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Invesco Perpetual Select Trust Plc - Annual Financial Report

Invesco Perpetual Select Trust plc

Annual Financial Report Announcement

Year Ended 31 May 2019

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FINANCIAL PERFORMANCE

CUMULATIVE TOTAL RETURNS(1)(2) TO 31 MAY 2019

UK Equity Portfolio
 
ONE
YEAR
THREE
YEARS
FIVE
YEARS
Net Asset Value –4.9% 17.3% 33.6%
Share Price –3.1% 19.0% 36.3%
FTSE All-Share Index –3.2% 28.4% 29.3%
Global Equity Income Portfolio
 
ONE
YEAR
THREE
YEARS
FIVE
YEARS
Net Asset Value –1.3% 37.4% 55.1%
Share Price –0.1% 38.4% 56.1%
MSCI World Index (£) 5.3% 49.6% 75.0%
Balanced Risk Allocation Portfolio
 
ONE
YEAR
THREE
YEARS
FIVE
YEARS
Net Asset Value –2.7% 13.6% 17.8%
Share Price –0.7% 16.1% 19.4%
Merrill Lynch 3 month LIBOR +5% pa 5.8% 16.7% 27.8%
Managed Liquidity Portfolio
 
ONE
YEAR
THREE
YEARS
FIVE
YEARS
Net Asset Value 1.3% 1.7% 1.5%
Share Price –0.5% 0.5% 0.1%
YEAR END NET ASSET VALUE, SHARE PRICE AND PREMIUM/(DISCOUNT)


SHARE CLASS
NET ASSET
VALUE
(PENCE)
SHARE
PRICE
(PENCE)


DISCOUNT
UK Equity 173.1 173.5 0.2%
Global Equity Income 197.6 195.0 (1.3)%
Balanced Risk Allocation 139.5 138.5 (0.7)%
Managed Liquidity 104.9 101.5 (3.2)%

(1)  Defined in the Glossary of Terms and Alternative Performance Measures, including reconciliations, on pages 105 to 108.

(2)  Source: Refinitiv.

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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 Allocation 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 29 to 32.

The Company enables shareholders to adjust their asset allocation to reflect their views 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 Share Portfolio over the year was –4.9%, which compares with the total return of –3.2% from the FTSE All-Share Index. The share price total return was –3.1%.

The NAV total return of the Global Equity Income Share Portfolio over the year was –1.3%, which compares with the total return from the MSCI World Index (£) of +5.3%. The share price total return was –0.1%.

The NAV total return of the Balanced Risk Allocation Share Portfolio was –2.7%, which compares with its benchmark of 3 months LIBOR plus 5% which returned +5.8%. The share price total return was –0.7%.

The NAV total return of the Managed Liquidity shares was +1.3%. The share price total return was –0.5%.

It is disappointing, both for the Board and for shareholders, to report on a year in which all three portfolios based on risk assets failed to meet or exceed their benchmarks. It is some small consolation that the second half of the financial year saw a significant improvement. The total return of the UK Equity Share Portfolio was +7.1% for the six months to the end of May compared with a return of +4.5% for the FTSE All-Share Index. Similarly the Balanced Risk Allocation Share Portfolio recovered its poise and rose by 4.7% compared with a rise in 3 months LIBOR plus 5% of 3.0%. The margin of underperformance by the Global Equity Income Share Portfolio was much smaller than in the first half of the year with a rise of 1.6% compared with a rise of 2.7% in the MSCI World Index (£). The Board has engaged in active discussion with the portfolio management team to understand the sources of this underperformance.

The UK Portfolio benefited from the listing of AJ Bell, our only unquoted investment. The company has been extremely successful during our ownership of the shares and was very well received on its public debut. The holding dates from 2007 and was the only exception to a policy of not investing in unquoted companies that has been in place from the Company’s launch. With the listing of AJ Bell we have taken the decision to include this restriction in the annual report investment policy disclosure. Otherwise the Portfolio benefited from better recognition of the significant inherent value within the unloved UK market, especially when it became apparent through strong corporate progress. The Board has recognised that the UK Equity Share Portfolio manager’s stance is based on clear value and remains supportive. The Global Equity Income Share Portfolio’s improvement stemmed from the better relative performance of the laggard UK and Continental European markets and also the unfashionable oil sector as the large US technology stocks lost some of their bounce.

On the other two share classes, the Balanced Risk Allocation Share Portfolio seems to be recovering from a setback, the causes of which are well articulated by the portfolio manager, in October and November; and holders of Managed Liquidity Shares will recall from my statement in the half year report that the principal investment has been changed to PIMCO Sterling Short Maturity Source UCITS ETF, from the Invesco Money Fund (UK), following a regulatory change.  

Economic development over the period was quite stable though there does appear to be a gentle trend towards slower growth worldwide. This caused some sharp reversals in financial markets as they swung from the expectation of several rises in the US Federal Reserve (Fed) Funds rate to the belief that the next change is more likely to be downwards.

The political scene was much more dramatic, especially in the UK and the US. The Brexit saga seems to come in several acts, each painfully like the previous one. It remains to be seen whether the new Prime Minister will adopt a different and more implementable policy both towards the European Union and the House of Commons. The US government, or at least the President, seems unconcerned by major policy swings, especially in trade, and, regarding the Middle East, seems only to be committed to Israel (or at least a Likud-led government there) and Saudi Arabia as allies. It also appears to have decided that China is a long-term adversary and not a collaborator.

Outlook

After a financial year of low returns and reasonable profit growth, markets have become rather cheaper. Economic growth is still continuing, though at a slightly slower pace, and profits are still rising. Given the prevalence of very low nominal and real interest rates, markets should offer reasonable, though probably not very exciting returns, especially because there is very little euphoria around. However, it seems likely that growth will be slower and may indeed tip over into recession further out as US tax cuts lose their effect and China suffers from possible weakness of demand as it shifts from export and investment-led growth to domestic consumption. Europe still suffers from the problems of the Euro, exacerbated by German economic policy and the weakness of the banking system. To combat any recessionary tendency may require a shift towards government-led infrastructure and climate change based investment and therefore a different mix of fiscal and monetary policy.

The political scene is different and unpredictable. At any given moment it is possible that there is about to be either a real war in, for example, the Gulf or Venezuela, or a trade war between the US and almost any other country. Most of this comes from the extremely volatile character of the current US administration and President and it is impossible to predict whether sabre-rattling will turn into anything serious. The greatest restraint is the polling knowledge that the US public now has a deep aversion to foreign adventures and wars. More parochially, I wrote a year ago that “a Brexit settlement will be reached [during this year].” It hasn’t, yet a year on the prediction still seems valid. What form it will take is still unclear, and even a new Prime Minister may take a little while to assess the opposing forces bearing on his government and formulate a coherent policy. Meantime 31 October isn’t very far away.

If one tries to stand back from the immediate noise and look further ahead it is probable that China’s relative rise will continue, even if its lack of population growth holds it back a little. It will acquire competitive technology where it doesn’t have it and the existing economic interdependence makes it much harder for the US to shut it out than was the case with the Soviet Union. Climate change will be a dominant theme for decades to come, whether its effects are ultimately contained or cause major dislocation and political strife. Politicians, whether in democracies or autocracies, will have to deal with the disillusionment now felt by many of their citizens.

The Board

I am retiring as Chairman, and as a Director, at the Annual General Meeting in October. My successor will be Graham Kitchen who has great knowledge of investment and the investment company sector. We are also close to appointing a new Director, details of whom will be announced in due course. I am proud to have been a Director, and then Chairman, of an innovative investment company whose aim has always been to satisfy the needs of the groups of shareholders who originally joined this Company’s predecessor in 1999 and to provide the same service to like minded individuals. I believe that despite occasional setbacks we have achieved this and that the Company is well placed to continue to do so.

Dividends

We continue to apply the dividend policy adopted four years ago, and approved, albeit with advisory votes, by shareholders last year, whereby for both UK Equity and Global Equity Income Shares, dividends are paid by way of three equal interim dividends declared in July, October and January with a ‘wrap-up’ fourth interim declared in April. For the year under review the first three dividends declared for both Share classes were 1.5p per share. The fourth dividends were 2.1p per share for the UK Equity Shares, bringing the total to 6.6p per share for the year, and 2.4p per share for the Global Equity Income Shares, bringing that total to 6.9p per share for the year.

For the Global Equity Income Shares the revenue earned in the year matched the dividends paid and no contribution from capital was required (2018: nil). However, for the UK Equity Shares a contribution from capital of approximately 0.9p per share was required to achieve the dividend level (2018: 0.3p) per share.

We intend to continue with this policy and investors are again being given advisory votes on it. We continue to target at least maintaining the dividend level from year to year for each of the equity Portfolios.

The first interim dividends declared in respect of the year to May 2020, which will be paid on 16 August 2019 to shareholders on the register on 26 July 2019, were 1.5p per share for UK Equity and 1.55p per share for Global Equity Income.

It continues to be the case that in order to maximise the capital return on the Balanced Risk Allocation Shares, the Directors only intend to declare dividends on the Balanced Risk Allocation 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. No dividends have been paid on the Balanced Risk Allocation Shares.

In the prevailing low interest rate environment the Managed Liquidity Portfolio had not been producing sufficient net revenue to cover the administrative costs of distribution and Managed Liquidity shareholders had consequently not received any dividends since May 2012. I am pleased to report the situation has improved a little during this past year and the Board has declared a dividend of 0.8p per Managed Liquidity Share, payable on 16 August 2019 to shareholders on the register on 26 July 2019. It remains the Directors’ intention to distribute substantially all net revenues earned by the Portfolio going forward. Given the quantum involved it is unlikely that such payments will be more frequent than annual and may indeed be less frequent.

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 prices 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 relatively 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 for cash on a non pre-emptive basis being renewed at general meetings of the Company.

Share Capital Movements

During the year to 31 May 2019, the Company bought back and placed in treasury 2,313,500 UK Equity Shares, 2,422,023 Global Equity Income Shares, 376,218 Balanced Risk Allocation Shares and 472,000 Managed Liquidity Shares. Other than as an artefact of the share conversion process no Shares were issued or sold from treasury and no treasury shares were cancelled. Since the year end a further 39,772 UK Equity Shares and 201,766 Global Equity Income Shares have been bought back into treasury. 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 2019; 1 November 2019; 3 February 2020; and 1 May 2020. Should you wish to convert Shares at any of these dates, conversion forms, which are available on the Manager’s website at www.invesco.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 54 to 56. The AGM will be held at 43-45 Portman Square, London W1H 6LY at 11.30 am on 3 October 2019 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
30 July 2019

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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 last twelve months have been a challenging time to manage equity portfolios. The FTSE All-Share Index reached a record high a week before the period under review began. I wrote at the time that the outlook for global economic growth had improved. Expectations for interest rates had increased accordingly and, along with more positive signs from Brexit negotiations, this suggested that a recovery in the share prices of modestly valued, economically sensitive companies, especially UK Financials, could be imminent. This would have been to the benefit of the Portfolio. Sadly, a year on, this has proved to have been a false dawn with two principal issues affecting global growth and weighing on extremely volatile equity markets over the last twelve months.

The first is the US-China trade war. What began with an innocuous-looking tariff on Chinese solar panels escalated through the year with increasing levies affecting a wider range of goods before ratcheting up significantly in December with the arrest in Canada of the Huawei CFO. From the start of the period under review in June 2018, confidence was dented and equity markets began to decline.

The second and arguably bigger impact was US interest rate policy. The US Federal Reserve (Fed) had begun to raise rates two years earlier. Against the supportive backdrop this time last year of full employment, wage growth of 3%, strong consumer confidence and GDP growth in the second quarter of 2018 of over 4%, they saw the opportunity to continue the progress towards more normal monetary policy. However just as the boost from tax cuts faded, the trade dispute worsened and growth weakened. After three rate rises through the balance of the year and with bond markets increasingly nervous of the economic outlook, the Fed’s assertion in December that policy was on “autopilot” caused a loss of confidence and bond markets moved to price in cuts to interest rates.

A sharp fall in the price of Brent crude oil from $85 in October to $50 in December added to the narrative that global growth was slowing, and by the half-year stage in November, the FTSE All-Share Index had fallen by almost 8%. In December, the worst final month of the year for the S&P since 1931, the FTSE All-Share Index declined a further 4%.

The new year saw greater optimism surrounding US-China trade talks as well as signals from the Fed that monetary policy may not be on “autopilot” after all. Between October and May the bond market moved from pricing in three increases for 2019 to three cuts and global equity markets duly rallied. By the end of March the FTSE All-Share Index had recovered two thirds of the losses from the fourth quarter of 2018 and by the end of April was 14% above the December low. Brent crude oil had climbed back to US$75 per barrel.

Despite the optimism creeping into headline index levels, political uncertainty persisted at home. The Bank of England cut its official 2019 UK growth estimate from +1.7% to just +1.2% as the question of the UK’s departure from the European Union continued to dominate the agenda. As the 29 March deadline for Britain’s exit drew closer, Parliament prepared to take control of the process. The Prime Minister’s stance softened and the chances of leaving without a deal were seen to recede. Sterling strengthened against international currencies over the first quarter, peaking at US$1.33 and €1.17 in March as an extension to Article 50 was secured, avoiding a no-deal exit.

The UK economy proved remarkably resilient throughout this period, as did trends in employment and disposable income. However, as the 29 March deadline was missed and the new 31 October deadline was set, some uncertainty crept in and impacted consumer confidence and retail sales, the latter not helped by an extremely tough comparative period in 2018, which was boosted by both weather and the Royal wedding. UK GDP and manufacturing output data for the month of April were very weak at -0.4% and -3.9% respectively, hinting at an artificial boost in the prior quarter as inventories were built into March to ensure continuity of supply.

In late May the Prime Minister announced her intention to resign as leader of the Conservatives. With most of the candidates to replace her from the Eurosceptic wing of the party and a number of them stating that they intended to take the UK out on 31 October with or without a deal, sterling showed renewed weakness and at the end of May had fallen to US$1.255.

Whilst the index was volatile during the period there were even more extreme relative sector and style moves as the market once again defaulted to old favourites, leaving reliable sources of growth such as Consumer Staples and Industrial Engineering companies trading at elevated levels.

Portfolio Performance

AJ Bell provided the standout contribution to returns over the period. The investment platform is a longstanding holding and completed an initial public offering in December 2018. The shares traded very strongly, ending the period up 150% on the IPO price, as strong institutional demand increased further following a positive trading update at the end of April.

In retail, the holdings in JD Sports Fashion and Next defied the crisis facing many high-street retailers to provide strong contributions to performance over the year. In March 2019, Next released full-year results that were in line with consensus expectations. The 15% rise in online sales offset declines in-store, demonstrating the resilience of the company’s multi-channel offering as industry sales move increasingly online. Meanwhile, JD Sports Fashion completed the acquisitions of US sportswear retailer The Finish Line Inc., and smaller UK rival Footasylum.

The Portfolio has only very selective exposure to the mining sector and the sole industrial metal name, Bushveld Minerals, proved a notable contributor. Shares in the AIM-listed vanadium producer rose steadily through to November 2018. The shares were buoyed by rising vanadium prices and by news that the company had struck a deal to consolidate its ownership of Strategic Minerals Corporation, the holding company of Vametco, Bushveld’s South African vanadium asset. More recent performance has been subdued, but the miner remained among the biggest contributors to performance over the year.

Media business Future was another strong performer. The company has executed to plan over the past year, trading well and making a number of strategic acquisitions. This mix of organic and acquisition-led growth resulted in meaningful upgrades to analyst forecasts which in turn drove a rerating, a powerful combination that saw the shares almost treble. Johnson Service performed particularly strongly in 2019 as the market began to recognise the quality and defensive nature of the earnings, supported by the release of its full year results for 2018.

Conversely, the Portfolio’s holding in Babcock International proved very disappointing for performance over the year. The company’s share price had started the period well, rallying almost 50% from the February 2018 low, as management appeared to convince the market that concerns around margins and the outlook for revenues were unfounded. However, the company then reduced its full year revenue growth guidance in July and the share price once again came under pressure. This negativity persisted for the rest of the review period compounded by an anonymous piece of research that questioned the sustainability of margins. Despite subsequent downgrades the recent capital markets day provided reassurance that the current levels of profitability and returns are sustainable. In light of the extreme reached in the valuation the position has been substantially increased.

easyJet was also among the largest detractors to performance. The share price was weak for much of the year, beset by disappointing demand during an unusually hot summer across Northern Europe and also by Brexit. In May 2019, the company released half-year results that were in line with guidance and reiterated full-year forecasts.

The share price of floorings manufacturer Victoria fell very sharply at the end of October 2018, following the release of an unexpected trading update. The company had sought to simplify and extend its debt finance arrangements, and in so doing was obliged to release commentary on trading and near-term strategy. The guidance for lower margins but higher revenues was taken badly by the market and the logic of the proposed bond issue was misunderstood, leaving the shares exposed to heavy short-selling. A meeting with company management provided comfort that the fundamental investment case remained intact. I have since conducted visits to three of the company’s manufacturing sites and my conviction in the stock remains. As such I have taken advantage of the significant share price weakness to increase the Portfolio’s holding by almost half.

Amid extended political uncertainty, the market has continued to avoid domestically exposed cyclicals and banks have been weak globally given the declining outlook for interest rates. The Portfolio retains a large weighting in Barclays and the attempt by activist investor Sherborne Investors (Guernsey) to gain a seat on the Board of Directors created further uncertainty. The size of the position reflects my continued conviction that the stock market’s valuation of Barclays is overly pessimistic, failing to reflect the company’s prospects of achieving long standing targets for capital generation and therefore the potential to return additional capital to shareholders. The shares are priced for no improvement in net interest margins and for a sharp increase in impairments, which looks something like a worst case scenario. This leaves the balance of risk and reward skewed firmly in favour of holding the shares.

Elsewhere in financials a relatively new position in Plus500, a financial trading platform, proved problematic. The company guided downwards on revenues which called into question the quality and sustainability of the business and introduced significant volatility to the outlook for profits. On balance I decided to exit the position.

Portfolio Strategy and Outlook

Once again I find myself reflecting on a very difficult environment to be managing money, at least with a valuation focused philosophy and a portfolio so weighted to outright Value. There have been the odd rays of sunlight - AJ Bell, HomeServe, Future - all holdings in high growth companies that have performed very strongly and now trade on very high multiples of near term earnings. However, this performance has also served to underline the polarisation that now exists in the market between perceived winners and losers, between the Value style on one hand and the Growth and Quality styles on the other.

Unfortunately there are few signs of imminent relief. Geopolitics and the global economic picture look more uncertain by the day, most obviously as a result of the escalating US-China trade war which has seen lead indicators weaken globally and forced a reluctant Fed to back off tightening interest rates and contemplate monetary easing of one form or another.

Low growth and low interest rates therefore look set to persist and central banks appear as determined as ever to do “whatever it takes” to avoid a debt deflation. No sooner has unconventional monetary policy been reversed than it is once again being contemplated, such that the ‘Japanification’ of other developed economies is now a regularly discussed theme. The UK picture is clouded further by Theresa May’s resignation and the ensuing leadership contest which leaves a parliamentary stalemate and a no deal exit from the EU a possibility once again.

Companies with predictable revenues and earnings have always attracted a premium rating and those offering less visibility have always merited a discount. However, the current climate has produced a divergence in valuations between perceived winners and losers that is extreme, levels only seen twice in the last thirty years, at the height of the tech bubble in 1999 and immediately prior to the Global Financial Crisis in 2008/9. At the top end, I believe stock markets are now at the limits of the rerating that has driven share price performance in recent years. The reciprocal of these high multiples is such low earnings yields that even if growth expectations are met, investing in these companies is unlikely to deliver an attractive total return. At the bottom end, earnings yields are so high that they alone offer a compelling total return. Should these companies grow earnings in the way I believe possible or ever be considered worthy of a rerating by the market, the total return from this point will be significant. This is not what the market expects. It is an increasingly contrarian approach that has seen underperformance in recent periods. Regardless, now is not the time to compromise on my conviction that valuation does matter.

So I am not changing the shape of the Portfolio but have exited positions where conviction had fallen or where I saw some risk of missing earnings forecasts that was not adequately reflected in the valuation. In the process I have taken gearing from 11% to 3%. This both reduces risk and creates scope to take advantage of any pronounced market weakness that may emerge in the future. I have also increased the weighting to gold miners to 8%. These holdings should provide insurance against tail risks, both geo-political (Iran, US/China tensions, loss of the US dollar’s reserve currency status) and economic (a credit event, widening US fiscal deficit and dollar weakness) and should in theory be inversely correlated with the market in times of stress.

I believe that a low valuation is the ultimate defensive attribute and a stretched valuation is a risk. The stock market seems instead to be interpreting a low valuation as evidence of a weak business and a high valuation to be the evidence of a company that can do no wrong. The investment objective for this Portfolio is “to provide shareholders with an attractive, real, long-term total return”. The Portfolio today consists largely of companies that provide the prospect of that return from the current level of capital generation: if earnings do not grow and current depressed multiples simply persist, I believe that objective can still be met. If earnings grow as I anticipate or if a rerating should occur, it should be exceeded.

James Goldstone
Portfolio Manager
30 July 2019

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UK EQUITY SHARE PORTFOLIO

LIST OF INVESTMENTS
AT 31 MAY 2019

Ordinary shares listed in the UK unless stated otherwise



COMPANY


SECTOR†
MARKET
VALUE
£’000

% OF
PORTFOLIO
BP Oil & Gas Producers 3,246 5.3
AJ Bell Financial Services 2,889 4.7
Barclays Banks 2,714 4.4
British American Tobacco Tobacco 2,145 3.5
Royal Dutch Shell – B Shares Oil & Gas Producers 2,117 3.5
Coats General Industrials 2,104 3.4
Tesco Food & Drug Retailers 2,062 3.4
JD Sports Fashion General Retailers 1,875 3.1
Next General Retailers 1,814 3.0
Royal Bank of Scotland Banks 1,635 2.7
RELX Media 1,512 2.5
Johnson Service Support Services 1,273 2.1
Babcock International Aerospace & Defence 1,240 2.0
Legal & General Life Insurance 1,156 1.9
Rolls-Royce Aerospace & Defence 1,074 1.8
Rolls-Royce – C shares 9
Summit Properties Real Estate Investment & Services 1,076 1.8
Victoria Household Goods & Home Construction 1,073 1.7
XPS Pensions Financial Services 1,053 1.7
Phoenix Spree Deutschland Real Estate Investment & Services 1,033 1.7
Future Media 1,022 1.7
Bushveld Minerals Mining  984 1.6
MJ Gleeson Household Goods & Home Construction  968 1.6
PRS REIT Real Estate Investment Trusts  945 1.5
Chesnara Life Insurance  939 1.5
Sigma Capital Financial Services  933 1.5
Hollywood Bowl Travel & Leisure  868 1.4
Endeavour Mining – Canadian listed Mining  815 1.3
P2P Global Investments Equity Investment Instruments  789 1.3
Agnico Eagle Mines – Canadian listed Mining  784 1.3
Barrick Gold – Canadian listed Mining  776 1.3
BCA Marketplace Support Services  758 1.2
Acacia Mining Mining  749 1.2
Melrose Industries Construction & Materials  723 1.2
Ashtead Support Services  719 1.2
McBride Household Goods & Home Construction  718 1.2
Ultra Electronics Aerospace & Defence  710 1.2
On the Beach Travel & Leisure  706 1.1
Harworth Real Estate Investment & Services  703 1.1
Newmont Goldcorp – US listed Mining  698 1.1
easyJet Travel & Leisure  689 1.1
Hibernia REIT – Irish listed Real Estate Investment Trusts  678 1.1
Secure Trust Bank Banks  649 1.1
HomeServe Support Services  633 1.0
BT Fixed Line Telecommunications  631 1.0
N Brown General Retailers  619 1.0
Amigo Financial Services  586 1.0
Aviva Life Insurance  582 0.9
CVS General Retailers  575 0.9
Capita Support Services  545 0.9
DS Smith General Industrials  535 0.9
Balfour Beatty Construction & Materials  514 0.8
Distribution Finance Capital Financial Services  491 0.8
Cairn Homes Household Goods & Home Construction  481 0.8
Hadrian’s Wall Secured Investments Equity Investment Instruments  480 0.8
Whitbread Travel & Leisure  470 0.8
Essentra Support Services  455 0.7
Safestyle UK General Retailers  407 0.7
Alfa Financial Software Software & Computer Services  378 0.6
Sherborne Investors (Guernsey) C Financial Services  371 0.6
Zegona Communications Non-equity Investment Instruments  340 0.6
Wheaton Precious Metals Mining  317 0.5
Tungsten Financial Services  297 0.5
TruFin Financial Services  120 0.2
Total Holdings 63 (2018: 75) 61,250 100.0

† FTSE Industry Classification Benchmark.

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GLOBAL EQUITY INCOME SHARE PORTFOLIO

MANAGER’S REPORT

Investment Objective

The investment objective of the Global Equity Income Share 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 delivered positive though volatile returns over the review period. Economic growth disappointed almost everywhere except for the US, where the equity market continued to be supported by fiscal stimulus in the shape of tax cuts and still-favourable domestic financial conditions. Disappointingly for us, UK and European equity markets were weak in comparison, with concerns around Brexit and political uncertainty in Italy affecting European equities. Our expectation throughout the reporting period was that a sensible deal between the EU and the UK would eventually be struck on Brexit, originally by 31 March 2019 and then by the extended EU deadlines. This did not happen and it increasingly appears that our optimism may have been misplaced.

The Japanese and Asian equity markets were held back by a slowing Chinese economy and fears over a tariff war between China and the US. Despite efforts to increase domestic consumption and wean the key Asian economies off reliance on exports to generate growth, the US economy remains a key driver of that regional economy. Other emerging markets were also affected by the malaise of slowing world trade growth, with Brazil and to some extent South Africa bucking the weak trend as investors welcomed new governments with reformist agendas.

Volatility peaked in the fourth quarter of 2018 and markets were led lower by the US as concerns over economic slowdown and high stock market valuations, particularly of previously high flying e-commerce and technology companies, intensified. The December slump was amongst the worst in history, with the US equity market having its biggest December fall since the Great Depression of 1931.

Markets regained some of the lost ground in January as fears of recession and a trade war eased and continued to rally in February in view of an increased likelihood of a trade deal between the US and China. Indications from the US Federal Reserve (Fed) of a softening of stance on monetary policy normalisation, together with some modest Chinese fiscal stimulus, helped to underpin sentiment further. Overall, global equity markets ended the first quarter of 2019 in positive territory amid hopes for progress in US-China trade talks and optimism that the Fed would remain less aggressive in raising interest rates. With the US equity market being the strongest performer, global stocks saw their largest quarterly gains since 2010.

Global equity markets remained in positive territory in April, driven by strong performance from US stocks in particular. The US equity market reached fresh record highs on the back of better than forecast company earnings. Sentiment was also boosted by stronger than expected US economic growth for the first three months of 2019. However, in a reversal of fortune, global equity markets had their worst month of the year in May as escalating trade tensions once again left market participants assessing the implications for slower economic growth. China hit back at Washington with its own retaliatory tariffs. The escalation in the trade war between the world’s two largest economies drew investors back to so-called ‘safe-haven’ assets. Market sentiment soured further as Donald Trump threatened higher tariffs on Mexican goods.

Portfolio Strategy and Review

On a total return basis, the Portfolio’s net asset value fell by 1.3% over the 12 months to the end of May 2019, compared to a rise of 5.3% in the MSCI World Index (in sterling terms, total return, net of withholding tax).

The Portfolio’s disappointing performance against its reference index over the year was largely due to its underweight exposure to the US (the US equity market was by far the strongest performer of all the major regions) and its overweight exposure to the UK and Europe (relatively weak markets versus the reference index). Our underweight exposure to the US has been longstanding due in large part to the relatively high valuations we see across a range of sectors and the low level of dividends available in that region.

We acknowledge the underperformance of the portfolio in recent years and it is of deep concern to us in the portfolio management team. We constantly review and reappraise our approach in view of market conditions and ongoing news relating to stocks within the portfolio. Prolonged periods in which a valuation driven approach underperforms is not unknown - the last prolonged period was from 1998 to 2000. In addition we note that competitors with similar income objectives have also struggled to perform. We continue to believe our focus on corporate valuations and free cashflow will deliver outperformance across a full economic and stock market cycle.

At the sector level, global equity market leadership has been dominated by a narrow range of growth orientated stocks concentrated in US ‘Big tech’ companies and the Portfolio’s lack of exposure to the so-called FAANG stocks (Facebook, Amazon, APPLE, Netflix, and Alphabet (Google)) detracted from returns. However, these companies appear expensive to us on many metrics and they offer zero income, hence the Portfolio’s underweight exposure versus the reference index. Furthermore, we see very strong valuation upside in the financial sector, in the last few years our holdings have underperformed, with European financials particularly weak. This is the result of slower than expected monetary policy normalisation, together with renewed political instability in Italy and, in our view, excessive regulation. However, we would highlight the outstanding valuations we see in this sector and significant dividend yields. Many well capitalised banks are trading at a significant discount to book value. Whist we believe this to be an anomaly, our overexposure to the banking sector was a material drag on performance versus the benchmark in the year.

Furthermore, our industrials and semiconductor holdings such as Taiwan Semiconductor Manufacturing and Broadcom have come under pressure more recently as trade tensions flared between the US and China. Markets have digested the implications of new US export restrictions placed on Chinese telecom firm Huawei and many US semiconductor companies, which are heavily exposed to China, have seen their share prices fall as a result of the ongoing trade dispute. We remain confident these businesses offer attractive upside and are clear market leaders in their respective areas of the market.

The consumer staples sector generally performed well through the year as it benefitted from its status as a safe haven on the assumption that company earnings will be sheltered from the economic fallout of the trade war. However, our underweight exposure, together with negative share price performance from our holding in the tobacco sector, had a negative impact on relative returns. We have been longstanding holders of British American Tobacco and continue to like its strong cash generation and attractive dividend yield. The shares reacted badly to comments from the US Federal Drug Administration restricting sales of certain tobacco products, exacerbated by strong competition in the new ‘lower risk' non-combustible products. We believe the market has overreacted and the company offers solid long term returns.

Our large energy exposure also detracted from returns and the decline in the price of oil was a significant factor. The price of oil peaked in October at around US$85 and then started its rather rapid decline in November, ending that month down over 20%. The weakness was driven by concerns over the demand risk outlook as global growth concerns increased. Furthermore, investors fretted over increases in supply as shale oil production in the US continues to grow rapidly, and OPEC seems unwilling to cut production further, which had a negative impact on a number of the energy stocks held within the Portfolio. Our bullishness on the sector, however, is not around the oil price being extremely strong, but rather on operating cost reductions and cuts to capital expenditure, which we believe is leading to extremely strong cash generation and will enable both rising dividends and some share buybacks over the coming three years.

Health care delivered positive performance for the Portfolio over the 12 months as markets became more defensively positioned, particularly in the fourth quarter of 2018. The share prices of Pfizer, Novartis and Roche all benefited as a result.

Portfolio Changes

Over the period new positions were established in Rolls-Royce, Carrefour, CRH, Samsung Electronics, Verizon Communications and Sanofi.

In our view Rolls-Royce is set to become a highly cash generative business and it has a good self-help story arising from increased operating efficiencies and new engine rollouts. The industry is highly regulated, with cutting-edge engineering giving them strong barriers to entry and has meant they have gained market share in respect of wide bodied jets. Increased flight hours per engine also makes the maintenance and spares business increasingly profitable.

Carrefour is a well-known food retailer in France. We believe that it has a strong balance sheet and an impressive new management team, who we feel will be able to bring about change and improve margins in what remains a strong franchise.

CRH supplies a broad range of products to the construction industry. It currently generates lower margins than its peers and is more lowly valued. However, it has a clear roadmap to improve margins and a management team we believe to be focussed on returns and capable of delivering on targets. The business has significant US exposure and thus should benefit from any pick up in US infrastructure spending.

Samsung Electronics has an improving corporate governance record which is important to us. The biggest improvement has been to its shareholder returns policy. Its stated policy is to improve dividend payout, and to pay out 50% of free cash flow to shareholders in either buybacks or dividends. It is attractively valued in our opinion, with a very robust balance sheet.

Verizon Communications, the US telecoms company, is likely to see growth in its mobile telecommunications business over the coming years, in our view. The competitive dynamics in the wireless industry are improving in the US, which sets the stage for more consistent growth and returns for Verizon in the near-to-medium term. Verizon offers a dividend yield in excess of 4%, while in our view the improving company fundamentals should be positive for shareholders over the next several years.

Finally, we initiated a new holding in Sanofi, the French multinational pharmaceutical company, because we believe it looks cheap relative to the rest of the sector. It appears that no value has been attributed to the new product pipeline and existing products are being valued at a discount to peers. The discount to the sector has in large part been due to a perceived weak management team and disappointing cost management. This we believe is now changing, with a new management team who we think can unlock the value in this business. The company has no significant patent expiry issues until 2028. We see it as a defensive stock offering predictable earnings growth at a discounted valuation.

We sold out of three positions (Union Pacific, Hiscox and China Mobile) after strong share price performance. We also exited our position in Airbus as we felt the share price had reached a level that reflected the positive outlook for the company. Lastly, we disposed of Nielsen. The company reported a surprisingly weak set of results and delivered a very negative outlook. This would not necessarily have prompted a sale of the position, but the lack of a credible strategy to improve and signs of structural shifts in one of its key businesses as well as the departure of members of senior management led us to the conclusion that the capital could be better deployed elsewhere.

Outlook

The global economic outlook is uncertain in our view. On the one hand central banks across the globe are maintaining a very pro-growth policy stance, and fiscal policy in many major economies is mildly expansionary. However, on the other, trade tensions between major trading blocks in Europe (the Brexit issue) and more importantly between the US and China, together with the ongoing secular trend of lower productivity improvements, are dragging on economic growth. Corporate earnings growth is therefore likely to be muted in the coming years. Our view is that major economies will continue to grow slowly, avoiding both recession and rising inflation, and that equity markets may grind higher over the next 12 months.

Whilst in our view not yet of bubble proportions, valuations in global equity markets are extremely bifurcated. Those stocks which seem to offer secular growth opportunities and low earnings volatility have risen sharply in price in recent years and have become increasingly expensive and offer low or no dividend yields, hence we do not own them. Meanwhile, companies with more obvious exposure to the economic cycle have, by and large, underperformed and are, in our view, trading at significant discounts to their intrinsic value. The gap in valuation terms between stocks exhibiting those differing characteristics is at record levels, whether you look at price/earnings ratios or measures related to asset values. Any reversion to mean will be of clear benefit to the Portfolio, though of course we cannot predict when this might happen.

Our investment strategy remains constant: to invest in companies at discounted valuations relative to their history and the market, with strong sustainable cash flows. We believe that growing and sustainable dividends flow from that, and in the long run that capital growth from such companies will outperform the broader market.

Nick Mustoe
Portfolio Manager
30 July 2019

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GLOBAL EQUITY INCOME SHARE PORTFOLIO

LIST OF INVESTMENTS
AT 31 MAY 2019

Ordinary shares unless stated otherwise.



COMPANY


INDUSTRY GROUP†


COUNTRY
MARKET
VALUE
£’000

% OF
PORTFOLIO
Chevron Energy US 2,167 3.2
Royal Dutch Shell – A shares Energy Netherlands 2,098 3.1
Orange Telecommunication Services France 2,090 3.1
BP Energy UK 2,041 3.0
United Technologies Capital Goods US 1,848 2.8
Pfizer Pharmaceuticals, Biotechnology & Life Sciences US 1,822 2.7
Total Energy France 1,821 2.7
Aon – A shares Insurance US 1,707 2.5
Roche Pharmaceuticals, Biotechnology & Life Sciences Switzerland 1,650 2.5
Novartis Pharmaceuticals, Biotechnology & Life Sciences Switzerland 1,634 2.4
Nasdaq Diversified Financials US 1,602 2.4
Taiwan Semiconductor Manufacturing Semiconductors & Semiconductor Equipment Taiwan 1,596 2.4
Citigroup Banks US 1,547 2.3
Amcor Materials Australia 1,515 2.3
Next Retailing UK 1,496 2.2
Verizon Communications Telecommunication Services US 1,456 2.2
Las Vegas Sands Consumer Services US 1,445 2.2
Allianz Insurance Germany 1,443 2.2
Carrefour Food & Staples Retailing France 1,438 2.2
Williams-Sonoma Retailing US 1,421 2.1
Canadian Natural Resources Energy Canada 1,398 2.1
Toyota Motor Automobiles & Components Japan 1,392 2.1
Sanofi Pharmaceuticals, Biotechnology & Life Sciences France 1,389 2.1
Rolls-Royce Capital Goods UK 1,339 2.0
Rolls-Royce C shares 11
Tesco Food & Staples Retailing UK 1,347 2.0
Amgen Pharmaceuticals, Biotechnology & Life Sciences US 1,282 1.9
Gilead Sciences Pharmaceuticals, Biotechnology & Life Sciences US 1,273 1.9
TE Connectivity Technology Hardware & Equipment Switzerland 1,270 1.9
JPMorgan Chase Banks US 1,231 1.8
Microsoft Software & Services US 1,219 1.8
BASF Materials Germany 1,192 1.8
Broadcom Semiconductors & Semiconductor Equipment US 1,181 1.8
Caixabank Banks Spain 1,178 1.8
Intesa Sanpaolo Banks Italy 1,156 1.7
Deutsche Post Transportation Germany 1,142 1.7
British American Tobacco Food, Beverage & Tobacco UK 1,088 1.6
Royal Bank of Scotland Banks UK 1,085 1.6
ING Banks Netherlands 1,066 1.6
BNP Paribas Banks France 1,029 1.5
Sumitomo Mitsui Financial Banks Japan  998 1.5
Wells Fargo Banks US  974 1.4
Adecco Commercial & Professional Services Switzerland  960 1.4
Samsung Electronics – preference shares Technology Hardware & Equipment South Korea  926 1.4
Equinor Energy Norway  913 1.4
CRH Materials Ireland  910 1.4
BAE Systems Capital Goods UK  847 1.3
easyJet Transportation UK  721 1.1
Koninklijke Ahold Delhaize Food & Staples Retailing Netherlands  679 1.0
Legal & General Insurance UK  611 0.9
Hyundai Motor – preference shares Automobiles & Components South Korea  560 0.8
Telefonica Brasil Telecommunication Services Brazil  445 0.6
Kangwon Land Consumer Services South Korea  391 0.6
Total Holdings 52 (2018: 53) 67,040 100.0

† MSCI and Standard & Poor’s Global Industry Classification Standard.

.

BALANCED RISK ALLOCATION SHARE PORTFOLIO

MANAGER’S REPORT

Investment Objective

The investment objective of the Balanced Risk Allocation Share 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

Equities started the financial year in positive territory, but then weakened over the second half of 2018, becoming particularly volatile over the fourth quarter as investors fretted over the effects of trade tensions and central bank actions. Equities staged an impressive rally in the first quarter of 2019, but still posted negative performance, in US dollar terms, for the Company’s financial year, with volatility returning in May. Bonds posted strong performance over the financial year, with yields falling across all markets in which the strategy invests as central banks turned dovish amid signs of weakening economic measures and below-target inflation. Commodities started the financial year in positive territory, but ended with negative returns as a strong US dollar and concerns over international trade caused most raw materials markets to decline.

Portfolio Performance

The Balanced Risk Allocation Portfolio posted a positive return for the year of –2.7%, compared with +5.8% for the benchmark, Merrill Lynch 3 month LIBOR plus 5%.

For the year to 31 May 2019 strategic exposure to bonds was the principal positive contributor to performance. Strategic exposure to both equities and commodities detracted from performance for the fiscal year.

Portfolio Strategy and Update

The Balanced Risk strategy seeks to achieve returns through balancing risk exposure between three asset classes: developed market equities, global government 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 relative to cash; 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.

Bond markets started the fiscal year positively, but prices retreated in the third quarter of 2018 as yields increased across the markets in which the strategy invests. Prices rebounded in the fourth quarter, as the return of volatility in equities and commodities engendered safe-haven flight, and the positive performance continued through the first quarter of 2019. The primary driver of returns across the asset class was the dovish tone emanating from the central banks in each of the markets in which the strategy is involved. The shift removed fears of additional tightening, which was further supported by revisions to growth and inflation forecasts, especially in Europe. A general weakening of economic data, particularly in global manufacturing, may be underpinning some of the flight-to-safety response as bonds held their gains despite the very strong rally in risk assets. Bond performance was led by Australia, followed by Canada. Australian yields fell as they played into the weakness of Chinese economic growth, to which they are geared.

Strategic exposure to equities detracted from performance as volatility entered the market. Equities started the fiscal year with positive performance, but fell markedly in both October and December in response to uncertainty regarding trade tensions between the US and China as well as concerns over central bank actions. Many markets entered bear market territory from peaks set earlier in the year. Equities staged an impressive rally in the first quarter of 2019 as central banks indicated they would hold off on future rate hikes. Japanese equities were the top detractor, followed by Hong Kong. Japanese equities were hurt by trade tensions as Japan’s trade balance shifted to a deficit. Hong Kong equities detracted as they tend to trade in line with China and manufacturing data from China indicated that activity had begun to contract, with signs of political unrest also beginning to appear.

Strategic exposure to commodities also detracted, led by agriculture. Agricultural commodities started the fiscal year in negative territory as prices suffered on fears of escalating trade war impacts and improvement in growing conditions. Agriculture prices continued to struggle throughout the fiscal year on conditions of oversupply. Energy also detracted from performance. Evidence of slowing manufacturing and economic activity resulting from the trade spat between the US and China and the effects of central bank actions, tempered demand expectations. This bearish demand sentiment along with concerns about robust production led to the sharp drops in energy prices. Within industrial metals, aluminium prices fell on continued strong exports and production from China while copper also declined. Within precious metals, silver declined to a greater extent than gold as it tends to trade in sympathy with industrial metals. Gold fell on the stronger US dollar.

Outlook

The ongoing trade tensions ratcheted higher in May as the US-China talks broke down and the Trump administration threatened Mexico with a new schedule of tariffs. Additionally, it seems that other countries are in the administration’s crosshairs. While seeming unpredictable in business or personal negotiations may be a viable tactic, unpredictability around national policy and the great potential for disrupting trust between nations and carefully structured business plans is most unwelcome. The surprise decision on Mexican tariffs – that seems to have been made unilaterally by the president without the support of or even foreknowledge by his party – could present several issues. First, Congress potentially could fail to support the measure against Mexico and wrest the tariff-levying power from the president. This would weaken Trump’s stance in the eyes of his adversaries. Secondly, China may dig in its heels, recognising the US administration’s inner-party turmoil and seeing that the president has opened a multi-front war on himself. The other major issue is a lack of confidence from US businesses. Companies have spent many years crafting intricate supply chains and manufacturing capabilities across borders that may now be upended through these tariff actions. A lack of trust in the stability of policy along with evidence of weakening economic activity across the globe may have a stifling impact on companies’ willingness to engage in capital expenditures until meaningful clarity returns. Given the level of uncertainty at present, we believe a focus on economic diversification is a reasonable approach.

Scott Wolle
Portfolio Manager
30 July 2019

.

BALANCED RISK ALLOCATION SHARE PORTFOLIO

LIST OF DERIVATIVE INSTRUMENTS

AT 31 MAY 2019


NOTIONAL
EXPOSURE
£’000
NOTIONAL
EXPOSURE
AS % OF
NET ASSETS
Government Bond Futures:
Australia 2,339 29.8
Canada 2,088 26.6
UK 1,037 13.2
US 972 12.4
Germany 149 1.9
Total Bond Futures (5) 6,585 83.9
Equity Futures:
Japan 879 11.2
UK 715 9.1
Europe 665 8.5
US large cap 548 7.0
US small cap 525 6.7
Hong Kong 405 5.2
Total Equity Futures (6)  3,737 47.7
Commodity Futures:
Agriculture
Soybean meal 155 2.0
Sugar 141 1.8
Soy bean 141 1.8
Cotton 135 1.7
Soybean oil 41 0.5
Wheat 40 0.5
Live Cattle 35 0.5
Corn 35 0.5
Coffee 30 0.4
Energy
Gasoline 179 2.3
Brent crude 148 1.9
WTI crude 87 1.1
New York Harbor ultra-low sulphur diesel 62 0.8
Gas-oil (diesel) 46 0.6
Natural gas 23 0.3
Industrial Metals
Copper 347 4.4
Aluminium 106 1.4
Precious Metals
Gold 207 2.6
Silver 115 1.5
Total Commodity Futures (19) 2,073 26.6
Total Derivative Instruments (30) 12,395 158.2

TARGET ANNUALISED RISK

The targeted annualised risk (volatility of monthly returns) for the portfolio as listed above is analysed as follows:

ASSET CLASS RISK CONTRIBUTION
Bonds 4.0% 50.0%
Equities 2.5% 31.7%
Commodities 1.5% 18.3%
8.0% 100.0%

BALANCED RISK ALLOCATION SHARE PORTFOLIO

LIST OF INVESTMENTS
AT 31 MAY 2019


YIELD
%
MARKET
VALUE
£’000
% OF
NET
ASSETS
Short Term Investments
Short-Term Investments Company (Global Series) plc 0.84 1,735 23.5
UK Treasury Bill 19 Aug 2019 0.75 1,388 18.8
UK Treasury Bill 4 Nov 2019 0.77  797 10.8
UK Treasury Bill 12 Aug 2019 0.71  749 10.1
UK Treasury Bill 11 Nov 2019 0.76  747 10.1
UK Treasury Bill 9 Sep 2019 0.78  549 7.4
UK Treasury Bill 18 Nov 2019 0.75  498 6.8
UK Treasury Bill 7 Oct 2019 0.73  479 6.5
UK Treasury Bill 5 Aug 2019 0.72  318 4.3
UK Treasury Bill 28 Oct 2019 0.73  110 1.5
Total Short Term Investments  7,370 99.8
Hedge Funds(1)
Harbinger Class L Holdings  13 0.2
Harbinger Class PE Holdings  2
Total Hedge Funds 15 0.2
Total Fixed Asset Investments  7,385 100.0

(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 Allocation Share Portfolio are shown on the previous page. At the year end all the derivative instruments held in the Balanced Risk Allocation 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 31.

.

MANAGED LIQUIDITY SHARE PORTFOLIO

MANAGER’S REPORT

Investment Objective

The investment objective of the Managed Liquidity Share Portfolio is to produce an appropriate level of income return combined with a high degree of security.

Market and Economic Review

Following on from the first hike in the base rate for a decade towards the end of 2017, the Bank of England raised rates by another 0.25% in August 2018. Economic data around that time appeared to indicate that the dip in output earlier in the year had been temporary with momentum recovering in the second quarter. At the same time, the unemployment rate had continued to fall, and average earnings had risen to the highest levels since the financial crisis, signalling some tightness in the labour market. Therefore, with inflation expected to remain slightly above target over the forecast horizon, the Monetary Policy Committee (MPC) deemed it necessary to tighten policy.

However, overall, the MPC have remained cautious about the economic outlook, recognising the potential significant impact around Brexit and have continued to state that any further increases to the base rate are likely to be at a gradual pace and to a limited extent.

Over the last 12 months, the US Federal Reserve (Fed) hiked rates twice. However, having previously forecast further hikes during 2019, the Fed have recognised the outlook for growth and inflation, partly due to concerns over potential trade wars, meant that a pause in the tightening cycle was the most appropriate course of action, with potentially some easing later in the year. This change of tone has driven core Government bond yields lower across the globe in recent months.

Portfolio Performance

The Managed Liquidity Portfolio NAV total return for the year ended 31 May 2019 was +1.3%.

Portfolio Strategy and Review

As explained in the half year report, from 18 January 2019 the investment strategy followed for this Portfolio has been to invest principally in the PIMCO Sterling Short Maturity Source UCITS ETF, which is managed by PIMCO with Invesco acting as co-promoter, and also in the Sterling Liquidity Portfolio of Short-Term Investments Company (Global Series) plc, which is a money market fund managed by Invesco. Prior to that date the principal investment had been the Invesco Money Fund (UK). The catalyst for this change was regulatory and the Board decided that it would be in investors’ best interests to switch the principal investment to an alternative with characteristics in line with the original intent of the Portfolio.

The PIMCO Sterling Short Maturity Source UCITS ETF seeks to maximise current income consistent with the preservation of capital and a high degree of liquidity. The fund is actively managed by PIMCO and invests in a diversified portfolio of government, corporate and asset-backed bonds, denominated in, or hedged back to, sterling. 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 portfolio manager at PIMCO is Andrew Bosomworth.

The Sterling Liquidity Portfolio of the Short-Term Investments Company (Global Series) plc is managed by Invesco in a laddered maturity structure, investing in repurchase agreements, time deposits, commercial paper, certificates of deposit, medium-term notes and floating rate notes rated A-1/P-1 or better. At 31 May 2019 the Sterling Liquidity Portfolio was rated AAAm by Standard and Poor's and AAAmmf by Fitch Ratings.

Outlook

The PIMCO Sterling Short Maturity Source UCITS ETF is actively managed by PIMCO and has the flexibility to navigate changes in the macroeconomic outlook. PIMCO’s baseline outlook includes a shallow recession in the next three to five years, which means that inflation is likely to remain low and central banks are likely to maintain base rates below historic averages. However, this relatively benign baseline is only one of several realistic scenarios and the probability distribution of economic outcomes is wider and less certain than usual.

Invesco
30 July 2019

.

MANAGED LIQUIDITY SHARE PORTFOLIO

LIST OF INVESTMENTS
AS AT 31 May

2018 2017
MARKET
VALUE
£’000

% OF
PORTFOLIO
MARKET
VALUE
£’000

% OF
PORTFOLIO
Invesco Money Fund (UK)*  4,905 99.0
PIMCO Sterling Short Maturity Source UCITS ETF  4,490 95.3
Short-Term Investments Company (Global Series) plc  220 4.7  48 1.0
 4,710 100.0  4,953 100.0

* During the year, the Managed Liquidity Share Portfolio switched its investment in the Invesco Money Fund (UK) to the PIMCO Sterling Short Maturity Source UCITS ETF, with effect from 18 January 2019, following an announcement made on that date.

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.

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 Link Asset Services to act as registrar and The Bank of New York Mellon (International) Limited (BNYMIL) as depositary and custodian.

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 Allocation 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 Share 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 (excluding property companies structured as REITs).

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 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 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 (excluding REITs);

–        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 when 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 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 (excluding REITs); 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.

Balanced Risk Allocation Share Portfolio

Investment Objective

The investment objective of the Balanced Risk Allocation 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’s 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 will not exceed twice the neutral weight. For the purposes of the maximum weighting only, commodity exposures are aggregated and measured by commodity complex rather than by individual assets.

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 Allocation Portfolio:

–        the aggregate notional amount of financial derivative instruments positions may not exceed 250% of the net assets of the Balanced Risk Allocation Portfolio; and

–        no more than 10% of the gross assets of the Balanced Risk Allocation 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 mainly in a range of sterling-based or related high quality debt securities and similar assets (which may include transferable securities, money market instruments, warrants, collective investment schemes and deposits), either directly or indirectly through authorised funds investing in such instruments, including funds managed by Invesco.

The Managed Liquidity Portfolio generally invests in 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 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 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. In particular, the Portfolio will typically contain some assets with a greater residual maturity, and as a whole will have greater weighted average maturity, than is prescribed by regulation governing money market funds.

Key Performance Indicators

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

•    Revenue and 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 2019 and of relevant benchmark indices were as follows:

UK Equity Portfolio –4.9%
FTSE All-Share Index –3.2%
Global Equity Income Portfolio –1.3%
MSCI World Index (£) 5.3%
Balanced Risk Allocation Portfolio –2.7%
3 month LIBOR plus 5% 5.8%
Managed Liquidity Portfolio 1.3%

Source: Refinitiv.

Other performance periods, together with share price total returns, are shown on page 2.

Revenue and Dividends

The Directors review revenue estimates and prospective dividend levels at each Board meeting. For the equity share classes the Directors have become more focused on total return since sanctioning contributions to dividends from capital, but dividends paid continue to be mostly constituted from revenue and revenue is an important element of overall Portfolio returns.

UK Equity Shares

Revenue earnings per Share for the UK Equity Share Portfolio was 5.73p (2018: 5.49p), based on net revenue for the year of £1,982,000 (2018: £2,038,000), which included receipts of £96,000 (2018: £110,000) of non-recurring special dividends, equivalent to 0.28p (2018: 0.30p).

Dividend Policy:

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.

Dividends Declared:

The Directors have declared and paid four interim dividends for the year ended 31 May 2019 totalling 6.60p per UK Equity Share (2018: 6.45p) of which 5.73p was met from revenue earned in the year. The aggregate of dividends paid in respect of the year was £2,279,000 (2018: £2,397,000) – the decrease reflects the reduction of shares in issue following conversions and buybacks in the year.

A first interim dividend for the year to 31 May 2020 of 1.5p was declared on 17 July 2019, setting the level for the next two dividends, in the absence of unforeseen circumstances.

Global Equity Income Shares

Revenue earnings per Share for the Global Equity Income Share Portfolio was 6.90p (2018: 6.50p), based on net revenue for the year of £2,234,000 (2018: £2,149,000), which included £38,000 (2018: £128,000) of special dividends.

Dividend Policy:

The Directors have set a target of at least maintaining, in the absence of unforeseen circumstances, the level of annual Global Equity Income 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.

Dividends Declared:

The Directors have declared and paid four interim dividends for the year ended 31 May 2019 totalling 6.90p (2018: 6.70p) per Global Equity Income Share, all of which was met from revenue earned in the year. The aggregate of dividends paid in respect of the year was £2,232,000 (2018: £2,211,000).

A first interim dividend for the year to 31 May 2020 of 1.55p was declared on 17 July 2019, setting the level for the next two dividends, in the absence of unforeseen circumstances.

Balanced Risk Allocation Shares

In order to maximise the capital return on the Balanced Risk Allocation Shares, the Directors only intend to declare dividends on the Balanced Risk Allocation 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.

No dividends are required to be declared or paid for the year to retain investment trust status.

Managed Liquidity Shares

The Board intends to declare dividends on the Managed Liquidity Portfolio when the level of income available allows. The Managed Liquidity Portfolio recorded a net revenue profit for the year of £27,000 (2018: £12,000). An interim dividend of 0.8p per Managed Liquidity Share was declared on 17 July 2019 in respect of the year ended 31 May 2019 (2018: nil). It currently appears unlikely, given the quantum of revenue being earned, that future dividends will be more frequent than annual and they could be less frequent.

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 operation 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 Board and the Manager 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 35. At 31 May 2019, the share prices, net asset values (NAV) and the discounts of the four Share classes were as follows:

2018 2017


SHARE CLASS
NET ASSET
VALUE
(PENCE)
SHARE
PRICE
(PENCE)


DISCOUNT
NET ASSET
VALUE
(PENCE)
SHARE
PRICE
(PENCE)


DISCOUNT
UK Equity 173.1 173.5 0.2% 189.0 186.0 (1.6)%
Global Equity Income 197.6 195.0 (1.3)% 207.2 202.0 (2.5)%
Balanced Risk Allocation 139.5 138.5 (0.7)% 143.4 139.5 (2.7)%
Managed Liquidity 104.9 101.5 (3.2)% 103.5 102.0 (1.4)%

The following charts show the premium/(discount) at which the Shares traded over the two years to 31 May 2019.

Source: Refinitiv.

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 daily 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 were as follows:



COMPANY

UK
EQUITY
GLOBAL
EQUITY
INCOME
BALANCED
RISK
ALLOCATION

MANAGED
LIQUIDITY
2019 0.87% 0.86% 0.86% 1.21% 0.38%
2018 0.81% 0.80% 0.81% 1.14% 0.35%

The above excludes rebates received by the Managed Liquidity Portfolio and, since during the past two years neither the UK Equity nor Global Equity Income Portfolios outperformed their benchmarks, there is no performance fee impact. However, in 2018 the UK Equity Portfolio wrote back £4,000 of performance fee previously provided, and the impact of this on the Portfolio in that year was –0.01%.

Financial Position

Assets and Liabilities

The Company’s balance sheet on page 70 shows the assets and liabilities at the year end. Details of the Company’s borrowing facility are shown in note 12(b) of the financial statements on page 84, 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 purchases 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 Allocation 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
ALLOCATION

MANAGED
LIQUIDITY
Shares in issue at the year end:
  – excluding treasury 33,088,595 31,668,234 5,618,428 4,370,361
  – held in treasury 10,517,040 7,301,023 5,157,218 7,805,785
Movements during the year:
  Increase/(decrease) arising from conversions (584,876) 768,038 (483,246) 141,653
  Shares bought back into treasury (2,313,500) (2,422,023) (376,218) (472,000)
  Average price thereon 174.1p 199.5p 137.9p 101.6p

Since the year end another 39,722 UK Equity Shares and 201,766 Global Equity Income Shares have been bought into treasury at prices of 170p and 202p, respectively.

Further details on net changes in issued share capital are set out in note 14 to the financial statements on pages 84 and 85. No treasury shares were cancelled during 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 44 to 46).

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 17 to the financial statements.

Investment Objectives and Attractiveness to Investors

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 or that the Shares will continue to meet investors’ needs.

The Board monitors the Share registers and the performance of the Company and each Portfolio. It has established a structure offering a range of options for investors and has set 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 Allocation Shares are set out on page 38.

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. Owing 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 factors. 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 pages 32 and 33).

Viability and Compulsory Conversion of a Class of Share

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 Share 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 Share 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 dividends in circumstances where, following the distribution, the Company’s assets would represent less than one and a half times the aggregate of its liabilities or the amount of net assets would be less than the aggregate of its share capital and undistributable reserves. 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 Share, 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 Allocation Portfolio may also be geared (by up to 250%, according to the investment policy set out on page 31) by means of the derivative instruments in which it invests. This is discussed separately below, under the heading: Additional Risks Applicable to Balanced Risk Allocation 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 Share 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 that Share class. 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 17 to the financial statements.

Additional Risks Applicable to Balanced Risk Allocation Shares

The use of financial derivative instruments forms part of the investment policy and strategy of the Balanced Risk Allocation 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 Directors’ view of the Company’s viability has not changed since last year. 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 36 to 39, 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 43.

Audit Committee Report

The extended audit committee report required by the UK Corporate Governance Code is set out on pages 44 to 46. There are no areas of concern in relation to the financial statements to bring to the attention of shareholders.

Board Responsibilities

As set out in the Directors’ Report on page 47 the Directors have a statutory duty to promote the success of the Company, whilst also having regard to certain broader matters, including the need to engage with employees, suppliers, customers and others, and to have regard to their interests (s172 Companies Act 2006). However, the Company has no employees and no customers in the traditional sense. In accordance with the Company’s nature as an investment trust the Board’s principal concern has been, and continues to be, the interests of the Company’s shareholders taken as a whole. Notwithstanding this, the Board has a responsible governance culture and also has due regard for broader matters so far as they apply. In particular, the Board engages with the Manager at every Board meeting and reviews its relationships with other service providers at least annually.

Board Diversity

The Company’s policy on diversity is set out on pages 49 and 50. At the year end the Board comprised four male and one female non-executive Directors resulting in female representation of 20%. As disclosed on page 47 the current Chairman (a male) will retire at the forthcoming AGM. A recruitment process is underway for a new Director, in respect of which the Board has a strong preference for the appointee to be female. If an appropriate female appointee is identified, female representation on the Board will become 40%. Summary biographical details of all the current Directors are set out on page?41. 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 30 July 2019.

Invesco Asset Management Limited

Company Secretary

.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

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

30 July 2019

.

INCOME STATEMENT
FOR THE YEAR ENDED 31 MAY

2018 2017

NOTES
REVENUE
£’000
CAPITAL
£’000
TOTAL
£’000
REVENUE
£’000
CAPITAL
£’000
TOTAL
£’000
Gains on investments at fair value 9 (7,814) (7,814)  1,692  1,692
Gains on derivative instruments 10  28 (268) (240) 47 641 688
Foreign exchange (losses)/gains  9  9 (46) (46)
Income 2  5,258 21  5,279  5,173 457  5,630
Investment management fees 3 (229) (520) (749) (253) (576) (829)
Performance fees 3  4  4
Other expenses 4 (466) (2) (468) (429) (2) (431)
Net return before finance costs and taxation  4,591 (8,574) (3,983)  4,538  2,170  6,708
Finance costs 5 (77) (179) (256) (66) (154) (220)
Net return before taxation  4,514 (8,753) (4,239)  4,472  2,016  6,488
Tax 6 (246) (246) (256) (256)
Return after taxation for the financial year  4,268 (8,753) (4,485)  4,216  2,016  6,232
Basic return per ordinary share: 7
– UK Equity Share Portfolio  5.73p (15.34)p (9.61)p 5.49p (3.82)p 1.67p
– Global Equity Income Share Portfolio  6.90p  (9.82)p (2.92)p 6.50p 8.65p 15.15p
– Balanced Risk Allocation Share Portfolio  0.42p  (4.86)p (4.44)p 0.24p 8.24p 8.48p
– Managed Liquidity Share Portfolio  0.59p  0.54p  1.13p 0.24p 0.02p 0.26p

The total column of this statement represents the Company’s profit and loss account, prepared in accordance with UK Accounting Standards. The return after taxation is the total comprehensive income and therefore no additional statement of other comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes 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 12, 19, 25 and 28 for the UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity Share Portfolios respectively.

.

.

STATEMENT OF CHANGES IN EQUITY
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 2017 1,060  1,290  80,542  347  69,608  583 153,430
Cancellation of deferred shares (4)  4  –
Shares bought back and held in treasury (3,838) (3,838)
Share conversions (3)  – 3
Return after taxation per the income statement  2,016  4,216  6,232
Dividends paid – note 8 (109) (4,499) (4,608)
At 31 May 2018  1,057  1,290  76,594  351  71,624  300 151,216
Cancellation of deferred shares (2) 2  –
Shares bought back and held in treasury (9,925) (9,925)
Share conversions (2)  – 2
Return after taxation per the income statement  2,016  4,216  6,232
Dividends paid – note 8 (297) (4,214) (4,511)
As at 31 May 2019  1,055  1,290 66,372 353 62,871 354 132,295

.

BALANCE SHEET
AS AT 31 MAY 2019




NOTES

UK
EQUITY
£’000
GLOBAL
EQUITY
INCOME
£’000
BALANCED
RISK
ALLOCATION
£’000

MANAGED
LIQUIDITY
£’000


TOTAL
£’000
Fixed assets
Investments held at fair value through profit or loss 9  61,250  67,040  7,385 4,710 140,385
Current assets
Derivative assets held at fair value through profit or loss 10  175  175
Debtors 11 3,580  518  412 6 4,516
Cash and cash equivalents  476  245  153  10  884
4,056  763  740  16 5,575
Creditors: amounts falling due within one year
Derivative liabilities held at fair value through profit or loss 10 (223) (223)
Other creditors 12(a) (670) (334) (65) (143) (1,212)
Bank loan 12(b) (7,350) (4,880) (12,230)
(8,020) (5,214) (288) (143) (13,665)
Net current (liabilities)/assets (3,964) (4,451)  452 (127) (8,090)
Provision 13  –
Net assets  57,286  62,589  7,837 4,583  32,295
Capital and reserves
Share capital 14(a)  436  389  108  122 1,055
Share premium 15  1,290 1,290
Special reserve 15  28,551  30,734  3,106 3,981  66,372
Capital redemption reserve 15  74  78 26  175  353
Capital reserve 15  28,225  31,015  3,363  268  62,871
Revenue reserve 15  373 (56)  37  354
Shareholders' funds  57,286  62,589  7,837 4,583 132,295
Net asset value per ordinary share
Basic 16 173.1p 197.6p 139.5p 104.9p

The financial statements were approved and authorised for issue by the Board of Directors on 30 July 2019.

Signed on behalf of the Board of Directors
Patrick Gifford
Chairman

.

BALANCE SHEET
AS AT 31 MAY 2018




NOTES

UK
EQUITY
£’000
GLOBAL
EQUITY
INCOME
£’000
BALANCED
RISK
ALLOCATION
£’000

MANAGED
LIQUIDITY
£’000


TOTAL
£’000
Fixed assets
Investments held at fair value through profit or loss 9  81,655  72,664  7,333  4,953 166,605
Current assets
Derivative assets held at fair value through profit or loss 10  281  281
Debtors 11  379  569  268  4  1,220
Cash and cash equivalents  308 1,600  50 1,958
 687  569  2,149  54  3,459
Creditors: amounts falling due within one year
Derivative liabilities held at fair value through profit or loss 10 (54) (54)
Other creditors 12(a) (684) (336) (55) (143) (1,218)
Bank overdraft 12(b) (1,140) (86) (1,226)
Bank loan 12(b) (13,650) (2,700) (16,350)
(14,334) (4,176) (195) (143) (18,848)
Net current (liabilities)/assets (13,647) (3,607)  1,954 (89) (15,389)
Provision 13
Net assets 68,008  69,057  9,287  4,864 151,216
Capital and reserves
Share capital 14(a)  442  382  113  120  1,057
Share premium 15  1,290  1,290
Special reserve 15  33,960  34,030  4,287  4,317  76,594
Capital redemption reserve 15  74  78  25  174  351
Capital reserve 15  33,532  34,196  3,653  243  71,624
Revenue reserve 15  371 (81)  10  300
Shareholders’ funds  68,008  69,057  9,287  4,864  151,216
Net asset value per ordinary share
Basic 16 189.0p 207.2p 143.4p 103.5p

.

CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MAY


NOTES
2018
£’000
2017
£’000
Cash flows from operating activities
Net return before finance costs and taxation (3,983) 6,708
Tax on overseas income (246) (256)
Adjustments for:
  Purchase of investments (48,892) (52,735)
  Sale of investments 63,997  55,743
  Sale of futures  35  531
 15,140 3,539
Scrip dividends (53) (83)
(Losses)/gains on investments 7,814 (1,692)
(Losses)/gains on derivatives  240 (688)
(Increase)/decrease in debtors (152)  240
Decrease in creditors and provision (4) (517)
Net cash inflow from operating activities  18,756 7,251
Cash flows from financing activities
Interest paid on bank borrowings (256) (225)
(Decrease)/increase in bank borrowings (5,346) 2,376
Share buy back costs (9,717) (3,828)
Equity dividends paid 8 (4,511) (4,608)
Net cash outflow from financing activities (19,830) (6,285)
Net (decrease)/increase in cash and cash equivalents (1,074)  966
Cash and cash equivalents at the start of the year 1,958  992
Cash and cash equivalents at the end of the year  884 1,958
Reconciliation of cash and cash equivalents to the Balance Sheet is as follows:
Cash held at custodian  884 358
Cash held on term deposit 1,600
Cash and cash equivalents  884 1,958
Cash flow from operating activities includes:
Interest received  88  55
Dividends received 4,871 5,184

.

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 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, including FRS 102 ‘the Financial Reporting Standard applicable in the UK and Republic of Ireland’, 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 (AIC) in November 2014 (SORP) as updated in February 2018. The financial statements are issued on a going concern basis as disclosed on page 51.

The accounting policies applied to these financial statements are consistent with those applied for the preceding year.

(ii)      Definitions used in the financial statements

‘Portfolio’ the UK Equity Share Portfolio, the Global Equity Income Share Portfolio, the Balanced Risk Allocation 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 Allocation 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 Allocation and Managed Liquidity Share Portfolios’ income statements and summaries of net assets (shown on pages 12, 19, 25 and 28) do not represent statutory accounts, are not required under UK Generally Accepted Accounting Practice 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 Financial Statements are presented in sterling, which is the Company’s functional and presentation currency and is the currency of the Company’s share capital and the predominant currency in which the Company’s shareholders operate. This 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.

(v)     Significant Accounting Estimates and Judgements

The preparation of the financial statements may require the Directors to make estimations where uncertainty exists. It also requires the Directors to make judgements, estimates and assumptions, in the process of applying the accounting policies. There have been no significant judgements, estimates or assumptions for the current or preceding year.

(b)     Financial instruments

The Company has chosen to apply the provisions of Sections 11 and 12 of FRS 102 in full in respect of the financial instruments, which is explained below.

(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 Allocation 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 revenue 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.

Expenses charged to the Company in relation to a specific Portfolio are charged directly to that Portfolio.

Expenses charged to the Company that are common to more than one Portfolio are allocated between those Portfolios in the same proportions as the net assets of each Portfolio at the latest conversion date.

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 Allocation 30% 70%
Managed Liquidity 100%

Any 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 taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax or a right to pay less tax in the future have occurred. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements. Deferred taxation assets are recognised where, in the opinion of the Directors, it is more likely than not that these amounts will be realised in future periods.

A deferred tax asset has not been recognised in respect of surplus management expenses as the Company is unlikely to have sufficient future taxable revenue to offset against these.

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 portfolios (investment assets) of the Company and income received from any other source.




2019

UK
EQUITY
£’000
GLOBAL
EQUITY
INCOME
£’000
BALANCED
RISK
ALLOCATION
£’000

MANAGED
LIQUIDITY
£’000

COMPANY
TOTAL
£’000
Income from investments
UK dividends:
  – ordinary dividends  2,058  463 2,521
  – special dividends 96  38  134
  – Scrip dividends 36 17 53
 2,190  518 2,708
Overseas dividends:
  – ordinary dividends 108 2,295 11  14 2,428
Unfranked investment income 44 9  53
Interest from Treasury bills 39  39
 2,342 2,813 50  23 5,228
Other income
Deposit interest 1 1  5 7
Rebates of management fee  23  23
Total income  2,343 2,814 55  46 5,258

   




2018

UK
EQUITY
£’000
GLOBAL
EQUITY
INCOME
£’000
BALANCED
RISK
ALLOCATION
£’000

MANAGED
LIQUIDITY
£’000

COMPANY
TOTAL
£’000
Income from investments
UK dividends:
  – ordinary dividends  1,933  514  2,447
  – special dividends  110  14  124
  – scrip dividends 83 83
 2,126  528  2,654
Overseas dividends:
  – ordinary dividends  233  2,067  9  1  2,310
  – special dividends  114  114
Unfranked investment income  44  4  48
Interest from Treasury bills  17  17
 2,403  2,709  26  5  5,143
Other income
Deposit interest  1  4  5
Rebates of management fee  25  25
Total Income

There were £21,000 of special dividends in respect of the UK Equity Portfolio recognised in capital during the year (2018: £455,000 in respect of the UK Equity Portfolio and £2,000 in respect of the Global Equity Income Portfolio).

3.       Investment management and performance fees

This note shows the fees paid to the Manager. These are made up of the individual Portfolio investment 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.




2019

UK
EQUITY
£’000
GLOBAL
EQUITY
INCOME
£’000
BALANCED
RISK
ALLOCATION
£’000

MANAGED
LIQUIDITY
£’000

COMPANY
TOTAL
£’000
Investment management fee:
– charged to revenue 98  107 18 6  229
– charged to capital  228  250 42 -  520
Total investment management fee  326  357 60 6  749
Performance fee provision written back to capital

   

2018
UK
EQUITY
£’000
GLOBAL
EQUITY
INCOME
£’000
BALANCED
RISK
ALLOCATION
£’000

MANAGED
LIQUIDITY
£’000

COMPANY
TOTAL
£’000
Investment management fee:
– charged to revenue  112  113  22  6  253
– charged to capital  262  264  50  576
Total investment management fee  374  377  72  6  829
Performance fee provision written back to capital (4) (4)

Details of the investment management agreement, including amendments during the previous year, are given on page 51 in the Directors’ Report.

The performance fee written back is solely in respect of the UK Equity Portfolio. No performance fee was earned on the UK Equity and Global Equity Income Portfolios for the current or previous year. Any underperformance must be fully offset by overperformance before any performance fee can be paid. Movements on the UK Equity and Global Equity Income Portfolios’ underperformance carried forward follow:

UK
EQUITY
2019
£’000
GLOBAL
EQUITY
INCOME
2019
£’000
UK
EQUITY
2018
£’000
GLOBAL EQUITY
INCOME
2018
£’000
(Under)/over performance brought forward (540) (893) 4 (778)
Under performance in the year (228) (598) (544) (115)
Under performance carried forward (768) (1,491) (540) (893)

4.       Other expenses

The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified.

2019 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Charged to revenue:
Directors’ remuneration (i) 70  74  9 5  158
Auditor’s fees (ii):
– for the audit of the Company’s financial statements 14 15 2 1 32
Other expenses (iii)  115  125 29 7  276
 199  214 40  13  466
Charged to capital:
Custodian transaction charges 1 1 2
Total  200  215 40  13  468

   

2018 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Charged to revenue:
Directors’ remuneration (i)  61  58  8  5  132
Auditor’s fees (ii):
– for the audit of the Company’s financial statements  12  14  2  1  29
Other expenses (iii)  119  115  28  6  268
 192  187  38  12  429
Charged to capital:
Custodian transaction charges  1  1  2
Total  193  188  38  12  431

(i)      The Director’s Remuneration Report provides information on Directors’ fees. Included within other expenses is £14,000 (2018: £13,000) of employer’s national insurance payable on Directors’ remuneration. As at 31 May 2019, the amounts outstanding on Directors’ fees and employer’s national insurance was £27,000 (2018: £23,000).

(ii)      Auditor’s fees are shown excluding VAT, which is included in other expenses.

(iii)     Includes fees for depositary, broker and registrar, and also printing, postage and listing costs.

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.

2019 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Interest payable on borrowings repayable within one year as follows:
  Charged to revenue 55  22  77
  Charged to capital  127  52  179
Total  182  74  256

   

2018 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Interest payable on borrowings repayable within one year as follows:
  Charged to revenue  47  19  66
  Charged to capital  109  45  154
Total  156  64  220

6.       Tax

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

2019 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Overseas tax 9  237  246
2018
Overseas tax 14  242  256

The accounting policy for taxation is disclosed in note 1(h).

(b)     Reconciliation of tax charge

2019 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Return before taxation (3,316) (710) (265)  52 (4,239)
Theoretical tax at the current UK Corporation Tax rate of 19.00% (2018: 19.00%) (630) (135) (50)  10 (805)
Effect of:
– Non-taxable losses/(gains) on investments and derivatives  945  546 49 (5) 1,535
– Non-taxable (gains)/losses on foreign exchange (1) 1 (2) (2)
– Non-taxable scrip dividends (7) (3) (10)
– Non-taxable UK dividends (385) (88) (473)
– Non-taxable UK special dividends (22) (7) (29)
– Non-taxable overseas dividends (20) (427) (447)
– Overseas tax 9  237  246
– Accrued income taxable on receipt (8) (8)
– Excess of allowable expenses over taxable income  115  121  3  239
Transfer of expenses between Portfolios:
– revenue 5 (5)
Tax charge for the year 9  237  246

   

2018 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Return before taxation  635  5,249  591  13  6,488
Theoretical tax at the current UK Corporation Tax rate of 19.00% (2017: 19.83%)  121  997  112  2  1,232
Effect of:
– Non-taxable losses/(gains) on investments and derivatives  283 (604) (123) (444)
– Non-taxable losses on foreign exchange  2  2  4  8
– Non-taxable scrip dividends (16) (16)
– Non-taxable UK dividends (363) (97) (460)
– Non-taxable UK special dividends (21) (3) (24)
– Non-taxable overseas dividends (44) (393) (437)
– Non-taxable overseas special dividends (86) (22) (108)
– Overseas tax  14  242  256
– Disallowable expenses  1  1  2
– Excess of allowable expenses over taxable income  123  119  7 (2)  247
Tax charge for the year  14  242  256

          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 £13,595,000 (2018: £12,311,000) that are available to offset future taxable revenue. A deferred tax asset of £2,311,000 (2018: £2,093,000), measured at the standard corporation tax substantively enacted rate of 17% (2018: 17%) 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 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 2019 2018
UK Equity 34,607,613 37,138,452
Global Equity Income 32,378,620 33,043,420
Balanced Risk Allocation  5,966,462 6,965,490
Managed Liquidity  4,597,944 5,025,445

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, follows:

2019 2018
NUMBER OF SHARES DIVIDEND RATE (PENCE) TOTAL £’000 NUMBER OF SHARES DIVIDEND RATE (PENCE) TOTAL £’000
UK Equity
  First interim 35,536,971 1.50 534 38,009,255 1.45 551
  Second interim 34,757,443 1.50 521 37,256,932 1.45 540
  Third interim 34,732,059 1.50 521 36,991,597 1.45 536
  Fourth interim 33,490,968 2.10 703 36,648,217 2.10 770
6.60  2,279 6.45 2,397
Global Equity Income
  First interim 32,756,219 1.50 492 32,747,913 1.45 475
  Second interim 32,410,667 1.50 486 32,708,411 1.45 474
  Third interim 32,604,620 1.50 489 32,973,355 1.45 478
  Fourth interim 31,888,951 2.40 765 33,333,896 2.35 784
6.90  2,232 6.70 2,211
Total paid in respect of the year 4,511 4,608

No dividends were paid to Balanced Risk Allocation and Managed Liquidity shareholders during the year (2018: nil).

The Company’s dividend policy permits the payment of dividends by the UK Equity, Global Equity Income and Managed Liquidity Portfolios from capital. An analysis of dividends paid in respect of the year from revenue and capital follows.

2019 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 COMPANY TOTAL £’000
Dividends paid in respect of the year:
  From revenue  1,982 2,232  4,214
  From capital  297 297
2,279 2,232 4,511

Since the year end, a dividend has been declared on the Managed Liquidity Portfolio Shares, in respect of the year ended 31 May 2019, of 0.8p (2018: nil) payable on 16 August 2019 to shareholders on the register on 26 July 2019. The dividend will be marked ex-dividend on 25 July 2019. The dividend of £35,000 (2018: nil) is payable from revenue.

2018 UK EQUITY £’000 GLOBAL EQUITY INCOME £’000 COMPANY TOTAL £’000
Dividends paid in respect of the year:
  From revenue – current year 2,038 2,149 4,187
  From revenue – reserves brought forward 250 62 312
  From revenue – total 2,288 2,211 4,499
  From capital 109 109
2,397 2,211 4,608

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

2019
£’000
2018
£’000
UK listed investments 68,122  98,132
UK unlisted investments 1,407
Overseas listed investments(i) 72,248  67,046
Unquoted hedge fund investments 15  20
140,385  166,605

(i)      Includes the Short-Term Investments Company (Global Series) plc positions held by the Balanced Risk Allocation Portfolio of £1,735,000 (2018: £2,273,000) and Managed Liquidity Portfolio of £220,000 (2018: £48,000).

(b)     Analysis of investment gains

2019
£’000
2018
£’000
Opening valuation Movements in year: 166,605  167,824
  Purchases at cost 48,735  52,896
  Sales – proceeds (67,141) (55,807)
  Sales – net realised gains on sales  3,108  11,749
Movement in investment holding gains in year (10,922) (10,057)
Closing valuation 140,385  166,605
Closing book cost 129,931  145,229
Closing investment holding gains 10,454  21,376
Closing valuation 140,385  166,605
Realised gains based on historical cost  3,108  11,749
Movement in investment holding gains in year (10,922) (10,057)
(Losses)/gains on investments (7,814) 1,692

(c)      Transaction costs

Transaction costs were £88,000 (2018: £138,000) on purchases and £42,000 (2018: £37,000) on sales.

10.     Derivative instruments

Derivative instruments are contracts whose price is derived from the value of other securities or indices. The Balanced Risk Allocation 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.

2019
£’000
2018
£’000
Opening derivative assets held at fair value through profit or loss 281  209
Opening derivative liabilities held at fair value through profit or loss (54) (142)
Opening net derivative assets held at fair value shown in the balance sheet 227  67
Closing derivative assets held at fair value through profit or loss 175  281
Closing derivative liabilities held at fair value through profit or loss (223) (54)
Closing net derivative (liabilities)/assets held at fair value shown in the balance sheet (48)  227
Movement in derivative holding (losses)/gains (275)  160
Net realised gains on derivative instruments  7  481
Net capital (loss)/gain on derivative instruments as shown in the income statement (268)  641
Net income arising on derivatives 28  47
Total (loss)/gain on derivatives instruments (240)  688

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 Allocation 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.

2019
£’000
2018
£’000
Amounts due from brokers  3,246  102
Collateral pledged for futures contracts  398  223
Tax recoverable  271  184
Prepayments and accrued income  601  711
 4,516 1,220

12(a). Other creditors

Creditors are amounts owed by the Company and include amounts due to brokers for the purchase of investments and amounts owed to suppliers, such as the Manager and auditor.

2019
£’000
2018
£’000
Shares bought back  218  10
Tax payable  137  137
Amounts due to brokers  210
Performance fee accrued  531  531
Accruals  326  330
Other payables  1,212 1,218

12(b). Bank overdraft and loans

At the year end the Company had a £25 million (2018: £25 million) committed 364 day multicurrency revolving credit facility, which is due for renewal on 15 May 2020 (2018: 17 May 2019). In addition, an overdraft facility for the purpose of short term settlement is also available. Both facilities are with The Bank of New York Mellon and from 17 May 2019 the interest payable on the credit facility is based on LIBOR +0.70% plus a 0.15% commitment fee (previously 0.85% plus a 0.20% commitment fee) on amounts drawndown.

Under the facility’s covenants, the Company’s total indebtedness must not exceed 30% of total assets (excluding any Balanced Risk Allocation Portfolio assets) and the total assets must not be less than £75 million (2018: £75 million).

13.     Provision

The provision arises from the UK Equity Portfolio's performance fee. The movements on the performance fee provision are as follows:

2019
£’000
2018
£’000
Provision brought forward 4
Underperformance offset in year (4)
Provision carried forward

14.     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 ALLOCATION MANAGED LIQUIDITY TOTAL SHARE CAPITAL
ORDINARY SHARES (NUMBER)
At 31 May 2018
35,986,971 33,322,219  6,477,892 4,700,708 80,487,790
Shares bought back into treasury (2,313,500) (2,422,023) (376,218) (472,000) (5,583,741)
Arising on share conversion:
 – August 2018 (419,528)  440,471 (114,918) 9,109 (84,866)
 – November 2018 (25,384)  193,953 (237,107) (21,095) (89,633)
 – February 2019 (113,591)  84,331 (4,698) 33,852 (106)
 – May 2019 (26,373)  49,283 (126,523)  119,787  16,174
At 31 May 2019 33,088,595 31,668,234  5,618,428 4,370,361 74,745,618
TREASURY SHARES (NUMBER)
At 31 May 2018
 8,203,540 4,879,000  4,781,000 7,333,785 25,197,325
Shares bought back into treasury  2,313,500 2,422,023 376,218  472,000 5,583,741
At 31 May 2019 10,517,040 7,301,023  5,157,218 7,805,785 30,781,066

   

UK EQUITY GLOBAL EQUITY INCOME BALANCED RISK ALLOCATION MANAGED LIQUIDITY TOTAL SHARE CAPITAL
ORDINARY SHARES OF 1 PENNY EACH (£’000) At 31 May 2018  360  334 65  47  806
Shares bought back into treasury (23) (25) (4) (5) (57)
Arising on share conversion:
 – August 2018 (4) 4 (1) (1)
 – November 2018 2 (3) (1)
 – February 2019 (1) 1 1 1
 – May 2019 (1) (1) 1 (1)
At 31 May 2019  331  316 56  44  747
TREASURY SHARES OF 1 PENNY EACH (£’000)
At 31 May 2018
82  48 48  73  251
Shares bought back into treasury 23  25  4 5  57
At 31 May 2019  105  73 52  78  308
TOTAL SHARE CAPITAL (£’000)
Ordinary share capital  331  316 56  44  747
Treasury share capital  105  73 52  78  308
At 31 May 2019  436  389 108  122 1,055
Average buy back price 174.1p 199.5p 137.9p 101.6p

The total cost of share buy backs was £9,925,000 (2018: £3,838,000). As part of the conversion process 238,918 (2018: 400,431) 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.

No ordinary shares were issued from treasury during the year (2018: nil).

(b)     Movements in Share Capital after the Year End

Since the year end 39,722 UK Equity Shares and 201,766 Global Equity Income Shares have been bought back  into treasury.

(c)      Voting Rights

Rights attaching to the Shares are described in the Directors’ Report on pages 52 and 53.

(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 104.

15.     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.

Capital investment gains and losses are shown in note 9(b), and form part of the capital reserve. The revenue reserve shows the net revenue retained after payments of any dividends. The capital and revenue reserves are distributable.

16.     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 2019 2018
NET ASSET VALUE PER SHARE PENCE NET ASSETS ATTRIBUTABLE £’000 NET ASSET VALUE PER SHARE PENCE NET ASSETS ATTRIBUTABLE £’000
UK Equity  173.1  57,286  189.0 68,008
Global Equity Income  197.6  62,589  207.2 69,057
Balanced Risk Allocation  139.5 7,837  143.4 9,287
Managed Liquidity  104.9 4,583  103.5 4,864

Net asset value per Share is based on net assets at the year end and on the number of Shares in issue (excluding Treasury Shares) for each Share class at the year end.

17.     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 11, 18, 23, 24 and 28.

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 36 to 39. 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 29 to 32. The management process is subject to risk controls, which the Audit Committee reviews on behalf of the Board, as described on pages 45 and 46.

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.

17.1      Market Risk

Market risk arises from changes in the fair value or future cash flows of a financial instrument because of movements in market prices. Market risk comprises three types of risk: currency risk (17.1.1), interest rate risk (17.1.2) and other price risk (17.1.3).

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 pages 47 and 48. 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.

17.1.1 Currency Risk

A majority of the Global Equity Income Portfolio, derivative instruments in the Balanced Risk Allocation 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. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is accrued and its 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 TO 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 FOREIGN CURRENCY EXPOSURE
£’000
YEAR ENDED 31 MAY 2019
Canadian Dollar 1,591 1,591
Euro 34 34 2,235 2,269
Swiss Franc 48 48 48
US Dollar 4 4 1,798 1,802
86 86 5,624 5,710
YEAR ENDED 31 MAY 2018
Canadian Dollar 889 889
Euro 11 11 3,323 3,334
Swiss Franc 46 46 46
US Dollar 1 1 1,484 1,485
58 58 5,696 5,754

GLOBAL EQUITY INCOME PORTFOLIO:

CURRENCY DEBTORS (DUE FROM BROKERS AND DIVIDENDS)
£’000
CASH/
(OVERDRAFT AT BANK)
£’000
CREDITORS (DUE TO 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 FOREIGN CURRENCY EXPOSURE
£’000
YEAR ENDED 31 MAY 2019
Australian Dollar 1,515 1,515
Brazilian Real 55 55 445 500
Canadian Dollar 1 1 1,398 1,399
Euro 120 120 18,631 18,751
Japanese Yen 22 22 2,390 2,412
Korean Won 1,878 1,878
Norwegian Krone 6 6 913 919
Swiss Franc 123 123 4,243 4,366
Taiwanese Dollar 1,596 1,596
US Dollar 70 12 82 23,445 23,527
396 13 409 56,454 56,863

   

CURRENCY DEBTORS (DUE FROM BROKERS AND DIVIDENDS)
£’000
CASH/
(OVERDRAFT AT BANK)
£’000
CREDITORS (DUE TO 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 FOREIGN CURRENCY EXPOSURE
£’000
YEAR ENDED 31 MAY 2018
Australian Dollar 985 985
Brazilian Real 15 15 666 681
Canadian Dollar 1 1 1,689 1,690
Euro 140 140 19,092 19,232
Hong Kong Dollar 83 (22) 61 1,610 1,671
Japanese Yen 19 175 (175) 19 2,424 2,443
Korean Won 1,019 1,019
Norwegian Krone 2,049 2,049
Swiss Franc 86 86 4,075 4,161
Taiwanese Dollar 1,684 1,684
US Dollar 71 71 24,861 24,932
415 153 (175) 393 60,154 60,547

BALANCED RISK ALLOCATION PORTFOLIO:

CURRENCY DERIVATIVE ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
£’000
CASH AT BANK
£’000
DERIVATIVE ASSETS 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 FOREIGN CURRENCY EXPOSURE
£’000
YEAR ENDED 31 MAY 2019
Australian Dollar 98 35 (52) 81 81
Canadian Dollar 19 32 20 71 71
Euro 12 29 41 41
Hong Kong Dollar 2 (6) 35 31 31
Japanese Yen 5 (58) 69 16 16
US Dollar 31 29 (159) 270 171 15 186
160 103 (223) 371 411 15 426

   

CURRENCY DERIVATIVE ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
£’000
CASH AT BANK
£’000
DERIVATIVE ASSETS 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 FOREIGN CURRENCY EXPOSURE
£’000
YEAR ENDED 31 MAY 2018
Australian Dollar 41 31 72 72
Canadian Dollar 25 35 (1) 59 59
Euro 49 45 17 111 111
Hong Kong Dollar 42 (1) 65 106 106
Japanese Yen 15 57 (3) 69 69
US Dollar 132 188 (53) 140 407 20 427
221 408 (54) 249 824 20 844

* Debtors includes collateral pledged for futures contracts.

Foreign Currency Sensitivity

The preceding exposure 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:

2019 2018
£/Australian Dollar +/– 2.0% +/– 3.5%
£/Brazilian Real +/– 3.4% +/– 5.8%
£/Canadian Dollar +/– 1.6% +/– 3.4%
£/Euro +/– 1.6% +/– 1.4%
£/Hong Kong Dollar +/– 1.6% +/– 3.4%
£/Japanese Yen +/– 1.9% +/– 2.6%
£/Korean Won +/– 1.9% +/– 1.9%
£/Norwegian Krone +/– 2.1% +/– 2.6%
£/Swedish Krona +/– 2.5% +/– 3.9%
£/Swiss Franc +/– 1.9% +/– 3.1%
£/Taiwan Dollar +/– 1.2% +/– 2.0%
£/US Dollar +/– 1.5% +/– 3.2%

The tables that follow illustrate the exchange rate sensitivity of revenue and capital returns arising from the Company’s financial non-sterling assets and liabilities for the year for the UK Equity, Global Equity Income and Balanced Risk Allocation Portfolios using the exchange rate fluctuations shown above.

If sterling had strengthened against other currencies by the exchange rate fluctuations shown in the table above, this would have had the following after tax effect:

UK EQUITY PORTFOLIO:

2019 2018
REVENUE RETURN
£’000
CAPITAL RETURN
£’000
TOTAL RETURN
£’000
REVENUE RETURN
£’000
CAPITAL RETURN
£’000
TOTAL RETURN
£’000
Canadian Dollar (25) (25) (30) (30)
Euro (36) (36) (1) (47) (48)
Swiss Franc (1) (1)
US Dollar (27) (27) (1) (47) (48)
(88) (88) (3) (124) (127)

GLOBAL EQUITY INCOME PORTFOLIO:

2019 2018
REVENUE RETURN
£’000
CAPITAL RETURN
£’000
TOTAL RETURN
£’000
REVENUE RETURN
£’000
CAPITAL RETURN
£’000
TOTAL RETURN
£’000
Australian Dollar (1) (30) (31) (1) (34) (35)
Brazilian Real (2) (15) (17) (1) (39) (40)
Canadian Dollar (1) (22) (23) (1) (57) (58)
Euro (15) (298) (313) (12) (267) (279)
Hong Kong Dollar (1) (1) (7) (56) (63)
Japanese Yen (2) (45) (47) (1) (63) (64)
Korean Won (1) (36) (37) (1) (19) (20)
Norwegian Krone (1) (19) (20) (2) (53) (55)
Swiss Franc (3) (81) (84) (4) (126) (130)
Taiwan Dollar (1) (19) (20) (1) (34) (35)
US Dollar (9) (352) (361) (17) (796) (813)
(37) (917) (954) (48) (1,544) (1,592)

BALANCED RISK ALLOCATION PORTFOLIO:

2019 2018
REVENUE RETURN
£’000
CAPITAL RETURN
£’000
TOTAL RETURN
£’000
REVENUE RETURN
£’000
CAPITAL RETURN
£’000
TOTAL RETURN
£’000
Australian Dollar (2) (2) (1) (3) (4)
Canadian Dollar (1) (1) (2) (2)
Euro (1) (1) (2) (2)
Hong Kong Dollar (4) (4)
Japanese Yen (2) (2)
US Dollar (3) (3) (14) (14)
(7) (7) (1) (27) (28)

If sterling had weakened against the currencies shown, the effect would have been the exact opposite.

17.1.2 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 or deposit taker. The Company has a £25 million (2018: £25 million), 364 day multicurrency revolving credit facility which is due for renewal on 15 May 2020. The Company uses the facility when required at levels approved and monitored by the Board.

Interest rate exposure

The Company also has available an uncommitted overdraft facility for settlement purposes and interest is dependent on the base rate determined by the custodian.

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:

2019 UK EQUITY
£’000
GLOBAL EQUITY INCOME
£’000
BALANCED RISK ALLOCATION
£’000
MANAGED LIQUIDITY
£’000
TOTAL
£’000
Exposure to floating interest rates:
Investments held at fair value through profit or loss(1)  1,735  4,710  6,445
Cash and cash equivalents 476  245 153  10  884
Bank loan (7,350) (4,880) (12,230)
(6,874) (4,635)  1,888  4,720 (4,901)
Exposure to fixed interest rates:
Investments held at fair value through profit or loss including UK Treasury Bills  5,635  5,635
Net exposure to interest rates (6,874) (4,635)  7,523  4,720 734

   

2018 UK EQUITY
£’000
GLOBAL EQUITY INCOME
£’000
BALANCED RISK ALLOCATION
£’000
MANAGED LIQUIDITY
£’000
TOTAL
£’000
Exposure to floating interest rates:
Investments held at fair value through profit or loss(1)  2,273  4,953  7,226
Cash and cash equivalents  308  1,600  50  1,958
Bank loan (13,650) (2,700) (16,350)
Bank overdraft (1,140) (86) (1,226)
(13,342) (3,840)  3,787  5,003 (8,392)
Exposure to fixed interest rates:
Investments held at fair value through profit or loss including UK Treasury Bills  5,040  5,040
Net exposure to interest rates (13,342) (3,840)  8,827  5,003 (3,352)

(1)  Comprises holdings in PIMCO Sterling Short Maturity Source UCITS ETF and Short-Term Investments Company (Global Series) plc (2018: Invesco Money Fund (UK) and Short-Term Investments Company (Global Series) plc).

The income on the PIMCO Sterling Short Maturity Source UCITS ETF, Invesco Money Fund (UK) 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 (2018: £25 million), the effect over one year of a 0.5% movement in interest rates would result in a £125,000 (2018: £125,000) maximum movement in the Company’s income and net assets.

The effect of a 1% movement in the interest rates on investments held at fair value through profit and loss would result in a £16,000 (2018: £19,000) maximum movement in the Company’s income statement 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 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 role of the portfolio managers to manage the Portfolios to achieve the best returns they can.

17.1.3 Other Price Risk

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:

2019 UK EQUITY
£’000
GLOBAL EQUITY INCOME
£’000
BALANCED RISK ALLOCATION
£’000
MANAGED LIQUIDITY
£’000
Profit after tax increase/decrease due to rise/fall of 10% 6,125 6,704 739 471
2018
Profit after tax increase/decrease due to rise/fall of 10% 8,166 7,266 733 495

17.2   Liquidity Risk

Management of liquidity risk

Liquidity risk is minimised as the investments held by 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:

2019 UK EQUITY 3 MONTHS OR LESS
£’000
GLOBAL EQUITY INCOME MORE THAN 3 MONTHS £’000 BALANCED RISK ALLOCATION 3 MONTHS OR LESS
£’000
MANAGED LIQUIDITY 3 MONTHS OR LESS
£’000
MORE THAN 3 MONTHS
£’000
3 MONTHS OR LESS
£’000
COMPANY TOTAL
£’000
Bank loan  7,350  4,880 12,230
Other creditors and accruals  138  334 65 143  680
Performance fee accrued 532  532
Derivative financial
  instruments 161 62  223
 7,488 532  5,214 226 62 143 13,665

   

2018 UK EQUITY 3 MONTHS OR LESS
£’000
GLOBAL EQUITY INCOME MORE THAN 3 MONTHS £’000 BALANCED RISK ALLOCATION 3 MONTHS OR LESS
£’000
MANAGED LIQUIDITY 3 MONTHS OR LESS
£’000
MORE THAN 3 MONTHS
£’000
3 MONTHS OR LESS
£’000
COMPANY TOTAL
£’000
Bank overdraft  1,140  86  1,226
Bank loan  13,650  2,700  16,350
Amount due to brokers  7  175  27  1  210
Other creditors and accruals  146  161  28  142  477
Performance fee accrued  531  531
Derivative financial
  instruments  37  17  54
 13,803  531  4,176  178  17  143  18,848

17.3   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:

2019 UK EQUITY
£’000
GLOBAL EQUITY INCOME
£’000
BALANCED RISK ALLOCATION
£’000
MANAGED LIQUIDITY
£’000
TOTAL
£’000
Bonds (UK Treasury bills)  5,635  5,635
Cash held as short-term investment(1)  1,735 220  1,955
Unquoted securities 15 15
Derivative financial instruments (48) (48)
Debtors(2) 3,580 518 412  6  4,516
Cash and cash equivalents  476 245 153 10 884
4,056 763  7,902 236  12,957

   

2018 UK EQUITY
£’000
GLOBAL EQUITY INCOME
£’000
BALANCED RISK ALLOCATION
£’000
MANAGED LIQUIDITY
£’000
TOTAL
£’000
Bonds (UK Treasury bills)  5,040  5,040
Invesco Money Fund (UK)  4,905  4,905
Cash held as short-term investment(1)  2,273  48  2,321
Unquoted securities  1,408  20  1,428
Derivative financial instruments  227  227
Debtors(2)  379  569 268  4  1,220
Cash and cash equivalents  308  1,600  50  1,958
 2,095  569  9,428  5,007  17,099

(1)       Comprises holdings in the Short-Term Investments Company (Global Series) plc.

(2)       Cash collateral pledged for futures contracts of £398,000 is included in debtors (2018: £223,000).

18.        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 (i.e. developed using market data) for the asset or liability, either directly or indirectly.

Level 3 – Inputs are unobservable (i.e. 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, derivative instruments and liquidity funds held in the Balanced Risk Allocation and Managed Liquidity Portfolios. Level 3 investments comprise any unquoted securities and the remaining hedge fund investments of the Balanced Risk Allocation Portfolio. During the year, the UK Equity Portfolio’s holding in AJ Bell was listed on the London Stock Exchange on 7 December 2018 and subsequently transferred to Level 1, valued at £2,889,000 (2018: Level 3, £1,408,000).

2019 UK EQUITY
£’000
GLOBAL EQUITY INCOME
£’000
BALANCED RISK ALLOCATION
£’000
MANAGED LIQUIDITY
£’000
TOTAL
£’000
Financial assets at fair value through profit or loss:
Level 1 61,250 67,040 5,635 4,490  138,415
Level 2 1,910  220 2,130
Level 3  15 15
Total for financial assets 61,250 67,040 7,560 4,710  140,560
Financial liabilities:
Level 2 – Derivative instruments  223  223

   

2018 UK EQUITY
£’000
GLOBAL EQUITY INCOME
£’000
BALANCED RISK ALLOCATION
£’000
MANAGED LIQUIDITY
£’000
TOTAL
£’000
Financial assets at fair value
  through profit or loss:
Level 1  80,244  72,664  5,040  157,948
Level 2  3  2,554  4,953  7,510
Level 3  1,408  20  1,428
Total for financial assets  81,655  72,664  7,614  4,953  166,886
Financial liabilities:
Level 2 – Derivative instruments  54  54

19.     Capital Management

This note is designed to set out the Company’s objectives, policies and processes for managing its capital. The capital is funded from monies invested in the Company by shareholders (both initial investment and any retained amounts) and any borrowings by the Company.

The Company’s total capital employed at 31 May 2019 was £144,525,000 (2018: £168,792,000) comprising borrowings of £12,230,000 (2018: £17,576,000) and equity share capital and other reserves of £132,295,000 (2018: £151,216,000).

The Company’s total capital employed is managed to achieve the Company’s investment objective and policy as set out on pages 29 and 32, including that borrowings may be used to raise equity exposure up to a maximum of 25% of net assets. At the balance sheet date, maximum gross gearing was 18.9% (2018: 17.3%). The Company’s policies and processes for managing capital are unchanged from the preceding year.

The main risks to the Company’s investments are shown in the Directors’ Report under the ‘Principal Risks and Uncertainties’ section on pages 36 to 39. These also explain that the Company has borrowing facilities which can be used in accordance with each Portfolio's investment objectivity 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 Corporation Tax Act 2010 and by the Companies Act 2006, respectively, and with respect to the availability of the overdraft facility, by the terms imposed by the lender. The Board regularly monitors, and 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.

20.        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 (2018: £nil).

21.        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’ remuneration and interests have been disclosed on pages 58 to 60 with additional disclosure in note 4. No other related parties have been identified.

Details of the Manager's services and fees are disclosed in the Director's Report on pages 51 and 52, and note 3.

22.        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.

.

The financial information set out above does not constitute the Company’s statutory accounts for the year ended 31 May 2019.  The financial information for 2018 is derived from the statutory accounts for the year ended 31 May 2018, which have been delivered to the Registrar of Companies.  The auditor has reported on the 2018 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 2019 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, 43-45 Portman Square, London W1H 6LY, and via the web pages of all of the Share classes on the Manager’s website at www.invesco.co.uk/investmenttrusts .

The Annual General Meeting will be held on 3 October 2019 at 11.30am at 43-45 Portman Square, London W1H 6LY.

By order of the Board
Invesco Asset Management Limited
30 July 2019

Contacts:
Angus Pottinger  020 3753 1000
Paul Griggs        020 3753 1000

.

NOTICE OF ANNUAL GENERAL MEETING

NOTICE IS GIVEN that the Annual General Meeting (AGM) of Invesco Perpetual Select Trust plc will be held at 43-45 Portman Square, London W1H 6LY at 11.30am on 3 October 2019 for the following purposes:

Ordinary Business of the Company

1. To receive the Annual Financial Report for the year ended 31 May 2019.

2. To approve the Directors’ Remuneration Policy.

3. To approve the Annual Statement and Report on Remuneration.

4. To re-elect Craig Cleland as a Director of the Company.

5. To re-elect Alan Clifton as a Director of the Company.

6. To re-elect Graham Kitchen as a Director of the Company.

7. To re-elect Victoria Muir as a Director of the Company.

8. To re-appoint Grant Thornton UK LLP as Auditor to the Company and authorise the Audit

Committee to determine the Auditor’s remuneration.

Special Business of the Company

To consider and, if thought fit, to pass the following resolution which will be proposed as an Ordinary Resolution:

9. 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 Allocation 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:

10. 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 Allocation and Managed Liquidity) for cash, either pursuant to the authority given by resolution 9 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 £33,048 of UK Equity Shares, £31,466 of Global Equity Income Shares, £5,618 of Balanced Risk Allocation Shares and £4,370 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.

11. 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 Allocation 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 3 October 2019, the date of the Annual General Meeting (equivalent, at 29 July 2019, to 4,954,018 UK Equity Shares, 4,716,823 Global Equity Income Shares, 842,202 Balanced Risk Allocation Shares and 655,117 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 must not be more than the higher of: (a) 5% above the average of the mid-market values of the Shares for the five business days before the purchase is made; and (b) the higher of the price of the last independent trade in the Shares and the highest then current independent bid for the Shares on the London Stock Exchange;

(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.

12. THAT:

the period of notice required for general meetings of the Company (other than Annual General Meetings) shall be not less than 14 days.

Ordinary Business of the UK Equity Share Class

Only holders of UK Equity Shares may vote on this resolution, which will be proposed as an Ordinary Resolution:

13. To approve the UK Equity Share Class Portfolio dividend payment policy as set out on page 33 of the 2019 annual financial report.

Ordinary Business of the Global Equity Income Share Class

Only holders of Global Equity Income Shares may vote on this resolution, which will be proposed as an Ordinary Resolution:

14. To approve the Global Equity Income Share Class Portfolio dividend payment policy as set out on page 33 of the 2019 annual financial report.

Dated 30th July 2019

By order of the Board

Invesco Asset Management Limited
Company Secretary


Source: PR Newswire (July 31, 2019 - 2:00 AM EDT)

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