TIDMEDIN
RNS Number : 8922A
Edinburgh Investment Trust PLC
30 May 2023
LEI: 549300HV0VXCRONER808 30 May 2023
The Edinburgh Investment Trust plc
ANNUAL FINANCIAL REPORT
FOR THE YEARED 31 MARCH 2023
30 May 2023 - The Directors of the Edinburgh Investment Trust
plc ("the Company") have today announced the annual results for the
period ending 31 March 2023.
Highlights
-- Net Asset Value (NAV) per share (with debt at fair value) on
a total return basis increased by 7.9%, comfortably exceeding the
2.9% return on the FTSE All-Share Index. The share price total
return was 8.4%.
-- Final dividend proposed of 6.7p per share. Dividends for the
financial year +5.6% compared with the previous year, equivalent to
a yield of 4.0%
-- Net gearing at 31 March 2023 of 4.7%
-- Share price discount to NAV narrowed marginally from 7.7% to 7.5%
-- Since James de Uphaugh became Manager of the Company in March
2020, the cumulative NAV return of +65.9% and the share price
return of +75.5% have outperformed the FTSE All-Share return of
+47.4% (all in total return terms)
Elisabeth Stheeman, Chair, said: "It has been a great pleasure
to lead the Company in my first year as the Chair of the Board.
Together with my fellow Directors, and the Company's Manager, we
have continued to build on the strengthening investment track
record to position the Company as a core holding for long-term
savers.
"It has been another encouraging twelve months for the Company's
investment returns. Growth in both the NAV and the share price
comfortably exceeded the FTSE All-Share Index. The NAV return in
total return terms was 7.9% against the index return of 2.9%. We
are therefore building a track record under the new Manager that
meets the Company's first investment objective - a long-term
increase of the NAV per share in excess of the index.
"Despite the ever-uncertain economic outlook, there is
enthusiasm about the underlying prospects for the stocks in the
Company's portfolio. The Manager's approach of maintaining a
diversified portfolio is therefore an important feature that should
help protect shareholders' capital over time. We believe the
Company is well positioned to deliver to shareholders attractive
total returns."
James de Uphaugh, Manager, said: "It is now just over three
years since we became the Manager of the Company. We took over in
the midst of the market sell-off in March 2020, as the full
implications of the COVID pandemic began to dawn. Since then, our
investment approach has helped us deal with an at times rapidly
changing economic and market backdrop. As it turns out, we became
stewards of your portfolio towards the lowest levels of the market.
Absolute returns have been strong since then.
"In terms of the main stock contributors over the last year, the
top three were BAE Systems, NatWest and Centrica. These stocks
encapsulate the diversified nature of the portfolio. Other
contributions came from Greggs, Standard Chartered and Weir.
"The better recent returns from the UK equity market strike us
as the early stages of a recovery in the market. This recovery is
rooted in the undervaluation of UK equities that has built up over
time and we remain optimistic about the specific prospects for the
Company's holdings.
"Overall, 2023 could see lower inflation, peaking interest rates
and perhaps a slightly better tenor from the consumer. A balanced,
diversified portfolio is as important as ever."
The Edinburgh Investment Trust plc
ANNUAL FINANCIAL REPORT
FOR THE YEARED 31 MARCH 2023
Financial Information and Performance Statistics
Year Ended Year Ended
31 March 31 March
Total Return(1)(3)(4) (all with dividends reinvested) 2023 2022
------------------------------------------------------ ---------- ----------
Net asset value(1) (NAV) - debt at fair value +7.9% +14.1%
Share price(2) +8.4% +10.6%
FTSE All-Share Index(2) +2.9% +13.0%
------------------------------------------------------ ---------- ----------
The Company's benchmark is the FTSE All-Share Index.
At 31 March At 31 March
Capital Return(1)(4) 2023 2022 Change %
------------------------ ---------------- ----------- ----------- --------
Net asset value - debt
at fair value 713.75p 686.69p +3.9
Share price(2) 660.00p 634.00p +4.1
FTSE All-Share Index(2) 4,157.88 4,187.78 -0.7
------------------------------------------ ----------- ----------- --------
Discount(1)(3)(4) -
debt at fair value (7.5)% (7.7)%
------------------------------------------ ----------- ----------- --------
Gearing (debt at fair
value)(1)(3)(4) - gross gearing 6.6% 10.3%
- net gearing 4.7% 4.4%
----------------------------------------- ----------- ----------- --------
Year Ended Year Ended
31 March
Revenue and Dividends(3) 31 March 2023 2022 Change %
---------------------------- ----------------------- ------------- ---------- ---------
Revenue return per ordinary share 25.99p 22.41p +15.6
Dividends - first interim 6.40p 6.00p
- second interim 6.40p 6.00p
- third interim 6.70p 6.40p
- proposed final 6.70p 6.40p
------------------------------------ ------------- ---------- ---------
- total dividends 26.20p 24.80p +5.6
------------------------------------ ------------- ---------- ---------
Consumer Price Index(2)(4) - annual
change 10.2% 7.0%
----------------------------------------------------- ------------- ---------- ---------
Dividend Yield(1)(3)(4) 4.0% 3.9%
----------------------------------------------------- ------------- ---------- ---------
Ongoing Charges Ratio(1)(3)(4) 0.53% 0.52%
----------------------------------------------------- ------------- ---------- ---------
Notes:
(1) These terms are defined in the Glossary of Terms and
Alternative Performance Measures, including reconciliations, on
pages 83 to 86. NAV with debt at fair value is widely used by the
investment company sector for the reporting of performance, premium
or discount, gearing and ongoing charges.
(2) Source: Refinitiv.
(3) Key Performance Indicator.
(4) Alternative Performance Measures.
References to page numbers in the Annual Financial Report, which
will be available from the Company's website: www.
edinburgh-investment-trust.co.uk
Chair's Statement
DEAR SHAREHOLDER
It has been a great pleasure to lead your Company in my first
year as the Chair of the Board. Together with my fellow Directors,
and the Company's Manager, we have continued to build on the
strengthening investment track record to position the Company as a
core holding for long-term savers.
I would particularly like to thank my predecessor, Glen Suarez,
who stood down as planned at last year's Annual General Meeting
after nine years on the Board. In recent years he oversaw a
transition of the Company with a new Manager and supporting team, a
sustainable and rising dividend, very attractively priced long-term
debt financing and the initiation of a new marketing strategy,
which has been further refined in the past year. This is an
excellent position from which the rest of the Board and I look
forward to building further.
PERFORMANCE
It has been another encouraging twelve months for the Company's
investment returns. Growth in both the Net Asset Value (NAV) and
the share price comfortably exceeded the benchmark index, the FTSE
All-Share Index. The NAV return was 7.9% against the index return
of 2.9%. These are in total return terms (i.e. the combination of
capital appreciation plus income received). We are therefore
building a track record under the new Manager that meets the
Company's first investment objective - a long-term increase of the
NAV per share in excess of the index.
The Company's share price total return was 8.4% over the year:
the share price itself moved from 634p to 660p, a rise of 4.1%,
with the balance coming from the dividends paid to shareholders.
The share price return differs from the NAV return because of the
changing share price discount to NAV. For this year the discount
narrowed marginally from 7.7% to 7.5%.
There are a number of investment factors that have influenced
the Company's returns over the year. Most important are the
performance of the businesses held in the Company's portfolio. Your
Manager takes mainly a 'bottom-up' approach, seeking to construct a
diversified portfolio. Echoing this, some of the major drivers of
returns over the year included the holdings in BAE Systems,
NatWest, Centrica and Greggs. To a lesser extent there were
offsetting negative returns from some of the mining stocks held,
including Anglo American and Newmont. Other factors that
contributed to the overall return were:
-- UK equities continue to rebound, outperforming global
equities. After an extended period of dull returns for UK equities,
extending to before the Brexit referendum of 2016, a combination of
strong fundamentals and attractive starting valuations have come to
the fore;
-- The positive returns have been despite the challenging
geopolitical situation, including the war between Russia and
Ukraine;
-- Another headwind for elements of the equity market has been
inflation. Here in the UK there is hope that this might start to
recede and that the cost of living crisis might in turn abate;
-- The UK equity market appears to have taken the recent
concerns about some banks in the US and Switzerland in its stride.
The Manager is alert to how this may affect bank lending appetites,
including in the UK, which could in turn impact the economic
outlook;
-- The effect of marking the Company's new loan notes to fair
value, reflecting the fall in value of the debt that the Company
issued in 2021/2 due to the rise in government bonds yields. As I
wrote in the interim report, this boosted the NAV by c.4% during
the year and is explained in more detail below.
It is also important to consider longer term returns: it has now
been three years since the change of Manager to James de Uphaugh
and his team. It is gratifying to see that the Company's growth in
NAV has exceeded that of the FTSE All-Share Index in each of the
three successive 12-month periods. Taken as a whole, over the three
years to 31 March 2023, the Company's cumulative NAV total return
has been 65.9%, with the Company's benchmark index returning 47.4%
over the same period. Over the past five years, the Company's NAV
return has been 25.2% cumulatively, compared with the Company's
benchmark index returning 27.9% over the same period. In all these
cases, the NAV is stated after deducting debt at fair values.
In our view, three years is the minimum period over which
investment success can be properly assessed. It is clearly positive
that the Company has had such encouraging returns over this period.
Growth in the share price has been more volatile, outperforming the
index in two of these three years. Further, the discount has
narrowed from 11.5% in March 2020 to 7.5% at the end of March 2023.
This results in an overall share price return (which is ultimately
what shareholders experience - as distinct from the NAV) of 75.5%,
which exceeds the NAV return. I will come back to the approach we
have taken towards the discount below.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE INVESTMENT FACTORS
We believe an important component of profitable investment
decisions is the consideration of Environmental, Social and
Governance (ESG) factors. Well managed and governed companies tend
to make successful long-term investments. The Manager therefore
considers such issues as an integral part of their research and
investment process. The Manager's report describes this in more
detail, as does the summary of the Manager's voting activities in
respect of each investee company. This is the first time that we
have included the detail of how we have exercised the Company's
voting rights as a shareholder. You will also see that we have
included some examples of the engagement the Manager had with
investee companies on some of the more contentious issues. I
encourage you to read these interesting examples.
DIVIDS
We have announced three interim dividends so far this year,
totalling 19.5 pence per share. For the final dividend, the Board
is proposing a payment of 6.7p per share, taking the total to 26.2p
per share. This final figure is a 5.6% increase on last year. When
divided by the year end share price of 660p, it results in a
dividend yield of 4.0%. This compares with the dividend yield on
the FTSE All-Share Index of 3.5% on average.
The dividend increase of 5.6% is behind the level of UK
inflation over the same period. As is evident from the bar chart of
longer-term dividend growth rates on page 4, we are not currently
meeting the second of the Company's two objectives: to grow
dividends per share in excess of UK inflation. We used these
reserves to maintain the dividend initially, but it became apparent
that the natural level of income generated by the portfolio was not
going to be sufficient, in the long run, to maintain the dividend
and, after much deliberation, decided to reduce it in the financial
year to March 2021. Looking forward, with expectations for
inflation coming down and noting our confidence in the ability of
our portfolio companies to grow their distributions, we anticipate
a return to the dividend rising above normalised inflation.
For this last financial year, I am pleased to report that
dividends received by the portfolio have continued to rise and in
conjunction with our lower costs of debt the P&L is in better
shape. This means that the dividends in respect of this financial
year are almost entirely covered by earnings: as the table on page
2 shows, dividends for the year of 26.2p compare with revenues of
26.0p.
Another important feature to note is that many of the stocks
held in the Company's portfolio are buying back their own shares
for cancellation. The Manager explores this in more detail in his
report later in this document but suffice to say, share buybacks
are another form of redistribution to shareholders, but in the form
of capital rather than income. Sometimes these buybacks complement
dividends paid to shareholders, other times they replace them.
Either way, the returns to shareholders of capital or income
support the broader concept of total returns which I used when
reporting performance at the beginning of this statement.
BORROWINGS
An element of borrowings, sensibly managed, should enhance
long-term returns to shareholders. For investment companies this
requires the returns from the equity portfolio to exceed the cost
of the debt.
This year has marked a major change in the borrowing costs of
the Company. The last of the Company's debentures, a GBP100m issue
dating back to 1997 and costing 7.75% per annum, matured last
September. The debt that has replaced it costs an average of 2.44%:
an immediate interest saving of over GBP5m a year. You may ask how
such an attractive rate of interest has been achieved, given the
much higher interest rates that have become prevalent of late. The
answer is that the Company contracted this interest rate with its
lenders in September 2021, a year in advance of the debenture
maturing. With hindsight, this proved extremely fortuitous
timing.
To reiterate an earlier point, the fall in government bond
prices (and rise in their yields) has contributed to a reduction in
the fair value of the outstanding loans. This does not affect the
balance sheet presented later in this report, where loans are
stated at par. But this does effect the level of reported gearing
(and investment returns) for which our long-standing practice - and
that of the Investment Trust sector generally - is to deduct loans
at fair value. Gearing calculations on this basis are set out in
full in the Glossary on page 84. Net gearing was 4.7% at the year
end.
The Board monitors the level of gearing against various
conservative thresholds. The stated policy is that it should not
exceed 25%. The current level of gearing is therefore significantly
below this threshold. But, in the event of unhelpful market moves
that drive up the level of gearing, the portfolio is highly liquid.
None of the NAV is attributed to unlisted, unquoted, or private
investments, and we have no plans to go down that route.
Overall, the borrowings have positively enhanced shareholder
returns in the last financial year - this is quantified in the
table on page 15 - and we are optimistic that this should also
apply over the next three years and beyond.
SHARE PRICE DISCOUNT TO NET ASSET VALUE
The discount varied from a low of 12.0% to a high of 4.8%. It
finished the year at 7.5%. We consider this an acceptable
performance as discounts across the investment trust universe as a
whole have generally widened. But we are not complacent. We would
like to see the discount narrow further as more investors are
attracted to the Company as a reliable long-term savings vehicle.
The marketing initiatives I describe below are designed to help
narrow the discount.
While the discount is at current levels, we will continue with
our policy of periodic share buy backs. Over the year we have
bought back 3% of the Company's shares which we have retained in
Treasury. These buybacks modestly enhance net asset value for
shareholders (see table on page 15) and we are continuing with our
policy of actively buying back shares while the discount persists.
A further 655,000 (0.33% of the issued share capital) of the
Company's shares have been repurchased since the end of the
financial year.
MARKETING
As mentioned earlier we have embarked on a range of new or
enhanced promotional activities. You may have seen our new website,
press advertisements, or noticed our greater digital promotion
through avenues such as Twitter and LinkedIn. The clear intention
here is to raise the profile of the Company and generate increased
buying of shares, whether from new or existing shareholders. The
Board is monitoring a series of Key Performance Indicators to
assess the effectiveness of this promotional spend and would
encourage you to sign up on our website to receive monthly
updates.
BOARD AND GOVERNANCE
At this year's Annual General Meeting, Vicky Hastings will not
be standing for re-election. The board has been very fortunate to
have had Vicky's wise counsel and exceptional attention to detail
for ten years. The last twelve months were an extension to the
normal nine years, in order to avoid having the Chair and the
Senior Independent Director standing down at the same time last
year.
We will all miss Vicky's hugely valuable insights and her
infectious enthusiasm, and we wish her all the very best with her
other corporate and charitable board responsibilities. Aidan Lisser
has kindly agreed to take on Vicky's role as Senior Independent
Director after the conclusion of the Annual General Meeting in
July.
In February we welcomed Annabel Tagoe-Bannerman as a
non-executive Director to the Board. She brings particular
operational legal and governance experience to the Board. With
Annabel's appointment, it means that we are in the fortunate
position of having five directors going forward each bringing
different skills and expertise to the boardroom discussions. These
are in a range of relevant fields for your Company, including
equity portfolio management, marketing, accounting, risk management
and regulation. We also have a board that meets or exceeds all the
recommended diversity guidelines. I thank all my fellow directors
for their hard work on behalf of shareholders over the last
year.
ANNUAL GENERAL MEETING
This year's Annual General Meeting will take place on Wednesday
19 July 2023 at 11.00am at the Balmoral Hotel in Edinburgh. Please
note the change of venue from last year. The whole Board and I look
forward to meeting as many of you as possible. For those unable to
attend in person, the AGM will also be streamed online, with the
ability to post questions live into the meeting. The link for
electronic access will be displayed prominently on the Company's
website and it will not require a passcode. Please see page 77 for
the Notice of AGM for more information.
There will also be a shareholder presentation and update in
central London on 27 September. All members of the Board, the
Manager and members of his team will attend. Further details will
be posted on the Company's website from next month.
OUTLOOK
As you will see from the Portfolio Manager's report, there is
enthusiasm about the underlying prospects for the stocks in the
Company's portfolio. Set against this is the ever-uncertain
economic outlook. The Manager's approach of maintaining a
diversified portfolio is therefore an important feature that should
help protect shareholders' capital over time. Meanwhile, many UK
equity market constituents in the portfolio stand at a valuation
discount to their international peers. Over time, if these
companies deliver the operational results that we believe they can,
it seems reasonable to expect this valuation differential to close.
Combined with a dividend yield of 4.0%, we believe this leaves the
Company well positioned to deliver to shareholders attractive total
returns.
ELISABETH STHEEMAN / Chair / 26 May 2023
Portfolio Manager's Report
For the year ended 31 March 2023
As we review the twelve months to the end of March 2023 and
consider what may be ahead for stock markets and economies, it is
worth beginning with a reminder of how we manage your Company:
-- We manage the Company's investments by constructing a
portfolio of 40-50 stocks. While this is a relatively concentrated
portfolio by many standards, we also manage it with the aim of
ensuring an adequate level of diversification across industries and
economic themes.
-- In order to meet the Company's two investment objectives, we
manage the portfolio with a 'total return' approach, with ESG
factors considered throughout the investment process.
-- Most holdings are UK-listed, and we have the flexibility to
hold up to 20% in overseas stocks.
-- Our aim is to construct a portfolio that has the potential to
outperform the UK equity index return over rolling three--year
periods.
-- We take the view that returns in excess of the UK equity
index should, over the long term, provide a satisfactory return for
savers when compared with other equity strategies and asset
classes.
-- An adequate degree of leverage, appropriately managed, should
further enhance long-term shareholder returns.
TOTAL RETURNS OVER THE LAST TWELVE MONTHS
Net Asset Value (NAV) per share rose 7.9%, while the share price
rose 8.4%. Both figures exceed the UK equity index return of 2.9%.
As the Chair's statement has described, the NAV's outperformance of
the index came primarily through superior stock selection as well
as through the revaluation of the Company's long-term debt.
In terms of the main stock contributors, the top three were BAE
Systems, NatWest and Centrica. These stocks encapsulate the
diversified nature of the portfolio, a defence contractor, a UK
bank and a domestic energy distribution company. Other
contributions came from food-on-the-go retailer Greggs, the
international bank Standard Chartered and the mining technology
group Weir. The portfolio had exposure to mining stocks and two of
the three biggest negatives were Anglo American and Newmont. The
third notable negative was from not holding BP for most of the
period, as its share price recovered (we bought shares in BP
towards the end of the period, as we describe below).
The discount of the shares to NAV narrowed slightly, hence the
modestly higher return in the shares than in the NAV.
TRANSACTIONS OVER THE LAST TWELVE MONTHS
We have made fewer than average transactions over the year, with
portfolio turnover of 21%. This means the holding period is
equivalent to just under five years on average.
The biggest change to the portfolio was the purchase of a
holding in BP. The shares were acquired following its latest
results, in which the group increased its investment plans in high
return energy transition growth engines such as Bioenergy and EV
Charging. In addition, it also announced new investment plans in
high-return upstream assets, which will help to meet the global
requirement for greater energy security post the war in Ukraine.
Consequently, the projected medium-term return on investment should
improve through to 2030. Capex on energy transition related
projects will still represent 45% of mid-term capex. We funded the
purchase of BP with a sale of the French energy group Total
Energies, which is more exposed to fluctuations in the LNG and gas
price.
Other significant purchases included GlaxoSmithKline and its
de-merged consumer goods unit, Haleon. Both stand at attractive
valuations and should have the additional benefit of refocused
management teams. Elsewhere, among the more stable growth stocks in
the portfolio, we sold Diageo and Reckitt Benckiser: where we view
their share prices as fully capturing their future prospects.
More recently, we have added selectively to our holdings in UK
cyclicals with strong market positions such as easyJet, Dunelm,
Travis Perkins and Marks & Spencer. The UK economic pulse has
been stronger than the consensus expected, with energy bills coming
down from the highs of last summer. This takes some pressure off
the consumer. These additions to the portfolio were funded by
reductions of a number of the more internationally focussed
companies such as KPN and Smith & Nephew.
These changes leave the portfolio sensibly diversified, in our
view. In addition to diversification by industry and sector, which
is evident from the portfolio listing on pages 16 to 17, we also
think about the broader drivers of future investment returns.
Again, we believe there is suitable diversification that should
provide sources of portfolio outperformance, whatever the economic
development or condition. These drivers of returns, and the
holdings that should benefit, include:
-- Supply chain resilience - Tesco, Compass and Intel;
-- Capitalising on data analytics technology - WPP, Dunelm & Weir;
-- The revenge of the incumbent - NatWest, Marks & Spencer and Centrica;
-- Businesses becoming stronger through corporate Darwinism - Whitbread, Serco, RS Group;
-- Profitability edge through cost curve positioning - Howdens, Mondi and Anglo American.
ESG CONSIDERATIONS
We take careful account of the ESG considerations of any
investment case. Taking account of such things are essential for
good investment performance and we do not place any major
restrictions on what we can invest in. For this reason, as we note
above, stocks like BP and BAE Systems, which might not make it into
other investors' portfolios, are acceptable to us. The
acceptability comes with the important caveat that we have to be
able to assure ourselves, to the best extent possible, that they
are behaving responsibly and making positive change for the
future.
To illustrate the kind of interactions we undertake when
assessing investments, the team engaged with Dunelm, the British
home furnishings retailer, in April and February 2023 and in
September 2022:
-- During the meeting in April 2023, the team engaged on the
group's proposed remuneration policy ahead of Dunelm's 2023 AGM.
The proposal included a new maximum opportunity for the CEO of 375%
of salary (up from 325%) which the team felt was reasonable.
-- In a subsequent meeting, the group asked for our input on
what we consider to be Dunelm's most material issues, such as the
sourcing of their goods and relationship with suppliers. We also
fed back that we appreciate the company's clear efforts to
demonstrate connectivity between the group's strategy, material
issues, and executive pay in its reporting.
-- At the meeting in February 2023, the team discussed the
group's near-term earnings and strategy. Dunelm aims to develop
product excellence across all price points and effective marketing.
It has increased efforts to develop product mastery across more
nascent categories where market shares are lower, with the ultimate
goal of becoming the one-stop for home spend. The group is also
introducing credit to facilitate more spend in bigger--ticket group
sections, like Furniture, which is an area in the market that is
growing substantially.
-- In September 2022, the team met with Dunelm to discuss how it
is controlling costs. The group reported that it was seeing a high
percentage of incremental UK homeware spend which could fuel EPS
growth through 2023. This engagement work reinforces our view of
Dunelm's business model resiliency. In turn this should support its
ability to deliver dividend growth in excess of inflation over the
long-term. This is the rationale for it being one of the larger
positions in the portfolio.
There are further examples of our ESG engagement with companies
on pages 25 to 26.
BORROWINGS
We were pleased to see the successful completion of the
Company's long-term refinancing of its debt last September. The new
debt, with an average interest coupon of 2.44% per annum, means a
significantly reduced cost of borrowings, leading in practice to a
future saving of over GBP5m per annum compared with the previous
arrangements.
We utilise this favourable financing by maintaining a fully
invested portfolio. The nature of the borrowings, with an average
maturity of 25 years, means that they are essentially permanent in
nature. We therefore tend to manage the portfolio with the
borrowings fully invested. When the portfolio's value rises, the
gearing should enhance returns, and the converse also applies: when
underlying returns are negative, the borrowings make the losses
greater. With this in mind, we take a tactical view of the economic
and market backdrop and can introduce a cash position to reduce
this impact by lowering 'net' gearing. For example, we may allow
the cash position to build up if we are struggling to find
attractively priced investment opportunities and fear the market
might be ripe for correction. However, shareholders should think of
us as investing the vast majority of the borrowings under normal
circumstances. Our gross gearing (borrowings) total would amount to
6.6% as at year end with an offsetting cash balance reducing the
net gearing to 4.7%.
DIVIDS RECEIVED
Actual revenue per share for the 12 months to 31 March 2023 was
26.0p. This compares with 22.4p in the previous year - a rise of
15.9%. Clearly this is a very satisfactory outcome. For context,
top line portfolio income was GBP49.0m (+10.8% on 2022), which was
split between ordinary dividends of GBP41.6m (+11.0%) and special
dividends of GBP7.4m (+10.0%). The reason for the revenue per share
rise of 15.9% exceeding underlying income growth of 10.8% is that
revenues are calculated after deducting costs including debt
interest. The new borrowing arrangements, as noted above, have
resulted in a significant fall in interest expense.
Looking ahead, we forecast more modest revenue per share growth.
Some of this is in part due to a mix effect in the portfolio, with
the sale of some higher yielding stocks including Total Energies
and Direct Line. Dividend generation nonetheless is robust across
the portfolio. Furthermore, the ordinary and special dividends
being received understate the shareholder distributions made by
investee companies which also include share buybacks. These remain
significant: there are ongoing share buybacks by BP, Shell,
Unilever and NatWest, plus from many other portfolio holdings.
Overall, c40% of portfolio holdings have declared some form of
ongoing share buyback. This is supportive of the 'total return'
ethos that should underpin returns to the Company's shareholders -
whether income or capital growth - in the years ahead.
The Directors' decision to recommend total dividends for the
year of 26.2p mean that dividends are almost entirely covered by
revenues for the year: a welcome position to be in.
THREE-YEAR REFLECTIONS
It is now just over three years since we became the Manager of
your Company. We took over in the midst of the market sell-off in
March 2020, as the full implications of the COVID -- 19 pandemic
began to dawn.
Since then, our investment approach has helped us deal with an
at times rapidly changing economic and market backdrop. The
roll-out of COVID -- 19 vaccines, the "mini-budget" crisis, rising
interest rates, a falling sterling currency and the tech sector
sell-off have all had to be navigated. A key advantage throughout
this period has been the diversified portfolio.
As it turns out, we became stewards of your portfolio towards
the lowest levels of the market. Absolute returns have been strong
since then. The end result is, as the Chair has already noted, a
cumulative total return of the Company's Net Asset Value (NAV) per
share of 65.9%. The share price, thanks to a narrowing of its
discount to NAV, has risen 75.5%. These returns compare with a FTSE
All-Share Index return of 47.4%.
In keeping with the stock-driven investment approach, when we
analyse the key drivers of returns over the period, we look at the
key stock contributors. For the last three years, the big winners
also reflect the flexible investment style we take. To illustrate,
the top five stock contributors to the outperformance were Ashtead
(industrial equipment hire), NatWest (banking), BAE Systems
(defence), Centrica (gas utility) and Anglo American (mining).
Hence clearly a bias towards a mix of cyclical companies -
benefitting from the recovery in the economy over the period
compared with expectations at the depths of the pandemic.
Inevitably there have been some less successful decisions along
the way. Interestingly, the biggest factor was having little or no
exposure to two large commodity groups - BP and Glencore. An
important part of the portfolio construction (and risk oversight)
process is managing these larger risks. A (very) small number of
holdings disappointed in their results, but in each case the
holding size had been calibrated to take account of the greater
downside risk.
In terms of the income generated over the last three years,
revenue per share has been disappointing for shareholders, moving
from 27.8p in 2020 to 26.0p in the last financial year. The
portfolio was overly dependent on unsustainable dividend income
prior to March 2020. We believe it is on a more sustainable and
progressive footing now.
Our view is that underlying fundamentals of the portfolio's
holdings ultimately drive the Company's total returns. We therefore
prefer to hold stocks for sufficient time to allow those
fundamentals to come through. We have long held the view that this
means a three-year period, and this does in fact coincide with the
average holding period since we were appointed in 2020.
Overall, we believe the last three years demonstrate the merits
of a flexible, long-term total return investment approach.
OUTLOOK
While we are cautious about the outlook for equity markets in
general, the better recent returns from UK equities strike us as
being the early stages of a recovery in the market. This recovery
is rooted in the undervaluation of UK equities that has built up
over time for a variety of well-rehearsed reasons such as Brexit
and final-salary pension funds reducing equity exposures. Just as
these headwinds appear to be waning, we remain optimistic about the
specific prospects for the Company's holdings.
We are cautious about markets because inflation remains a
challenge. It will naturally come down to a degree, helped by some
inputs such as gas prices being markedly lower than a year ago. But
consumer expectations have ratcheted up. Economic history tells us
that it is much harder to squeeze inflation back into the bottle,
once the inflation genie is out.
At the market level, this economic slowdown is likely to be
different from those we have experienced since the turn of the
millennium. They may be more reminiscent of those of the 1980s and
1990s: more typical slowdowns when inflation has been too high and
interest rates have been raised to choke it off. At the same time,
bank lending criteria are likely to tighten in the US because of
the recent set of banking failures and near failures in the US and
Switzerland, which could present downside risk to economic
growth.
On a more positive note, at the corporate level, the current
elevated rate of inflation means nominal revenue growth should be
tolerable even if real GDP falters. Another help is that China has
'reopened'. Overall, 2023 could see lower inflation, peaking
interest rates and perhaps a slightly better tenor from the
consumer.
Therefore, a balanced, diversified portfolio is as important as
ever. In market terms, we may have entered a new and different
investing environment from that which has prevailed since the
financial crisis of 2008. For much of the period since then, it
often seemed that an investment style that focused on buying and
holding growth stocks - sometimes with little regard to valuation
or how durable the growth would be - was all that was required.
Now, we have a return to an investment environment in which an
understanding of company fundamentals matters, as does an
appreciation of how the valuation paid for a stock ultimately
determines investment returns.
JAMES DE UPHAUGH / PORTFOLIO MANAGER CHRIS FIELD / DEPUTY
PORTFOLIO MANAGER
26 MAY 2023
Portfolio Manager's Core Investment Beliefs
Our competitive edge rests on the combination of our Global
Fundamental team's structure within Liontrust and our flexible
investment style. Liontrust provides a stable environment in which
our Portfolio Manager operates, and our investment approach
produces portfolios that aim to deliver long-term outperformance on
a repeatable basis.
ACTIVE MANAGEMENT
Stock-driven. Share prices follow fundamentals over the long
term. Through our proven investment approach, we expect to
outperform over the long term, net of fees.
High conviction portfolio. We expect the portfolio to contain
around 40 to 50 stocks. Holdings sizes reflect the conviction we
have in each company and our assessment of the upside and downside
potential of its share price.
Risk. We think of risk as permanent capital loss. To mitigate
this, our analysis of a company's valuation is the first line of
defence. Our risk management process combines our depth of
knowledge of the stocks in the portfolio, plus separate oversight
by Liontrust's Portfolio Risk Committee.
FLEXIBLE INVESTMENT STYLE
Open-minded approach. We do not have dogmatic style biases, such
as 'growth' or 'value'. We are also prepared to invest in companies
that we identify as having scope for recovery through management
change, business transformation or an improving business
environment. We expect the profile of the portfolio to evolve
depending on our assessment of individual companies and our reading
of the economic and market background.
Disciplined, rigorous, fundamental research. In keeping with the
stock-driven nature of the portfolio, approximately three quarters
of our effort takes the form of in-depth stock research. The
remainder is spent on macroeconomic and geopolitical analysis.
Full Environmental, Social and Governance ('ESG') integration.
ESG-related considerations have financial implications for the
portfolio's holdings. We prioritise and engage our holdings on
their key, material issues, many of which are ESG-related. The
outcomes from our in-depth analysis and engagements help form our
conviction level and investment decisions. In this way, ESG lies at
the heart of our investment process.
TOTAL RETURN STRATEGY
A focus on both capital growth and income. We take a total
return approach: investor returns should derive over the long term
from both capital appreciation and dividend income. We often prefer
companies with organic investment opportunities: as such, we
normally expect companies with growing profits - and share prices -
to contribute to returns. We view income as an important component
rather than the primary driver of investment return. This aligns
with the Company's twin objectives.
LONG TERM
Typical holding period of 3-5 years. This is an appropriate
period to ensure that underlying corporate fundamentals drive
investment returns. It is therefore also a sensible period over
which to measure an active manager.
Gearing should enhance shareholder returns. One of the
advantages of an investment trust is the ability to borrow to
enhance equity returns. We therefore expect gearing to boost
investment returns over time.
CAPACITY MANAGEMENT
Scale diseconomies. In our view, investment performance can
rapidly suffer if assets under management become too large. We
carefully manage capacity to ensure that the interests of existing
clients take precedence over new clients. The approach ensures we
retain a size advantage. It enables us to reposition the portfolio
- and those of all our other clients - quickly and efficiently when
required.
DEEP INVESTMENT RESOURCE WITH GLOBAL PERSPECTIVE
A close-knit investment team. Average experience for each member
of the team is 15 years. The team has been stress -- tested across
various market cycles.
Challenge and debate. This is encouraged within a structured
risk control environment, with robust oversight processes. Team
members own Liontrust equity and co-invest in the team's investment
strategies, which in turn underpins teamwork and collaboration.
Business Review
STRATEGY AND BUSINESS MODEL
The Edinburgh Investment Trust plc is an investment company and
its investment objective is set out below. The strategy the Board
follows to achieve that objective 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 and have been
approved by shareholders.
The business model the Company has adopted to achieve its
investment objective has been to contract the services of the
Manager to manage and administer the portfolio in accordance with
the Board's strategy and under its oversight. The portfolio manager
with individual responsibility for the day-to-day management of the
portfolio is James de Uphaugh and the deputy portfolio manager is
Chris Field.
In addition, the Company has contractual arrangements with Link
Group to act as registrar, The Bank of New York Mellon
(International) Limited as depositary and custodian, and Apex
Listed Companies Services (UK) Limited, (formerly Sanne Fund
Services (UK) Limited) to act as Company Secretary.
INVESTMENT OBJECTIVE AND POLICY
Investment Objective
The Company invests primarily in UK securities with the
long-term objective of achieving:
1. an increase of the Net Asset Value per share in excess of the
growth in the FTSE All-Share Index; and
2. growth in dividends per share in excess of the rate of UK
inflation.
Investment Policy
The Company will generally invest in companies quoted on a
recognised stock exchange in the UK. The Company may also invest up
to 20% of the market value of the Company's investment portfolio,
measured at the time of any acquisition, in securities listed on
stock exchanges outside the UK. The portfolio is selected by the
Portfolio Manager on the basis of its assessment of the fundamental
value available in individual securities. Whilst the Company's
overall exposure to individual securities is monitored carefully by
the Board, the portfolio is not primarily structured on the basis
of industry weightings. No acquisition may be made which would
result in a holding being greater than 10% of the market value of
the Company's investment portfolio. Similarly, the Company may not
hold more than 5% of the issued share capital (or voting shares) in
any one company. Investment in convertibles is subject to normal
security limits. Should these or any other limit be exceeded by
subsequent market movement, each resulting position is specifically
reviewed by the Board.
The Company may borrow money to provide gearing to the equity
portfolio of up to 25% of net assets.
Use of derivative instruments is monitored carefully by the
Board and permitted within the following constraints: the writing
of covered calls against securities which in aggregate amount to no
more than 10% of the value of the portfolio and the investment in
FTSE 100 futures which when exercised would equate to no more than
15% of the value of the portfolio. Other derivative instruments may
be employed, subject to prior Board approval, provided that the
cost (and potential liability) of exercise of all outstanding
derivative positions at any time should not exceed 25% of the value
of the portfolio at that time. The Company may hedge exposure to
changes in foreign currency rates in respect of its overseas
investments.
RESULTS AND DIVIDS
At the year end the share price was 660.0p per ordinary share
(2022: 634.00p). The net asset value (debt at fair value) per
ordinary share was 713.73p (2022: 686.69p).
The Directors declared a third interim dividend for the year
ended 31 March 2023 of 6.70 pence per ordinary share (2022: 6.40
pence), an increase of 4.7% compared with each of the first two
interim dividends. This dividend is payable on 26 May 2023 to
ordinary shareholders on the register on 5 May 2023. The shares
were quoted ex-divided on 4 May 2023.
The Board is recommending a final dividend of 6.70p per share
which is the same as the third interim dividend declared last
month, implying a full year payout of 26.20 pence per share. This
represents an increase of 5.6% compared with the total underlying
ordinary dividends paid for the financial year to 31 March
2022.
PERFORMANCE
The Board reviews the Company's performance by reference to a
number of key performance indicators (KPIs) which are shown on page
2. Notwithstanding that some KPIs are beyond its control, they are
measures of the Company's absolute and relative performance. The
KPIs assist in managing performance and compliance and are reviewed
by the Board at each meeting.
The Chair's Statement on pages 5 to 7 gives a commentary on the
performance of the Company during the year, the gearing and the
dividend.
The Board reviews an analysis of expenditure at each Board
meeting, and the Audit and Management Engagement Committees
formally review the fees payable to the main service providers,
including the Manager, on an annual basis. The ongoing charges
figure is calculated in accordance with the AIC methodology and is
reviewed by the Board annually in comparison to peers.
The Board also regularly reviews the performance of the Company
in relation to the 23 investment trusts in the UK Equity Income
sector (including the Company). As at 31 March 2023 the Company was
ranked 2nd by NAV performance in this sector over one year, 5th
over three years and 10th over five years (source:
Morningstar).
OUTLOOK, INCLUDING THE FUTURE OF THE COMPANY
The main trends and factors likely to affect the future
development, performance and position of the Company's business can
be found in the Portfolio Manager's Report. Details of the
principal risks affecting the Company can be found on pages 18 to
21.
FINANCIAL POSITION AND BORROWINGS
The Company's balance sheet on page 58 shows the assets and
liabilities at the year end. Borrowings at the year end comprised
of GBP120 million of Unsecured Senior Loan Notes (2022: GBP20
million and GBP100m Debenture).
PERFORMANCE ATTRIBUTION
for year
ended
31 March 2023
%
--------------------------------- -------------
Total Return Basis(1)
NAV (debt at fair value) 7.9
Benchmark 2.9
--------------------------------- -------------
Relative performance 5.0
Analysis of Relative Performance
Portfolio total return 4.5
Benchmark total return(1) 2.9
Portfolio outperformance [A] 1.6
Borrowings:
Net gearing effect 0.4
Interest (0.5)
Market value movement 3.8
Management fee (0.4)
Other expenses (0.1)
Tax (0.1)
Share buybacks
Subtotal [B] 0.3
--------------------------------- -------------
Relative performance [A+B] 5.0
--------------------------------- -------------
(1) Source: Refinitiv.
Performance Attribution - analyses the performance of the
Company relative to its benchmark index. The Analysis of Relative
Performance estimate the quantum of relative performance that is
attributable to each of the factors set out in this table. The
table is intended to be indicative rather than precise; the
accuracy of each estimate is determined by a variety of factors
such as the volatility of investment returns over the year and
intra-month, and the timing of income receipts and expenditure
payments.
Relative performance - represents the arithmetic difference
between the NAV and benchmark returns.
Portfolio total return - represents the return of the holdings
in the portfolio including transaction costs, cash and income
received, but excluding expenses incurred by the Company.
Net gearing effect - measures the impact of the unsecured senior
loan notes and cash on the Company's relative performance. This
will be positive if the portfolio has positive capital performance,
total return is positive and negative if capital performance total
return is negative.
Interest - the debenture stock, unsecured senior loan notes and
bank facility interest paid has a negative impact on
performance.
Market value movement - represents the change in market value of
the Company's borrowings, measured to the end of the financial year
or maturity from the start of the financial year or issuance, each
as appropriate.
Management fee - the base fee reduces the Company's net assets
and decreases returns.
Other expenses and tax - reduce the level of assets and
therefore result in a negative effect on relative performance.
Share buybacks - measures the effect of ordinary shares bought
back at a discount to net asset value on the Company's relative
performance.
Investments in Order of Valuation
At 31 March 2023
UK LISTED ORDINARY SHARES UNLESS OTHERWISE STATED
Value % of
Company Sector GBP'000 Portfolio
------------------------------- -------------------------------------- --------- ---------
Shell Oil, Gas and Coal 89,645 7.3
BAE Systems Aerospace and Defence 69,124 5.6
Personal Care, Drug and Grocery
Unilever Stores 62,430 5.1
Personal Care, Drug and Grocery
Tesco Stores 61,692 5.0
NatWest Banks 56,746 4.6
AstraZeneca Pharmaceuticals and Biotechnology 54,874 4.5
Centrica Gas, Water and Multi-Utilities 47,470 3.9
Ashtead Industrial Transportation 43,275 3.5
Anglo American Industrial Metals and Mining 41,372 3.4
HSBC Banks 39,037 3.2
------------------------------- -------------------------------------- --------- ---------
TEN TOP HOLDINGS 565,665 46.1
----------------------------------------------------------------------- --------- ---------
Weir Industrial Engineering 37,609 3.1
RS Group Industrial Support Services 33,579 2.7
Dunelm Retailers 32,802 2.7
WPP Media 32,583 2.7
Standard Chartered Banks 31,345 2.5
Hays Industrial Support Services 28,750 2.3
Compass Consumer Services 27,658 2.3
GlaxoSmithKline Pharmaceuticals and Biotechnology 26,696 2.2
Novartis - Swiss Listed Pharmaceuticals and Biotechnology 24,125 2.0
Personal Care, Drug and Grocery
Greggs Stores 23,961 1.9
------------------------------- -------------------------------------- --------- ---------
TWENTY TOP HOLDINGS 864,773 70.5
----------------------------------------------------------------------- --------- ---------
Serco Industrial Support Services 22,259 1.8
Haleon Pharmaceuticals and Biotechnology 22,175 1.8
Marks & Spencer Retailers 22,107 1.8
Convatec Medical Equipment and Services 20,939 1.7
Mondi General Industrials 20,069 1.6
Admiral Non-Life Insurance 19,666 1.6
BP Oil, Gas and Coal 19,309 1.6
Whitbread Travel and Leisure 17,881 1.5
Smith & Nephew Medical Equipment and Services 17,222 1.4
easyJet Travel and Leisure 16,689 1.4
------------------------------- -------------------------------------- --------- ---------
THIRTY TOP HOLDINGS 1,063,089 86.7
----------------------------------------------------------------------- --------- ---------
Newmont - US Listed Precious Metals and Mining 15,951 1.3
KPN - Dutch Listed Telecommunications Service Providers 15,653 1.3
Thales - French Listed Aerospace and Defence 15,644 1.3
CNH Industrial Industrial Engineering 13,780 1.1
Bellway Household Goods and Home Construction 12,638 1.0
Ascential Software and Computer Services 12,627 1.0
Travis Perkins Industrial Support Services 11,863 1.0
Redrow Household Goods and Home Construction 11,712 0.9
Howden Joinery Retailers 9,828 0.8
QinetiQ Aerospace and Defence 8,618 0.7
------------------------------- -------------------------------------- --------- ---------
FORTY TOP HOLDINGS 1,191,403 97.1
----------------------------------------------------------------------- --------- ---------
Roche - Swiss Listed Pharmaceuticals and Biotechnology 8,424 0.7
Genuit Construction and Materials 6,812 0.6
Intel - US Listed Technology Hardware and Equipment 6,405 0.5
Marshalls Construction and Materials 6,014 0.5
Siemens - German Listed General Industrials 3,884 0.3
Publicis - French Listed Media 3,707 0.3
Raven Property(S) - Preference
shares Real Estate Investment Services - -
Investment Banking and Brokerage
Eurovestech(UQ) Services - -
------------------------------- -------------------------------------- --------- ---------
TOTAL HOLDINGS 46 (2022:
50) 1,226,649 100.0
----------------------------------------------------------------------- --------- ---------
S - Delisted
UQ - Unquoted investment
Principal Risks and Uncertainties
RISK MANAGEMENT AND MITIGATION
The Manager (AIFM) is responsible for the portfolio management
of the Company and for exercising the risk management function in
respect of the Company. As part of this risk management function,
the AIFM maintains a register of identified risks including
emerging risks likely to impact the Company. This is updated
regularly, following discussions with the Manager and highlighted
to the Board.
The Board, through the Audit Committee and with the assistance
of the Manager, regularly reviews a report of potential risks to
the Company in the form of a risk control summary. The document
includes a description of each identified risk, the mitigating
action taken, reporting and disclosure to the Board and an impact
and probability risk rating. The rating is given both prior to and
after the Board's mitigation of each risk. The information is then
displayed in matrix form which allows the Board to identify the
Company's key risks. As the changing risk environment in which the
Company operates has evolved, the total number of risks has
fluctuated, with certain risks having been removed and new risks
added with emerging risks actively discussed as part of this
process and, so far as practicable, mitigated.
The composition of the Board is regularly reviewed to ensure its
members offer sufficient knowledge and experience to assess,
anticipate and mitigate these risks, as far as possible.
The Company's key long-term investment objectives are an
increase in the net asset value per share in excess of the growth
in the FTSE All-Share Index (the 'benchmark') and an increase in
dividends in excess of the annual rate of UK inflation. The
principal risks and uncertainties facing the Company are an
integral consideration when assessing the operations in place to
meet these objectives, including the performance of the portfolio,
share price and dividends. The Board is ultimately responsible for
the risk control systems but the day-to-day operation and
monitoring are delegated to the Manager. The Board has carried out
a robust assessment of the principal and emerging risks facing the
Company, including those that would threaten its business model,
future performance, solvency or liquidity. The following sets out a
description of the principal and emerging risks and how they are
being managed or mitigated.
MARKET RISK
A great majority of the Company's investments are traded on
recognised stock exchanges. The principal risk for investors in the
Company is a significant fall and/or a prolonged period of decline
in those markets. The Company's investments and the income derived
from them are influenced by many factors such as general economic
conditions, interest rates, inflation, a recurrence of a pandemic,
geopolitical events, the war in Ukraine and government policies as
well as by supply and demand reflecting investor sentiment. Such
factors are outside the control of the Board and Manager and may
give rise to high levels of volatility in the prices of investments
held by the Company. The asset value and price of the Company's
shares and its earnings and dividends may consequently also
experience volatility and may decline.
Fluctuations in interest rates and exchange rates could reduce
returns and lead to depreciation of the Company's net asset
value.
Market risk is included in the risk control summary report that
is prepared by the Manager and reviewed by the Board at each
meeting. Additionally, the Board receives reports on the
performance of the portfolio at each meeting. The portfolio is
positioned by the Manager for medium to long-term returns.
INVESTMENT PERFORMANCE RISK
The Board sets investment policy and risk guidelines, together
with investment limits, and monitors adherence to these at each
Board meeting. All individual investment decisions are delegated to
the Portfolio Manager. The Portfolio Manager's approach is to
construct a portfolio which should benefit from expected future
trends in the UK and global economies. The Portfolio Manager is a
long-term investor, prepared to take substantial positions in
securities and sectors across a range of different types of stock.
This reflects the Portfolio Manager's high conviction, stock-driven
investment process and total return approach. Strategy, asset
allocation and stock selection decisions by the Portfolio Manager
can lead to underperformance of the portfolio relative to the
benchmark and/or income targets.
The Portfolio Manager's style may result in a concentrated
portfolio with significant overweight or underweight positions in
individual stocks or sectors compared to the index and
consequently, the Company's performance may deviate significantly,
possibly for extended periods, from that of the benchmark. In a
similar way, the Portfolio Manager manages other portfolios holding
many of the same stocks as the Company which reflects the Portfolio
Manager's high conviction style of investment management. This
could increase the liquidity and price risk of certain stocks under
certain scenarios and market conditions. However, the Board and
Portfolio Manager believe that the investment process and policy
outlined above should, over the long term, meet the Company's
objectives of Net Asset Value per share growth in excess of the
benchmark and real dividend per share growth. Investment selection
is delegated to the Portfolio Manager. The Board does not specify
asset allocations. Information on the Company's performance against
the benchmark and peer group is provided to the Board at each Board
meeting. The Board uses this to review the performance of the
Company, taking into account how performance relates to the
Company's objectives. The Portfolio Manager is responsible for
monitoring the portfolio selected and seeks to ensure that
individual stocks meet an acceptable risk-reward profile.
As described in the investment policy, derivatives may be used
provided that the market exposure arising is less than 25% of the
value of the portfolio.
Investment Performance risk is included in the risk control
summary report that is prepared by the Manager and reviewed by the
Board at each meeting. The Board also receives reports on the
performance of the portfolio and on compliance with the Company's
investment policy guidelines from the Manager at each meeting. As
part of the annual assessment, the Board reviews the performance of
the Manager and the management contract at the Management
Engagement Committee meeting.
The Board also reviews the annual depository report and report
from the compliance department of the Manager and any breaches of
the investment policy, limits or guidelines are reported
immediately to the Board and Audit Committee Chairs.
Investment risk is increased through the Company's borrowing,
namely the GBP120m Unsecured Senior Loan Notes. This facilitates
additional investment exposure than would be the case for an
unleveraged portfolio; if the investments fall in value, this will
increase the adverse impact on performance. On a routine basis the
Board monitors the appropriateness of gross and net gearing levels,
and the amount of headroom above minimum NAV levels as agreed with
the lenders.
INCOME/DIVID RISK
The Company is subject to the risk that income generation from
its investments fails to reach the level of income required to meet
its objectives.
The Board monitors this risk through the review of detailed
income and dividend forecasts and comparison against budget. These
are contained within the Board papers and the Board considers the
level of income at each meeting. Revenue estimates are presented at
each Board meeting and Board committee meeting which determine the
three interim dividends and propose the final dividend.
The Board also takes into account the size of the Company's
accumulated income and capital reserves which can be used to
supplement dividends for a period where income levels alone do not
cover the proposed dividend payments.
SHARE PRICE RISK
There is a risk that the Company's prospects and NAV may not be
fully reflected in the share price from time-to-time and that the
Company's objectives are no longer meeting investors'
expectations.
The share price is monitored on a daily basis and, at the
request of the Board, the Company is empowered to repurchase shares
within agreed parameters which are regularly reviewed with the
Company's broker. The discount at which the shares trade to NAV can
be influenced by share repurchases. During the year, the Company
repurchased 5,601,604 shares for holding in treasury (2022:
1,104,800).
Risk management activity includes systematic reviews of the
investment objective and investment strategy and regular dialogue
with major shareholders and marketing activities.
Share price risk is included in the risk control summary report
that is prepared by the Manager and reviewed by the Board at each
meeting. In addition, the Board monitors the Company's investment
performance against its stated objectives and peer group and
reviews the marketing report at every Board meeting.
CORPORATE GOVERNANCE AND INTERNAL CONTROLS RISK
The Board has delegated to third-party service providers the
management of the investment portfolio, depositary and custody
services (which include the safeguarding of the assets),
registration services, accounting and company secretarial
services.
The principal risks arising from the above contracts relate to
the performance of the Manager, the performance of administrative,
registration, depositary, custodial and banking services, and the
failure of information technology systems used by third-party
service providers. These risk areas could lead to the loss or
impairment of the Company's assets, inadequate returns to
shareholders and loss of investment trust status. Consequently, in
respect of these activities the Company is dependent on the
Manager's control systems and those of its administrator,
depositary, custodian and registrar.
An annual review of the control environments of all service
providers is carried out by the Company Secretary who provides an
assessment of these risks and the operation of the controls for
consideration by the Audit Committee and is formally reported to
and considered by the Board.
Investment trust status is assessed by the Manager, reviewed at
every Board meeting and confirmed by the Audit Committee and HMRC
annually. Taxation matters are dealt with by independent
accountants.
RELIANCE ON THE MANAGER AND OTHER THIRD-PARTY PROVIDERS RISK
The Company is reliant upon the performance of third-party
service providers for its executive function and other service
provisions. The Company's most significant contract is with the
Manager, to whom responsibility for the management of the Company's
portfolio is delegated. The Company has other contractual
arrangements with third parties to act as administrator, company
secretary, registrar, depositary and broker. The Company's
operational structure means that all cyber risk (information and
physical security) arises at its third-party service providers,
including fraud, sabotage or crime against the Company. 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 pursue successfully its
investment policy and expose the Company to risk of loss or to
reputational risk.
In particular, the Manager performs services which are integral
to the operation of the Company. 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 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 pursue its
investment policy.
The Board seeks to manage these risks in a number of ways:
- The Company Secretary reviews the performance and the service
organisation control reports of third-party service providers and
reports to the Board on an annual basis at the Audit Committee
meeting.
- The Board reviews the performance of the Manager at every
Board meeting and otherwise as appropriate. The Board has the power
to replace the Manager and reviews the management contract formally
once a year.
- The day-to-day management of the portfolio is the
responsibility of the named Portfolio Manager, James de Uphaugh,
Head of the Liontrust Global Fundamental team. James joined
Liontrust in April 2022 as part of the acquisition of Majedie Asset
Management Limited where he was Chief Investment Officer. He is a
Fund Manager and Analyst with 34 years' investment experience in UK
and international equity markets. James is responsible for
co-managing the UK Equity Fund of Liontrust and managing The
Edinburgh Investment Trust plc.
- The risk that the Portfolio Manager might be incapacitated or
otherwise unavailable is mitigated by the fact that he works
within, and is supported by, the wider Liontrust team. Moreover,
Chris Field, as Deputy Portfolio Manager, would be able to manage
the portfolio if James de Uphaugh was unable to do so for any
reason.
- The Board has set guidelines within which the Portfolio
Manager is permitted wide discretion. Any proposed variation
outside these guidelines is referred to the Board and compliance
with the guidelines and the guidelines themselves are reviewed at
every Board meeting.
PHYSICAL AND TRANSITIONAL CLIMATE CHANGE
Globally, climate change effects are already emerging in the
form of changing weather patterns. Extreme weather events could
potentially impair the operations of individual investee companies,
potential investee companies, their supply chains and their
customers. Legislative changes are driving an economic adjustment
towards a low-carbon economy. There are considerable risks to the
value, business model and operations of investee and potential
investee companies due to stranded assets and how investors,
financial regulators and policymakers respond to climate concerns.
The Portfolio Manager takes such risks into account, along with the
downside risk to any company - whether in the form of its business
prospects, market valuation or sustainability of dividends - that
is perceived to be making a detrimental contribution to climate
change. Further details on the Portfolio Manager's process for
considering climate risk relating to each portfolio holding are
supplied in the s.172 statement on page 23. The Company invests in
a broad portfolio of businesses with operations spread
geographically, which should limit the impact of location-specific
weather events.
Climate change related risks are regularly monitored by the
Manager and reviewed by the Board at every meeting as required,
together with any new guidance.
OTHER RISKS
The Company is subject to laws and regulations by virtue of its
status as an investment trust and is required to comply with
certain regulatory requirements that are applicable to listed
closed-ended investment companies. The Company is subject to the
continuing obligations imposed by the UK Listing Authority on all
companies whose shares are listed on the Official List.
The Manager reviews compliance with investment trust tax
conditions and other financial and regulatory requirements on a
daily basis with any issues being immediately brought to the
attention of the Board.
The Company may be exposed to other business, strategic and
political risks in the future, as well as regulatory risks (such as
an adverse change in the tax treatment of investment companies),
credit, liquidity and concentration risks. The risk control summary
report allows the Board to consider all these risks, the measures
in place to control them and the possibility of any other risks
that could arise.
The Board ensures that satisfactory assurances are received from
the service providers. The Manager's compliance officers produce
regular reports for review by the Company's Audit Committee.
Additionally, the depositary monitors stock, cash, borrowings
and investment restrictions throughout the year. The depositary
reports formally once a year and also has access to the Company
Chair and the Audit Committee Chair if needed during the year.
Please see note 16 on page 70 to read more about risk management
and financial instruments.
EMERGING RISKS
The Board has put in place robust procedures to assist with
identifying emerging risks that arise from existing risks or from
new situations. The Board is kept informed through its advisors and
Manager regarding any political, economic, legal or regulatory
changes that it is anticipated may significantly affect the
Company.
For example, there are currently a growing number of risks as a
result of emerging geopolitical factors that may translate into
greater stock market risk, as well as heightened macro-economic
changes in inflation, interest rates and energy costs, the
ever-evolving global regulatory and trade environments and a risk
of re-emergence of a global pandemic. Geopolitical factors include
the war in Ukraine, Scottish independence and global supply chain
issues . Whilst these risks currently exist, their extent and
long-term impact are yet to emerge but they are regularly assessed
by the Manager and the Board.
Viability Statement
The Directors' view of the Company's viability has not changed
since last year. The Company, as an investment trust, is a
collective investment vehicle rather than a commercial business
venture and is designed and managed for long--term investment. The
Company's investment objective clearly sets this out. 'Long-term'
for this purpose is considered by the Directors to be at least five
years, a timeframe in which the accuracy of estimates and
assumptions is deemed to be reasonable. The Company's viability has
thus been assessed over that period. Five years is considered a
reasonable time frame for a forecast, however, the life of the
Company is not intended to be limited to that or any other
period.
There are no current plans to amend the investment strategy,
which has delivered long-term good investment performance above or
in line with benchmark for shareholders and, the Directors believe,
should continue to do so. The investment strategy and its
associated risks are kept under constant review by the board.
In assessing the viability of the Company under various
scenarios, the Directors undertook a robust assessment of the risks
to which it is exposed (including the issues arising from the
COVID-19 pandemic, Russia's invasion of Ukraine and climate
change), as set out on page 18 together with mitigating factors.
The risks of failure to meet the Company's investment objective,
and contributory market and investment risks, were considered to be
of particular importance. The Directors also took into account: the
investment capabilities of the portfolio manager; the liquidity of
the portfolio, with nearly all investments being listed and readily
realisable; the Company's borrowings as considered in further
detail in the Going Concern Statement on page 41; the ability of
the Company to meet its liabilities as they fall due; the Company's
annual operating costs and that, as a closed ended investment
trust, the Company is not affected by the liquidity issues of open-
ended companies caused by large or unexpected redemptions.
In taking account of these factors and on reviews conducted as
part of the detailed internal controls and risk management
processes set out on page 40, the Directors have undertaken a
reverse stress test seeking to identify the financial circumstances
that might result in the Company becoming unviable. This concluded
that the viability of the Company may start to be challenged if the
value of Total Shareholders Funds were to fall permanently by
approximately 80% from the level at the year end, a fall that the
Board considers to be near implausible having noted that since the
inception of the Company's All-Share Index Total Return benchmark
in December 1985, the largest fall over any calendar year has been
29.9%, the largest fall over any rolling five year period was 28.8%
and the largest fall over any period was 42.9% (all based on
benchmark calendar month end values).
Based on the above, and assuming there is no adverse change to
the regulatory environment and tax treatment of UK investment
trusts to the extent that would challenge the viability of the UK
investment trust industry as a whole, the Directors have a
reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the five
year period of assessment.
Section 172 Statement, Company Sustainability and
Stakeholders
BOARD RESPONSIBILITIES
The responsibilities of the Board include setting the Company's
strategic aims, providing the leadership to put them into effect,
supervising the Manager and reporting to shareholders on their
stewardship. The Board is ultimately responsible for the direction,
management, performance and long-term sustainable success of the
Company.
The Board sets the Company's strategy and objectives, taking
into account the interests of all its stakeholders. However, the
Company has no employees and no customers in the traditional sense.
Consistent 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.
COMPANY SUSTAINABILITY AND STAKEHOLDERS
A good understanding of the Company's stakeholders enables the
Board to consider the potential impact of strategic decisions on
each stakeholder group during the decision -- making process. By
considering the Company's purpose, vision and values, together with
its strategic priorities, the Board aims for its decisions to be
fair and take account of the interests of the key stakeholder
groups. As an externally managed investment company, the Company
does not have any employees. The Board considers its main
stakeholders to be its shareholders, service providers, investee
companies and the Manager.
SECTION 172 STATEMENT
During the year under review, the Board believes that it has
acted in good faith and discharged its duties under Section 172 of
the Companies Act 2006 to promote the success of the Company for
the benefit of its members as a whole and having regard to the
interest of stakeholders and the factors set out in s172. The Board
performed its role as outlined in the schedule of matters reserved
for the Board and taking into account the interest of the key
stakeholders during the decision-making process.
The following sections include examples of how the Company's
stakeholders were considered during the key Board decisions. Key
Board decisions include payment of dividends, liquidity management
via share issuance and buy--backs, marketing, performance
evaluation, negotiation on debt and re-appointment of the
Investment Manager and other key service providers, ESG integration
into investment decisions and Board succession planning. Please see
the table below for a reference to where this information can be
found:
Section 172 statement
area Reference
--------------------------------- -----------------------------------------------------------
The likely consequences See Chair's Statement on page 5, The Portfolio Manager's
of any decision in the Report, Core Investment Beliefs and Business Review
long-term on pages 9 to 15, Going Concern and Viability Statements
on pages 41 and 22 and Stakeholder Engagement section
below.
--------------------------------- -----------------------------------------------------------
The interests of the As a closed-ended investment company, the Company
Company's employees has no employees. Stewardship section on page 25
refers to how the Company assesses its impact on
the social issues.
--------------------------------- -----------------------------------------------------------
The need to foster the As a closed-ended investment company, the Company
Company's business relationships has no customers in the traditional sense. See Stakeholder
with suppliers, customers Engagement section below Principal Risks and Uncertainties
and others on page 18 and Stewardship section on page 25 on
how the Company assesses its impact on and engages
with its key stakeholders.
--------------------------------- -----------------------------------------------------------
The impact of the Company's See Principal Risks and Uncertainties on page 18,
operations on the community Stewardship section on page 25 and ESG matters disclosure
and environment below on how the Company assesses its impact on
the community and environment of its investee companies.
--------------------------------- -----------------------------------------------------------
The desirability of the See Stakeholder Engagement section on page 24, Anti-Bribery
Company maintaining a and Corruption and Modern Slavery disclosures on
reputation for high standards pages 26-27.
of business conduct
--------------------------------- -----------------------------------------------------------
The need to act fairly See Stakeholder Engagement section on page 24 and
as between members of Corporate Governance Report on pages 29 to 44.
the Company
--------------------------------- -----------------------------------------------------------
ENGAGEMENT WITH SHAREHOLDERS
Shareholder relations are given high priority by both the Board
and the Manager and the Board welcomes feedback from shareholders
throughout the year. The prime medium by which the Company
communicates with shareholders is through the half-yearly and
annual financial reports, which aim to provide shareholders with a
full understanding of the Company's activities and results. This
information is supplemented by the daily publication of the net
asset value, monthly factsheets as well as dividend and other
announcements.
Feedback from shareholders forms part of the discussion at all
Board meetings and at the Board's annual strategy meeting which
involves consideration of how the Company is meeting shareholder
expectations.
Shareholders can also visit the Company's website
www.edinburgh-investment-trust.co.uk in order to access copies of
the annual and half-yearly financial reports, pre-investment
information, Key Information Documents (KIDs), proxy voting
results, factsheets and stock exchange announcements. The Company's
website also hosts videos and other applicable written materials by
the Manager to enhance the information available. Shareholders can
send their questions using a dedicated section of the Company's
website.
Typically, at each AGM, a presentation is made by the Manager
following the formal business of the meeting and shareholders have
the opportunity to attend, vote and most importantly to communicate
directly with the Manager and Board. Presentations to both
institutional shareholders and analysts also follow the publication
of the annual results. The Company held a physical AGM with virtual
attendance on 21 July 2022 which allowed shareholders to join via a
live weblink and to submit questions during the meeting. In
addition to the AGM and presentations, the Board and Manager hosted
a shareholder event in London on 22 September 2022. The Chair uses
these events to lead the Company's engagement with its
shareholders. Please see page 77 for the notice of 2023 Annual
General Meeting and page 7 for details of the 2023 shareholder
event.
Regular dialogue is maintained between the Manager and major
institutional shareholders throughout the year to discuss aspects
of investment performance, governance and strategy and to listen to
shareholder views in order to help develop an understanding of
their issues and concerns. All meetings between the Manager and
shareholders are reported to the Board.
There is a clear channel of communication between the Board and
the Company's Shareholders via the Company Secretary. The Company
Secretary passes to the Chair all correspondence addressed to the
Board of the Company.
The strategy of the Company is reviewed by the Board on an
annual basis. At the strategy day in September 2022 the Board
discussed discount management, marketing and board recruitment.
Whilst feedback from shareholders is sought regularly,
shareholders' feedback provided by the Company's Broker and Manager
is a major consideration at this meeting.
ENGAGEMENT WITH THE MANAGER
The Board has regular dialogue with and reports from the Manager
on the portfolio of investments, including performance against set
objectives and risk management and the Manager attends each Board
meeting to provide updates and answer questions from the Board. The
Board has also discussed the AIFM's responsibility under the
Consumer Duty Act with the Manager and received comfort as to how
those responsibilities will be met.
ENGAGEMENT WITH SERVICE PROVIDERS
As an externally managed investment trust, the Company conducts
all its business through its key service providers. The Board
believes that maintaining a collaborative relationship with each of
the Company's service providers Is essential to the Board's
decision-making and the ongoing success of the Company. At least
annually the Board reviews the performance and services of its key
service providers including the Manager and receives and considers
the internal control reports on a quarterly basis covering their
operations, policies and control environments.
The Board reviews the quarterly reports of the service providers
and whether the services meet the requirements of the Company,
represent value for money and are therefore in the best interests
of shareholders. We expect to conduct ourselves fairly with all
service providers, to maintain a reputation as a trusted, fair and
reliable partner. The Board and/or delegates of the Board engage
with key providers on a periodic basis through service review
meetings or, by invitation, attendance at Board or committee
meetings. Such engagement gives opportunity to both parties to
discuss any challenges being experienced and potential solutions
thereon, and to identify planned developments at the Company or the
service provider. We aim to pay promptly and if in dispute, to
engage openly to resolve matters in a timely manner.
Following the COVID-19 pandemic, the Board continues to ensure
that service providers are as prepared as possible for all such
eventualities which could disrupt the performance of their
respective functions.
ENGAGEMENT WITH INVESTEE COMPANIES
The Manager is a long-term investor and develops strong
relationships with both investee and potential investee companies
and reports their conversations back to the Board. Both the Board
and the Manager believe that engagement with investee companies is
positive, beneficial and welcomed.
Voting is a key activity in the dialogue with investee companies
and these decisions are reported to the Board on a quarterly basis.
Voting is undertaken by the same team that manages the portfolio
assets rather than it being delegated to an independent third
party.
The Board supports the Manager's approach to ESG in the context
of its management of the portfolio, please see below on ESG matters
and stewardship of investee companies.
ENVIRONMENTAL SOCIAL AND GOVERNANCE ("ESG") MATTERS
As an investment company with no employees, property or
activities outside investment, environmental policy has limited
application, yet the Board is committed to taking a responsible
approach to ESG matters. The Company's compliance with the AIC Code
of Corporate Governance is detailed in the Corporate Governance
Statement on page 32, which demonstrates the Company's own
responsibilities on matters such as governance.
In respect of the Company's investments, the Manager and the
other members of the investment team integrate ESG risks and
opportunities (including climate change related risks) as part of a
material assessment undertaken for all holdings. Consistent with
the Manager's investment approach, this analysis is undertaken on a
bottom-up, stock basis. The risks and opportunities that each
holding faces over a three-to-five-year period are then identified
and prioritised. Many of these issues can be sub-categorised as
"E", "S" and "G" issues. The issues that are identified as the key
ones are at the forefront of engagement discussions on holdings
with the investee companies. These frequently include issues
related to global warming, including those focused on transitional
risks, legislation risks, and/or physical risks. The Manager is a
signatory to the Principles of Responsible Investment ('PRI').
Further information is available at www.liontrust.co.uk and through
the investment company ESG disclosures at www.theaic.co.uk.
The Board recognises that the most material way in which the
Company can have an impact is through responsible ownership of its
investments. See below how the Manager engages with the management
of investee companies to encourage that high standards of ESG
practice are adopted.
The Company made no political donations during the year in
review.
STEWARDSHIP CODE AND EXERCISE OF VOTING POWERS
The Board considers that the Company has a responsibility as a
shareholder to ensure that high ESG standards are maintained in the
companies in which it invests. One of the principal means of
putting shareholder responsibility into practice is through the
exercise of voting rights. The Company aims to provide investment
specific active stewardship and the Company's voting rights are
exercised on an informed and independent basis. The Manager has
adopted a clear and considered policy towards its stewardship
responsibility on behalf of the Company. The Manager takes steps to
satisfy itself about the extent to which investee companies protect
shareholder value and comply with local recommendations and
practices, such as the UK Corporate Governance Code. The Manager's
approach to corporate governance and the UK Stewardship Code can be
found on the Manager's website at www.liontrust.co.uk together with
a copy of the Manager's Stewardship Policy and the Manager's global
proxy voting policy.
Members of the Manager's investment team are responsible for
overseeing all aspects of the Stewardship process, including voting
on all resolutions at all Annual General Meetings and Extraordinary
General Meetings in the UK and overseas. The Manager assesses
corporate governance, remuneration policies and, if deemed
necessary, will challenge management where it is felt that the best
interests of shareholders are not being met.
The Board reviews the Manager's voting record at each meeting.
The table below demonstrates how the Manager voted during the year
in review. The Manager voted at all meetings, except for an
unlisted legacy holding in Raven Property.
Total %
For Against Items Against
----------------------- --- ------- ----- -------
Audit Related 84 0 84 0.0%
----------------------- --- ------- ----- -------
Capitalisation 186 5 191 2.6%
----------------------- --- ------- ----- -------
Company Articles 9 1 10 10.0%
----------------------- --- ------- ----- -------
Compensation 73 11 84 13.1%
----------------------- --- ------- ----- -------
Corporate Governance 1 0 1 0.0%
----------------------- --- ------- ----- -------
Director Election 436 13 449 2.9%
----------------------- --- ------- ----- -------
Director Related 7 0 7 0.0%
----------------------- --- ------- ----- -------
Environmental 6 2 8 25.0%
----------------------- --- ------- ----- -------
Miscellaneous 2 0 2 0.0%
----------------------- --- ------- ----- -------
Non-Routine Business 4 0 4 0.0%
----------------------- --- ------- ----- -------
Routine Business 87 1 88 1.1%
----------------------- --- ------- ----- -------
Social(1) 4 21 25 84.0%
----------------------- --- ------- ----- -------
Strategic Transactions 4 0 4 0.0%
----------------------- --- ------- ----- -------
Takeover Related 37 0 37 0.0%
----------------------- --- ------- ----- -------
Total 940 54 994 5.4%
----------------------- --- ------- ----- -------
(1) The large number of against votes relates to a policy of
voting against UK Political Donations and Expenditure.
(2) The term return on capital employed (ROCE) refers to a
financial ratio that can be used to assess a company's
profitability and capital efficiency.
The Managers' policy is to invest in well managed companies with
robust ESG policies. The examples below demonstrate how the Manager
voted on certain ESG issues and its rationale behind it.
- NatWest Group. Resolution summary: to re-elect Frank Dangeard
as Director. The Manager voted against this proposal because, in
addition to his role as NED of the Company, Frank Dangeard serves
on the boards of three other publicly listed companies.
Furthermore, he is the Chair of the Board in two of those
companies. This could potentially compromise his ability to commit
sufficient time to his role at NatWest Group. The outcome of the
vote was that the resolution was passed, albeit with 20% of votes
against. We will continue to engage with the management on this
issue.
- RS Group. Resolution summary: to approve the company's
remuneration policy. Although it was a contentious policy, with
some third-party advisors recommending their clients to vote
against it, the Manager supported the resolution. The Manager
believe the CEO and Financial Director have done an outstanding job
in reversing the fortunes of the company and positioning the
business for long term success. It is important for the
remuneration to be competitive. Moreover, the award targets are
extremely stretching and have the strong underpinning of the 20%
ROCE(2) condition. The resolution was passed, albeit with over 39%
of votes against.
- Shell Group. Resolution summary: this was a shareholder --
filed resolution, which requested Shell to set and publish targets
for greenhouse gas (GHG) emissions. The Manager voted against this
proposal as it was considered unnecessary, because a separate
management-filed proposal at the same meeting, to approve the Shell
energy transition progress update, showed good progress with the
plan. The shareholder-filed resolution was therefore redundant as
Shell had already disclosed those targets. The resolution was not
passed, with 80% of votes against.
- Ashtead Group. Resolution summary: to approve the company's
remuneration report. The Manager voted against this management
proposal. This was because the actions taken by the Remuneration
Committee in response to the significant levels of dissent recorded
against the remuneration-related resolutions at the 2021 AGM were
not considered sufficient to address the underlying concerns
raised. The resolution was passed, with 33% of votes against the
report. We will continue to engage with the management on this
issue.
In addition, the Manager publishes an annual Responsible
Capitalism report, providing cumulative voting statistics, full
disclosure on voting policy and extracts of engagement for the
year. The Manager publishes a quarterly voting record on its
website www.liontrust.co.uk.
MODERN SLAVERY DISCLOSURE
The Company aims to adopt the highest standards of conduct and
is committed to integrating responsible business practices
throughout its operations. The prevention of modern slavery is an
important part of corporate good governance.
The Company is an investment vehicle and does not provide goods
or services in the normal course of its business or have customers
or employees. Accordingly, the Directors consider that the Company
is not required to make any slavery or human trafficking statement
under the Modern Slavery Act 2015.
ANTI-BRIBERY AND CORRUPTION
It is the Company's policy to conduct its business in an honest
and ethical manner. The Company takes a zero--tolerance approach to
bribery and corruption and is committed to acting professionally,
fairly and with integrity in all its business dealings and
relationships wherever it operates. The Company's policy and the
procedures that implement it are designed to support that
commitment.
PREVENTION OF THE FACILITATION OF TAX EVASION
The Board has adopted a zero-tolerance approach to the criminal
facilitation of tax evasion.
GREENHOUSE GAS EMISSIONS AND STREAMLINED ENERGY AND CARBON
REPORTING ('SECR')
The Company has no employees, physical assets, property or
operations of its own, does not provide goods or services and does
not have its own customers. It follows that the Company has little
or no direct environmental impact. In consequence, the Company has
limited greenhouse gas emissions to report from its operations
aside from travel to board meetings, nor does it have
responsibility for any other sources of emissions under the
Companies Act 2006 (Strategic Report and Directors' Reports)
Regulations 2013. As the Company has no material operations and
therefore has low energy usage, it has not included an energy and
carbon report.
CONCLUSION
The Directors believe that they have fulfilled their duties
under s172 of the Companies Act 2006 in their deliberations on all
matters. The Board takes into account the interests of all the
Company's key stakeholders, as outlined above, in its
decision-making which reflects the Board's belief that the
long-term sustainable success of the Company is linked directly to
its key stakeholders. Work of the Board and its Committees is
described in the Governance Report on pages 29 to 44.
This Strategic Report was approved by the Board on 26 May
2023
Signed by order of the Board of Directors
APEX LISTED COMPANIES SERVICES (UK) LIMITED / COMPANY SECRETARY
/ 26 MAY 2023.
Statement of Directors' Responsibilities
IN RESPECT OF THE PREPARATION OF THE ANNUAL FINANCIAL REPORT
The Directors are responsible for preparing the annual financial
report and financial statements in accordance with applicable law
and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law they are
required to prepare the financial statements in accordance with UK
accounting standards, including FRS 102 The Financial Reporting
Standard applicable in the UK and Republic of Ireland.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Company and of its profit or
loss for that period.
In preparing these financial statements, the Directors are
required to:
- select suitable accounting policies and then apply them consistently;
- make judgements and estimates that are reasonable and prudent;
- state whether applicable UK accounting standards have been
followed, subject to any material departures disclosed and
explained in the financial statements;
- assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern;
and
- use the going concern basis of accounting unless they either
intend to liquidate the Company or to cease operations, or have no
realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
its financial statements comply with the Companies Act 2006.
They are responsible for such internal controls as they
determine are necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error, and have general responsibility for taking such
steps as are reasonably open to them to safeguard the assets of the
Company and to prevent and detect fraud and other
irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors' Report,
Directors' Remuneration Report and Corporate Governance Statement
that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website, which is maintained by the Company's Manager.
Legislation in the UK governing the preparation and dissemination
of financial statements may differ from legislation in other
jurisdictions.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE
ANNUAL FINANCIAL REPORT
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the Company; and
- the Strategic Report includes a fair review of the development
and performance of the business and the position of the Company,
together with a description of the principal risks and
uncertainties that it faces.
We consider the 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
ELISABETH STHEEMAN
CHAIR
26 MAY 2023
Income Statement
For the year ended 31 March
2023 2022
Revenue Capital Total Revenue Capital Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------------- ----- ------- ------- ------- ------- ------- -------
Gains on investments held
at fair value 9(b) - 6,023 6,023 - 101,815 101,815
Losses on foreign exchange - (191) (191) - (148) (148)
Income 2 48,998 - 48,998 44,211 10,036 54,247
Investment management fee 3 (1,492) (3,482) (4,974) (1,512) (3,528) (5,040)
Other expenses 4 (1,092) (7) (1,099) (977) (9) (986)
---------------------------- ----- ------- ------- ------- ------- ------- -------
Net return before finance
costs and taxation 46,414 2,343 48,757 41,722 108,166 149,888
Finance costs 5 (1,718) (4,015) (5,733) (2,492) (5,815) (8,307)
---------------------------- ----- ------- ------- ------- ------- ------- -------
Return/(loss) on ordinary
activities before taxation 44,696 (1,672) 43,024 39,230 102,351 141,581
Tax on ordinary activities 6 (781) - (781) (663) - (663)
---------------------------- ----- ------- ------- ------- ------- ------- -------
Return/(loss) on ordinary
activities after taxation
for the financial year 43,915 (1,672) 42,243 38,567 102,351 140,918
---------------------------- ----- ------- ------- ------- ------- ------- -------
Return/(loss) per ordinary
share:
Basic and diluted 7 25.99p (0.99)p 25.00p 22.41p 59.47p 81.88p
---------------------------- ----- ------- ------- ------- ------- ------- -------
The total column of this statement represents the Company's
income statement, prepared in accordance with UK Accounting
Standards. The return/(loss) after taxation is the total
comprehensive income/(expense) and therefore no additional
statement of 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.
The accompanying notes are an integral part of these financial
statements.
Balance Sheet
At 31 March 2023
2023 2022
Notes GBP'000 GBP'000
--------------------------------------- ----- --------- ---------
Non current assets
Investments held at fair value 9(a) 1,226,649 1,218,725
--------------------------------------- ----- --------- ---------
Current assets
Debtors 10 12,392 10,824
Cash and cash equivalents 22,362 68,728
--------------------------------------- ----- --------- ---------
Total assets 1,261,403 1,298,277
--------------------------------------- ----- --------- ---------
Non current liabilities
Unsecured Senior Loan Notes 12 (120,000) (20,000)
--------------------------------------- ----- --------- ---------
Current liabilities
Other payables 11 (2,059) (2,566)
7.75% Debenture Stock 30 Sep 2022 11 - (99,874)
--------------------------------------- ----- --------- ---------
Total liabilities (122,059) (122,440)
--------------------------------------- ----- --------- ---------
Net assets 1,139,344 1,175,837
Equity
Called up share capital 13 48,917 48,917
Share premium account 14 10,394 10,394
Capital redemption reserve 14 24,676 24,676
Capital reserve 14 1,003,989 1,041,086
Revenue reserve 14 51,368 50,764
--------------------------------------- ----- --------- ---------
Total equity 1,139,344 1,175,837
Net asset value per ordinary share:
Basic and diluted - debt at par value 688.52p 687.24p
Basic and diluted - debt at fair value 713.75p 686.69p
--------------------------------------- ----- --------- ---------
The financial statements on pages 57 to 75 were approved and
authorised for issue by the Board of Directors on 26 May 2023.
ELISABETH STHEEMAN / CHAIR
Signed on behalf of the Board of Directors
The accompanying notes are an integral part of these financial
statements.
Statement of Changes in Equity
For the year ended 31 March
Capital
Share Share Redemption Capital Revenue
Capital Premium Reserve Reserve(1) Reserve(1) Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------ ----- ------- ------- ---------- ---------- ---------- ---------
At 31 March 2021 48,917 10,394 24,676 945,728 61,516 1,091,231
Return on ordinary activities - - - 102,351 38,567 140,918
Dividends paid 8 - - - - (49,319) (49,319)
Shares bought back and
held in treasury(2) 13 - - - (6,993) - (6,993)
------------------------------ ----- ------- ------- ---------- ---------- ---------- ---------
At 1 April 2022 48,917 10,394 24,676 1,041,086 50,764 1,175,837
(Loss)/return on ordinary
activities - - - (1,672) 43,915 42,243
Dividends paid 8 - - - - (43,311) (43,311)
Shares bought back and
held in treasury(2) 13 - - - (35,425) - (35,425)
------------------------------ ----- ------- ------- ---------- ---------- ---------- ---------
At 31 March 2023 48,917 10,394 24,676 1,003,989 51,368 1,139,344
------------------------------ ----- ------- ------- ---------- ---------- ---------- ---------
(1) The revenue reserve and certain amounts of the capital
reserve are distributable by way of dividend.
(2) Shares bought back and held in treasury includes transaction costs.
The accompanying notes are an integral part of these financial
statements.
Cash Flow Statement
For the year ended 31 March
2023 2022
Notes GBP'000 GBP'000
------------------------------------------------------- ----- --------- ---------
Cash flow from operating activities
Net return before finance costs and taxation 48,757 149,888
Tax on overseas income 6 (781) (663)
Adjustments for:
Purchase of investments (254,040) (426,367)
Sale of investments 251,961 462,132
Gains on investments held at fair value (6,023) (101,815)
Increase in debtors (2,706) (3,201)
Increase in creditors 37 128
------------------------------------------------------- ----- --------- ---------
Net cash inflow from operating activities 37,205 80,102
------------------------------------------------------- ----- --------- ---------
Cash flow from financing activities
Interest paid on overdraft (3) (1)
Interest and commitment fees paid on bank facility (12) (85)
Interest paid on unsecured senior loan notes/debenture
stocks (4,372) (7,994)
Issue of unsecured senior loan notes 100,000 20,000
Redemption of debenture loan stock (100,000) -
Shares bought back and held in treasury (35,873) (6,545)
Dividends paid 8 (43,311) (49,319)
------------------------------------------------------- ----- --------- ---------
Net cash outflow from financing activities (83,571) (43,944)
------------------------------------------------------- ----- --------- ---------
Net (decrease)/increase in cash and cash equivalents (46,366) 36,158
Cash and cash equivalents at start of the year 68,728 32,570
------------------------------------------------------- ----- --------- ---------
Cash and cash equivalents at the end of the year 22,362 68,728
------------------------------------------------------- ----- --------- ---------
Cash and cash equivalent comprises:
Cash held at custodian 1,093 1,021
Goldman Sachs Liquidity Reserve International Fund
- Money Market Fund 21,269 47,727
UK Government Treasury Bill - 19,980
------------------------------------------------------- ----- --------- ---------
Cash and cash equivalents 22,362 68,728
------------------------------------------------------- ----- --------- ---------
Cash flow from operating activities includes:
Dividends received 45,820 50,447
Interest received 6 -
------------------------------------------------------- ----- --------- ---------
At 31
At 1 April Non-cash March
2022 Cash flow movement 2023
GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------------ ---------- --------- -------- ---------
Reconciliation of net debt:
Cash and cash equivalents 68,728 (46,366) - 22,362
Debenture Stock 7 3/4 % 30 September 2022 (99,874) 100,000 (126) -
Unsecured Senior Loan Notes (20,000) (100,000) - (120,000)
------------------------------------------ ---------- --------- -------- ---------
Total (51,146) (46,366) (126) (97,638)
------------------------------------------ ---------- --------- -------- ---------
The accompanying notes are an integral part of these financial
statements.
Notes to the Financial Statements
1. PRINCIPAL 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 adopted in the preparation of
these financial statements are set out below. These policies have
been consistently applied during the year and the preceding
year.
A. Basis of Preparation
Accounting Standards Applied
The financial statements have been prepared in accordance with
the Companies Act 2006, applicable United Kingdom Accounting
Standards and applicable law (UK Generally Accepted Accounting
Practice (UK GAAP)) including FRS 102 'The Financial Reporting
Standard applicable in the UK and Republic of Ireland' and with the
Statement of Recommended Practice Financial Statements of
Investment Trust Companies and Venture Capital Trusts, issued by
the Association of Investment Companies (SORP) in April 2021 (as
amended in July 2022).
The financial statements are issued on a going concern basis.
Details of the Directors' assessment of the going concern status of
the Company, which considered the adequacy of the Company's
resources and the impacts of the COVID-19 pandemic, are given on
page 41.
As an investment fund the Company has the option not to present
a cash flow statement. A cash flow statement is not required when
an investment fund meets all the following conditions:
substantially all investments are highly liquid and are carried at
market value, and where a Statement of Changes in Equity is
provided: all of which are satisfied.
However the Directors' have elected to present a cash flow
statement in the annual financial report to present additional
relevant information to readers of the financial statements.
Significant Accounting Estimates, Assumptions and Judgements
The preparation of the financial statements may require the use
of estimates, assumptions and judgements which may affect the
reported amounts of assets and liabilities at the reporting date.
While estimates are based on best judgement using information and
financial data available the actual outcome may differ from these
estimates. The Directors have applied their judgement for the
allocation of the investment management fee and finance costs
between capital and revenue in the income statement as set out in
Note 1G and the treatment of special dividend income between
capital and income, as set out in Note 1J. The Directors do not
believe that these judgements nor any accounting estimates,
assumptions or judgements that have been applied to the financial
statements have a significant risk of causing material adjustment
to the carrying amount of assets and liabilities within the next
financial year.
B. Foreign Currency and Segmental Reporting
(i) Functional and presentational currency
The financial statements are presented in sterling, which is the
Company's functional and presentational currency and the currency
in which the Company's share capital and expenses, as well as its
assets and liabilities, are denominated.
(ii) 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.
(iii) Segmental reporting
The Directors are of the opinion that the Company is engaged in
a single segment of business of investing in equity and debt
securities, issued by companies quoted mainly on the UK or other
recognised stock exchanges.
C. Financial Instruments
The Company has chosen to apply Section 11 and 12 of FRS102 in
full in respect of the financial instruments.
(i) Recognition of financial assets and financial liabilities
The Company recognises financial assets and financial
liabilities when the Company becomes a party to the contractual
provisions of the instrument. The Company will offset financial
assets and financial liabilities if the Company has a legally
enforceable right to set off the recognised amounts and 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 have expired.
(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 are classified as held at fair value
through profit or loss.
Financial assets held at fair value through profit or loss are
initially recognized as fair value, which is taken to be their
acquisition price, with transaction costs expensed in the income
statement. These are subsequently valued at fair value.
Fair value for investments that are actively traded in organised
financial markets is determined by reference to stock exchange
quoted bid prices at the balance sheet date. Fair value for
investments that are actively traded but where active stock
exchange quoted bid prices are not available is determined by
reference to a variety of valuation techniques including broker
quotes and price modelling. Unquoted, unlisted or illiquid
investments are valued by the Directors at fair value using a
variety of valuation techniques including earnings multiples,
recent transactions and other market indicators, cash flows and net
assets.
- Financial liabilities
Financial liabilities, including borrowings, are initially
measured at transaction price, being the fair value. For
liabilities issued at a discount or with significant associated
transaction costs, such discount and costs are subsequently
measured at amortised cost using the effective interest method.
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: short term in duration (typically three
months or less from the date of acquisition), highly liquid
investments 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.
E. Hedging
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 recognised in the income statement and taken to
capital reserves.
F. Income
Interest income arising from fixed income securities and cash is
recognised in the income statement using the effective interest
method. Dividend income arises from equity investments held and is
recognised on the date investments are marked 'ex-dividend'.
Special dividends are looked at individually to ascertain the
reason behind the payment. This will determine whether they are
treated as income or capital in the income statement.
Deposit interest and underwriting commission receivable are
taken into account on an accruals basis.
G. Expenses and Finance Costs
Expenses are recognised on an accruals basis and finance costs
are recognised using the effective interest method in the income
statement.
The investment management fee and finance costs are allocated
70% to capital and 30% to revenue. This is in accordance with the
Board's expected long-term split of returns, in the form of capital
gains and income respectively, from the portfolio. Transaction
costs are recognised as capital in the income statement. All other
expenses are allocated to revenue in the income statement.
H. Taxation
The liability to corporation tax is based on net revenue for the
year, excluding non-taxable dividends. The tax charge is allocated
between the revenue and capital account on the marginal basis
whereby revenue expenses are matched first against taxable income
in the revenue account.
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 is only recognised in respect of surplus
management expenses, losses on loan relationships and eligible
unrelieved foreign tax to the extent that it is probable that the
Company will be able to recover them from future taxable
revenue.
I. Dividends Payable
Dividends are not recognised in the financial statements unless
there is an obligation to pay at the balance sheet date. Proposed
dividends are recognised in the year in which they are paid to
shareholders.
J. Critical accounting estimates and judgements
No critical accounting judgements or estimates were made during
the year.
K. Accounting for reserves
The share premium comprises the net proceeds received by the
Company following the issue of shares, after deduction of the
nominal amount of 25 pence and any applicable issue costs. The
capital redemption reserve maintains the equity share capital of
the Company and arose from the nominal value of any shares bought
back and cancelled; both are non-distributable.
The capital reserve includes the investment holding
gains/(losses), being the difference between cost and market value
at the balance sheet date. It also includes cumulative realised
gains/(losses) and costs related to share buybacks. 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 payment
of any dividends. The revenue reserve and certain amounts of the
capital reserve are distributable by way of dividend.
L. Shares repurchased and held in treasury
The cost of repurchasing ordinary shares (for cancellation or to
hold in treasury) including the related stamp duty and transaction
cost is charged to the capital reserve and dealt with in the
Statement of Changes in Equity. Share repurchase transactions are
accounted for on a trade date basis. Where shares are cancelled (or
are subsequently cancelled having previously been held in
treasury), the nominal value of those shares is transferred out of
Called up share capital and into the Capital redemption reserve.
Should shares held in treasury be reissued, the sales proceeds will
be treated as a realised capital profit up to the amount of the
purchase price of those shares and will be transferred to capital
reserves. The excess of the sales proceeds over the purchase price
will be transferred to Share premium.
2. INCOME
This note shows the income generated from the portfolio
(investment assets) of the Company and income received from any
other source.
2023 2022
GBP'000 GBP'000
--------------------------------- ------- -------
Income from investments:
UK zero coupon bond income 148 11
UK dividends 35,807 32,253
UK special dividends 6,999 6,689
Overseas dividends 5,287 5,193
Overseas special dividends 358 -
Interest from money market funds 393 28
--------------------------------- ------- -------
48,992 44,174
Other income:
Deposit interest 6 -
Underwriting commission - 37
--------------------------------- ------- -------
6 37
--------------------------------- ------- -------
Total income 48,998 44,211
--------------------------------- ------- -------
No special dividends have been recognised in capital during the
year (2022: GBP10,036,000).
3. INVESTMENT MANAGEMENT FEE
This note shows the fee due to the Manager. This is calculated
and paid monthly.
2023 2022
------- ------- ------- ------- ------- -------
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------- ------- ------- ------- ------- ------- -------
Investment management fee 1,492 3,482 4,974 1,512 3,528 5,040
-------------------------- ------- ------- ------- ------- ------- -------
1,492 3,482 4,974 1,512 3,528 5,040
-------------------------- ------- ------- ------- ------- ------- -------
Details of the investment management agreement is disclosed on
page 41 in the Directors' Report. At 31 March 2023 investment
management fees of GBP429,000 (2022: GBP427,000) were accrued.
4. OTHER EXPENSES
The other expenses(i) of the Company are presented below, those
paid to the Directors and the auditors are separately
identified.
2023 2022
------- ------- ------- ------- ------- -------
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------------------------- ------- ------- ------- ------- ------- -------
Other expenses 1,092 7 1,099 977 9 986
--------------------------------------------------- ------- ------- ------- ------- ------- -------
Other expenses include
the following:
Directors' remuneration(ii) 189 - 189 184 - 184
Auditors' fees:(iii)
* for audit of the Company's annual financial
statements 48 - 48 41 - 41
--------------------------------------------------- ------- ------- ------- ------- ------- -------
The maximum Directors' fees authorised by the Articles of
Association are GBP250,000 per annum.
(i) Other expenses include:
- GBP18,000 (2022: GBP17,000) of employer's National Insurance
payable on Directors' remuneration. As at 31 March 2023, the
amounts outstanding on Directors' remuneration and employer's
National Insurance was GBP64,000 (2022: GBPnil); and
- custodian transaction charges of GBP7,000 (2022: GBP9,000). These are charged to capital.
(ii) There were seven directors for a period during the year and
the Director's Remuneration Report on page 45 provides further
information on Directors' fees.
(iii) Auditor's fees include expenses but exclude VAT.
5. FINANCE COSTS
Finance costs arise on any borrowing facilities the Company has
used. Borrowing facilities are the GBP120m notes (2022 GBP100m
debenture stock, GBP20m notes and a GBP25m bank revolving credit
facility). Please see note 12 for additional details of the
Unsecured Senior Loan Note terms.
2023 2022
------- ------- ------- ------- ------- -------
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------------------------------- ------- ------- ------- ------- ------- -------
Interest payable on borrowings
repayable not by instalment:
* Commitment fees due on loan facility 4 8 12 18 42 60
* Interest on overdraft facility 1 2 3 - 1 1
* Debenture stock repayable within 1 year 1,235 2,883 4,118 2,325 5,425 7,750
* Unsecured Senior Loan notes repayable after 5 years 442 1,032 1,474 73 171 244
Amortised debenture stock
discount and issue costs 36 90 126 76 176 252
----------------------------------------------------------- ------- ------- ------- ------- ------- -------
1,718 4,015 5,733 2,492 5,815 8,307
----------------------------------------------------------- ------- ------- ------- ------- ------- -------
6. TAXATION AND TOTAL RETURN ON ORDINARY ACTIVITIES
As an investment trust the Company pays no tax on capital gains.
As the Company invests principally in UK equities, it has little
overseas tax and the overseas tax charge is the result of
withholding tax deducted at source. This note also clarifies the
basis for the Company having no deferred tax asset or
liability.
(a) Tax charge
2023 2022
GBP'000 GBP'000
------------------ ------- -------
Overseas taxation 781 663
------------------ ------- -------
(b) Reconciliation of tax charge
2023 2022
GBP'000 GBP'000
------------------------------------------------------- ------- --------
Return on ordinary activities before taxation 43,024 141,581
Theoretical tax at the current UK Corporation Tax rate
of 19% (2022: 19%) 8,175 26,900
Effects of:
- Non-taxable UK dividends (6,803) (6,128)
- Non-taxable UK special dividends (1,398) (972)
- Non-taxable overseas dividends (982) (3,178)
- Non-taxable gains on investments (1,145) (19,345)
- Non-taxable losses on foreign exchange 36 28
- Excess of allowable expenses over taxable income 2,116 2,693
- Disallowable expenses 1 2
- Overseas taxation 781 663
------------------------------------------------------- ------- --------
Tax charge for the year 781 663
------------------------------------------------------- ------- --------
(c) Deferred tax
Owing to the Company's status as an investment company, and the
Directors' intention that it continues to meet the conditions
required to maintain that approval in the foreseeable future, no
deferred tax has been provided on any capital gains and losses
arising on the revaluation or disposal of investments.
(d) Factors that may affect future tax changes
The Company has cumulative excess management expenses of
GBP502,750,000 (2022: GBP491,547,000) that are available to offset
future taxable revenue.
A deferred tax asset of GBP125,687,483 (2022: GBP122,886,688) at
25% (2022: 25%) 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 deferred tax assets can be
offset.
7. RETURN/(LOSS) PER ORDINARY SHARE
Return per share is the amount of gain generated for the
financial year divided by the weighted average number of ordinary
shares in issue.
The basic revenue, capital and total return per ordinary share
is based on each of the returns on ordinary activities after
taxation and on 168,985,796 (2022: 172,100,486) ordinary shares,
being the weighted average number of ordinary shares in issue
throughout the year.
8. DIVIDS ON ORDINARY SHARES
Dividends represent the distribution of income to shareholders.
The Company pays four dividends a year - three interims and one
final dividend.
2023 2022
-------------- --------------
pence GBP'000 pence GBP'000
----------------------------------------------- ----- ------- ----- -------
Dividends paid and recognised in the year:
- third interim paid in respect of previous
year 6.40 10,934 6.00 10,331
- final paid in respect of previous year 6.40 10,925 6.00 10,331
- special dividend paid in respect of previous
year - - 4.65 8,006
- first interim paid 6.40 10,783 6.00 10,331
- second interim paid 6.40 10,669 6.00 10,320
----------------------------------------------- ----- ------- ----- -------
25.60 43,311 28.65 49,319
----------------------------------------------- ----- ------- ----- -------
2023 2022
-------------- --------------
pence GBP'000 pence GBP'000
------------------------------------------ ----- ------- ----- -------
Dividends payable in respect of the year:
- first interim 6.40 10,783 6.00 10,331
- second interim 6.40 10,669 6.00 10,320
- third interim 6.70 11,087 6.40 10,934
- proposed final 6.70 11,087 6.40 10,927
------------------------------------------ ----- ------- ----- -------
26.20 43,626 24.80 42,512
------------------------------------------ ----- ------- ----- -------
The proposed final dividend is subject to approval by ordinary
shareholders at the AGM.
9. INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT AND LOSS
The portfolio comprises investments which are principally listed
on a regulated stock exchange or traded on AIM. A very small
proportion of investments are valued by the Directors as they are
unlisted.
Gains or losses are either:
- realised, usually arising when investments are sold; or
- unrealised, being the difference from cost on those investments still held at the year end.
(a) Analysis of investments by listing status
2023 2022
GBP'000 GBP'000
----------------------------------------------------------- --------- ---------
Investments listed on a recognised investment exchange 1,226,649 1,218,419
Unlisted or not regularly traded investments at Directors'
valuation - 306
----------------------------------------------------------- --------- ---------
1,226,649 1,218,725
----------------------------------------------------------- --------- ---------
(b) Analysis of investment gains:
2023 2022
GBP'000 GBP'000
--------------------------------- --------- ---------
Opening book cost 1,048,510 1,026,675
Opening investment holding gains 170,215 124,333
Opening fair value 1,218,725 1,151,008
Movements in year:
Purchases at cost 252,724 427,683
Sales - proceeds (250,823) (461,781)
Gains on investments in the year 6,023 101,815
--------------------------------- --------- ---------
Closing fair value 1,226,649 1,218,725
--------------------------------- --------- ---------
Closing book cost 1,040,163 1,048,510
Closing investment holding gains 186,486 170,215
--------------------------------- --------- ---------
Closing fair value 1,226,649 1,218,725
--------------------------------- --------- ---------
The Company received GBP250,823,000 (2022: GBP461,781,000) from
investments sold in the year. The book cost of these investments
when they were purchased was GBP261,072,000 (2022: GBP405,848,000)
realising a loss of GBP10,249,000 (2022: gain of GBP55,933,000).
These investments have been revalued over time and until they were
sold any unrealised profits/losses were included in the fair value
of the investments.
The transaction costs included in gains on investments amount to
GBP1,162,000 (2022: GBP1,698,000) on purchases and GBP99,000 (2022:
GBP152,000) for sales.
10. DEBTORS
Debtors are amounts which are due to the Company, such as monies
due from brokers for investments sold and income which has been
earned (accrued) but not yet received.
2023 2022
GBP'000 GBP'000
------------------------------------- ------- -------
Amounts due from brokers - 1,138
Overseas withholding tax recoverable 2,316 1,897
Prepayments and accrued income 10,076 7,789
------------------------------------- ------- -------
12,392 10,824
------------------------------------- ------- -------
11. OTHER PAYABLES: AMOUNTS FALLING DUE WITHIN ONE YEAR
Creditors are amounts which must be paid by the Company and are
split between those payable within 12 months of the balance sheet
date and those payable after that time. The main creditors have
historically been the debenture and bank borrowings. The other
creditors include any amounts due to brokers for the purchase of
investments, amounts owing on share buy backs awaiting settlement
or amounts owed to suppliers (accruals) such as the Manager and
auditors.
2023 2022
GBP'000 GBP'000
----------------------------------------------------- ------- -------
Debenture Stock 7 3/4 % redeemable 30 September 2022 - 99,874
Amounts due to brokers - 1,316
----------------------------------------------------- ------- -------
Share buybacks awaiting settlement - 448
Accruals 2,059 802
----------------------------------------------------- ------- -------
2,059 102,440
----------------------------------------------------- ------- -------
The debenture was redeemed at par on 30 September 2022.
The effect on the net asset value of deducting the debenture
stock at fair value, rather than at par, is disclosed in the
Alternative Performance Measures on page 85.
As at 31 March 2022 the Company had a 364 day committed
revolving credit facility (the 'bank facility') of GBP25 million
with The Bank of New York Mellon. The facility had not been
utilised for a number of years, and a decision was taken that it
would not be renewed when it matured on 15 June 2022.
The Company has arranged refinancing for the debenture as
previously noted.
12. UNSECURED SENIOR LOAN NOTES: AMOUNTS FALLING DUE AFTER MORE
THAN ONE YEAR
These creditors are amounts that must be paid, as shown by note
11, but are due more than one year after the balance sheet
date.
2023 2022
Loan Notes GBP'000 GBP'000
--------------------------------------------------- ------- -------
Unsecured Senior Loan Notes - 2.26% interest rate,
maturity 30 September 2037 35,000 -
Unsecured Senior Loan Notes - 2.49% interest rate,
maturity 30 September 2047 35,000 -
Unsecured Senior Loan Notes - 2.53% interest rate,
maturity 30 September 2051 20,000 20,000
Unsecured Senior Loan Notes - 2.53% interest rate,
maturity 30 September 2057 30,000 -
--------------------------------------------------- ------- -------
120,000 20,000
--------------------------------------------------- ------- -------
The Unsecured Senior Loan Notes comprise four separate notes. As
shown above, each has a fixed interest rate and contracted maturity
date when the par value must be repaid. Interest is payable on a
semi-annual basis, with equal amounts payable on each of 31 March
and 30 September each year. These notes require the Net Assets of
the Company to remain not less than GBP300m. This requirement was
met throughout the year.
13. CALLED UP SHARE CAPITAL
Share capital represents the total number of shares in issue,
including treasury shares.
2023 2022
GBP'000 GBP'000
---------------------------- ------- -------
Share capital:
Ordinary shares of 25p each 41,369 42,770
Treasury shares of 25p each 7,548 6,147
---------------------------- ------- -------
48,917 48,917
---------------------------- ------- -------
2023 2022
---------------------------------------- ----------- -----------
Number of ordinary shares in issue:
Brought forward 171,078,129 172,182,929
Shares bought back and held in treasury (5,601,604) (1,104,800)
Carried forward 165,476,525 171,078,129
Number of shares held in treasury:
Brought forward 24,588,605 23,483,805
Shares bought back into treasury 5,601,604 1,104,800
Carried forward 30,190,209 24,588,605
---------------------------------------- ----------- -----------
Total ordinary shares 195,666,734 195,666,734
---------------------------------------- ----------- -----------
During the year the Company bought back, into treasury,
5,601,604 (2022: 1,104,800) ordinary shares at an average price of
632.40p (2022: 632.95p) (including costs). Since the year end until
22 May 2023, (being the last practicable day prior to the
publication of this report), 655,000 shares have been bought back
into treasury Note 1L on page 63 explains the policy on the
transaction costs related to the shares repurchased and held in
treasury.
The Directors' Report on pages 36 and 43 sets out the Company's
share capital structure, restrictions and voting rights.
14. RESERVES
This note explains the different reserves attributable to
shareholders. The aggregate of the reserves and share capital (see
previous note) make up total shareholders' funds.
The share premium comprises the net proceeds received by the
Company following the issue of shares, after deduction of the
nominal amount of 25 pence and any applicable issue costs. The
capital redemption reserve maintains the equity share capital of
the Company and arose from the nominal value of any shares bought
back and cancelled; both are non-distributable.
The capital reserve includes the investment holding
gains/(losses), being the difference between cost and market value
at the balance sheet date. It also includes cumulative realised
gains/(losses) and costs related to share buybacks. Capital
investment gains and losses are shown in note 9(b) and form part of
the capital reserve.
The revenue reserve and certain amounts of the capital reserve
are distributable by way of dividend.
15. NET ASSET VALUE PER ORDINARY SHARE
The Company's total net assets (total assets less total
liabilities) are often termed shareholders' funds and are converted
into NAV per ordinary share by dividing by the number of shares in
issue (excluding treasury shares).
NAV - debt at par value
The shareholders funds in the balance sheet are accounted for in
accordance with accounting standards. Prior to the redemption of
the GBP100m debenture stock on 30 September 2022 this did not
reflect the rights of shareholders on a return of assets under the
Articles of Association. Those rights were reflected in the net
assets with debt at par and the corresponding NAV per share. A
reconciliation between the two sets of figures follows. As the
GBP120m Unsecured Senior Loan Notes were issued at and being
recorded at par, a reconciliation is not required.
2023 2022
------------------------ ------------------------
NAV Shareholders' NAV Shareholders'
per share funds per share funds
pence GBP'000 pence GBP'000
---------------------------------- --------- ------------- --------- -------------
Shareholders' funds 688.52 1,139,344 687.31 1,175,837
Less:
Unamortised discount and expenses
arising from debenture issue - - (0.07) (126)
---------------------------------- --------- ------------- --------- -------------
NAV - debt at par 688.52 1,139,344 687.24 1,175,711
---------------------------------- --------- ------------- --------- -------------
A reconciliation showing the NAV per share and Shareholders
funds using debt at fair value is shown in the Alternative
Performance Measures on page 85.
16. RISK MANAGEMENT, FINANCIAL ASSETS AND LIABILITIES
Financial instruments comprise the Company's investment
portfolio, derivative instruments (if any) as well as cash, and any
borrowings, debtors and creditors. This note sets out the Company's
financial instruments and the risks related to them.
Financial instruments
The Company's financial instruments mainly comprise its
investment portfolio (as shown on pages 16 and 17), loan notes, a
bank facility as well as its cash, debtors and creditors that arise
directly from its operations such as sales and purchases awaiting
settlement and accrued income. For the purpose of this note 'cash'
should be taken to comprise cash and cash equivalents as defined in
note 1D. The accounting policies in note 1C include criteria for
the recognition and the basis of measurement applied for financial
instruments. Note 1 also includes the basis on which income and
expenses arising from financial assets and liabilities are
recognised and measured.
The main financial risks that the Company faces from its
financial instruments are market risk, liquidity risk, and credit
risk. These 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.
Liquidity risk - arising from any difficulty in meeting
obligations associated with financial liabilities.
Credit 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
The Directors have delegated to the Manager the responsibility
for the day-to-day investment activities and management of gearing
of the Company as more fully described in the Directors'
Report.
As an investment trust the Company invests in equities and other
investments for the long-term so as to fulfil its investment policy
(incorporating the Company's investment objective). In pursuing its
investment objective, the Company is exposed to a variety of risks
that could result in either a reduction in the Company's net assets
or a reduction of the profits available for dividends. The
associated risk management policies are summarised below and have
remained substantially unchanged for the two years under review
16.1 Market Risk
The Company's Manager assesses the Company's exposure when
making each investment decision, and monitors the overall level of
market risk for the whole of the investment portfolio on an ongoing
basis. The Board has meetings in each calendar quarter to assess
risk and review investment performance, as disclosed in the Board
Responsibilities on pages 35 and 36. Any borrowing to gear the
investment portfolio is used to enhance returns but also increases
the Company's exposure to market risk and volatility. The Company
has the ability to gear using its GBP120 million Unsecured Senior
Loan Notes.
16.1.1 Currency risk
The majority of the Company's assets and all of its liabilities
are denominated in sterling. There is some exposure to US dollar,
Swiss franc and the Euro.
16.1.2 Inflation risk
The Company has no assets or liabilities that have direct
inflation link properties.
Management of the currency risk
The Manager monitors the Company's direct exposure to foreign
currencies on a daily basis and reports to the board on a regular
basis. Forward currency contracts can be used to reduce the
Company's exposure to foreign currencies arising naturally from the
Manager's choice of securities. All contracts are limited to
currencies and amounts commensurate with the assets denominated in
currencies. No Forward currency contracts were used during the year
(2022: none).
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 included in the financial statements and its
receipt.
The Company may invest up to 20% of the portfolio in securities
listed on non-UK stock exchanges. At the year end holdings of
non-UK securities total GBP93.8 million (2022: GBP144.3 million)
representing 7.7% (2022: 12.0%) of the portfolio.
Currency exposure
The fair values of the Company's monetary items that had a
material currency exposure at 31 March 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 so as to show the overall level of exposure.
2023 2022
---------------------------------- -------------------------
USD DKK CHF EUR USD CHF EUR
Currency exposure GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------- ------- ------- ------- ------- ------- ------- -------
Foreign currency exposure
on net
monetary items 3,137 40 1,420 1,495 3,793 1,106 2,389
Investments at fair value
through profit or loss that
are equities 22,356 - 32,549 52,668 46,641 27,635 70,032
----------------------------- ------- ------- ------- ------- ------- ------- -------
Total net foreign currency
exposure 25,493 40 33,969 54,163 50,434 28,741 72,421
----------------------------- ------- ------- ------- ------- ------- ------- -------
The above may not be representative of the exposure to risk
during the year, because the levels of foreign currency exposure
may change significantly throughout the year.
Currency sensitivity
In respect of the Company's material direct foreign currency
exposure to investments denominated in currencies, if sterling had
weakened by 3.9% (2022: 2.0%) for the US dollar, 3.5% (2022: 1.5%)
for the Swiss franc, 2.0% (2022: 1.2%) for the Euro, and for the
Danish Krone, 2.0% (2022: GBPnil) during the year, the capital
return and net assets of the Company would have increased for all
currency exposures by GBP3.2 million (2022: GBP2.3 million).
Conversely, if sterling had strengthened to the same extent for the
currencies mentioned above, the capital return and net assets of
the Company would have decreased by the same amount. The exchange
rate variances noted above have been based on market volatility in
the year, using the standard deviation of sterling's fluctuation to
the applicable currency. This sensitivity takes no account of any
impact on the market values of the Company's investments arising
from the foreign currency mix of their respective revenues,
expenses, assets and liabilities.
16.1.3 Interest rate risk
Interest rate movements will affect the level of income
receivable on cash deposits and money market funds, and the
interest payable on variable rate borrowings. When the Company has
cash balances, they are held on variable rate bank accounts
yielding rates of interest dependent on the base rate determined by
the custodian, The Bank of New York Mellon (International)
Limited.
The Company has Unsecured Senior Loan Notes of GBP120 million
(2022: GBP20 million). The Unsecured Senior Loan Notes have a fixed
interest rate which only exposes the Company to changes in market
value in the event that the debt is repaid before maturity.
Specifics of the Unsecured Senior Loan Notes are shown in note 12.
The details of their fair value and the affect on net asset value
within the Net Asset Value (NAV) - Debt at Fair Value
reconciliation within the Alternative Performance Measures on page
85.
The Company held two fixed income securities during the year
(2022: one), both being short-term zero coupon government bonds
which matured during the financial year. As at 31 March 2023 no
government bonds (2022: one) to the value of GBPnil (2022:
GBP19.98m) were recognised as a Cash and Cash Equivalent on the
Balance Sheet.
Interest rate exposure
At 31 March 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 re-set; and
- fixed interest rates (giving fair value interest rate risk) -
when the financial instrument is due for repayment.
2023 2022
---------------------------------------- ----------------------------------------
Between Between
one After one After
Within and five five Within and five five
one year years years Total one year years years Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------------- -------- -------- --------- --------- --------- -------- -------- ---------
Exposure to floating
interest rates:
- Cash and cash equivalents 22,488 - 22,488 48,748 - 48,748
- Exposure to fixed
interest rates:
- UK Government Treasury
Bill - - - 19,980 - 19,980
- Debenture stock
- debt at par value - - - (100,000) (100,000)
- Unsecured Senior
Loan Notes - debt
at par value - - (120,000) (120,000) - - (20,000) (20,000)
---------------------------- -------- -------- --------- --------- --------- -------- -------- ---------
Total exposure to
interest rates 22,488 - (120,000) (97,512) (31,272) - (20,000) (51,272)
---------------------------- -------- -------- --------- --------- --------- -------- -------- ---------
16.1.4 Other price risk
Other price risks (i.e. changes in market prices other than
those arising from interest rate risk or currency risk) may affect
the value of the equity investments, but it is the business of the
Manager to manage the portfolio to achieve the best return that he
can.
Management of the other price risk
The Directors manage the market price risks inherent in the
investment portfolio by meeting regularly to monitor on a formal
basis the Manager's compliance with the Company's stated objectives
and policies, and to review investment performance.
The Company's portfolio is the result of the Manager's
investment process and need not be highly correlated with the
Company's benchmark or the market in which the Company invests. The
value of the portfolio will not move in line with the market but
will move as a result of the performance of the company shares
within the portfolio.
If the value of the portfolio fell by 10% at the balance sheet
date, the profit after tax for the year and the net assets of the
Company would decrease by GBP122.7 million (2022: GBP121.9
million). Conversely, if the value of the portfolio rose by 10%,
the profit after tax and the net assets of the Company would
increase by the same amounts.
16.2 Liquidity risk
Liquidity risk is minimised as the majority of the Company's
investments constitute a diversified portfolio of readily
realisable securities which can be sold to meet funding commitments
as necessary.
Liquidity risk exposure
The contractual maturities of the financial liabilities at the
year end, based on the earliest date on which payment can be
required, are as follows:
More than
three months More than
Three months but less one
than one
or less year year Total
2023 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------ ------------ ------------ --------- -------
Loan note - debt at par value - - 120,000 120,000
Interest on loan notes - 2,928 70,500 73,428
Accruals 2,059 - - 2,059
------------------------------ ------------ ------------ --------- -------
2,059 2,928 190,500 195,487
------------------------------ ------------ ------------ --------- -------
More than
three months
Three months but less More than
than one
or less year one year Total
2022 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------ ------------ ------------ --------- -------
Debenture stock - debt at par value - 100,000 - 100,000
Loan note - debt at par value - - 20,000 20,000
Interest on debenture stock - 3,875 - 3,875
Interest on loan note - 506 14,421 14,927
Amounts due to brokers 1,316 - - 1,316
Share buybacks awaiting settlement 448 - - 448
Accruals 802 - - 802
------------------------------------ ------------ ------------ --------- -------
2,566 104,381 34,421 141,368
------------------------------------ ------------ ------------ --------- -------
16.3 Credit risk
Credit risk encompasses the failure by counterparties to deliver
securities which the Company has paid for, or to pay for securities
which the Company has delivered, and cash balances. Counterparty
risk is minimised by using only approved counterparties. The
Company's ability to operate in the short-term may be adversely
affected if the Company's custodian suffers insolvency or other
financial difficulties. However, with the support of the
depositary's restitution obligation the risk of outright credit
loss on the investment portfolio is remote. The Board reviews the
custodian's annual controls report and the Manager's management of
the relationship with the custodian. Cash balances are limited to a
maximum of 1% of net assets with any one deposit taker, with only
approved deposit takers being used, and a maximum deposit of 6% of
net assets in aggregate in liquidity funds with credit ratings of
AAAm (or equivalent). These limits are at the discretion of the
Board and are reviewed on a regular basis. The investment policy
also allows for UK Government Treasuries to be held. Such holdings
are recorded as cash equivalents if they meet the criteria set out
in Note 1D on page 59.
16.4 Custody risk
All investment assets are held in custody by The Bank of New
York Mellon (International) Limited in accounts segregated from the
bank's own assets.
17. CLASSIFICATION UNDER FAIR VALUE HIERARCHY
The values of the financial assets and financial liabilities are
carried either at their fair value (investments), or at a
reasonable approximation of fair value (amounts due from brokers,
dividends receivable, accrued income, amounts due to brokers,
accruals, cash and any drawings on the bank facility) or at
amortised cost (debenture).
Fair Value Hierarchy Disclosures
All except two of the Company's portfolio of investments are in
the Level 1 category as defined in FRS 102 as amended for fair
value hierarchy disclosures (March 16). The three levels set out in
this follow.
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.
2023
--------------------------------------
Level 1 Level 2 Level 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------------ --------- ------- ------- ---------
Financial assets designated at fair value
through profit or loss:
Quoted investments:
Equities and preference shares 1,226,649 - - 1,226,649
Unquoted and suspended investments - - - -
------------------------------------------ --------- ------- ------- ---------
Total for financial assets 1,226,649 - - 1,226,649
------------------------------------------ --------- ------- ------- ---------
2022
--------------------------------------
Level 1 Level 2 Level 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------------ --------- ------- ------- ---------
Financial assets designated at fair value
through profit or loss:
Quoted investments:
Equities and preference shares 1,218,419 - - 1,218,419
Unquoted investments - - 306 306
------------------------------------------ --------- ------- ------- ---------
Total for financial assets 1,218,419 - 306 1,218,725
------------------------------------------ --------- ------- ------- ---------
The valuation techniques used by the Company are explained in
the accounting policies note. At the end of the financial year
there were no Level 2 investments (2022: no Level 2 investments).
There were two Level 3 investments at the year end totalling GBPnil
(2022: two investments totalling: GBP306,000).
The holding in Eurovestech did not change during the year, but
the fair value was reduced to GBPnil (2022: GBP69,000).
Raven Property is the other unquoted investment. Their issued
preference shares were suspended on 2 March 2022 due to sanctions
on the company's Russian businesses. At the balance sheet date the
shares have been de-listed and recorded a fair value of GBPnil
(2022: GBP237,000).
The book cost and fair value of the debenture stock, based on
the offer value at the balance sheet date, are as follows:
2023 2022
---------------- ----------------
Book Fair Book Fair
Value Value Value Value
GBP'000 GBP'000 GBP'000 GBP'000
-------------------------------------- ------- ------- ------- -------
Debenture stock repayable within one
year:
7 3/4 % Debenture Stock 30 September
2022 - - 100,000 102,734
Discount on issue of debenture stock - - (126) -
Loan notes repayable after five year:
Unsecured Senior Loan Notes 120,000 78,253 20,000 18,204
-------------------------------------- ------- ------- ------- -------
120,000 78,253 119,874 120,938
-------------------------------------- ------- ------- ------- -------
Please refer to page 85 which describes the fair valuation
process of the Company's loan notes.
18. CAPITAL MANAGEMENT
The Company's total capital employed at 31 March 2023 was
GBP1,259,276,000 (2022: GBP1,259,314,000) comprising borrowings of
GBP120,000,000 (2022: GBP119,874,000) and equity share capital and
other reserves of GBP1,139,344,000 (2022: GBP1,175,837,000).
The Company's total capital employed is managed to achieve the
Company's objective and investment policy as set out on page 14,
including that borrowings may be used to provide gearing of the
equity portfolio up to the maximum authorised by shareholders,
currently 25% of net assets. Net gearing was 4.7% (2022: 4.4%) at
the balance sheet date. The Company's policies and processes for
managing capital were unchanged throughout the year and the
preceding year.
The main risks to the Company's investments are shown in the
Strategic Report under the 'Principal Risks and Uncertainties'
section on pages 18 to 21. These also explain that the Company is
able to use borrowings to gear and that gearing will amplify the
effect on equity of changes in the value of the 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 section 1158 Corporation Tax Act 2010 and by the
Companies Act 2006, respectively, and with respect to the
availability of the bank 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. As detailed in note 11 and note 12, current borrowings
comprise the unsecured senior loan notes.
19. CONTINGENCIES, GUARANTEES AND FINANCIAL COMMITMENTS
There were no contingencies, guarantees or other financial
commitments of the Company as at 31 March 2023 (2022: nil).
20. RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH 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 in pages 45 and 48 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
Directors' Report on page 41, and in note 3.
21. POST BALANCE SHEET EVENTS
There are no significant events after the end of the reporting
period requiring disclosure.
BOARD CHANGES
At this year's Annual General Meeting, Vicky Hastings will not
be standing for re-election. The board has been very fortunate to
have had Vicky's wise counsel and exceptional attention to detail
for ten years. The last twelve months were an extension to the
normal nine years, in order to avoid having the Chair and the
Senior Independent Director standing down at the same time last
year.
Aidan Lisser has kindly agreed to take over Vicky's role as
Senior Independent Director after the conclusion of the Annual
General Meeting 19 July 2023. Please see the Governance section in
the Annual Financial Report for more details (pages 29 - 48).
NOTICE OF ANNUAL GENERAL MEETING
Notice of the Annual General Meeting of the Company is included
in the Annual Financial Report (pages 77 - 80).
The Annual General Meeting of the Company will be held at The
Balmoral Hotel, Edinburgh, EH2 2EQ on 19 July 2023 at 11am.
The Annual Financial Report will be submitted to the National
Storage Mechanism and will shortly be available for inspection at:
National Storage Mechanism | FCA
The Audited Annual Financial Report will be posted to
shareholders shortly. Copies may be obtained during normal business
hours from the Company's registered office, First Floor, 9
Haymarket Square, Edinburgh, EH3 8RY.
A copy of the Annual Financial Report will be available from the
Company's website: www. edinburgh-investment-trust.co.uk
By order of the Board
Apex Listed Companies Services (UK) Limited
Company Secretary
30 May 2023
Enquiries
Liontrust Fund Partners LLP
James Mowat +44 20 3908 8822
james.mowat@liontrust.co.uk
Investec Bank plc
Tom Skinner + 44 20 7597 4000
Montfort Communications
Gay Collins +44 7798 626282
Shireen Farhana +44 7757 299250
Ella Henderson +44 7762 245122
EIT@montfort.london
Apex Listed Companies Services (UK) Limited (Company
Secretary)
Brian Smith +44 20 3327 9720
Notes to editors
About The Edinburgh Investment Trust plc
Founded over 130 years ago, The Edinburgh Investment Trust plc
is listed on the London Stock Exchange and is included in the FTSE
250 index. It invests primarily in a portfolio of UK listed shares
and has net assets of approximately GBP1.1 billion. The Company's
twin investment objectives for the long term are to outperform the
FTSE All-Share Index on a Net Asset Value (NAV) basis and to
produce dividend growth in excess of the rate of UK inflation.
Liontrust Fund Partners LLP became the Company's AIFM with effect
from 1 April 2022.
ENDS
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