematic. The zero weighting in the banks sector impacted positively on performance, while the zero weighting in the mining sector, where share prices demonstrated exceptional swings, was a positive over the period as a whole, but a negative over the final few months.
Among the detractors to performance over the period was support services business G4S. The company has faced headwinds in its emerging markets businesses and from provisions for its “onerous” (unprofitable) contracts in the UK and from balance sheet concerns. The Manager believes the negative share price reaction has been unduly harsh, with the company well positioned to deliver growth from its bid pipeline in a challenging macro-economic environment.
TalkTalk Telecom announced that it had been the victim of a cyber-attack in October 2015. The shares were marked down in the weeks following the news, but stabilised later in the period as it was confirmed that the impact of the attack had been less than originally suspected.
Game Digital saw its shares fall sharply after an update on pre-Christmas trading, which confirmed that UK sales had fallen off sharply at the most critical time of year for the company. Sales of old format content have declined much faster than expected and, while sales of new generation content have remained strong, these were not enough to offset the fall. The company’s sales in the Spanish market have remained strong.
Rolls-Royce published a negative trading update in November, forecasting that 2015 profits would be at the lower end of expectations and that demand would weaken in 2016. With visibility of future earnings growth showing no signs of improvement, the Manager sold the remainder of the holding in the company, having reduced the position earlier in the year.
Also weighing on portfolio performance were the holdings in the travel & leisure sector, where sentiment has been overshadowed by terrorist events. Thomas Cook confirmed a challenging trading backdrop for 2016, although it has moved much of its summer capacity to the Western Mediterranean. EasyJet reported a reduction in revenue per seat – with the Paris bombing and the French air traffic control strikes having a short term impact.
In terms of portfolio activity, the holding in Amlin was disposed of on acceptance of the bid from Mitsui. As mentioned above, the holding in Rolls-Royce was sold while the holdings in GlaxoSmithKline, Ladbrokes and Workspace were also disposed of. New investments were made in Altria, BCA Marketplace, Circassia Pharmaceuticals, Next, Secure Trust Bank, VPC Specialty Lending and Zegona Communications.
Outlook
The near term outlook for the UK equity market is dominated by the implications of the result of the EU referendum. Although directionally predictable, the scale of the decline in Brexit-sensitive UK equity sectors (financials, construction, travel) has been severe, whilst any sectors which are heavily exposed to US dollar revenues performed strongly after the vote. As a result, whilst not planning a fundamental shift in sector allocation, the fund manager is focussing analysis on identifying good opportunities in the areas suffering the worst of the sell-off. History suggests this is the most productive course, particularly since valuations in these sectors were already very depressed.
Looking through the Brexit induced volatility, the outlook for the UK stock market is likely to be clouded by a muted macro-economic backdrop in the global economy and increased pressure on profitability in the corporate sector. The multi-year monetary policy of setting interest rates at close to zero has not stimulated capital investment. Rather, companies have contained costs, particularly wages, and have used low financing costs to buy back their own stock. Whilst good for profit margins and shareholder returns in the short term, the result has been a level of economic growth in the developed world which is below historic averages. Another side effect has been to widen income inequality in many developed market economies, which contributed to the result of the UK referendum. This is prompting incumbent governments, increasingly wary of more populist movements, to redress the balance with a range of measures, including an increase in the national minimum wage and tackling corporate tax arbitrage. Combined with some natural wage pressure from tighter labour markets in the US, this is beginning to threaten corporate profit margins.
The collapse in energy prices and the relentless drive of digital technology have entrenched low inflation expectations such that, combined with the factors outlined above, the global economy faces an ongoing lack of pricing power. This in turn has restrained the level of turnover growth in many industries, while any rebound in energy prices or pick up in employment costs may not easily be passed on.
The overall implications for the UK stock market, which is highly global in its make-up, are that earnings growth in many sectors may disappoint. Given that valuations are not obviously cheap, overall returns from equities may be expected to be subdued for the time being. The volatility witnessed since the start of 2016, in addition to that surrounding the referendum and partly caused by nervousness over financial stability in China, is also likely to remain a feature of the investment landscape. The manager continues to focus the Company’s portfolio on investments which demonstrate the ability to grow earnings and dividends in this challenging environment.
Mark Barnett
Portfolio Manager
28 July 2016
.
STRATEGIC REPORT
UK EQUITY SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 31 MAY 2016
Ordinary shares listed in the UK unless stated otherwise
COMPANY |
SECTOR† |
MARKET
VALUE
£’000 |
% OF
PORTFOLIO |
| British American Tobacco |
Tobacco |
3,982 |
5.4 |
| Reynolds American – US common stock |
Tobacco |
3,877 |
5.3 |
| Imperial Brands (formerly Imperial Tobacco) |
Tobacco |
3,351 |
4.6 |
| BT Group |
Fixed Line Telecommunications |
3,034 |
4.1 |
| AstraZeneca |
Pharmaceuticals & Biotechnology |
2,754 |
3.7 |
| Roche – Swiss common stock |
Pharmaceuticals & Biotechnology |
2,598 |
3.5 |
| BAE Systems |
Aerospace & Defence |
2,493 |
3.4 |
| BP |
Oil & Gas Producers |
2,402 |
3.3 |
| Provident Financial |
Financial Services |
2,179 |
3.0 |
| Rentokil Initial |
Support Services |
1,867 |
2.5 |
| Legal & General |
Life Insurance |
1,849 |
2.5 |
| Beazley |
Non-life Insurance |
1,813 |
2.5 |
| London Stock Exchange |
Financial Services |
1,781 |
2.4 |
| Capita |
Support Services |
1,764 |
2.4 |
| Bunzl |
Support Services |
1,734 |
2.4 |
| Compass |
Travel & Leisure |
1,726 |
2.3 |
| RELX (formerly Reed Elsevier) |
Media |
1,696 |
2.3 |
| Babcock International |
Support Services |
1,690 |
2.3 |
| BTG |
Pharmaceuticals & Biotechnology |
1,623 |
2.2 |
| Hiscox |
Non-life Insurance |
1,468 |
2.0 |
| SSE |
Electricity |
1,459 |
2.0 |
| Shaftesbury |
Real Estate Investment Trusts |
1,349 |
1.8 |
| Centrica |
Gas, Water & Multiutilities |
1,328 |
1.8 |
| NewRiver Retail |
Real Estate Investment Trusts |
1,314 |
1.8 |
| Novartis – Swiss common stock |
Pharmaceuticals & Biotechnology |
1,269 |
1.7 |
| KCOM |
Fixed Line Telecommunications |
1,237 |
1.7 |
| Derwent London |
Real Estate Investment Trusts |
1,207 |
1.6 |
| easyJet |
Travel & Leisure |
1,127 |
1.5 |
| Drax |
Electricity |
1,057 |
1.4 |
| G4S |
Support Services |
916 |
1.2 |
| HomeServe |
Support Services |
915 |
1.2 |
| Smith & Nephew |
Health Care Equipment & Services |
914 |
1.2 |
| TalkTalk Telecom |
Fixed Line Telecommunications |
865 |
1.2 |
| Thomas Cook |
Travel & Leisure |
860 |
1.2 |
| Circassia Pharmaceuticals |
Pharmaceuticals & Biotechnology |
851 |
1.2 |
| Reckitt Benckiser |
Household Goods & Home Construction |
851 |
1.2 |
| Lancashire |
Non-life Insurance |
795 |
1.1 |
| BCA Marketplace |
Financial Services |
784 |
1.1 |
| A J Bell – Unquoted |
Financial Services |
750 |
1.0 |
| Altria – US common stock |
Tobacco |
735 |
1.0 |
| Sherborne Investors Guernsey B – A shares |
Financial Services |
708 |
1.0 |
| Vectura |
Pharmaceuticals & Biotechnology |
659 |
0.9 |
| Next |
General Retailers |
643 |
0.9 |
| P2P Global Investments |
Equity Investment Instruments |
617 |
0.8 |
| Zegona Communications |
Non-equity Investment Instruments |
610 |
0.8 |
| Harworth |
Real Estate Investment & Services |
593 |
0.8 |
| CLS |
Real Estate Investment & Services |
578 |
0.8 |
| N Brown |
General Retailers |
528 |
0.7 |
| GAME Digital |
General Retailers |
389 |
0.5 |
| Secure Trust Bank |
Banks |
347 |
0.5 |
| Doric Nimrod Air Two – preference shares |
Equity Investment Instruments |
339 |
0.5 |
| Doric Nimrod Air Three – preference shares |
Equity Investment Instruments |
338 |
0.5 |
| Macau Property Opportunities Fund |
Real Estate Investment & Services |
314 |
0.4 |
| VPC Specialty Lending Investments |
Financial Services |
282 |
0.4 |
| PuriCore |
Health Care Equipment & Services |
134 |
0.2 |
| Funding Circle SME |
Equity Investment Instruments |
124 |
0.2 |
| Nimrod Sea Assets |
Equity Investment Instruments |
102 |
0.1 |
| HaloSource |
Chemicals |
6 |
– |
| Barclays Bank – Nuclear Power Notes 28 Feb 2019 |
Electricity |
2 |
– |
| Melrose Industries |
Industrial Engineering |
2 |
– |
|
|
|
|
|
|
73,579 |
100.0 |
† FTSE Industry Classification Benchmark.
.
STRATEGIC REPORT
GLOBAL EQUITY INCOME SHARE PORTFOLIO
MANAGER’S REPORT
Investment Objective
The investment objective of the Global Equity Income Portfolio is to provide an attractive and growing level of income return and capital appreciation over the long term, predominantly through investment in a diversified portfolio of equities worldwide.
Market and Economic Review
Global equity markets rose marginally over the 12 months to the end of May 2016, despite market concerns over lower-for-longer growth prospects, heightened financial volatility and a lack of clarity over central bank policies. The arrival of a much anticipated US Federal Reserve (Fed) interest rate increase in December 2015 for the first time in almost a decade was embraced by investors. Whilst the Fed had initially indicated room for four US interest rate hikes in 2016, global macroeconomic and geopolitical developments continued to influence the Fed’s timing, forcing it to pursue a more cautious approach. Encouraging core economic, housing and retail data pointed to improving consumer confidence and a pick-up, albeit modest, in growth as the broader US economy regained its momentum.
Markets welcomed the European Central Bank’s expansion of its quantitative easing programme in an effort to revive eurozone inflation, underpin the region’s slow path to recovery and counter external economic threats. Although investors initially embraced the Bank of Japan’s surprise move to implement negative interest rates, concerns over a stronger yen and the effectiveness of monetary policy dampened their mood.
Elsewhere, confidence returned to emerging markets, supported by some positive economic data from China. However, concerns over China’s ability to rebalance the economy and the impact of a possible near-term US interest rate hike weighed on investor sentiment. After spending much of 2015 on a downward trajectory, the global benchmark Brent crude oil recovered to the US$50-per-barrel mark for the first time in seven months in May.
Portfolio Performance
On a total return basis, the Portfolio’s net asset value declined by 0.2% over the 12 months to the end of May 2016, compared to a rise of 0.7% in the MSCI World Index (£, net of withholding tax).
Portfolio Strategy and Review
Performance of the Portfolio lagged the benchmark MSCI World index over the 12 months, largely due to its underweight exposure to the US and overweight exposure to the UK and Europe.
Our overweight exposure to UK equities detracted from returns, in part due to the challenging market conditions faced by FTSE 100 companies. For the year to the end of May 2016, the FTSE 100 Index returned –7.23% (total return). In particular, declining commodity prices and a slowdown in manufacturing took its toll, whilst financials were subject to repeated market volatility. Looking at Europe, both our relative overweight exposure and stock selection in the region detracted from overall returns. This was mostly due to our exposure to European financials, which continued to struggle in a low interest rate environment.
The Portfolio’s relative underweight position in the US, which strongly outperformed the broader benchmark index as the economy regained its momentum supported by stronger core economic data, was a limiting factor. Whilst overall US equity market valuations continued to appear stretched to us, careful stock selection was a positive for portfolio returns. Rising consumer confidence, a strong housing recovery and an improving labour market helped to support greater discretionary spending. A number of our US equity holdings were among the top individual contributors to returns, such as Microsoft, Chevron and Philip Morris International. Our Asia (ex-Japan) exposure outperformed the regional component of the reference index due to strong stock selection.
At the sector level, the Portfolio’s overweight exposure to the energy sector detracted as the oil & gas industry experienced continued pressure. However, this started to reverse towards the end of the period. Stock selection in the financial (which have been subject to repeated market volatility), industrials (impacted by a downturn in commodities) and utilities sectors also detracted from returns. Whilst our exposure to the healthcare sector marginally detracted from returns, stock selection, such as our holding in Novartis AG, which we believe continues to offer a healthy dividend, was a positive as our position outperformed the benchmark index return in this sector.
In contrast, strong stock selection in consumer staples, with holdings such as British American Tobacco, Kellogg and Philip Morris International, as well as in the cyclically-geared consumer discretionary and materials sectors proved beneficial as both strongly contributed to the Portfolio’s performance. Our overweight exposure to telecommunication services, exemplified by our holding in China Mobile, a dominant mobile operator in China with clear opportunities to grow its earnings, was also a positive. Stock selection within information technology was a positive and contributed relatively strong performance versus the benchmark index, but was offset by being underweight in this sector.
Finally, as economic conditions increasingly showed signs of improving health and modest growth, the de-rating of more economically-sensitive areas provided a number of attractively-valued opportunities. We continue to find such opportunities within financials as well as other out-of-favour sectors, such as energy and consumer discretionary.
Outlook
Sluggish global economic growth, low inflation and potential geopolitical headwinds, particularly the upcoming US presidential elections in November 2016, continue to persist. The US economy is benefiting from modest growth and Europe’s economic recovery continues to gain ground.
Investors were completely wrong-footed by the decision of UK voters on 23 June 2016 to leave the European Union. As a result, the immediate market reaction was extreme as dramatic market moves reflected the emotional response of investors. The main pain was taken by sterling but equities were also affected, particularly in cyclical sectors, such as financials, as investors retreated into perceived ‘safe haven’ assets across global markets. However, after the initial volatility, with the Bank of England hinting at additional stimulus measures, markets appear to be slowly stabilising. We think this reflects the event being principally a UK one, with Europe sharing some of the pain, but with the global contagion contained.
Looking ahead, we remain optimistic that a number of UK and European companies offer compelling valuation opportunities, particularly in the financials sector, and should benefit from the combined tailwinds of loose monetary policy, encouraging labour data and returning consumer confidence. Our strategy remains constant, to invest in high quality companies at attractive valuations. We view high quality companies as those that can sustain profit margins and deliver positive returns through the economic cycle. We view growing and sustainable dividends as clear evidence of these sorts of companies. In aggregate therefore, we target companies that offer attractive yields, sustainable income and potential capital upside.
Nick Mustoe
Portfolio Manager
28 July 2016
.
STRATEGIC REPORT
GLOBAL EQUITY INCOME SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 31 MAY 2015
Ordinary shares unless stated otherwise
COMPANY |
INDUSTRY GROUP† |
COUNTRY† |
MARKET
VALUE
£’000 |
% OF
PORTFOLIO |
| British American Tobacco |
Food Beverage & Tobacco |
UK |
1,955 |
3.4 |
| BT Group |
Telecommunication Services |
UK |
1,924 |
3.3 |
| Novartis |
Pharmaceuticals Biotechnology & Life Sciences |
Switzerland |
1,854 |
3.2 |
| JPMorgan Chase |
Diversified Financials |
US |
1,760 |
3.1 |
| Chevron |
Energy |
US |
1,727 |
3.0 |
| Philip Morris International |
Food Beverage & Tobacco |
US |
1,653 |
2.9 |
| Legal & General |
Insurance |
UK |
1,650 |
2.9 |
| Pfizer |
Pharmaceuticals Biotechnology & Life Sciences |
US |
1,632 |
2.8 |
| Amgen |
Pharmaceuticals Biotechnology & Life Sciences |
US |
1,554 |
2.7 |
| Microsoft |
Software & Services |
US |
1,515 |
2.6 |
| Nielsen |
Commercial & Professional Services |
US |
1,483 |
2.6 |
| PNC Financial Services |
Banks |
US |
1,461 |
2.5 |
| RELX (formerly Reed Elsevier) |
Media |
Netherlands |
1,459 |
2.5 |
| United Technologies |
Capital Goods |
US |
1,394 |
2.4 |
| ING |
Banks |
Netherlands |
1,387 |
2.4 |
| BP |
Energy |
UK |
1,347 |
2.3 |
| Airbus |
Capital Goods |
France |
1,312 |
2.3 |
| Statoil |
Energy |
Norway |
1,286 |
2.2 |
| Roche |
Pharmaceuticals Biotechnology & Life Sciences |
Switzerland |
1,269 |
2.2 |
| Orange |
Telecommunication Services |
France |
1,258 |
2.2 |
| Total |
Energy |
France |
1,208 |
2.1 |
| Allianz |
Insurance |
Germany |
1,182 |
2.1 |
| Intesa Sanpaolo |
Banks |
Italy |
1,147 |
2.0 |
| Aon – A shares |
Insurance |
US |
1,144 |
2.0 |
| Deutsche Boerse |
Diversified Financials |
Germany |
1,117 |
1.9 |
| Taiwan Semiconductor Manufacturing |
Semiconductors & Semiconductor Equipment |
Taiwan |
1,101 |
1.9 |
| Deutsche Post |
Transportation |
Germany |
1,101 |
1.9 |
| Centrica |
Utilities |
UK |
1,076 |
1.9 |
| UBS |
Diversified Financials |
Switzerland |
1,059 |
1.8 |
| American Express |
Diversified Financials |
US |
1,039 |
1.8 |
| Hiscox |
Insurance |
UK |
946 |
1.6 |
| Nordea |
Banks |
Sweden |
924 |
1.6 |
| Amcor |
Materials |
Australia |
915 |
1.6 |
| Royal Dutch Shell – A shares |
Energy |
Netherlands |
875 |
1.5 |
| Booker |
Food & Staples Retailing |
UK |
871 |
1.5 |
| easyJet |
Transportation |
UK |
860 |
1.5 |
| Adecco |
Commercial & Professional Services |
Switzerland |
858 |
1.5 |
| CK Hutchison |
Capital Goods |
Hong Kong |
814 |
1.4 |
| DS Smith |
Materials |
UK |
785 |
1.4 |
| Honda Motor |
Automobiles & Components |
Japan |
778 |
1.4 |
| RTL |
Media |
Luxembourg |
743 |
1.3 |
| Las Vegas Sands |
Consumer Services |
US |
732 |
1.3 |
| Yue Yuen Industrial |
Consumer Durables & Apparel |
Hong Kong |
708 |
1.2 |
| Williams-Sonoma |
Retailing |
US |
682 |
1.2 |
| Standard Chartered |
Banks |
UK |
629 |
1.1 |
| United Parcel Service – B shares |
Transportation |
US |
592 |
1.0 |
| China Mobile – R |
Telecommunication Services |
Hong Kong |
547 |
1.0 |
| London Stock Exchange |
Diversified Financials |
UK |
540 |
0.9 |
| Canon |
Technology Hardware & Equipment |
Japan |
529 |
0.9 |
| Union Pacific |
Transportation |
US |
496 |
0.9 |
| Zhejiang Expressway – H |
Transportation |
Hong Kong |
424 |
0.7 |
| Cheung Kong Property |
Real Estate |
Hong Kong |
367 |
0.6 |
|
|
|
57,669 |
100.0 |
† MSCI and Standard & Poor’s Global Industry Classification Standard.
H H-Shares – shares issued by companies incorporated in the People’s Republic of China (PRC) and listed on the Hong Kong Stock Exchange.
R: Red Chip Holdings – holdings in companies incorporated outside the PRC, listed on the Hong Kong Stock Exchange, and controlled by PRC entities by way of direct or indirect shareholding and/or representation on the board.
.
STRATEGIC REPORT
BALANCED RISK SHARE PORTFOLIO
MANAGER’S REPORT
Investment Objective
The investment objective of the Balanced Risk Portfolio is to provide shareholders with an attractive total return in differing economic and inflationary environments, and with low correlation to equity and bond market indices by gaining exposure to three asset classes: debt securities, equities and commodities.
Market and Economic Review
After a prolonged period of calm, volatility returned in earnest during the third quarter of 2015, leading to contagion and more unstable correlations within and across asset classes. Global equity markets experienced a challenging quarter as disappointing economic data across developed economies and China suggested a more difficult environment ahead for share prices. Commodity prices in aggregate continued to fall, with the Bloomberg Commodity Index recording its worst quarterly loss since the depths of the recession in 2008. Bonds were the only asset class to generate slight gains as investors sought a safe haven from the return of volatility in equities and commodities, and as interest rate normalisation was put on hold and expectations for lacklustre growth bolstered their attractiveness.
Equity markets’ results varied over the span of the fourth quarter as early period strength gave way to broad weakness in December. Nevertheless, in local currency terms, equity markets used within the strategy ended the quarter with positive returns, led by Japan, Europe, Hong Kong and US large caps. Bond markets also ended the quarter mixed owing to a host of varying factors. Canada and Japan saw prices rise marginally while US, UK and Australian bonds traded lower. Commodities ended 2015 with their third quarterly loss for the year. Three of the four sub-complexes finished with losses, led by energy, which was plagued by a strong US dollar, rising global production and softening demand. Industrial metals fell on further weakening indicators from the Chinese economy, while precious metals fell on US dollar strength and the first interest rate increase by the US Federal Reserve (Fed) in nine years. Agriculture prices were flat as weather impact led to inconsistent results across the sub-complex.
The first quarter of 2016 saw the return of volatility in equities post the rate hike by the Fed. Despite the dramatic rally in stocks in March, the weak start to the year left equities with negative returns in aggregate. Commodities were finally able to halt the freefall in prices during this quarter largely due to strength in metal prices early in the period and strength in agricultural and energy commodities later in the period. Bonds emerged as the clear winner for the quarter as strong performance in January and February on safe haven flows saw only minor dilution by a pullback in March.
The Company’s year ended with most developed equity markets continuing to ease higher, building on momentum after a challenging start to 2016. Bond markets rebounded from lacklustre results in April with solid gains despite central bank jawboning about the imminent need to hike policy rates. Commodities in aggregate posted slight declines whereas at the complex level, agricultural and energy commodities performed well while metals posted losses.
Portfolio Performance
The Balanced Risk Portfolio posted a negative return for the year of –0.3%, compared with +5.6% for the benchmark, 3 month LIBOR plus 5%.
Portfolio Strategy and Review
The Balanced Risk strategy seeks to achieve returns through balancing risk exposure between three asset classes, being equities, bonds and commodities. The asset class weightings are determined using a proprietary investment process, with assets being selected according to three key criteria: a correlation matrix to ensure diversification; the ability to generate excess returns; and specific liquidity and transparency criteria. Exposure to the asset classes is principally obtained through highly liquid and transparently priced exchange-traded futures contracts, with cash and cash equivalents being held as collateral.
Bonds started the financial year strongly as the only consistent contributor to returns for the third quarter of 2015 as nervous investors sought a safe haven from the continuing decline in commodity prices and the renewed volatility in equity prices. Several factors caused weakness in equities for the period, including the surprise Chinese Renminbi devaluation, disappointing GDP data from Europe and Canada, weak manufacturing purchasing managers index (PMI) data from a host of countries and confusion about likely policy direction from the Fed. Commodities were the largest detractor from results in the quarter. Energy suffered the steepest price declines, as US stockpiles remained well above the five-year seasonal average and a weakening Chinese economy and the prospect of the return of Iranian barrels on the lifting of sanctions added to fear of a global oil glut. Agricultural commodities were weighed down by corn, wheat and soy exposures as improving weather conditions raised production estimates and a stronger dollar added additional price pressure. Industrial metals, including both copper and aluminium, declined further, in concert with concerns over China’s slowest economic growth in two decades. Despite an August rally in gold, precious metals remained in a downward trend, undermined by a strong dollar and prospects for a US interest rate increase later in the year.
In the fourth quarter, developed equities were the sole contributor to results, but performance diverged between markets. Equities saw broad strength in October as share price indices rebounded in a range of 5%-11% from the weakness in the third quarter. Europe and Japan led all markets, even in the face of uninspiring economic data, largely driven by expectations for additional monetary stimulus. Bonds had a minor impact on performance for the quarter as the period was marked by comments from the US Fed about the need to begin embarking on the path of rate normalisation. Additionally, relatively strong performance from equity markets in October and November reduced the safe haven appeal of bonds. Commodities produced the largest drag on the quarter’s results. Energy-related assets were the most meaningful detractor led by declines in Brent and WTI crude oil, which continued to be pressured by a stronger US dollar, rising supplies, with Russia’s production hitting a post-Soviet high in December, and high inventory levels.
Government bonds bounced back in the first quarter of 2016 as the return of volatility in equities created strong demand for safe haven assets. Bonds helped to temper poor performance across risky assets in January and February while only posting minor losses when risk appetite returned in March. Commodities also bolstered gains during the quarter as the long slide in materials prices levelled off. Initially, precious metals were the primary driver of results as investors sought safe haven assets amidst the volatility in equities and as a hedge against the inconsistencies between the pronouncements and actions of central banks. Later, energy and agricultural commodities took the baton, as beneficiaries of a weakening US dollar. Despite a strong rally across equity markets late in the period, equities were the sole net detractor from results for the quarter. Volatility in the asset class in the first two months of the year led to one of the poorest starts to a calendar year for the asset class. A combination of weak economic data and confusion over the direction and effectiveness of central bank policy led to nervousness amongst investors that central bankers tried to assuage through dovish language and hints of continued policy accommodation.
Bonds finished the Company’s fiscal year strongly despite continued calls from central bankers for a hike in rates in the summer. Potential factors helping buoy bond prices included a tepid start to the year across several economic measures including GDP, ISM manufacturing data and regional Fed surveys. Additionally, concerns over the strengthening support for a “Brexit”, which was up for vote in June, may have sparked demand for safe haven assets. Most equity markets continued to recover in May from a tough start to 2016 by building on momentum from April. US, European and Japanese shares saw strong gains ranging from 1.7%-3.8% for May. UK shares only managed marginal gains, likely as a result of uncertainty surrounding the impact of a “Brexit”. Hong Kong was the only market among the six we invest in to see losses in May as it traded off in sympathy with China. Commodities produced mild losses for the month at the asset class level. Agricultural commodities led results on continued strong performance of soymeal and soybeans, corn, sugar and a recent positive trend for live cattle. Energy commodities also saw gains as a result of supply disruptions due to the Canadian wildfires and upheaval in Nigeria and Venezuela. The exception was natural gas which continues to struggle with excess inventory after the warm winter. Industrial metals traded off on weaker than expected China manufacturing data and on the weakening of the Chinese Renminbi relative to the US dollar. Gold and silver also struggled in May in response to Fed calls for rate increases and rumours that Venezuela was selling its gold reserves in order to meet obligations as the country spirals into economic crisis.
Outlook
The issue at centre stage for financial markets over the foreseeable future will be the fallout from the vote by the UK to leave the European Union. Investors will be keen to gain an understanding of the economic impact the move may have not only on the UK and Europe, but if there is potential to inflict harm on a broader scale. Central banks are already adopting an accommodative stance with the Bank of England’s Mark Carney hinting at the potential for additional monetary policy easing over the summer months. The other impact of the “Brexit” is whether or not it spurs a separatist movement amongst other EU members causing an existential crisis for the bloc. The only certainty arising from the impact of the vote is a period of increased uncertainty.
Current positioning of the portfolio retains overweights across all six equity markets, but on a reduced basis in Europe, Japan and both US markets while the overweights to the UK and Hong Kong have been strengthened. In bonds, we have shifted to an underweight stance in Australia and Canada and have softened the overweight to the UK. The overweight to US Treasuries has been increased, but only mildly. The strategy is now absent not only Japanese government bonds, but also German government bonds primarily as a result of the negative yields in those instruments and in the case of Japan, the impaired flight-to-safety quality. In general, we have become more constructive in commodities. We are carrying overweights across all agricultural exposures, and have shifted from underweight to overweight in the energy complex with the exception of unleaded petrol which holds a reduced underweight. In metals, we have moved from underweight to overweight in copper, aluminium and silver and have strengthened the existing overweight to gold.
Scott Wolle
Portfolio Manager
28 July 2016
.
STRATEGIC REPORT
BALANCED RISK SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 31 MAY 2016
|
YIELD
% |
MARKET
VALUE
£’000 |
% OF
NET
ASSETS |
| Short-Term Investments |
|
|
|
| Short-Term Investment Company (Global Series) |
0.579 |
2,190 |
24.8 |
| UK Treasury Bill 30 Aug 2016 |
0.458 |
2,497 |
28.2 |
| UK Treasury Bill 7 Nov 2016 |
0.481 |
2,993 |
33.9 |
|
|
|
|
| Total Short Term Investments |
|
7,680 |
86.9 |
|
|
|
|
| Hedge Funds(1) |
|
|
|
| Harbinger Class PE Holdings |
|
17 |
0.2 |
| Harbinger Class L Holdings |
|
1 |
– |
|
|
|
|
| Total Hedge Funds |
|
18 |
0.2 |
|
|
|
|
| Total Fixed Asset Investments |
|
7,698 |
87.1 |
(1) The hedge fund investments are residual holdings of the previous investment strategy, which are awaiting realisation of underlying investments.
Derivative instruments held in the Balanced Risk Share Portfolio are shown on the following page. At the year end all the derivative instruments held in the Balanced Risk Share Portfolio were exchange traded futures contracts. Holdings in futures contracts that are not exchange traded are permitted as explained in the investment policy on page 30.
STRATEGIC REPORT
BALANCED RISK SHARE PORTFOLIO
LIST OF DERIVATIVE INSTRUMENTS
AT 31 MAY 2016
|
NOTIONAL
EXPOSURE
£’000 |
NOTIONAL
EXPOSURE
AS % OF
NET ASSETS |
| Government Bond Futures: |
|
|
| UK |
1,473 |
16.7 |
| Australia |
1,458 |
16.5 |
| Canada |
1,448 |
16.4 |
| US |
674 |
7.6 |
| Germany |
503 |
5.7 |
|
|
|
| Total Bond Futures (5) |
5,556 |
62.9 |
|
|
|
| Equity Futures: |
|
|
| UK |
684 |
7.7 |
| Europe |
632 |
7.2 |
| Japan |
599 |
6.8 |
| US large cap |
577 |
6.5 |
| US small cap |
556 |
6.3 |
| Hong Kong |
454 |
5.1 |
|
|
|
| Total Equity Futures (6) |
3,502 |
39.6 |
|
|
|
| Commodity Futures: |
|
|
| Agriculture |
|
|
| Soy bean |
276 |
3.1 |
| Sugar |
247 |
2.8 |
| Soybean meal |
224 |
2.6 |
| Cotton |
196 |
2.2 |
| Coffee |
63 |
0.7 |
| Corn |
56 |
0.6 |
| Soybean oil |
53 |
0.6 |
| Wheat |
48 |
0.5 |
| Energy |
|
|
| Brent crude |
213 |
2.4 |
| Gasoline |
190 |
2.2 |
| WTI crude |
141 |
1.6 |
| Gas oil (diesel) |
64 |
0.7 |
| Natural gas |
62 |
0.7 |
| New York Harbor ultra-low sulphur diesel |
44 |
0.5 |
| Precious Metals |
|
|
| Gold |
419 |
4.8 |
| Silver |
276 |
3.1 |
| Industrial Metals |
|
|
| Copper |
324 |
3.7 |
| Aluminium |
214 |
2.4 |
|
|
|
| Total Commodity Futures (18) |
3,110 |
35.2 |
|
|
|
| Total Derivative Instruments (29) |
12,168 |
137.7 |
The targeted annualised risk (volatility of monthly returns) for the portfolio as listed above is analysed as follows:
| ASSET CLASS |
RISK |
CONTRIBUTION |
| Bonds |
3.0% |
31.0% |
| Equities |
4.3% |
45.1% |
| Commodities |
2.3% |
23.9% |
|
|
|
|
9.6% |
100.0% |
.
STRATEGIC REPORT
MANAGED LIQUIDITY SHARE PORTFOLIO
MANAGER’S REPORT
Investment Objective
The investment objective of the Managed Liquidity Portfolio is to produce an appropriate level of income return combined with a high degree of security.
Market and Economic Review
During June and July 2015 there was a high expectation that the Bank of England would, for the first time since 2007, hike UK interest rates during the second half of the year. However, expectations began to change in late summer amidst concerns over the global economy. By early 2016 the market was not anticipating the first hike in UK interest rates to happen until at least 2020. Indeed, during February there were rising expectations that UK interest rates might need to be cut. By 31 May 2016 the market was increasingly focused on the UK’s referendum on membership of the European Union with uncertainty about the result reflected in volatility of short dated sterling bond yields.
Over the 12 months to 31 May 2016 inflation was very low with the consumer price index of inflation briefly becoming negative during the autumn. The Bank of England’s view was that this level of inflation was largely a result of previous sterling strength and the fall in commodity prices. Given the temporary nature of these factors the Bank of England expects UK inflation to return to its 2% target by mid-2018. The Bank’s view remains that when UK interest rates begin to rise they will do so gradually.
In interbank lending markets, over the 12 months to 31 May 2016 sterling 3 month LIBOR, the interest rate at which the largest banks lend money to one another, rose from 0.57% to 0.59%. Meanwhile, 2 year Gilt yields fell from 0.51% to 0.43%.
Portfolio Performance
The Managed Liquidity Portfolio NAV total return for the year ended 31 May 2016 was of –0.1%.
Portfolio Strategy and Review
Our investment strategy is achieved by investing in the Invesco Perpetual Money Fund and the Sterling Liquidity Portfolio of Short-Term Investments Company (Global Series) plc, each of which invests in a diversified portfolio of high quality sterling denominated short-term money market instruments.
The Invesco Perpetual Money Fund has positions in a number of government, quasi-government and corporate bonds. In order to limit the exposure to interest rate risk and credit risk (the likelihood of an issuer defaulting), these bonds are both short dated and of high quality. The fund also holds some floating rate bonds whose interest rates are reset at regular intervals and so can further mitigate the effect of rising interest rates on fund performance.
The Sterling Liquidity Portfolio of the Short-Term Investments Company (Global Series) plc invests in high quality sterling denominated money market instruments such as commercial paper, certificates of deposit, time deposits and asset-backed commercial paper. At 31 May 2016 the Sterling Liquidity Portfolio was rated AAAm by Standard and Poor’s and AAAmmf by Fitch Ratings.
Outlook
The UK electorate’s decision to reject membership of the European Union has affected expectations for UK monetary policy. The market now believes the Bank is prepared to ease policy further. We continue to monitor the situation closely and our portfolio constituent funds are positioned accordingly.
Stuart Edwards
Portfolio Manager
28 July 2016
.
STRATEGIC REPORT
MANAGED LIQUIDITY SHARE PORTFOLIO
LIST OF INVESTMENTS
AS AT 31 MAY
|
2016 |
2015 |
|
|
MARKET
VALUE
£’000 |
% OF
PORTFOLIO |
MARKET
VALUE
£’000 |
% OF
PORTFOLIO |
| Invesco Perpetual Money Fund† |
4,894 |
92.1 |
4,880 |
89.4 |
| Short-Term Investments Company (Global Series) |
418 |
7.9 |
580 |
10.6 |
|
|
|
|
|
|
5,312 |
100.0 |
5,460 |
100.0 |
|
|
|
|
|
|
† At the year end the Managed Liquidity Share Portfolio held 9.90% (2015: 8.23%) of the outstanding shares in the Invesco Perpetual Money Fund.
.
STRATEGIC REPORT
BUSINESS REVIEW
Invesco Perpetual Select Trust plc is a UK investment company with four Share classes, each of which has separate investment objectives, as set out below, and is represented by a separate Portfolio. The strategy the Board follows to achieve its overall objective and those of each Share class is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These are also set out below.
The business model the Company has adopted to achieve its objective has been to contract the services of Invesco Fund Managers Limited (‘IFML’ or the ‘Manager’) to manage the portfolios in accordance with the Board’s strategy and under its oversight. The Manager is also responsible for providing company secretarial, marketing, accounting and general administration services. In practice, many of these services are performed under delegated authority by Invesco Asset Management Limited (IAML), a company related to IFML. References to the Manager in this annual financial report should consequently be considered to include both entities. Invesco Perpetual is a business name of both IFML and IAML.
All administrative support is provided by third parties under the oversight of the Board. In addition to the management and administrative functions of the Manager, the Company has contractual arrangements with Capita Asset Services to act as registrar and BNY Mellon Trust & Depositary (UK) Limited as depositary. The depositary has delegated safekeeping of the Company’s investments to The Bank of New York Mellon (London Branch).
Investment Policy
The Company’s and respective Share classes’ investment objectives, investment policies and risk and investment limits combine to form the ‘Investment Policy’ of the Company.
The Company
Investment Objective and Policy
The Company’s investment objective is to provide shareholders with a choice of investment strategies and policies, each intended to generate attractive risk-adjusted returns.
The Company’s share capital comprises four Share classes: UK Equity Shares, Global Equity Income Shares, Balanced Risk Shares and Managed Liquidity Shares, each of which has its own separate portfolio of assets and attributable liabilities. The investment objectives, policies and risks and limits of the Portfolios for these classes follow. With the exception of borrowings, the limits for the Company and the four Share classes are measured at the point of acquisition of investments, unless otherwise stated.
Investment Limits of the Company
The Board has prescribed limits on the Investment Policy of the Company, which include the following:
– no more than 15% of the gross assets of the Company may be invested in a single investment; and
– no more than 10% of the gross assets of the Company may be invested in other listed investment companies.
UK Equity Share Portfolio
Investment Objective
The investment objective of the UK Equity Portfolio is to provide shareholders with an attractive real long-term total return by investing primarily in UK quoted equities.
Investment Policy and Risk
The UK Equity Portfolio is invested primarily in UK equities and equity-related securities of UK companies across all market sectors.
The Manager invests the UK Equity Portfolio so as to maximise exposure to the most attractive sectors and securities, within a portfolio structure that reflects the Manager’s view of the macroeconomic environment. The Manager does not set out to manage the risk characteristics of the UK Equity Portfolio relative to the FTSE All-Share Index (the ‘benchmark index’) and the investment process may result in potentially very significant over or underweight positions in individual sectors versus the benchmark. The size of weightings will reflect the Manager’s view of the attractiveness of a security and the degree of conviction held. If a security is not considered to be a good investment, it will not be held in the UK Equity Portfolio, irrespective of its weight in the benchmark index.
The Manager controls the stock-specific risk of individual securities by ensuring that the UK Equity Portfolio is always diversified across market sectors. In-depth and continual analysis of the fundamentals of investee companies allows the Manager to assess the financial risks associated with any particular security.
It is expected that, typically, the Portfolio will hold between 45 and 80 securities.
The Directors believe that the use of borrowings can enhance returns to shareholders and the UK Equity Portfolio will generally use borrowings in pursuing its investment objective.
Investment Limits
The Board has prescribed limits on the investment policy of the UK Equity Portfolio, which include the following:
– no more than 12% of the gross assets of the UK Equity Portfolio may be held in a single investment;
– no more than 10% of the gross assets of the UK Equity Portfolio may be held in other listed investment companies;
– no more than 20% of the gross assets of the UK Equity Portfolio may be held in overseas assets; and
– borrowings may be used to raise equity exposure up to a maximum of 25% of the net assets of the UK Equity Portfolio where it is considered appropriate.
Global Equity Income Share Portfolio
Investment Objective
The investment objective of the Global Equity Income Portfolio is to provide an attractive and growing level of income return and capital appreciation over the long term, predominantly through investment in a diversified portfolio of equities worldwide.
Investment Policy and Risk
The Portfolio will be invested predominantly in a portfolio of listed, quoted or traded equities worldwide, but may also hold other securities from time to time including, inter alia, fixed interest securities, preference shares, convertible securities and depositary receipts. Investment may also be made in regulated or authorised collective investment schemes. The Portfolio will not invest in companies which are not listed, quoted or traded at the time of investment, although it may have exposure to such companies where, following investment, the relevant securities cease to be listed, quoted or traded. The Manager will at all times invest and manage the Portfolio’s assets in a manner that is consistent with spreading investment risk, but there will be no rigid industry, sector, region or country restrictions.
The Portfolio may utilise derivative instruments including index-linked notes, contracts for differences, covered options and other equity-related derivative instruments for efficient portfolio management and investment purposes. Any use of derivatives for investment purposes will be made on the basis of the same principles of risk spreading and diversification that apply to the Portfolio’s direct investments, as described above.
It is expected that, typically, the Portfolio will hold between 45 and 80 securities.
The Directors believe that the use of borrowings can enhance returns to Global Equity Income shareholders, and the Global Equity Income Portfolio may use borrowings in pursuing its investment objective.
The Company’s foreign currency investments will not be hedged to sterling as a matter of general policy. However, the Manager may employ currency hedging, either back to sterling or between currencies (i.e. cross hedging of portfolio investments).
Investment Limits
The Board has prescribed the following limits on the investment policy of the Global Equity Income Portfolio:
– no more than 20% of the gross assets of the Global Equity Income Portfolio may be invested in fixed interest securities;
– no more than 10% of the gross assets of the Global Equity Income Portfolio may be held in a single investment;
– no more than 10% of the gross assets of the Global Equity Income Portfolio may be held in other listed investment companies; and
– borrowings may be used to raise equity exposure up to a maximum of 20% of the net assets of the Global Equity Income Portfolio, when it is considered appropriate to do so.
Balanced Risk Share Portfolio
Investment Objective
The investment objective of the Balanced Risk Portfolio is to provide shareholders with an attractive total return in differing economic and inflationary environments, and with low correlation to equity and bond market indices by gaining exposure to three asset classes: debt securities, equities and commodities.
Investment Policy and Risk
The Portfolio utilises two main strategies: the first seeks to balance the risk contribution from each of three asset classes (equities, bonds and commodities), with the aim of reducing the probability, magnitude and duration of capital losses, and the second seeks to shift tactically the allocation among the assets with the aim of improving expected returns.
The Portfolio is constructed so as to achieve appropriate diversity and to balance risk by asset class (bonds, equities and commodities) and by asset within each asset class. Neutral risk weighting is achieved when each asset class contributes an equal proportion of the total Portfolio risk and each asset contributes an equal proportion of the total risk for its respective asset class. The Manager is permitted to actively vary asset class weightings, subject to a maximum of 150% and a minimum of 50% of each asset class’ neutral weight. The Manager is also permitted to actively vary individual asset weightings, provided the asset class guidelines are not violated. Asset weights may not be less than zero (short) and may on occasion exceed twice the neutral weight.
The Portfolio will be mainly invested directly in highly liquid and transparently priced exchange-traded futures contracts, with cash and cash equivalents being held as collateral. However, the Portfolio may also be invested in equities, equity-related securities and debt securities (including floating rate notes). Financial derivative instruments (including but not limited to futures and total return swaps) are used only to achieve long exposure to the three asset classes. The Portfolio may also use financial derivative instruments, including currency futures and forwards, for efficient portfolio management, hedging and investment purposes. Financial derivative instruments will not be used to create net short positions in any asset class. The derivatives portfolio will typically comprise between 20 and 33 investment positions.
It is expected that the Portfolio’s investments will mainly be denominated in sterling. Any non-sterling derivative investments may be hedged back into sterling at the discretion of the Manager when it is economic to do so.
Investment Limit
The Board has prescribed the following limits on the investment policy of the Balanced Risk Portfolio:
– the aggregate notional amount of financial derivative instruments positions may not exceed 250% of the net assets of the Balanced Risk Portfolio; and
– no more than 10% of the gross assets of the Balanced Risk Portfolio may be held in other listed investment companies.
Managed Liquidity Share Portfolio
Investment Objective
The investment objective of the Managed Liquidity Portfolio is to produce an appropriate level of income return combined with a high degree of security.
Investment Policy and Risk
The Managed Liquidity Portfolio invests in a range of sterling-based or related money market fund assets (which may include transferable securities, money market instruments, warrants, collective investment schemes and deposits), either directly or indirectly through money market funds, including funds managed by Invesco Perpetual or its associated companies.
The Managed Liquidity Portfolio generally invests in money market funds authorised as UCITS schemes (Undertakings for Collective Investments in Transferable Securities, being open ended retail investment funds in the EU), which are required under governing regulations to provide a prudent spread of risk. In the event that the Managed Liquidity Portfolio is invested directly in securities and instruments, the Manager will observe investment restrictions and risk diversification policies that are consistent with UCITS regulations.
Investment Limits
The Board has prescribed limits on the investment policy of the Managed Liquidity Portfolio, which include the following:
– no more than 10% of the gross assets of the Managed Liquidity Portfolio may be held in a single investment, other than authorised money market funds or high quality sovereign debt securities; and
– no more than 5% of the gross assets of the Managed Liquidity Portfolio may be held in unquoted investments, other than authorised money market funds.
Investors should note that the Managed Liquidity Shares are not designed to replicate the returns or other characteristics of a bank or building society deposit or money market fund.
Performance
The Board reviews the performance of the Company by reference to a number of Key Performance Indicators, at either a Company or Portfolio level, which include the following:
• Investment Performance
• Dividends
• Discount/Premium
• Ongoing Charges
Investment Performance
To assess investment performance the Board monitors the net asset value (NAV) performance of the individual Share classes relative to that of benchmark indices it considers to be appropriate. However, given the requirements and constraints of the investment objectives and policies followed, no index can be expected to fully represent the performance that might reasonably be expected from any one or all of the Company’s Share classes.
The NAV total return performance of each of the Portfolios over the year to 31 May 2016 and of relevant benchmark indices were as follows:
| UK Equity Portfolio |
–1.4% |
| FTSE All-Share Index |
–6.3% |
|
|
| Global Equity Income Portfolio |
–0.2% |
| MSCI World Index (£) |
0.7% |
|
|
| Balanced Risk Portfolio |
–0.3% |
| 3 month LIBOR plus 5% |
5.6% |
|
|
| Managed Liquidity Portfolio |
–0.1% |
Source: Thomson Reuters Datastream.
Other performance periods, together with share price total returns, are shown on page 2.
Dividends
UK Equity Portfolio
The Directors have set a target of at least maintaining, in the absence of unforeseen circumstances, the level of annual UK Equity dividends per share from year to year. Further, they have implemented a model of declaring (with payment in the month following) three equal interim dividends in July, October and January with a ‘wrap-up’ fourth interim in April. Depending on the level of income received in each quarter, and in the year, these four dividends may be enhanced with contributions from capital profits to achieve the target. The annual target set for the year ended 31 May 2016 was 6.15p.
The Directors have declared and paid four interim dividends for the year ended 31 May 2016 totalling 6.15p per UK Equity Share (2015: 6.15p) of which 5.81p was met from revenue earned in the year. The year’s revenue was enhanced by the receipt of £264,000 (2015: £487,000) of non-recurring special dividends, equivalent to 0.66p (2015: 1.22p). Net revenue for the year ended 31 May 2016 for the UK Equity Portfolio was £2,321,000 (2015: £2,525,000). The aggregate of dividends paid in respect of the year was £2,459,000 (2015: £2,434,000).
A first interim dividend for the year to 31 May 2017 of 1.4p was declared on 14 July 2016, setting the level for the next two dividends, in the absence of unforeseen circumstances.
Global Equity Income Portfolio
The Board announced in April 2015, that for the purpose of paying dividends to shareholders, with effect from 1 June 2015, it would supplement the revenue earned by the portfolio with a small percentage of capital, thus increasing the overall dividend payment. The Board set a target of 6p per share for the aggregate dividends to be paid in respect of the year ended 31 May 2016. Also, in common with the UK Equity shares, the Board implemented a model of declaring (with payment in the month following) three equal interim dividends in July, October and January with a ‘wrap-up’ fourth interim in April.
The Directors have declared and paid four interim dividends for the year ended 31 May 2016 totalling 6p (2015: 4.60p) per Global Equity Income Share of which 5.51p was met from revenue earned in the year. The year’s revenue was enhanced by the receipt of £60,000 (2015: £49,000) of non-recurring special dividends equivalent to 0.19p (2015: 0.16p). Net revenue for the year for the Global Equity Income Portfolio was £1,782,000 (2015: £1,470,000). The aggregate of dividends paid in respect of the year was £1,946,000 (2015: £1,444,000).
A first interim dividend for the year to 31 May 2017 of 1.4p was declared on 14 July 2016, setting the level for the next two dividends, in the absence of unforeseen circumstances.
Balanced Risk Portfolio
In order to maximise the capital return on the Balanced Risk Shares, the Directors only intend to declare dividends on the Balanced Risk Shares to the extent required, having taken into account the dividends paid on the other Share classes, to maintain the Company’s status as an investment trust under section 1158 of the Corporation Tax Act 2010. Accordingly, no dividends are required to be declared or paid for the year.
Managed Liquidity Portfolio
The Board intends to declare dividends on the Managed Liquidity Portfolio prior to each conversion, subject to the level of income available. There was a net revenue loss for the year for the Managed Liquidity Portfolio of £7,000 (2015: £7,000).
As a consequence of continued very low interest rates and in view of the administrative costs involved, no interim dividend was declared on the Managed Liquidity Shares for the year ended 31 May 2016 (2015: nil).
Discount/(Premium)
The Company has a discount control policy in place for all four Share classes, whereby the Company offers to issue or buy back Shares of all classes with a view to maintaining the market price of the shares at close to their respective net asset values, and by so doing, avoid significant overhangs or shortages in the market. It is the Board’s policy to buy back shares and to sell shares from treasury on terms that do not dilute the net asset value attributable to existing shareholders at the time of the transaction.
The ongoing implementation of this policy is dependent upon the authorities to buy back and issue shares being renewed by shareholders. Notwithstanding the intended effect of this policy, there can be no guarantee that the Company’s shares will trade at close to their respective net asset values. Shareholders should also be aware that there is a risk that this discount policy may lead to a reduction in the size of the Company over time.
The Manager and the Board closely monitor movements in the Company’s share prices and dealings in the Company’s shares. Share movements in the year are summarised on page 34. At 31 May 2016, the share prices, net asset values (NAV) and the discount or premium of the four Share classes were as follows:
|
2016 |
2015 |
| SHARE CLASS |
NET ASSET
VALUE
(PENCE) |
SHARE
PRICE
(PENCE) |
DISCOUNT/
(PREMIUM) |
NET ASSET
VALUE
(PENCE) |
SHARE
PRICE
(PENCE) |
DISCOUNT/
(PREMIUM) |
| UK Equity |
164.3 |
162.5 |
1.1% |
173.0 |
172.5 |
0.3% |
| Global Equity Income |
159.2 |
156.0 |
2.0% |
165.7 |
166.8 |
(0.6)% |
| Balanced Risk |
122.8 |
119.3 |
2.9% |
123.2 |
121.8 |
1.2% |
| Managed Liquidity |
103.1 |
101 |
2.1% |
103.2 |
101.9 |
1.3% |
Ongoing Charges
The expenses of managing the Company are reviewed by the Board at every meeting. The Board aims to minimise the ongoing charges figure which provides a guide to the effect on performance of all annual operating costs of the Company. The ongoing charges figure is calculated by dividing the annualised ongoing charges, including those charged to capital, by the average net asset value during the year, expressed as a percentage.
At the year end the ongoing charges figure of the Company and that for the different Share classes, excluding any performance fees, were as follows:
|
COMPANY |
UK
EQUITY |
GLOBAL
EQUITY
INCOME |
BALANCED
RISK |
MANAGED
LIQUIDITY |
| 2016 |
0.95% |
0.96% |
0.95% |
1.19% |
0.39% |
| 2015 |
0.95% |
0.96% |
0.95% |
1.19% |
0.36% |
The additional impact of performance fees of £401,000 (2015: £533,000) for the UK Equity Portfolio was:
|
COMPANY |
UK
EQUITY |
| 2016 |
0.31% |
0.61% |
| 2015 |
0.42% |
0.84% |
During the year the Global Equity Income Portfolio did not outperform its benchmark by more than the 1% hurdle so no performance fee was earned.
Financial Position
Assets and Liabilities
The Company’s balance sheet on page 65 shows the assets and liabilities at the year end. Details of the Company’s borrowing facility are shown in note 12 of the financial statements on page 77, with interest paid (finance costs) in note 5.
Due to the readily realisable nature of the Company’s assets, cash flow does not have the same significance as for an industrial or commercial company. The Company’s principal cash flows arise from the purchase and sales of investments and the income from investments against which must be set the costs of borrowing and management expenses.
Borrowing Policy
Borrowing policy is under the control of the Board, which has established effective parameters for the Portfolios. Borrowing levels are regularly reviewed. As part of the Company’s Investment Policy, the approved borrowing limits are 25% of the net assets of the UK Equity Portfolio and 20% of net assets of the Global Equity Income Portfolio. The Balanced Risk Portfolio does not use borrowings, but is geared by means of the derivative instruments used to implement its investment policy. The Managed Liquidity Portfolio does not use borrowings.
Issued Share Capital
All Share classes have a nominal value of 1p per Share.
The following table summarises the Company’s share capital at the year end and movements during the year.
NUMBER OF SHARES |
UK
EQUITY |
GLOBAL
EQUITY
INCOME |
BALANCED
RISK |
MANAGED
LIQUIDITY |
| Shares in issue at the year end: |
|
|
|
|
| – excluding treasury |
40,013,223 |
32,627,852 |
7,199,116 |
5,906,165 |
| – held in treasury |
5,973,000 |
3,418,000 |
4,240,000 |
6,837,785 |
| Movements during the year: |
|
|
|
|
| Increase/(decrease) arising |
(329,709) |
(22,825) |
(221,201) |
850,905 |
| Shares issued from/(bought back) into treasury |
550,000 |
1,120,000 |
(90,000) |
(150,000) |
| Average price thereon |
169.2p |
156.4p |
109.9p |
101.1p |
Since 31 May 2016, a further 250,000 UK Equity Shares and 250,000 Global Equity Income Shares have been bought back into treasury, at weighted average prices of 162.2p and 157.5p respectively.
Further details on net changes in issued share capital are set out in note 13 to the financial statements on pages 78 and 79. No treasury shares were cancelled in the year.
Current and Future Developments
As part of the Company’s overall strategy, the Company seeks to manage its affairs so as to maximise returns for shareholders. The Board also has a longer-term objective to increase the size of the Company in the belief that increasing the assets of the Company in this way will make the Company’s Shares more attractive to investors and improve the liquidity of the Shares.
Details of trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the portfolio managers’ reports and further details as to the risks affecting the Company are set out under ‘Principal Risks and Uncertainties’ below.
Principal Risks and Uncertainties
The audit committee regularly undertakes a robust assessment of the risks the Company faces, on behalf of the Board (see Audit Committee Report on pages 42 to 44).
The following are considered to be the most significant risks to the Company and to shareholders in relation to their investments in the Company. Further details of risks and risk management policies as they relate to the financial assets and liabilities of the Company are detailed in note 16 to the financial statements.
Investment Objectives
There is no guarantee that the Investment Policy of the Company and of each Portfolio will provide the returns sought by the Company. There can be no guarantee, therefore, that the Company will achieve its investment objectives.
The Board monitors the performance of the Company and each Portfolio and has established guidelines to ensure that the Investment Policy of the Company and each Portfolio is pursued by the Manager.
Market Movements and Portfolio Performance
Individual Portfolio performance is substantially dependent on the performance of the securities (including derivative instruments) held within the Portfolio. The prices of these securities are influenced by many factors including the general health of regional and worldwide economies; interest rates; inflation; government policies; industry conditions; political and diplomatic events; tax laws; environmental laws; and by the demand from investors. The Manager strives to maximise the total return from Portfolios, but the investments held are influenced by market conditions and the Board acknowledges the external influences on the performance of each Portfolio. Further risks specifically applicable to the Balanced Risk Shares are set out on page 37.
The performance of the Manager is carefully monitored by the Board, and the continuation of the Manager’s mandates is reviewed each year. The Board has established guidelines to ensure that the investment policies of each class of Share are pursued by the Manager.
For a fuller discussion of the economic and market conditions facing the Company and the current and future performance of the different Portfolios of the Company, please see both the Chairman’s Statement on pages 3 to 5 and the portfolio managers’ reports starting on page 7.
Risks Applicable to the Company’s Shares
Shares in the Company are designed to be held over the long-term and may not be suitable as short-term investments. There can be no guarantee that any appreciation in the value of the Company’s Shares will occur and investors may not get back the full value of their investments. Due to the potential difference between the mid-market price of the Shares and the prices at which they are sold, there is no guarantee that their realisable value will reflect their mid-market price.
The market value of a Share, as well as being affected by its net asset value (NAV), is also influenced by investor demand, its dividend yield, where applicable, and prevailing interest rates, amongst other things. As such, the market value of a Share can fluctuate and may not reflect its underlying NAV. Shares may therefore trade at discounts to their NAVs. However, the Board has adopted a discount control policy that applies to all Share classes and the Board and the Manager monitor the market rating of each Share class.
Past performance of the Company’s Shares is not necessarily indicative of future performance.
While it is the intention of the Directors to pay dividends to holders of the UK Equity, Global Equity Income and Managed Liquidity Shares, this will be affected by the returns achieved by the respective Portfolios and the dividend policy adopted by the Board. Accordingly, the amount of dividends paid to shareholders may fluctuate. Any change in the tax or accounting treatment of dividends received or other returns may also affect the level of dividend paid on the Shares in future years. The Directors have resolved, in the absence of unforeseen circumstances, to supplement revenue with capital profits in order to pay equity Portfolio dividends at specified target levels (see page 5).
Viability and Compulsory Conversion of a Class of Shares
It is possible that through poor performance, market sentiment, or otherwise, lack of demand for one of the Company’s share classes could result in the relevant Portfolio becoming too small to be viable. The Board monitors share conversions and Portfolio sizes and liaises with the Manager on the continued viability of each Share class. The Board has received assurances from the Manager that the size of the portfolios is not critical to the Manager being able to continue to offer its investment management services in respect of any of the Company’s four portfolio strategies.
The continued listing on the Official List of each class of Share is dependent on at least 25% of the Shares in that class being held in public hands. This means that if more than 75% of the Shares of any class were held by, inter alia, the Directors, persons connected with Directors or persons interested in 5% or more of the relevant Shares, the listing of that class of Shares might be suspended or cancelled. The Listing Rules state that the FCA may allow a reasonable period of time for the Company to restore the appropriate percentage if this rule is breached, but in the event that the listing of any class of Shares were cancelled the Company would lose its investment trust status.
Accordingly, if at any time the Board considers that the listing of any class of Shares on the Official List is likely to be cancelled and the loss of such listing would mean that the Company would no longer be able to qualify for approval as an investment trust under section 1158 of the Corporation Tax Act 2010, the Board may serve written notice on the holders of the relevant Shares requiring them to convert their Shares into another Share class.
Liability of a Portfolio for the Liabilities of Another Portfolio
The Directors intend that, in the absence of unforeseen circumstances, each Portfolio will effectively operate as if it were a stand-alone company. However, investors should be aware of the following factors:
• As a matter of law, the Company is a single entity. Therefore, in the event that any of the Portfolios has insufficient funds or assets to meet all of its liabilities, on a winding-up or otherwise, such a shortfall would become a liability of the other Portfolios and would be payable out of the assets of the other Portfolios in such proportions as the Board may determine; and
• The Companies Act 2006 prohibits the Directors from declaring any dividends in circumstances where the Company’s assets represent less than one and a half times the aggregate of its liabilities. If the Company were to incur material liabilities in the future, a significant fall in the value of the Company’s assets as a whole may affect the Company’s ability to pay dividends on a particular class of Shares, even though there are distributable profits attributable to the relevant Portfolio.
Gearing
Performance may be geared by use of the £25 million 364 day multicurrency revolving credit facility. The Company also has an uncommitted overdraft facility of up to 10% of net assets. There is no guarantee that these facilities will be renewed at maturity or on terms acceptable to the Company. If it were not possible to renew these facilities or replace them with one from another lender, the amounts owing by the Company would need to be funded by the sale of securities.
The Balanced Risk Portfolio may also be geared (by up to 250%, according to the investment policy set out on page 30) by means of the derivative instruments in which it invests. This is discussed separately below, under the heading: Additional Risks Applicable to Balanced Risk Shares.
Gearing levels of the different Portfolios will change from time to time in accordance with the respective portfolio managers’ assessments of risk and reward. Where market exposure is geared any reduction in the value of the geared Portfolio’s investments may lead to a correspondingly greater percentage reduction in its NAV (which is likely to affect Share prices adversely). Any reduction in the number of Shares in issue (for example, as a result of buy backs) will, in the absence of a corresponding reduction in borrowings, result in an increase in a Portfolio’s gearing.
Whilst the use of borrowings by the Company should enhance the total return on a particular class of Shares where the return on the underlying securities is rising and exceeds the cost of borrowing, it will have the opposite effect where the underlying return is falling, further reducing the total return on the Shares. Similarly, the use of gearing by investment companies or funds in which the Company invests increases the volatility of those investments.
Hedging
The Company may use derivatives to hedge its exposure to currency or other risks and for the purpose of efficient portfolio management. There may be a correlation between price movements in the underlying securities, currency or index, on the one hand, and price movements in the investments, which are the subject of the hedge, on the other hand. In addition, an active market may not exist for a particular hedging derivative instrument at any particular time.
Regulatory and Tax Related
The Company is subject to various laws and regulations by virtue of its status as a public limited investment company registered under the Companies Act 2006, its status as an investment trust and its listing on the London Stock Exchange. Loss of investment trust status could lead to the Company being subject to Capital Gains Tax on the sale of its investments. A serious breach of other regulatory rules could lead to suspension from the London Stock Exchange, a fine or a qualified Audit Report. Other control failures, either by the Manager or any other of the Company’s service providers, could result in operational or reputational problems, erroneous disclosures or loss of assets through fraud, as well as breaches of regulations.
The Manager reviews the level of compliance with the Corporation Tax Act 2010 and other financial regulatory requirements on a daily basis. All transactions, income and expenditure are reported to the Board. The Board regularly considers the risks to which the Company is exposed, the measures in place to control them and the potential for other risks to arise. The Board ensures that satisfactory assurances are received from service providers. The depositary and the Manager’s compliance and internal audit officers report regularly to the Company’s Audit Committee.
The risks and risk management policies and procedures as they relate to the financial assets and liabilities of the Company are also detailed in note 16 to the financial statements.
Additional Risks Applicable to Balanced Risk Shares
The use of financial derivative instruments forms part of the investment policy and strategy of the Balanced Risk Portfolio. The Portfolio’s ability to use these instruments may be limited by market conditions, regulatory limits and tax considerations. The absence of a liquid market for any particular instrument at any particular time may inhibit the ability of the Manager to liquidate a financial derivative instrument at an advantageous price. However, the Manager actively seeks the most liquid means of obtaining the required exposures. The financial derivative instruments used for the strategy are geared instruments and the aggregate notional exposure will usually exceed the net asset value of the Portfolio. Whilst this could result in greater fluctuations in the net asset value, and consequently the share price, the use of leverage is normally necessary to achieve the target volatility required to meet the return objective. The degree of leverage inherent in futures trading potentially means that a relatively small price movement in a futures contract may result in an immediate and substantial loss and it would be necessary to increase the collateral held at the clearing broker to cover such loss. This is mitigated by the Company not using financial derivative instruments to create net short positions in any asset class combined with holding cash balances sufficient to meet collateral requirements.
Reliance on Third Party Service Providers
The Company has no employees and the Directors have all been appointed on a non-executive basis. The Company is therefore reliant upon the performance of third party service providers for its executive function. In particular, the Manager performs services that are integral to the operation of the Company and the custodian appointed by the Depositary holds assets on its behalf. Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to successfully pursue its Investment Policy.
The Manager may be exposed to reputational risks. In particular, the Manager may be exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its reputation. Any damage to the reputation of the Manager could result in potential counterparties and third parties being unwilling to deal with the Manager and by extension the Company. This could have an adverse impact on the ability of the Company to successfully pursue its Investment Policy.
Viability Statement
The Company is an investment company which operates as a collective investment vehicle, designed and managed for long term investment. The Board considers long term for this purpose to be at least three years and so has assessed the Company’s viability over this period. However, the life of the Company is not intended to be limited to that or any other period.
In assessing the viability of the Company the Board considered the principal risks to which it is exposed, as set out on pages 34 to 37, together with mitigating factors. The risks of failure to meet the Company’s and the Portfolios’ investment objectives, contributory market and investment risks and the challenges of lack of scale were considered to be of particular importance. The Board also took into account the capabilities of the Manager and the varying market conditions already experienced by the Company since its launch in 2006. On the question of scale, the Board has concluded that if an individual Portfolio became too small it should not cause the Company itself to be unviable.
In terms of financial risks to viability, materially all of the investments comprising the portfolios are readily realisable. The equity portfolios also produce a stream of dividend income, which may fluctuate but which the Board expects to continue. The Company has no long term liabilities and the total value of the portfolios is a multiple of the value of the Company’s short term liabilities and annual operating costs. Consequently, there appears little to no prospect of the Company not being able to meet its financial obligations as they fall due in the next three years.
Based on the above, the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.
Corporate Governance
The Board is committed to maintaining high standards of Corporate Governance. The Corporate Governance Statement required by the UKLA Listing Rules is set out on page 41.
Audit Committee Report
The extended audit committee report required by the UK Corporate Governance Code is set out on pages 42 to 44. There are no areas of concern in relation to the financial statements to bring to the attention of shareholders.
Board Diversity
The Company’s policy on diversity is set out on page 47. From 1 July 2015 the Board has comprised four male and one female non-executive Directors. Consequently, at 31 May 2016 and through most of the year to that date there was 20% female representation on the Board. Summary biographical details of all the Directors are set out on page 39. The Company has no employees.
Social and Environmental Matters
As an investment company with no employees, property or activities outside investment, environmental policy has limited application. The Manager considers various factors when evaluating potential investments. While a company’s policy towards the environment and social responsibility, including with regard to human rights, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not make investment decisions on environmental and social grounds alone. The Manager applies the United Nations Principles for Responsible Investment.
Modern Slavery Act
The Company is an investment vehicle and does not provide goods or services in the normal course of its business, or have customers. Accordingly, the Directors consider that the Company is not within the scope of the Modern Slavery Act 2015.
This Strategic Report was approved by the Board on 28 July 2016.
Invesco Asset Management Limited
Company Secretary
.
DIRECTORS’ RESPONSIBILITIES STATEMENT
in respect of the preparation of the annual financial report
The Directors are responsible for preparing the annual financial report in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under the law the Directors have elected to prepare financial statements in accordance with UK Accounting Standards, including FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland.’ Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in 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 adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and which 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, a Directors’ Report, which includes a Corporate Governance Statement, and a Directors’ Remuneration Report that comply with that law and those regulations.
The Directors confirm that:
• in so far as they are aware, there is no relevant audit information of which the Company’s Auditor is unaware; and
• each Director has taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s Auditor is aware of that information.
The Directors of the Company each confirm to the best of their knowledge that:
• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position, net return and cash flows of the Company; and
• this annual financial report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that it faces.
The Directors consider that this annual financial report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
Signed on behalf of the Board of Directors
Patrick Gifford
Chairman
28 July 2016
.
INCOME STATEMENT
FOR THE YEAR ENDED 31 MAY
|
2015 |
2014 |
|
NOTES |
REVENUE
£’000 |
CAPITAL
£’000 |
TOTAL
£’000 |
REVENUE
£’000 |
CAPITAL
£’000 |
TOTAL
£’000 |
| (Losses)/gains on investments |
9 |
– |
(4,065) |
(4,065) |
– |
12,644 |
12,644 |
| Gains/(losses) on derivative instruments |
10 |
66 |
(80) |
(14) |
85 |
362 |
447 |
| Foreign exchange gains/(losses) |
|
– |
18 |
18 |
– |
(17) |
(17) |
| Income |
2 |
5,011 |
– |
5,011 |
4,843 |
– |
4,843 |
| Management fees |
3 |
(249) |
(579) |
(828) |
(246) |
(573) |
(819) |
| Performance fees |
3 |
– |
(401) |
(401) |
– |
(533) |
(533) |
| Other expenses |
4 |
(426) |
(2) |
(428) |
(408) |
(3) |
(411) |
|
|
|
|
|
|
|
|
| Net return before finance costs and taxation |
|
4,402 |
(5,109) |
(707) |
4,274 |
11,880 |
16,154 |
| Finance costs |
5 |
(62) |
(144) |
(206) |
(65) |
(152) |
(217) |
|
|
|
|
|
|
|
|
| Return on ordinary activities before taxation |
|
4,340 |
(5,253) |
(913) |
4,209 |
11,728 |
15,937 |
| Tax on ordinary activities |
6 |
(199) |
– |
(199) |
(165) |
– |
(165) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Return on ordinary activities after taxation for the |
|
4,141 |
(5,253) |
(1,112) |
4,044 |
11,728 |
15,772 |
|
|
|
|
|
|
|
|
| Basic return per ordinary share: |
7 |
|
|
|
|
|
|
| – UK Equity Share Portfolio |
|
5.81p |
(8.38)p |
(2.57)p |
6.38p |
17.16p |
23.54p |
| – Global Equity Income Share Portfolio |
|
5.51p |
(5.58)p |
(0.07)p |
4.68p |
14.71p |
19.39p |
| – Balanced Risk Share Portfolio |
|
0.60p |
(1.35)p |
(0.75)p |
0.73p |
4.16p |
4.89p |
| – Managed Liquidity Share Portfolio |
|
(0.14)p |
0.04p |
(0.10)p |
(0.12)p |
(0.02)p |
(0.14)p |
The total column of this statement represents the Company’s profit and loss account, prepared in accordance with UK Accounting Standards. The return on ordinary activities after taxation is the total comprehensive income and therefore no additional statement of comprehensive income is presented. The supplementary revenue and capital columns are prepared in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the year. Income statements for the different Share classes are shown on pages 11, 17, 24 and 27 for the UK Equity, Global Equity Income, Balanced Risk and Managed Liquidity Share Portfolios respectively.
The accompanying notes are an integral part of this statement.
.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
FOR THE YEAR ENDED 31 MAY
|
SHARE
CAPITAL
£’000 |
SHARE
PREMIUM
ACCOUNT
£’000 |
SPECIAL
RESERVE
£’000 |
CAPITAL
REDEMPTION
RESERVE
£’000 |
CAPITAL
RESERVES
£’000 |
REVENUE
RESERVE
£’000 |
TOTAL
£’000 |
| At 31 May 2014 |
1,062 |
1,290 |
83,467 |
340 |
37,598 |
372 |
124,129 |
| Cancellation of deferred shares |
– |
– |
(3) |
3 |
– |
– |
– |
| Shares bought back and held in treasury |
– |
– |
(310) |
– |
– |
– |
(310) |
| Share conversions |
(3) |
– |
3 |
– |
– |
|
– |
| Realised gains on disposal of investments |
– |
– |
– |
– |
3,594 |
– |
3,594 |
| Movement in investment holding gains |
– |
– |
– |
– |
9,050 |
– |
9,050 |
| Gains on derivative instruments |
– |
– |
– |
– |
362 |
– |
362 |
| Foreign exchange losses |
– |
– |
– |
– |
(17) |
– |
(17) |
| Charged to capital: |
|
|
|
|
|
|
|
| – management fees |
– |
– |
– |
– |
(573) |
– |
(573) |
| – performance fees |
– |
– |
– |
– |
(533) |
– |
(533) |
| – other expenses |
– |
– |
– |
– |
(3) |
– |
(3) |
| – finance costs |
– |
– |
– |
– |
(152) |
– |
(152) |
| Revenue return on ordinary activities per the income statement |
– |
– |
– |
– |
– |
4,044 |
4,044 |
| Dividends – note 8 |
– |
– |
– |
– |
– |
(3,878) |
(3,878) |
| At 31 May 2015 |
1,059 |
1,290 |
83,157 |
343 |
49,326 |
538 |
135,713 |
| Cancellation of deferred shares |
– |
– |
(2) |
2 |
– |
– |
– |
| Shares issued from treasury |
– |
– |
2,654 |
– |
– |
– |
2,654 |
| Shares bought back and held in treasury |
– |
– |
(252) |
– |
– |
– |
(252) |
| Share conversions |
3 |
– |
(3) |
– |
– |
– |
– |
| Realised gains on disposal of investments |
– |
– |
– |
– |
3,664 |
– |
3,664 |
| Movement in investment holding losses |
– |
– |
– |
– |
(7,729) |
– |
(7,729) |
| Losses on derivative instruments |
– |
– |
– |
– |
(80) |
– |
(80) |
| Foreign exchange gains |
– |
– |
– |
– |
18 |
– |
18 |
| Charged to capital: |
|
|
|
|
|
|
|
| – management fees |
– |
– |
– |
– |
(579) |
– |
(579) |
| – performance fees |
– |
– |
– |
– |
(401) |
– |
(401) |
| – other expenses |
– |
– |
– |
– |
(2) |
– |
(2) |
| – finance costs |
– |
– |
– |
– |
(144) |
– |
(144) |
| Revenue return on ordinary activities per the income statement |
– |
– |
– |
– |
– |
4,141 |
4,141 |
| Dividends – note 8 |
– |
– |
(302) |
– |
– |
(4,103) |
(4,405) |
| As at 31 May 2016 |
1,062 |
1,290 |
85,252 |
345 |
44,073 |
576 |
132,598 |
The accompanying notes are an integral part of this statement.
.
BALANCE SHEET
AS AT 31 MAY 2016
|
|
|
GLOBAL |
|
|
|
|
|
UK |
EQUITY |
BALANCED |
MANAGED |
|
|
|
EQUITY |
INCOME |
RISK |
LIQUIDITY |
TOTAL |
|
NOTES |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
| Fixed assets |
|
|
|
|
|
|
| Investments held at fair value |
|
|
|
|
|
|
| through profit or loss |
9 |
73,579 |
57,669 |
7,698 |
5,312 |
144,258 |
|
|
|
|
|
|
|
| Current assets |
|
|
|
|
|
|
| Derivative assets held at fair value |
|
|
|
|
|
|
| through profit or loss |
10 |
– |
– |
388 |
– |
388 |
| Debtors |
11 |
477 |
570 |
191 |
8 |
1,246 |
| Cash and cash equivalents |
|
629 |
701 |
654 |
917 |
2,901 |
|
|
1,106 |
1,271 |
1,233 |
925 |
4,535 |
| Creditors: amounts falling due |
|
|
|
|
|
|
| within one year |
|
|
|
|
|
|
| Derivative liabilities held at fair |
|
|
|
|
|
|
| value through profit or loss |
10 |
– |
– |
(68) |
– |
(68) |
| Other creditors |
12 |
(8,958) |
(6,997) |
(26) |
(146) |
(16,127) |
| Net current (liabilities)/assets |
|
(7,852) |
(5,726) |
1,139 |
779 |
(11,660) |
| Net assets |
|
65,727 |
51,943 |
8,837 |
6,091 |
132,598 |
| Shareholders’ funds |
|
|
|
|
|
|
| Share capital |
13(a) |
460 |
361 |
114 |
127 |
1,062 |
| Share premium |
14 |
– |
– |
1,290 |
– |
1,290 |
| Special reserve |
14 |
41,589 |
32,834 |
5,277 |
5,552 |
85,252 |
| Capital redemption reserve |
14 |
73 |
78 |
24 |
170 |
345 |
| Capital reserve |
14 |
23,355 |
18,237 |
2,239 |
242 |
44,073 |
| Revenue reserve |
14 |
250 |
433 |
(107) |
– |
576 |
|
|
|
|
|
|
|
| Shareholders’ funds |
|
65,727 |
51,943 |
8,837 |
6,091 |
132,598 |
| Net asset value per ordinary share |
15 |
164.3p |
159.2p |
122.8p |
103.1p |
|
These financial statements were approved and authorised for issue by the Board of Directors on 28 July 2016.
Signed on behalf of the Board of Directors
Patrick Gifford
Chairman
The accompanying notes are an integral part of this statement.
.
BALANCE SHEET
AS AT 31 MAY 2015
|
NOTES |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
TOTAL
£’000 |
| Fixed assets |
|
|
|
|
|
|
| Investments held at fair value through profit or loss |
9 |
78,083 |
57,895 |
8,411 |
5,460 |
149,849 |
|
|
|
|
|
|
|
| Current assets |
|
|
|
|
|
|
| Derivative assets held at fair value through profit or loss |
10 |
– |
– |
159 |
– |
159 |
| Debtors |
11 |
424 |
277 |
2,940 |
49 |
3,690 |
| Cash and cash equivalents |
|
268 |
302 |
388 |
19 |
977 |
|
|
692 |
579 |
3,487 |
68 |
4,826 |
| Creditors: amounts falling due within one year |
|
|
|
|
|
|
| Derivative liabilities held at fair value through profit or loss |
10 |
– |
– |
(125) |
– |
(125) |
| Other creditors |
12 |
(9,936) |
(6,226) |
(2,519) |
(156) |
(18,837) |
| Net current (liabilities)/assets |
|
(9,244) |
(5,647) |
843 |
(88) |
(14,136) |
| Net assets |
|
68,839 |
52,248 |
9,254 |
5,372 |
135,713 |
| Shareholders’ funds |
|
|
|
|
|
|
| Share capital |
13(a) |
463 |
360 |
117 |
119 |
1,059 |
| Share premium |
14 |
– |
– |
1,290 |
– |
1,290 |
| Special reserve |
14 |
41,349 |
31,335 |
5,636 |
4,837 |
83,157 |
| Capital redemption reserve |
14 |
73 |
78 |
23 |
169 |
343 |
| Capital reserve |
14 |
26,704 |
20,042 |
2,340 |
240 |
49,326 |
| Revenue reserve |
14 |
250 |
433 |
(152) |
7 |
538 |
| Shareholders’ funds |
|
68,839 |
52,248 |
9,254 |
5,372 |
135,713 |
| Net asset value per ordinary share |
15 |
173.0p |
165.7p |
123.2p |
103.2p |
|
.
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting policies
Accounting policies describe the Company’s approach to recognising and measuring transactions during the year and the position of the Company at the year end.
The principal accounting policies, all of which have been consistently applied throughout this year and the preceding year, are set out below.
(a) Basis of preparation
(i) Accounting Standards applied
The financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice (UK GAAP)) and with the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in November 2014. Accordingly, FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland applies for these financial statements for the year ended 31 May 2016 and has been applied for the first time. The financial statements are issued on a going concern basis.
As a result of the first time adoption of FRS 102 and the revised SORP, comparative figures and presentation have been revised where required. The net return attributable to ordinary shareholders and shareholders’ funds remain unchanged. As an investment fund the Company has the option, which it has taken, not to present a cash flow statement. A cash flow statement is not required when an investment fund meets all the following conditions: substantially all investments are highly liquid and are carried at market value, and where a statement of changes in equity is provided (in these financial statements it is called the Reconciliation of Movements in Shareholders’ Funds). The accounting policies applied to these financial statements are consistent with those applied for the year ended 31 May 2015, apart from a revision to cash which is now defined as cash and cash equivalents. Note 1(d) sets out the accounting policy for cash and cash equivalents. No other accounting policies have changed as a result of the application of FRS102, amendments to FRS102 (see below) and the revised SORP.
Amendments to FRS 102 – Fair value hierarchy disclosures (March 2016) amends paragraphs 34.22 and 34.42 of FRS 102, revising the disclosure requirements for financial instruments held at fair value to align these with the disclosure requirements of EU-adopted IFRS. These amendments become effective for accounting periods beginning on or after 1 January 2017. The Company has chosen to early adopt these paragraphs. There are no accounting policy or disclosure changes as a result of this adoption.
(ii) Definitions used in the financial statements
‘Portfolio’ the UK Equity Share Portfolio, the Global Equity Income Share Portfolio, the Balanced Risk Share Portfolio and/or the Managed Liquidity Share Portfolio (as the case may be). Each comprises, or may include, an investment portfolio, derivative instruments, cash, loans, debtors and other creditors, which together make up the net assets as shown in the balance sheet.
‘Share’ UK Equity Share, Global Equity Income Share, Balanced Risk Share, Managed Liquidity Share and/or Deferred Share (as the case may be).
The financial statements for the Company comprise the income statement, reconciliation of movements in shareholders’ funds, the total column of the balance sheet and the company totals shown in the notes to the financial statements.
The UK Equity, Global Equity Income, Balanced Risk and Managed Liquidity Share Portfolios’ income statements and summaries of net assets do not represent statutory accounts, are not required under UK Generally Accepted Accounting Practice or the SORP, and are not audited. These have been disclosed to assist shareholders’ understanding of the assets and liabilities, and income and expenses of the different Share classes.
In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the income statement between items of a revenue and capital nature has been presented alongside the income statement.
(iii) Functional and presentational currency
The Company’s functional currency is sterling as its operating activities are based in the UK and a majority of its assets, liabilities, income and expenses are in sterling, which is also the currency in which these accounts are prepared.
(iv) Transactions and balances
Transactions in foreign currency, whether of a revenue or capital nature, are translated to sterling at the rates of exchange ruling on the dates of such transactions. Foreign currency assets and liabilities are translated to sterling at the rates of exchange ruling at the balance sheet date. Any gains or losses, whether realised or unrealised, are taken to the capital reserve or to the revenue account, depending on whether the gain or loss is of a capital or revenue nature. All gains and losses are recognised in the income statement.
(b) Financial instruments
The Company has chosen to apply the provisions of Sections 11 and 12 of FRS102 in full in respect of the financial instruments.
(i) Recognition of financial assets and financial liabilities
The Company recognises financial assets and financial liabilities when the Company becomes a party to the contractual provisions of the instrument. The Company will offset financial assets and financial liabilities if the Company has a legally enforceable right to set off the recognised amounts and interests and intends to settle on a net basis.
(ii) Derecognition of financial assets
The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial asset that is created or retained by the Company is recognised as an asset.
(iii) Derecognition of financial liabilities
The Company derecognises financial liabilities when its obligations are discharged, cancelled or expire.
(iv) Trade date accounting
Purchases and sales of financial assets are recognised on trade date, being the date on which the Company commits to purchase or sell the assets.
(v) Classification and measurement of financial assets and financial liabilities
Financial assets
The Company’s investments, including financial derivative instruments, are classified as held at fair value through profit or loss.
Financial assets held at fair value through profit or loss are initially recognised at fair value, which is taken to be their cost, with transaction costs expensed in the income statement, and are subsequently valued at fair value.
Fair value for investments, including financial derivative instruments, that are actively traded in organised financial markets is determined by reference to stock exchange quoted bid prices at the balance sheet date. For investments that are not actively traded or where active stock exchange quoted bid prices are not available, fair value is determined by reference to a variety of valuation techniques including broker quotes and price modelling. Where there is no active market, unlisted/illiquid investments are valued by the Directors at fair value with regard to the International Private Equity and Venture Capital Valuation Guidelines and on recommendations from Invesco’s Pricing Committee, both of which use valuation techniques such as earnings multiples, recent arm’s length transactions and net assets.
Financial liabilities
Financial liabilities, excluding financial derivative instruments but including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method.
(c) Derivatives and hedging
Derivative instruments are valued at fair value in the balance sheet. Derivative instruments may be capital or revenue in nature and, accordingly, changes in their fair value are recognised in revenue or capital in the income statement as appropriate.
Forward currency contracts entered into for hedging purposes are valued at the appropriate forward exchange rate ruling at the balance sheet date. Profits or losses on the closure or revaluation of positions are included in capital reserves.
Futures contracts may be entered into for hedging purposes and any profits and losses on the closure or revaluation of positions are included in capital reserves. Where futures contracts are used for investment exposure any income element arising on bond futures is recognised as a gain on derivative instruments in the income statement and shown in revenue.
(d) Cash and cash equivalents
Cash and cash equivalents may comprise cash (including short term deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value) as well as cash equivalents, including money market funds. Investments are regarded as cash equivalents if they meet all of the following criteria: highly liquid investments held in the Company’s base currency that are readily convertible to a known amount of cash, are subject to an insignificant risk of change in value and provide a return no greater than the rate of a three-month high quality government bond. For the Balanced Risk and Managed Liquidity Portfolios, cash and cash equivalents do not include investments in Short Term Investments Company (Global Series) plc as this forms part of those Portfolio’s fixed assets.
(e) Income
Dividend income from investments is recognised when the shareholders’ right to receive payment has been established, normally the ex-dividend date. UK dividends are stated net of related tax credits. Interest income arising from cash is recognised on an accruals basis and underwriting commission is recognised as earned. Special dividends are taken to income unless they arise from a return of capital, when they are allocated to capital in the income statement. Income from fixed income securities is recognised in the income statement using the effective interest method.
(f) Expenses and finance costs
All expenses are accounted for on an accruals basis. Expenses are charged to the income statement and shown in revenue except where expenses are presented as capital items when a connection with the maintenance or enhancement of the value of the investments held can be demonstrated and thus management fees and finance costs are charged to revenue and capital to reflect the Directors’ expected long-term view of the nature of the investment returns of each Portfolio.
Finance costs are accounted for on an accruals basis using the effective interest rate method.
The management fees and finance costs are charged in accordance with the Board’s expected split of long-term returns, in the form of capital gains and income, to the applicable Portfolio as follows:
PORTFOLIO |
REVENUE
RESERVE |
CAPITAL
RESERVE |
| UK Equity |
30% |
70% |
| Global Equity Income |
30% |
70% |
| Balanced Risk |
30% |
70% |
| Managed Liquidity |
100% |
- |
ny entitlement to any investment performance fee which is attributable to the UK Equity and/or the Global Equity Income Portfolio is allocated 100% to capital as it is principally attributable to the capital performance of the investments in that Portfolio.
(g) Dividends
Dividends are accrued in the financial statements when there is an obligation to pay the dividends at the balance sheet date.
(h) Taxation
Tax expense represents the sum of tax currently payable and deferred tax. Any tax payable is based on taxable profit for the period. Taxable profit differs from profit before tax as reported in the income statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
For the Company, any allocation of tax relief to capital is based on the marginal basis, such that tax allowable capital expenses are offset against taxable income. Where individual Portfolios have extra tax capacity arising from unused tax allowable expenses which can be used by a different Portfolio, this extra tax capacity is transferred between the Portfolios at a valuation of 1% of the amount transferred.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.
Investment trusts which have approval under the appropriate tax regulations are not liable for taxation on capital gains.
2. Income
This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.
2016 |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
COMPANY
TOTAL
£’000 |
| Income from investments |
|
|
|
|
|
| UK dividends: |
|
|
|
|
|
| – ordinary dividends |
1,955 |
524 |
– |
– |
2,479 |
| – special dividends |
240 |
– |
– |
– |
240 |
|
|
|
|
|
|
|
2,451 |
492 |
– |
– |
2,943 |
|
2,195 |
524 |
– |
– |
2,719 |
| UK scrip dividends |
48 |
38 |
– |
– |
86 |
| Overseas dividends |
|
|
|
|
|
| – ordinary dividends |
422 |
1,596 |
11 |
2 |
2,031 |
| – special dividends |
24 |
60 |
– |
– |
84 |
| Unfranked investment income |
41 |
– |
– |
12 |
53 |
| Interest from Treasury bills |
– |
– |
27 |
– |
27 |
|
2,730 |
2,218 |
38 |
14 |
5,000 |
| Other income |
|
|
|
|
|
| Deposit interest |
– |
– |
1 |
1 |
2 |
| Total income |
2,739 |
2,218 |
39 |
15 |
5,011 |
|
|
|
|
|
|
| 2015 |
|
|
|
|
|
| UK dividends: |
|
|
|
|
|
| – ordinary dividends |
2,048 |
492 |
– |
– |
2,540 |
| – special dividends |
403 |
– |
– |
– |
403 |
|
|
|
|
|
|
|
2,451 |
492 |
– |
– |
2,943 |
| UK scrip dividends |
36 |
34 |
– |
– |
70 |
| Overseas dividends |
|
|
|
|
|
| – ordinary dividends |
351 |
1,295 |
11 |
4 |
1,661 |
| – special dividends |
84 |
49 |
– |
– |
133 |
| Unfranked investment income – interest |
– |
– |
– |
11 |
11 |
| Interest from Treasury bills |
– |
– |
23 |
– |
23 |
|
|
|
|
|
|
|
2,922 |
1,870 |
34 |
15 |
4,841 |
| Other income |
|
|
|
|
|
| Deposit interest |
1 |
– |
1 |
– |
2 |
|
|
|
|
|
|
| Total income |
2,923 |
1,870 |
35 |
15 |
4,843 |
There were no special dividends recognised in capital during the year (2015: £nil).
3. Management and performance fees
This note shows the fees paid to the Manager. These are made up of the individual Portfolio management fees calculated quarterly on the basis of their net asset values and the performance fees of the UK Equity and Global Equity Income Portfolios.
2016 |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
COMPANY
TOTAL
£’000 |
| Management fee: |
|
|
|
|
|
| – charged to revenue |
130 |
99 |
19 |
1 |
249 |
| – charged to capital |
303 |
231 |
45 |
– |
579 |
| Total management fee |
433 |
330 |
64 |
1 |
828 |
| Performance fee charged to capital |
401 |
– |
– |
– |
401 |
|
|
|
|
|
|
| 2015 |
|
|
|
|
|
| Management fee: |
|
|
|
|
|
| – charged to revenue |
128 |
97 |
20 |
1 |
246 |
| – charged to capital |
298 |
227 |
48 |
– |
573 |
| Total management fee |
426 |
324 |
68 |
1 |
819 |
| Performance fee charged to capital |
533 |
– |
– |
– |
533 |
Details of the investment management agreement, are given on page 49 in the Directors’ Report.
The performance fee accrued is solely in respect of the UK Equity Portfolio. This fee can only be paid when that Portfolio’s year end net asset value is above its high watermark of 172.99p. Accordingly, although earned, no fee is payable for the current year (2015: £449,000 payable). The following shows the movements on the performance fee accrual.
|
2016
£’000 |
2015
£’000 |
| Accrual bought forward |
1,353 |
1,280 |
| Paid in year |
(449) |
(460) |
| Earned in year |
401 |
533 |
| Accrual carried forward (see note 12) |
1,305 |
1,353 |
No performance fee is payable on the Global Equity Income Portfolio for the current or previous year. Any underperformance must be fully set off by overperformance before any performance fee can be paid. Movements on the Global Equity Income Portfolio’s underperformance carried forward follow:
|
2016 |
2015 |
|
£’000 |
£’000 |
| Underperformance bought forward |
476 |
259 |
| Underperformance in the year |
131 |
217 |
| Underperformance carried forward |
607 |
476 |
4. Other expenses
The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified.
2016 |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
COMPANY
TOTAL
£’000 |
| Charged to revenue: |
|
|
|
|
|
| Directors’ fees (i) |
65 |
51 |
9 |
5 |
130 |
| Auditor’s fees (ii): |
|
|
|
|
|
| – for the audit of the financial statements |
14 |
11 |
2 |
1 |
28 |
| – for other services relating to tax compliance |
4 |
3 |
1 |
– |
8 |
| Other expenses |
126 |
90 |
29 |
15 |
260 |
|
209 |
155 |
41 |
21 |
426 |
| Charged to capital: |
|
|
|
|
|
| Custodian transaction charges |
1 |
1 |
– |
– |
2 |
|
|
|
|
|
|
| Total |
210 |
156 |
41 |
21 |
428 |
|
|
|
|
|
|
| 2015 |
|
|
|
|
|
| Charged to revenue: |
|
|
|
|
|
| Directors’ fees (i) |
53 |
42 |
8 |
5 |
108 |
| Auditor’s fees (ii): |
|
|
|
|
|
| – for the audit of the financial statements |
14 |
10 |
2 |
1 |
27 |
| – for other services relating to tax compliance |
4 |
3 |
– |
– |
7 |
| Other expenses |
123 |
94 |
34 |
15 |
266 |
|
194 |
149 |
44 |
21 |
408 |
| Charged to capital: |
|
|
|
|
|
| Custodian transaction charges |
1 |
2 |
– |
– |
3 |
| Total |
195 |
151 |
44 |
21 |
411 |
(i) The Directors’ Remuneration Report provides information on Directors’ fees. Included within other expenses is £10,000 (2015: £10,000) of employer’s national insurance payable on Directors’ fees. As at 31 May 2016, the amount outstanding on Directors’ fees and employer’s national insurance was £19,000 (2015: £19,000).
(ii) Auditor’s fees are shown excluding VAT, which is included in other expenses.
5. Finance costs
Finance costs are the cost of borrowing facilities. These are made up of costs incurred to have the facility in place and any interest charged when the facility is used.
2016 |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
COMPANY
TOTAL
£’000 |
| Interest payable on borrowings |
|
|
|
|
|
| repayable within one year as follows: |
|
|
|
|
|
| Charged to revenue |
37 |
25 |
– |
– |
62 |
| Charged to capital |
87 |
57 |
– |
– |
144 |
| Total |
124 |
82 |
– |
– |
206 |
|
|
|
|
|
|
| 2015 |
|
|
|
|
|
| Interest payable on borrowings |
|
|
|
|
|
| repayable within one year as follows: |
|
|
|
|
|
| Charged to revenue |
38 |
27 |
– |
– |
65 |
| Charged to capital |
90 |
62 |
– |
– |
152 |
| Total |
128 |
89 |
– |
– |
217 |
6. Taxation
As an investment trust, the Company pays no tax on capital gains. However, the Company suffers tax on certain overseas dividends that is irrecoverable and this note shows details of the tax charge. In addition, this note clarifies the basis for the Company having no deferred tax asset or liability.
(a) Tax charge
|
2016 |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
COMPANY
TOTAL
£’000 |
|
Overseas tax |
42 |
157 |
– |
– |
199 |
|
2015 |
|
|
|
|
|
|
Overseas tax |
38 |
127 |
– |
– |
165 |
The accounting policy for taxation is disclosed in note 1(h).
(b) Reconciliation of tax charge
|
2016 |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
COMPANY
TOTAL
£’000 |
|
Return on ordinary activities before taxation |
(986) |
134 |
(56) |
(5) |
(913) |
|
Theoretical tax at the current UK Corporation Tax rate of 20.00% (2015: 20.83%) |
(197) |
27 |
(11) |
(1) |
(182) |
|
Effect of: |
|
|
|
|
|
|
– Non taxable losses on investments and derivatives |
513 |
301 |
16 |
– |
830 |
|
– Non taxable losses/(gains) on foreign exchange |
(1) |
2 |
(5) |
– |
(4) |
|
– Non taxable scrip dividends |
(10) |
(8) |
– |
– |
(18) |
|
– UK dividends which are not taxable |
(418) |
(105) |
– |
– |
(523) |
|
– Overseas dividends which are not taxable |
(89) |
(331) |
– |
– |
(420) |
|
– Overseas tax |
42 |
157 |
– |
– |
199 |
|
– Excess of allowable expenses over taxable income |
202 |
114 |
– |
1 |
317 |
|
Tax charge for the year |
42 |
157 |
– |
– |
199 |
|
2015 |
|
|
|
|
|
|
Return on ordinary activities before taxation |
9,354 |
6,215 |
376 |
(8) |
15,937 |
|
Theoretical tax at the current UK Corporation Tax rate of 20.83% |
1,949 |
1,295 |
78 |
(2) |
3,320 |
|
Effect of: |
|
|
|
|
|
|
– Non taxable gains on investments and derivatives |
(1,607) |
(1,027) |
(76) |
– |
(2,710) |
|
– Non taxable losses on foreign exchange |
– |
4 |
– |
– |
4 |
|
– Non taxable scrip dividends |
(8) |
(7) |
– |
– |
(15) |
|
– UK dividends which are not taxable |
(412) |
(103) |
– |
– |
(515) |
|
– Overseas dividends which are not taxable |
(175) |
(280) |
– |
– |
(455) |
|
– Overseas tax |
38 |
127 |
– |
– |
165 |
|
– Disallowable expenses |
– |
1 |
– |
– |
1 |
|
– Excess of allowable expenses over taxable income |
253 |
117 |
(2) |
2 |
370 |
|
Tax charge for the year |
38 |
127 |
– |
– |
165 |
|
|
|
|
|
|
|
|
|
|
Given the Company’s status as an investment trust, and the intention to continue meeting the conditions required to retain such status for the foreseeable future, the Company has not provided any UK corporation tax on any realised or unrealised capital gains or losses arising on investments.
(c) Factors that may affect future tax charges
The Company has excess management expenses and loan relationship deficits of £9,971,000 (2015: £8,381,000) that are available to offset future taxable revenue. A deferred tax asset of £1,795,000 (2015: £1,676,000), measured at the standard corporation tax substantively enacted rate of 18% (2015: 20%) has not been recognised in respect of these expenses since the Directors believe that there will be no taxable profits in the future against which the deferred tax assets can be offset.
7. Basic return per Ordinary Share
Return per share is the amount of gain (or loss) generated for each share class in the financial year divided by the weighted average number of the shares in issue.
Basic revenue, capital and total return per ordinary share is based on each of the returns on ordinary activities after taxation shown by the income statement for the applicable Share class and on the following numbers of Shares being the weighted average number of Shares in issue throughout the year for each Share class:
|
WEIGHTED AVERAGE
NUMBER OF SHARES |
| SHARE |
2016 |
2015 |
| UK Equity |
39,958,921 |
39,581,368 |
| Global Equity Income |
32,364,967 |
31,399,191 |
| Balanced Risk |
7,452,162 |
7,694,565 |
| Managed Liquidity |
5,228,172 |
5,623,405 |
|
|
|
|
8. Dividends
Dividends represent distributions of income less expenses to shareholders. Dividends are paid as an amount per share held.
Dividends paid for each applicable Share class, which represent distributions for the purpose of s1159 of the Corporation Tax Act 2010, are as follows:
|
2016 |
2015 |
|
NUMBER
OF SHARES |
DIVIDEND
RATE (PENCE) |
TOTAL
£’000 |
NUMBER
OF SHARES |
DIVIDEND
RATE (PENCE) |
TOTAL
£’000 |
| UK Equity |
|
|
|
|
|
|
| First interim |
39,792,732 |
1.20 |
478 |
39,509,136 |
1.00 |
395 |
| Second interim |
40,118,405 |
1.20 |
481 |
39,562,970 |
1.30 |
514 |
| Third interim |
40,026,774 |
1.20 |
480 |
39,561,680 |
1.20 |
475 |
| Fourth interim |
39,974,044 |
2.55 |
1,020 |
39,610,057 |
2.65 |
1,050 |
|
|
6.15 |
2,459 |
|
6.15 |
2,434 |
|
|
|
|
|
|
|
| Global Equity Income |
|
|
|
|
|
|
| First interim |
31,530,677 |
1.40 |
441 |
31,443,444 |
1.45 |
456 |
| Second interim |
31,892,746 |
1.40 |
447 |
31,323,049 |
0.95 |
298 |
| Third interim |
32,995,312 |
1.40 |
462 |
31,323,049 |
0.40 |
125 |
| Fourth interim |
33,108,029 |
1.80 |
596 |
31,402,944 |
1.80 |
565 |
|
|
6.00 |
1,946 |
|
4.60 |
1,444 |
|
|
|
|
|
|
|
| Total paid in respect of the year |
|
|
4,405 |
|
|
3,878 |
No dividends have been paid to Balanced Risk and Managed Liquidity shareholders during the year (2015: nil).
The Company’s dividend policy was changed from the prior year with the result that dividends from the UK Equity and Global Equity Income Portfolios may include contributions from capital. An analysis of dividends paid for the year from revenue and capital follows. Prior to this, all dividends were paid from revenue.
|
2016 |
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
COMPANY
TOTAL
£’000 |
|
Dividends paid in respect of the year: |
|
|
|
|
|
|
– from revenue |
2,321 |
1,782 |
- |
- |
4,103 |
|
– from capital |
138 |
164 |
- |
- |
302 |
|
|
2,459 |
1,946 |
- |
- |
4,405 |
9. Investments held at fair value
The portfolio is made up of investments which are listed, i.e. traded on a regulated stock exchange, and a small proportion of investments which are valued by the Directors as they are unlisted or not regularly traded. Gains and losses are either:
• realised, usually arising when investments are sold; or
• unrealised, being the difference from cost of those investments still held at the year end.
(a) Analysis of investments by listing status
|
|
2016
£’000 |
2016
£’000 |
|
UK listed investments |
87,317 |
93,609 |
|
UK unlisted investments |
750 |
730 |
|
Overseas listed investments(i) |
56,173 |
55,487 |
|
Unquoted hedge fund investments |
18 |
23 |
|
|
144,258 |
149,849 |
(i) Includes the Short-Term Investments Company (Global Series) plc positions held by the Managed Liquidity Portfolio of £418,000 (2015: £580,000) and Balanced Risk Portfolio of £2,190,000 (2015: £2,900,000).
.
(b) Analysis of investment gains/(losses)
|
2016
£’000 |
2016
£’000 |
| Opening valuation |
149,849 |
135,991 |
| Movements in year: |
|
|
| Purchases at cost |
31,998 |
39,214 |
| Sales – proceeds |
(33,524) |
(38,000) |
| Sales – net realised gains on sales |
3,664 |
3,594 |
| Movement in investment holding gains in year |
(7,729) |
9,050 |
| Closing valuation |
144,258 |
149,849 |
| Closing book cost |
115,750 |
113,612 |
| Closing investment holding gains |
28,508 |
36,237 |
| Closing valuation |
144,258 |
149,849 |
| Realised gains based on historical cost |
3,664 |
3,594 |
| Movement in investment holding gains/(losses) in year |
(7,729) |
9,050 |
| (Losses)/gains on investments |
(4,065) |
12,644 |
(c) Transaction costs
Transaction costs were £57,000 (2015: £67,000) on purchases and £42,000 (2015: £28,000) on sales.
10. Derivative instruments
Derivative instruments are contracts whose price is derived from the value of other securities or indices. The Balanced Risk Portfolio uses futures, which represent agreements to buy or sell commodities or financial instruments at a pre-determined price in the future.
Excluding forward currency contracts used for currency hedging purposes.
|
2016
£’000 |
2016
£’000 |
| Opening derivative assets held at fair value through profit and loss |
159 |
357 |
| Opening derivative liabilities held at fair value through profit and loss |
(125) |
(54) |
| Opening net derivative liabilities held at fair value shown in balance sheet |
34 |
303 |
| Closing derivative assets held at fair value through profit and loss |
388 |
159 |
| Closing derivative liabilities held at fair value through profit and loss |
(68) |
(125) |
| Closing net derivative assets held at fair value shown in balance sheet |
320 |
34 |
| Movement in derivative holding gains |
286 |
(269) |
| Net realised gains on derivative instruments |
(366) |
631 |
| Net capital gain on derivative instruments as shown in the income statement |
(80) |
362 |
| Net income arising on derivatives |
66 |
85 |
| Total gain on derivatives instruments |
(14) |
447 |
The derivative assets/liabilities shown in the balance sheet are the unrealised gains/losses arising from the revaluation to fair value of futures contracts held in the Balanced Risk Share Portfolio, as shown on page 23.
11. Debtors
Debtors are amounts due to the Company, such as monies due from brokers for investments sold and income which has been earned (accrued) but not yet received.
|
2016
£’000 |
2016
£’000 |
| Amounts due from brokers |
164 |
2,533 |
| Collateral pledged for futures contracts |
176 |
400 |
| Taxation recoverable |
165 |
188 |
| Prepayments and accrued income |
741 |
569 |
|
1,246 |
3,690 |
12. Other creditors
Creditors are amounts owed by the Company, and include any bank loans, amounts due to brokers for the purchase of investments and amounts owed to suppliers, such as the Manager and auditor.
|
2016
£’000 |
2016
£’000 |
| Bank loan |
13,750 |
14,500 |
| Taxation payable |
137 |
149 |
| Amounts due to brokers |
594 |
2,514 |
| Performance fee accrued |
1,305 |
1,353 |
| Accruals |
341 |
321 |
|
16,127 |
18,837 |
At the year end the Company had a maximum uncommitted overdraft facility of 10% of net assets and a £25 million (2015: £25 million) committed 364 day multicurrency revolving credit facility, which is due for renewal on 19 May 2017 (2015: 21 April 2016), both with The Bank of New York Mellon. The interest payable on the credit facility is based on LIBOR +0.85% on amounts drawndown.
13. Share capital
Share capital represents the total number of shares in issue.
All shares have a nominal value of 1 penny.
(a) Movements in Share Capital During the Year
Issued and fully paid:
|
|
UK
EQUITY |
GLOBAL
EQUITY
INCOME |
BALANCED
RISK |
MANAGED
LIQUIDITY |
TOTAL
SHARE
CAPITAL |
|
ORDINARY SHARES (NUMBER) |
|
|
|
|
|
|
At 31 May 2015 |
39,792,932 |
31,530,677 |
7,510,317 |
5,205,260 |
84,039,186 |
|
Shares bought back into treasury |
– |
– |
(90,000) |
(150,000) |
(240,000) |
|
Shares issued from treasury |
550,000 |
1,120,000 |
– |
– |
1,670,000 |
|
Arising on share conversion: |
|
|
|
|
|
|
– August 2015 |
(124,327) |
62,069 |
82,805 |
9,249 |
29,796 |
|
– November 2015 |
(191,631) |
282,566 |
(120,849) |
20,447 |
(9,467) |
|
– February 2016 |
(52,730) |
112,717 |
(46,947) |
(28,966) |
(15,926) |
|
– May 2016 |
38,979 |
(480,177) |
(136,210) |
850,175 |
272,767 |
|
At 31 May 2016 |
40,013,223 |
32,627,852 |
7,199,116 |
5,906,165 |
85,746,356 |
|
TREASURY SHARES (NUMBER) |
|
|
|
|
|
|
At 31 May 2015 |
6,523,000 |
4,538,000 |
4,150,000 |
6,687,785 |
21,898,785 |
|
Shares bought back into treasury |
– |
– |
90,000 |
150,000 |
240,000 |
|
Shares issued from treasury |
(550,000) |
(1,120,000) |
– |
– |
(1,670,000) |
|
At 31 May 2016 |
5,973,000 |
3,418,000 |
4,240,000 |
6,837,785 |
20,468,785 |
|
ORDINARY SHARES OF 1 PENNY EACH (£’000) |
|
|
|
|
|
At 31 May 2015 |
398 |
315 |
75 |
52 |
840 |
|
Shares bought back into treasury |
– |
– |
– |
(1) |
(1) |
|
Shares issued from treasury |
5 |
11 |
– |
– |
16 |
|
Arising on share conversion: |
|
|
|
|
|
|
– August 2015 |
(1) |
1 |
1 |
– |
1 |
|
– November 2015 |
(2) |
3 |
(1) |
– |
– |
|
– February 2016 |
(1) |
1 |
(1) |
– |
(1) |
|
– May 2016 |
1 |
(4) |
(2) |
8 |
3 |
|
At 31 May 2016 |
400 |
327 |
72 |
59 |
858 |
|
TREASURY SHARES OF 1 PENNY EACH (£’000) |
|
|
|
|
|
At 31 May 2015 |
65 |
45 |
42 |
67 |
219 |
|
Shares bought back into treasury |
– |
– |
– |
1 |
1 |
|
Shares issued from treasury |
(5) |
(11) |
– |
– |
(16) |
|
At 31 May 2016 |
60 |
34 |
42 |
68 |
204 |
|
TOTAL SHARE CAPITAL (£’000) |
|
|
|
|
|
|
Ordinary share capital |
400 |
327 |
72 |
59 |
858 |
|
Treasury share capital |
60 |
34 |
42 |
68 |
204 |
|
At 31 May 2016 |
460 |
361 |
114 |
127 |
1,062 |
|
Average buy back price |
n/a |
n/a |
109.9p |
101.1p |
|
|
Average issue price |
169.2p |
156.4p |
n/a |
n/a |
|
The total cost of share buy backs was £252,000 (2015: £310,000). As part of the conversion process 226,861 (2015: 296,760) deferred shares of 1p each were created and subsequently cancelled during the year. No deferred shares were in issue at the start or end of the year.
During the year 550,000 UK Equity ordinary shares (2015: nil) and 1,120,000 Global Equity Income ordinary shares (2015: nil) were sold from treasury to the Company’s corporate broker, Canaccord Genuity Limited, for onward transmission to their clients. The gross proceeds of these sales, which were to satisfy secondary market demand, were respectively £930,000 and £1,751,000. All of the sales were at prices consistent with quoted market prices at the time and at a small premium to the net asset value.
(b) Movements in Share Capital after the Year End
Since 31 May 2016, a further 250,000 UK Equity Shares and 250,000 Global Equity Income Shares have been bought back into treasury, at weighted average prices of 162.2p and 157.5p respectively.
(c) Voting Rights
Rights attaching to the Shares are described in the Directors’ Report on page 50.
(d) Deferred Shares
The Deferred shares do not carry any rights to participate in the Company’s profits, do not entitle the holder to any repayment of capital on a return of assets (except for the sum of 1p) and do not carry any right to receive notice of or attend or vote at any general meeting of the Company. Any Deferred shares that arise as a result of conversions of Shares are cancelled in the same reporting period.
(e) Future Convertibility of the Shares
Shares are convertible at the option of the holder into any other class of Share. Further conversion details are given on the inside front cover and in the Shareholder Information on page 96.
14. Reserves
This note explains the different reserves attributable to shareholders. The aggregate of the reserves and share capital (see previous note) make up total shareholders’ funds.
The share premium comprises the net proceeds received by the Company following the issue of new shares, after deduction of the nominal amount of 1 penny and any applicable costs. The special reserve arose from the cancellation of the share premium account, in January 2007, and is available as distributable profits to be used for all purposes under the Companies Act 2006, including buy back of shares and payment of dividends. The capital redemption reserve arises from the nominal value of shares bought back and cancelled; this and the share premium are non-distributable.
The capital reserve includes unrealised investment holding gains, being the difference between cost and fair value, of £28,508,000 (2015: £36,237,000). It also includes realised net gains of £15,565,000 (2015: £13,089,000) which are distributable, including by way of buy back of shares and payment of dividends.
The revenue reserve shows the net revenue retained after payments of any dividends and is distributable by way of dividend.
15. Net asset value per Share
The total net assets (total assets less total liabilities) attributable to a share class are often termed shareholders’ funds and are converted into net asset value per share by dividing by the number of shares in issue.
The net asset value per Share and the net assets attributable at the year end were as follows:
| ORDINARY SHARES |
2016 |
2015 |
|
NET ASSET
VALUE PER
SHARE
PENCE |
NET ASSETS
ATTRIBUTABLE
£’000 |
NET ASSET
VALUE PER
SHARE
PENCE |
NET ASSETS
ATTRIBUTABLE
£’000 |
| UK Equity |
164.3 |
65,727 |
173.0 |
68,839 |
| Global Equity Income |
159.2 |
51,943 |
165.7 |
52,248 |
| Balanced Risk |
122.8 |
8,837 |
123.2 |
9,254 |
| Managed Liquidity |
103.1 |
6,091 |
103.2 |
5,372 |
Net asset value per Share is based on net assets at the year end and on the number of relevant Shares in issue at the year end.
16. Financial instruments
This note summarises the risks deriving from the financial instruments that comprise the Company’s assets and liabilities.
The Company’s financial instruments comprise the following:
– investments in equities, fixed interest securities and liquidity funds which are held in accordance with the Company’s investment objectives and the investment objectives of the four Portfolios;
– short-term debtors, creditors and cash arising directly from operations;
– short-term forward foreign currency and futures contracts; and
– bank loans and short-term overdrafts, used to finance operations.
The financial instruments held in each of the four investment portfolios are shown on pages 10, 16, 22, 23 and 27.
The accounting policies in note 1 include criteria for the recognition and the basis of measurement applied for these financial instruments. Note 1 also includes the basis on which income and expenses arising from financial assets and liabilities are recognised and measured.
The Company’s principal risks and uncertainties are outlined in the Strategic Report on pages 34 to 37. This note expands on risk areas in relation to the Company’s financial instruments. The portfolios are managed in accordance with the Company’s investment policies and objectives, which are set out on pages 28 to 31. The management process is subject to risk controls, which the Audit Committee reviews on behalf of the Board, as described on pages 43 and 44.
The principal risks that an investment company faces in its portfolio management activities are set out below:
Market risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk:
Currency risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in foreign exchange rates;
Interest rate risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market interest rates; and
Other price risk – arising from fluctuations in the fair value or future cash flows of a financial instrument for reasons other than changes in foreign exchange rates or market interest rates, whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market.
Liquidity risk – arising from any difficulty in meeting obligations associated with financial liabilities.
Credit risk, incorporating counterparty risk – arising from financial loss for a company where the other party to a financial instrument fails to discharge an obligation.
Risk Management Policies and Procedures
As an investment trust the Company invests in equities and other investments for the long-term in accordance with its investment policies so as to meet its investment objectives. In pursuing its objectives, the Company is exposed to a variety of risks that could result in a reduction in the Company’s net assets or a reduction of the profits available for dividends. The risks applicable to the Company and the Directors’ policies for managing these risks follow. These have not changed from those applying in the previous year.
The Directors have delegated to the Manager the responsibility for the day-to-day investment activities of the Company as more fully described in the Directors’ Report.
The main risk that the Company faces arising from its financial instruments is market risk – this risk is reviewed in detail below. Since the Company mainly invests in quoted investments and derivative instruments traded on recognised exchanges, liquidity risk and credit risk are significantly mitigated.
Market Risk
The Company’s portfolio managers assess the individual investment portfolio exposures when making each investment decision for their Portfolios, and monitor the overall level of market risk on the whole of their investment portfolio on an ongoing basis. The Board meets at least quarterly to assess risk and review investment performance for the four Portfolios and the Company, as disclosed in the Board Responsibilities section of the Directors’ Report on page 45. Borrowings can be used by the UK Equity and Global Equity Income Portfolios, which will increase the Company’s exposure to market risk and volatility. The borrowing limits for these Portfolios are 25% and 20% of attributable net assets, respectively.
Currency Risk
A majority of the Global Equity Income Portfolio, derivative instruments in the Balanced Risk Portfolio and a small proportion of the UK Equity Portfolio consist of assets, liabilities and income denominated in currencies other than sterling. As a result, movements in exchange rates will affect the sterling value of those items.
Management of Currency Risk
The portfolio managers monitor the separate Portfolios’ exposure to foreign currencies on a daily basis and report to the Board on a regular basis. Forward foreign currency contracts can be used to limit the Company’s exposure to anticipated future changes in exchange rates and to achieve portfolio characteristics that assist the Company in meeting its investment objectives in line with its investment policies. All contracts are limited to currencies and amounts commensurate with the exposure to those currencies. No such contracts were in place at the current or preceding year end. Income denominated in foreign currencies is converted to sterling on receipt.
Foreign Currency Exposure
The fair value or amortised cost of the Company’s monetary items that have foreign currency exposure at 31 May are shown below. Where the Company’s equity investments (which are not monetary items) are priced in a foreign currency they have been included separately in the analysis in order to show the overall level of exposure.
UK EQUITY PORTFOLIO:
CURRENCY |
DEBTORS
(DUE FROM
BROKERS
AND
DIVIDENDS)
£’000 |
CASH/
(OVERDRAFT)
AT BANK
£’000 |
CREDITORS
(DUE FROM
BROKERS
AND
ACCRUALS)
£’000 |
CURRENCY
EXPOSURE
ON NET
MONETARY
ITEMS
£’000 |
INVESTMENTS
AT FAIR
VALUE
THROUGH
PROFIT OR
LOSS THAT
ARE EQUITIES
£’000 |
TOTAL NET
CURRENCY
£’000 |
| YEAR ENDED 31 MAY 2016 |
|
|
|
|
|
| Swiss Franc |
48 |
– |
– |
48 |
3,867 |
3,915 |
| US Dollar |
– |
– |
– |
– |
4,714 |
4,714 |
|
48 |
– |
– |
48 |
8,581 |
8,629 |
| YEAR ENDED 31 MAY 2015 |
|
|
|
|
|
| Swiss Franc |
57 |
– |
– |
57 |
4,186 |
4,243 |
| US Dollar |
– |
– |
– |
– |
4,210 |
4,210 |
|
57 |
– |
– |
57 |
8,396 |
8,453 |
GLOBAL EQUITY INCOME PORTFOLIO:
CURRENCY |
DEBTORS
(DUE FROM
BROKERS
AND
DIVIDENDS)
£’000 |
CASH/
(OVERDRAFT)
AT BANK
£’000 |
CREDITORS
(DUE FROM
BROKERS
AND
ACCRUALS)
£’000 |
TOTAL
FOREIGN
CURRENCY
EXPOSURE
ON NET
MONETARY
ITEMS
£’000 |
INVESTMENTS
AT FAIR
VALUE
THROUGH
PROFIT OR
LOSS THAT
ARE EQUITIES
£’000 |
TOTAL NET
CURRENCY
£’000 |
| YEAR ENDED 31 MAY 2016 |
|
|
|
|
|
| Australian Dollar |
– |
– |
– |
– |
915 |
915 |
| Chinese Renminbi |
18 |
– |
– |
18 |
– |
18 |
| Euro |
137 |
– |
– |
137 |
12,788 |
12,925 |
| Hong Kong Dollar |
25 |
– |
– |
25 |
2,860 |
2,885 |
| Japanese Yen |
5 |
– |
– |
5 |
1,307 |
1,312 |
| Norwegian Krone |
26 |
– |
– |
26 |
1,286 |
1,312 |
| Swedish Krona |
– |
– |
– |
– |
924 |
924 |
| Swiss Franc |
45 |
– |
– |
45 |
5,041 |
5,086 |
| Taiwan New Dollar |
– |
– |
– |
– |
1,101 |
1,101 |
| US Dollar |
147 |
– |
(209) |
(62) |
18,864 |
18,802 |
|
403 |
– |
(209) |
194 |
45,086 |
45,280 |
| YEAR ENDED 31 MAY 2015 |
|
|
|
|
|
| Australian Dollar |
– |
– |
– |
– |
1,367 |
1,367 |
| Euro |
19 |
– |
– |
19 |
12,841 |
12,860 |
| Hong Kong Dollar |
– |
– |
– |
– |
1,877 |
1,877 |
| Indonesian Rupiah |
– |
– |
– |
– |
525 |
525 |
| Japanese Yen |
4 |
– |
– |
4 |
1,477 |
1,481 |
| Norwegian Krone |
9 |
– |
– |
9 |
1,163 |
1,172 |
| Swedish Krona |
– |
– |
– |
– |
1,282 |
1,282 |
| Swiss Franc |
49 |
– |
– |
49 |
5,714 |
5,763 |
| Taiwan New Dollar |
– |
– |
– |
– |
779 |
779 |
| US Dollar |
80 |
– |
– |
80 |
17,129 |
17,209 |
|
161 |
– |
– |
161 |
44,154 |
44,315 |
BALANCED RISK PORTFOLIO:
CURRENCY |
DERIVATIVE
ASSETS AT
FAIR VALUE
THROUGH
PROFIT OR
LOSS
£’000 |
CASH/
(OVERDRAFT)
AT BANK
£’000 |
DERIVATIVE
LIABILITIES AT
FAIR VALUE
THROUGH
PROFIT OR
LOSS
£’000 |
DEBTORS
DUE FROM/
(CREDITORS
DUE TO)
BROKERS &
DIVIDENDS/
(ACCRUALS)
£’000 |
TOTAL
FOREIGN
CURRENCY
EXPOSURE
ON NET
MONETARY
ITEMS
£’000 |
INVESTMENTS
AT FAIR
VALUE
THROUGH
PROFIT OR
LOSS THAT
ARE EQUITIES
£’000 |
TOTAL NET
CURRENCY
£’000 |
| YEAR ENDED 31 MAY 2016 |
|
|
|
|
|
|
|
| Australian Dollar |
31 |
20 |
– |
(7) |
44 |
– |
44 |
| Canadian Dollar |
5 |
10 |
– |
21 |
36 |
– |
36 |
| Euro |
26 |
50 |
– |
40 |
116 |
– |
116 |
| Hong Kong Dollar |
9 |
18 |
– |
25 |
52 |
– |
52 |
| Japanese Yen |
20 |
17 |
– |
16 |
53 |
– |
53 |
| US Dollar |
280 |
124 |
(68) |
45 |
381 |
18 |
399 |
|
371 |
239 |
(68) |
140 |
682 |
18 |
700 |
| YEAR ENDED 31 MAY 2015 |
|
|
|
|
|
|
|
| Australian Dollar |
– |
20 |
(12) |
45 |
53 |
– |
53 |
| Canadian Dollar |
15 |
13 |
– |
16 |
44 |
– |
44 |
| Euro |
– |
34 |
(12) |
58 |
80 |
– |
80 |
| Hong Kong Dollar |
– |
27 |
(15) |
45 |
57 |
– |
57 |
| Japanese Yen |
58 |
15 |
– |
(34) |
39 |
– |
39 |
| US Dollar |
50 |
5 |
(86) |
282 |
251 |
23 |
274 |
|
123 |
114 |
(125) |
412 |
524 |
23 |
547 |
* Cash includes collateral pledged for futures contracts.
Foreign Currency Sensitivity
The above sensitivity analysis is based on the Company’s monetary foreign currency financial instruments held at each balance sheet date and takes account of forward foreign exchange contracts, if used, that offset the effects of changes in currency exchange rates. The effect of strengthening or weakening of sterling against other currencies to which the Company is exposed is calculated by reference to the volatility of exchange rates during the year using the standard deviation of currency fluctuations against the mean, giving the following exchange rate fluctuations:
|
2016 |
2015 |
| £/Australian Dollar |
+/– 4.6% |
+/– 3.6% |
| £/Canadian Dollar |
+/– 3.8% |
+/– 2.3% |
| £/Euro |
+/– 4.2% |
+/– 4.2% |
| £/Hong Kong Dollar |
+/– 3.6% |
+/– 4.6% |
| £/Indonesian Rupiah |
+/– 5.2% |
+/– 2.1% |
| £/Japanese Yen |
+/– 7.7% |
+/– 3.1% |
| £/Norwegian Krone |
+/– 3.5% |
+/– 5.9% |
| £/Swedish Krona |
+/– 4.6% |
+/– 4.9% |
| £/Swiss Franc |
+/– 3.4% |
+/– 3.7% |
| £/Taiwan Dollar |
+/– 2.8% |
+/– 3.0% |
| £/US Dollar |
+/– 3.7% |
+/– 4.6% |
The tables that follow illustrate the exchange rate sensitivity of revenue and capital returns arising from the Company’s financial assets and liabilities for the year for the UK Equity, Global Equity Income and Balanced Risk Portfolios.
If sterling had strengthened against the currencies shown by the table above, this would have had the following after tax effect:
UK EQUITY PORTFOLIO:
|
2016 |
2015 |
|
REVENUE
RETURN |
CAPITA
RETURN |
TOTAL RETURN |
REVENUE
RETURN |
CAPITA
RETURN |
TOTAL RETURN |
| Swiss Franc |
(5) |
(131) |
(136) |
(6) |
(157) |
(163) |
| US Dollar |
(16) |
(174) |
(190) |
(5) |
(194) |
(199) |
|
(21) |
(305) |
(326) |
(11) |
(351) |
(362) |
GLOBAL EQUITY INCOME PORTFOLIO:
|
2016 |
2015 |
|
REVENUE
RETURN |
CAPITA
RETURN |
TOTAL RETURN |
REVENUE
RETURN |
CAPITA
RETURN |
TOTAL RETURN |
| Australian Dollar |
(1) |
(42) |
(43) |
(2) |
(49) |
(51) |
| Euro |
(27) |
(540) |
(567) |
(17) |
(540) |
(557) |
| Hong Kong Dollar |
(1) |
(104) |
(105) |
(2) |
(86) |
(88) |
| Indonesian Rupiah |
– |
– |
– |
– |
(11) |
(11) |
| Japanese Yen |
(3) |
(101) |
(104) |
(1) |
(46) |
(47) |
| Norwegian Krone |
(3) |
(45) |
(48) |
(3) |
(69) |
(72) |
| Swedish Krona |
– |
(43) |
(43) |
– |
(63) |
(63) |
| Swiss Franc |
(8) |
(171) |
(179) |
(6) |
(213) |
(219) |
| Taiwan Dollar |
(1) |
(31) |
(32) |
– |
(23) |
(23) |
| US Dollar |
(9) |
(701) |
(710) |
(24) |
(792) |
(816) |
|
(53) |
(1,778) |
(1,831) |
(55) |
(1,892) |
(1,947) |
BALANCED RISK PORTFOLIO:
|
2016 |
2015 |
|
REVENUE
RETURN |
CAPITA
RETURN |
TOTAL RETURN |
REVENUE
RETURN |
CAPITA
RETURN |
TOTAL RETURN |
| Australian Dollar |
– |
(2) |
(2) |
– |
(2) |
(2) |
| Canadian Dollar |
– |
(1) |
(1) |
– |
(1) |
(1) |
| Euro |
– |
(5) |
(5) |
– |
(3) |
(3) |
| Hong Kong Dollar |
– |
(2) |
(2) |
– |
(3) |
(3) |
| Japanese Yen |
– |
(4) |
(4) |
– |
(1) |
(1) |
| US Dollar |
(1) |
(15) |
(16) |
(3) |
(13) |
(16) |
|
(1) |
(29) |
(30) |
(3) |
(23) |
(26) |
If sterling had weakened against the currencies shown, the effect would have been the converse.
Interest Rate Risk
Interest rate movements may affect:
– the fair value of the investments in fixed-interest rate securities;
– the level of income receivable on cash deposits; and
– the interest payable on variable rate borrowings.
Management of interest rate 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 as part of the portfolio management and borrowings processes of the portfolio managers. The Board reviews on a regular basis the investment portfolio and borrowings. This encompasses the valuation of fixed-interest and floating rate securities and gearing levels.
When the Company has cash balances, they are held in variable rate bank accounts yielding rates of interest dependent on the base rate of the custodian. The Company has a £25 million (2015: £25 million), 364 day multicurrency revolving credit facility which is due for renewal on 19 May 2017 (2015: 21 April 2016). The Company uses the facility when required at levels approved and monitored by the Board.
Interest rate exposure
At 31 May the exposure of financial assets and financial liabilities to interest rate risk is shown by reference to:
– floating interest rates (giving cash flow interest rate risk) – when the interest rate is due to be reset; and
– fixed interest rates (giving fair value interest rate risk) – when the financial instrument is due for repayment.
The following table sets out the financial assets and financial liabilities exposure at the year end:
|
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
TOTAL
£’000 |
| 2016 |
|
|
|
|
|
| Exposure to floating interest rates: |
|
|
|
|
|
| Investments held at fair value through profit or loss* |
– |
– |
2,190 |
5,312 |
7,502 |
| Cash and cash equivalents |
629 |
701 |
654 |
917 |
2,901 |
| Bank loans |
(7,150) |
(6,600) |
– |
– |
(13,750) |
|
(6,521) |
(5,899) |
2,844 |
6,229 |
(3,347) |
| Exposure to fixed interest rates: |
|
|
|
|
|
| Investments held at fair value through profit or loss including UK Treasury Bills |
– |
– |
5,490 |
– |
5,490 |
| Net exposure to interest rates |
(6,521) |
(5,899) |
8,334 |
6,229 |
2,143 |
|
|
|
|
|
|
| 2015 |
|
|
|
|
|
| Exposure to floating interest rates: |
|
|
|
|
|
| Investments held at fair value through profit and loss* |
– |
– |
2,900 |
5,460 |
8,360 |
| Cash and cash equivalents |
268 |
302 |
388 |
19 |
977 |
| Bank loans |
(8,400) |
(6,100) |
– |
– |
(14,500) |
|
(8,132) |
(5,798) |
3,288 |
5,479 |
(5,163) |
| Exposure to fixed interest rates: |
|
|
|
|
|
| Investments held at fair value through |
|
|
|
|
|
| profit and loss including |
|
|
|
|
|
| UK Treasury Bills |
– |
– |
5,488 |
– |
5,488 |
| Net exposure to interest rates |
(8,132) |
(5,798) |
8,776 |
5,479 |
325 |
* Comprises holdings in the Short-Term Investments Company (Global Series) plc and Invesco Perpetual Money Fund.
The income on the Invesco Perpetual Money Fund and Short Term Investments Company (Global Series) plc investments is affected by interbank lending rates; the principal amount should normally remain stable regardless of interest rate movements.
Interest rate sensitivity
At the maximum possible borrowing of £25 million (2015: £25 million), the effect over one year of a 0.5% movement in interest rates would result in a £125,000 (2015: £125,000) maximum movement in the Company’s income and net assets.
The effect over one year of a 1% movement in the interest rates on investments held at fair value through profit and loss would result in a £15,000 (2015: £25,000) maximum movement in the Company’s income and net assets.
The above exposure and sensitivity analysis are not representative of the year as a whole, since the level of exposure changes frequently throughout the year
Other Price Risk
Other price risks (i.e. changes in market prices other than those arising from interest rate risk or currency risk) may affect the value of the equity investments, but it is the business of the portfolio managers to manage the Portfolios to achieve the best returns they can.
Management of Other Price Risk
The Directors monitor the market price risks inherent in the investment portfolios by meeting regularly to review performance.
The Company’s investment portfolios are the result of the Manager’s investment processes and as a result are not wholly correlated with the individual Portfolios’ benchmarks or the markets in which the Portfolios invest. The value of the investment portfolios will not move in line with the markets but will move as a result of the performance of the shares held within the investment portfolios.
If the value of an investment portfolio moved by 10% at the balance sheet date, the profit after tax and net assets for the year would increase/decrease by the following amounts:
|
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
| 2016 |
|
|
|
|
| Profit after tax increase/decrease due to rise/fall of 10% |
7,358 |
5,767 |
770 |
531 |
|
|
|
|
|
| 2015 |
|
|
|
|
| Profit after tax increase/decrease due to rise/fall of 10% |
7,808 |
5,790 |
841 |
546 |
Liquidity Risk
Management of liquidity risk
Liquidity risk is minimised as the majority of investments held in the Company’s four portfolios are diversified and the majority are readily realisable securities which can be sold to meet funding commitments. If required, the Company’s borrowing facilities provide additional long-term and short-term flexibility.
The Directors' policy is that in normal market conditions short-term borrowings be used to manage short term liabilities and working capital requirements rather than to realise investments.
Liquidity risk
The contractual maturities of financial liabilities at the year end, based on the earliest date on which payment can be required, are as follows:
|
UK
EQUITY |
GLOBAL
EQUITY
INCOME |
BALANCED
RISK |
MANAGED
LIQUIDITY |
|
|
3 MONTHS
OR LESS
£’000 |
MORE THAN
3 MONTHS
£’000 |
3 MONTHS
OR LESS
£’000 |
3 MONTHS
OR LESS
£’000 |
MORE THAN
3 MONTHS
£’000 |
3 MONTHS
OR LESS
£’000 |
COMPANY
TOTAL
£’000 |
| 2016 |
|
|
|
|
|
|
|
| Bank loan |
7,150 |
– |
6,600 |
– |
– |
– |
13,750 |
| Amount due to brokers |
332 |
– |
261 |
– |
– |
1 |
594 |
| Other creditors and accruals |
171 |
– |
136 |
26 |
– |
145 |
478 |
| Performance fee accrued |
– |
1,305 |
– |
– |
– |
– |
1,305 |
| Derivative financial instruments |
– |
– |
– |
68 |
– |
– |
68 |
|
7,653 |
1,305 |
6,997 |
94 |
– |
146 |
16,195 |
|
|
|
|
|
|
|
|
| 2015 |
|
|
|
|
|
|
|
| Bank loan |
8,400 |
– |
6,100 |
– |
– |
– |
14,500 |
| Amount due to brokers |
19 |
– |
– |
2,494 |
– |
1 |
2,514 |
| Other creditors and accruals |
164 |
– |
126 |
25 |
– |
155 |
470 |
| Performance fee accrued |
449 |
904 |
– |
– |
– |
– |
1,353 |
| Derivative financial instruments |
– |
– |
– |
84 |
41 |
– |
125 |
|
9,032 |
904 |
6,226 |
2,603 |
41 |
156 |
18,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk
Credit risk is that the failure of the counterparty in a transaction to discharge its obligations under that transaction could result in the Company suffering a loss.
This risk is managed as follows:
– investment transactions are carried out with a selection of brokers, approved by the Manager and settled on a delivery versus payment basis. Brokers’ credit ratings are regularly reviewed by the Manager, so as to minimise the risk of default to the Company;
– the derivative financial instruments are all exchange traded and the exchange guarantees their settlement;
– the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the daily review of failed trade reports and the use of daily stock and cash reconciliations. Only approved counterparties are used;
– the Company’s ability to operate in the short-term may be adversely affected if the Company’s Manager, other outsource service providers, or their delegates suffer insolvency or other financial difficulties. The Board reviews annual controls reports from major service providers;
– where an investment is made 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; and
– cash balances are limited to a maximum of £2.5 million for each Portfolio with any one deposit taker (other than cash collateral on derivative instruments), with only deposit takers approved by the Manager being used. Cash held at brokers includes any cash collateral on futures contracts and during the year only one futures clearing broker, Merrill Lynch, was used.
The following table sets out the maximum credit risk exposure at the year end:
|
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
TOTAL
£’000 |
| 2016 |
|
|
|
|
|
| Bonds (UK Treasury bills) |
– |
– |
5,490 |
– |
5,490 |
| Invesco Perpetual Money Fund |
– |
– |
– |
4,894 |
4,894 |
| Cash held as short term investment(1) |
– |
– |
2,190 |
418 |
2,608 |
| Unquoted securities |
750 |
– |
18 |
– |
768 |
| Derivative financial Instruments |
– |
– |
320 |
– |
320 |
| Debtors(2) |
477 |
570 |
191 |
9 |
1,247 |
| Cash and cash equivalents |
629 |
701 |
654 |
917 |
2,901 |
|
1,856 |
1,271 |
8,863 |
6,238 |
18,228 |
|
|
|
|
|
|
| 2015 |
|
|
|
|
|
| Bonds(UK Treasury bills) |
– |
– |
5,488 |
– |
5,488 |
| Invesco Perpetual Money Fund |
– |
– |
– |
4,880 |
4,880 |
| Cash held as short term investment(1) |
– |
– |
2,900 |
580 |
3,480 |
| Unquoted securities |
730 |
– |
23 |
– |
753 |
| Derivative financial instruments |
– |
– |
34 |
– |
34 |
| Debtors(2) |
424 |
277 |
2,940 |
49 |
3,690 |
| Cash and cash equivalents |
268 |
302 |
388 |
19 |
977 |
|
1,422 |
579 |
11,773 |
5,528 |
19,302 |
(1) Comprises holdings in the Short-Term Investments Company (Global Series) plc.
(2) Cash collateral pledged for futures contracts of £176,000 is included in debtors (2015: £400,000).
17. Fair Values of Financial Assets and Financial Liabilities
‘Fair value’ in accounting terms is the amount at which an asset can be bought or sold in a transaction between willing parties, i.e. a market-based, independent measure of value. This note sets out the fair value hierarchy comprising three ‘levels’ and the aggregate amount of investments in each level.
The financial assets and financial liabilities are either carried in the balance sheet at their fair value (investments and derivative instruments), or the balance sheet amount is a reasonable approximation of fair value.
FRS 102 as amended for fair value hierarchy disclosures (March 2016) sets out three fair value levels. These are:
Level 1 – The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable (ie developed using market data) for the asset or liability, either directly or indirectly.
Level 3 – Inputs are unobservable (ie for which market data is unavailable) for the asset or liability.
Categorisation within the hierarchy is determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability.
The valuation techniques used by the Company are explained in the accounting policies note. The majority of the Company’s investments are quoted equity investments and Treasury bills which are deemed to be Level 1. Level 2 comprises all other quoted fixed income investments, the UK Equity Portfolio’s holdings of Barclays Bank Nuclear Power Notes, derivative instruments and liquidity funds held in the Balanced Risk and Managed Liquidity Portfolios. Level 3 investments comprise any unquoted securities and the remaining hedge fund investments of the Balanced Risk Portfolio.
|
UK
EQUITY
£’000 |
GLOBAL
EQUITY
INCOME
£’000 |
BALANCED
RISK
£’000 |
MANAGED
LIQUIDITY
£’000 |
TOTAL
£’000 |
| 2016 |
|
|
|
|
|
| Financial assets designated at fair value through profit or loss: |
|
|
|
|
|
| Level 1 |
72,827 |
57,669 |
5,490 |
– |
135,986 |
| Level 2 |
2 |
– |
2,578 |
5,312 |
7,892 |
| Level 3 |
750 |
– |
18 |
– |
768 |
| Total for financial assets |
73,579 |
57,669 |
8,086 |
5,312 |
144,646 |
|
|
|
|
|
|
| Financial liabilities: |
|
|
|
|
|
| Level 2 – Derivative instruments |
– |
– |
68 |
– |
68 |
|
|
|
|
|
|
| 2015 |
|
|
|
|
|
| Financial assets designated at fair value through profit or loss: |
|
|
|
|
|
| Level 1 |
77,305 |
57,895 |
5,488 |
– |
140,688 |
| Level 2 |
48 |
– |
3,059 |
5,460 |
8,567 |
| Level 3 |
730 |
– |
23 |
– |
753 |
| Total for financial assets |
78,083 |
57,895 |
8,570 |
5,460 |
150,008 |
|
|
|
|
|
|
| Financial liabilities: |
|
|
|
|
|
| Level 2 – Derivative instruments |
– |
– |
125 |
– |
125 |
A reconciliation of the fair value movement in Level 3 is set out below.
|
UK
EQUITY
£’000 |
BALANCED
RISK
£’000 |
TOTAL
£’000 |
| 2016 |
|
|
|
| Opening fair value |
730 |
23 |
753 |
| Sales – proceeds |
– |
(8) |
(8) |
| Sales – net realised losses |
– |
(4) |
(4) |
| Movement in investment holding gains |
20 |
7 |
27 |
| Closing fair value of Level 3 |
750 |
18 |
768 |
|
|
|
|
| 2015 |
|
|
|
| Opening fair value |
781 |
27 |
808 |
| Sales – proceeds |
– |
(7) |
(7) |
| Sales – net realised losses |
– |
(7) |
(7) |
| Movement in investment holding (losses)/gains |
(51) |
10 |
(41) |
| Closing fair value of Level 3 |
730 |
23 |
753 |
18. Capital Management
This note is designed to set out the Company’s objectives, policies and processes for managing its capital. This capital being funded by monies invested in the Company by shareholders (both initial investment and retained amounts) and any borrowings by the Company.
The Company’s total capital employed at 31 May 2016 was £146,348,000 (2015: £150,213,000) comprising borrowings of £13,750,000 (2015: £14,500,000) and equity share capital and other reserves of £132,598,000 (2015: £135,713,000).
The Company’s total capital employed is managed to achieve each of the Company’s and the Portfolios’ investment objectives as set out on pages 28 to 31, including that borrowings may be used to provide gearing. Borrowings were drawn down by the UK Equity Portfolio and Global Equity Income Portfolio, the net gearing of which were 9.9% and 11.4% (2015: 11.8% and 11.1%) respectively. The Company’s policies and processes for managing capital were unchanged throughout the year and the preceding year.
The main risks to the Company’s investments are shown in the Directors’ Report in the ‘Principal Risks and Uncertainties’ section on pages 34 to 37. These also explain that the Company has borrowing facilities which can be used in accordance with each Portfolios’ investment objective and policy and that this will amplify the effect on equity of changes in the value of each applicable portfolio.
The Board can also manage the capital structure directly since it has taken the powers, which it is seeking to renew, to issue and buy back shares and it also determines dividend payments.
The Company is subject to externally imposed capital requirements with respect to the obligation and ability to pay dividends by the Corporation Tax Act 2010 and by the Companies Act 2006, respectively, and with respect to the availability of the borrowing facility, by the terms imposed by the custodian. The Board regularly monitors, and the Company has complied with, the externally imposed capital requirements. This is unchanged from the prior year.
Borrowings comprise any drawings on the credit and/or overdraft facilities, details of which are given in note 12.
19. Contingencies, guarantees and financial commitments
Any liabilities the Company is committed to honour but which are dependent on a future circumstance or event occurring would be disclosed in this note if any existed.
There were no contingencies, guarantees or financial commitments of the Company at the year end (2015: £nil).
20. Related party transactions and transactions with the Manager
A related party is a company or individual who has direct or indirect control or who has significant influence over the Company. Under accounting standards, the Manager is not a related party.
Under UK GAAP, the Company has identified the Directors as related parties. The Directors’ emoluments and interests have been disclosed on pages 54 to 56 with additional disclosures in note 4. No other related parties have been identified.
Details of the Manager’s services and fees are disclosed in the Directors’ Report on page 49 and note 3.
21. Post Balance Sheet Events
Any significant events that occurred after the Company’s financial year end but before the signing of the balance sheet will be shown here.
There are no significant events after the end of the reporting period requiring disclosure.
.
Notice of Annual General Meeting
NOTICE IS GIVEN that the Annual General Meeting (AGM) of Invesco Perpetual Select Trust plc will be held at 6th Floor, 125 London Wall, London EC2Y 5AS at 11.30am on 4 October 2016 for the following purposes:
Ordinary Business
1. To receive the Annual Financial Report for the year ended 31 May 2016.
2. To approve the Directors’ Remuneration Policy.
3. To approve the Annual Statement and Report on Remuneration.
4. To re-elect Patrick Gifford a Director of the Company.
5. To re-elect Alan Clifton a Director of the Company.
6. To appoint Grant Thornton LLP as Auditor to the Company and authorise the Audit Committee to determine the Auditor’s remuneration.
Special Business
To consider and, if thought fit, to pass the following resolution which will be proposed as an Ordinary Resolution:
7. THAT:
the Directors be and they are hereby generally and unconditionally authorised, for the purpose of section 551 of the Companies Act 2006 as amended from time to time prior to the date of passing this resolution (‘2006 Act’) to exercise all the powers of the Company to allot relevant securities (as defined in sections 551(3) and (6) of the 2006 Act) up to an aggregate nominal amount equal to £1,000,000 of UK Equity Shares, £1,000,000 of Global Equity Income Shares, £1,000,000 of Balanced Risk Shares and £1,000,000 of Managed Liquidity Shares, provided that this authority shall expire at the conclusion of the next AGM of the Company or the date falling fifteen months after the passing of this resolution, whichever is the earlier, but so that such authority shall allow the Company to make offers or agreements before the expiry of this authority which would or might require relevant securities to be allotted after such expiry and the Directors may allot relevant securities in pursuance of such offers or agreements as if the power conferred hereby had not expired.
To consider and, if thought fit, to pass the following resolutions which will be proposed as Special Resolutions:
8. THAT:
the Directors be and they are hereby empowered, in accordance with sections 570 and 573 of the Companies Act 2006 as amended from time to time prior to the date of the passing of this resolution (‘2006 Act’) to allot Shares in each class (UK Equity, Global Equity Income, Balanced Risk and Managed Liquidity) for cash, either pursuant to the authority given by resolution 7 set out above or (if such allotment constitutes the sale of relevant Shares which, immediately before the sale, were held by the Company as treasury shares) otherwise, as if section 561 of the 2006 Act did not apply to any such allotment, provided that this power shall be limited:
(a) to the allotment of Shares in connection with a rights issue in favour of all holders of a class of Share where the Shares attributable respectively to the interests of all holders of Shares of such class are either proportionate (as nearly as may be) to the respective numbers of relevant Shares held by them or are otherwise allotted in accordance with the rights attaching to such Shares (subject in either case to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or legal or practical problems under the laws of, or the requirements of, any regulatory body or any stock exchange in any territory or otherwise);
(b) to the allotment (otherwise than pursuant to a rights issue) of equity securities up to an aggregate nominal amount of £39,763 of UK Equity Shares, £32,377 of Global Equity Income Shares, £7,199 of Balanced Risk Shares and £5,906 of Managed Liquidity Shares; and
(c) to the allotment of equity securities at a price of not less than the net asset value per Share as close as practicable to the allotment or sale.
and this power shall expire at the conclusion of the next AGM of the Company or the date fifteen months after the passing of this resolution, whichever is the earlier, but so that this power shall allow the Company to make offers or agreements before the expiry of this power which would or might require equity securities to be allotted after such expiry as if the power conferred by this resolution had not expired; and so that words and expressions defined in or for the purposes of Part 17 of the 2006 Act shall bear the same meanings in this resolution.
9. THAT:
the Company be generally and subject as hereinafter appears unconditionally authorised in accordance with section 701 of the Companies Act 2006 as amended from time to time prior to the date of passing this resolution (‘2006 Act’) to make market purchases (within the meaning of section 693(4) of the 2006 Act) of its issued Shares in each Share class (UK Equity, Global Equity Income, Balanced Risk and Managed Liquidity).
PROVIDED ALWAYS THAT
(i) the maximum number of Shares hereby authorised to be purchased shall be 14.99% of each class of the Company’s share capital at 4 October 2016, the date of the Annual General Meeting (equivalent, at 27 July 2016, to 5,960,507 UK Equity Shares, 4,853,440 Global Equity Income Shares, 1,079,147 Balanced Risk Shares and 885,334 Managed Liquidity Shares);
(ii) the minimum price which may be paid for a Share shall be 1p;
(iii) the maximum price which may be paid for a Share in each Share class shall be an amount equal to 105% of the average of the middle market quotations for a Share taken from and calculated by reference to the London Stock Exchange Daily Official List for five business days immediately preceding the day on which the Share is purchased;
(iv) any purchase of Shares will be made in the market for cash at prices below the prevailing net asset value per Share (as determined by the Directors);
(v) the authority hereby conferred shall expire at the conclusion of the next AGM of the Company or, if earlier, on the expiry of 15 months from the passing of this resolution unless the authority is renewed at any other general meeting prior to such time; and
(vi) the Company may make a contract to purchase Shares under the authority hereby conferred prior to the expiry of such authority which will be executed wholly or partly after the expiration of such authority and may make a purchase of Shares pursuant to any such contract.
10. THAT:
the period of notice required for general meetings of the Company (other than Annual General Meetings) shall be not less than 14 days.
All Resolutions are explained further in the Directors’ Report on pages 52 and 53.
Dated 28th July 2016
By order of the Board
Invesco Asset Management Limited
Company Secretary
.
The financial information set out above does not constitute the Company’s statutory accounts for the year ended 31 May 2016. The financial information for 2015 is derived from the statutory accounts for the year ended 31 May 2015, which have been delivered to the Registrar of Companies. The auditor has reported on the 2015 accounts; the audit report was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain a statement under section 498 of the Companies Act 2006. The statutory accounts for the year ended 31 May 2016 have been finalised and audited but have not yet been delivered to the Registrar of Companies.
The audited annual financial report will be available to shareholders, and will be delivered to the Registrar of Companies, shortly. Copies may be obtained during normal business hours from the Company’s Registered Office, from its correspondence address, 6th Floor, 125 London Wall, London EC2Y 5AS, and via the web pages of all of the Share classes on the Manager’s website at www.invescoperpetual.co.uk/investmenttrusts .
The Annual General Meeting will be held on 4 October 2016 at 11.30am at 6th Floor, 125 London Wall, London EC2Y 5AS.
By order of the Board
Invesco Asset Management Limited
28 July 2016
Contacts:
Angus Pottinger 020 3753 1000
Paul Griggs 020 3753 1000
