TIDMFAS
FIDELITY ASIAN VALUES PLC
Annual Report for the year ended 31 July 2020
CHAIRMAN'S STATEMENT
Kate Bolsover - I have pleasure in presenting the Annual Report of Fidelity
Asian Values PLC (the "Company") for the year ended 31 July 2020.
By any standard the year under review has been an extraordinary one, with
countries around the world experiencing unprecedented challenges in the wake of
the Coronavirus ("COVID-19") pandemic. Our thoughts are with all those who have
been affected.
Against a challenging market backdrop, our Portfolio Manager, Nitin Bajaj,
ranks first among his small cap peers on a five-year view, however recent
performance has, unfortunately, been weaker. From an investment perspective,
while 'in-person' company meetings have been paused for now, Nitin undertakes
virtual meetings with existing and potential investee companies which are
proving to be effective.
The Manager is keeping its business continuity plans and operational resilience
strategies under constant review and is taking the necessary steps to meet its
regulatory obligations and to support its investors. The Company's other third
party service providers have also implemented similar measures to ensure
business disruption is kept to a minimum.
In seeking to provide shareholders with a differentiated equity exposure to
Asian markets, Nitin focuses on buying businesses that have strong management
but are mispriced. This often leads him to invest in small and medium sized
companies, the 'winners of tomorrow', before they become well-known.
Unfortunately, this segment of the market has been disproportionately impacted
by the prevailing environment and this has weighed on shorter-term performance.
As Nitin explains in his Portfolio Manager's Review, the value-investing style
he deploys, and which has historically rewarded investors, is currently out of
favour, generating excellent longer-term opportunities while demanding patience
nearer-term.
INVESTMENT AND MARKET REVIEW
In the 12 months to 31 July 2020, NAV performance was -16.7% compared to a
return of +2.7% for the Comparative Index*. Share price performance over the
same period was a disappointing -24.8%, reflecting the fact that the Company
has moved from trading at a premium to its NAV to a discount in more recent
times. In addition to the significant impact of COVID-19 on Asian equity
markets, Nitin also faces dual headwinds in his stylistic bias for value and
also for smaller and medium sized businesses.
Value, as an investment style, is experiencing the longest and deepest
underperformance relative to growth since the 1960s. Value stocks considered
across a range of valuation metrics, including price-to-book and
price-to-earnings multiples, have not traded so cheaply since 1968. The stocks
of smaller and medium sized companies meanwhile have been severely punished,
certainly by historical standards, in a market environment dominated by
mega-cap names. The Board believes that value investing will return to favour
and that this is a period of unprecedented opportunity to invest in good
companies at competitive prices.
* The Company's Comparative Index changed from the MSCI All Countries Asia
ex Japan Index (net) total return (in Sterling terms) to the MSCI All Countries
Asia ex Japan Small Cap Index (net) total return (in Sterling terms) on 1
February 2020. Therefore, the Comparative Index reported is a blend of the two.
RESPONSE AND OUTLOOK
In response to this difficult environment and with the Company trading at its
widest discount in over a decade, the Board initiated a buyback programme in
March of this year. The Company has bought back 1,648,782 shares over the
period under review (further details below). At the end of the financial year,
the Company traded at a discount to NAV of 8.1%. The Board has also carefully
monitored service providers throughout the pandemic, ensuring operational
robustness.
In this year, perhaps more than most, predicting the future is difficult. The
road ahead may be strewn with challenges, but we remain encouraged by the
extreme valuation differential between "growth" and "value" companies and the
opportunities inherent in that. As we begin the new financial year, valuations
are even more extreme in Asia than they were in the run up to the dot com
bubble, when growth stocks sold at extraordinary multiples. While we continue
to monitor performance carefully, Nitin continues to have our full support in
navigating the months and years ahead. We are reassured by the high quality of
his portfolio and thank shareholders for their ongoing support.
OTHER MATTERS
Gearing
Increased volatility and risk aversion in the market has created stock picking
opportunities and Nitin has been able to add new holdings and increase existing
positions at more attractive valuations. Over his tenure, Nitin has not felt
the need to use gearing extensively and has reduced gearing slightly from the
level reported last year. He continues to believe that the main driver of the
Company's performance will be stock picking.
Management Fee
The Company has had a variable management fee structure in place since 1 August
2018. It uses a Comparative Index against which the variable element of the
management fee is calculated. The change to the Comparative Index from the MSCI
All Countries Asia ex Japan Index (net) total return (in Sterling terms) to the
MSCI All Countries Asia ex Japan Small Cap Index (net) total return (in
Sterling terms) from 1 February 2020 has had no impact on any fees accrued
until the date of the change. Since then, any over or under performance has
been measured against the new Comparative Index.
The fee to 31 July 2020 was GBP1,655,000 (2019: GBP2,262,000). Given the relative
underperformance, the variable management fee represented 0.59% of net assets
throughout the period (2019: 0.78%).
Discount/Premium and Share Repurchases/Issues
As reported in the Company's Half-Yearly Report, up until 31 January 2020 the
Company's shares had mostly traded at a premium and the Board authorised the
issue of 265,981 ordinary shares from the Company's block listing facility.
Issuing shares increases the size of the Company, making it more liquid and
allowing for costs to be spread out over a larger asset base. Since then and as
at the date of this report, no additional ordinary shares have been issued.
Repurchases of ordinary shares are made at the discretion of the Board and
within guidelines set by it and in light of prevailing market conditions.
Shares will only be repurchased when it results in an enhancement to the NAV of
the ordinary shares. In order to assist in managing the discount, the Board has
shareholder approval to hold in Treasury any ordinary shares repurchased by the
Company, rather than cancelling them. Any shares held in Treasury would only be
re-issued at NAV per share or at a premium to NAV per share.
As I have highlighted above, we have seen an extraordinary level of turmoil in
the world's financial markets and the Company's premium/discount has been
commensurately volatile. The Board initiated a buyback program in March whereby
1,648,782 ordinary shares have been repurchased for holding in Treasury
(representing 2.18% of the issued share capital). 422,255 shares have been
repurchased since the end of the reporting period and as at the date of this
report.
Dividend
Subject to shareholders' approval at the Annual General Meeting ("AGM") on 8
December 2020, the Directors recommend a dividend of 8.50 pence per ordinary
share which represents a decrease of 3.4% over the 8.80 pence paid in 2019.
This dividend will be payable on 10 December 2020 to shareholders on the
register at close of business on 23 October 2020 (ex-dividend date 22 October
2020). Shareholders should be reminded that as the Company's objective is
long-term capital growth, the level of dividend is a function of a particular
year's income and it should not be assumed that dividends will continue to be
paid in the future.
BOARD OF DIRECTORS
As reported in the Company's Half-Yearly Report, Philip Smiley retired from the
Board on 30 April 2020. His extensive experience in Asia and unique insights
about the region were much appreciated by the Board and I would like to take
this opportunity to thank him for his terrific contribution.
Timothy Scholefield succeeded Philip as Senior Independent Director on 1 May
2020.
All Directors are subject to annual re-election at the forthcoming AGM. The
Directors' biographies are included in the Annual Report, and between them,
they have a wide range of appropriate skills and experience to form a balanced
Board of the Company.
BOARD SUCCESSION
The Board has spent a considerable amount of time discussing its succession
plan for the next four years and wishes to share these with investors. Grahame
Stott will have completed his nine-year tenure in 2022 and will step down from
the Board at the AGM in 2022 and he will be replaced as Audit Committee
Chairman by Clare Brady. By the AGM in 2023, I will have served four years as a
Director and a further nine years as Chairman and will step down from the Board
at the AGM in 2023. The Board considers that I continue to be independent.
ANNUAL GENERAL MEETING - TUESDAY, 8 DECEMBER 2020 AT 11.00 AM
In response to the wide spread of COVID-19, the current Government guidance
stipulates that large gatherings of people are prohibited.
With this in mind, this year's AGM will be virtual in nature. In accordance
with the Corporate Governance and Insolvency Act 2020 and with the Company's
Articles of Association, the AGM will be conducted in closed session via video
conference. This meeting will be restricted to the formal business of the
meeting as set out in the Annual Report and voting on the resolutions therein.
An online presentation by the Chairman and Portfolio Manager which will be
available online at www.fidelity.co.uk/asianvalues.
Copies of the Portfolio Manager's presentation can be requested by email at
investmenttrusts@fil.com or in writing to the Secretary at FIL Investments
International, Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey,
KT20 6RP.
It is not the Board's intention to exclude or discount the views of the
Company's shareholders, but at the moment, the health of all investors,
workforce and officers must be paramount. We urge all shareholders to make use
of the proxy form provided. If you hold shares through the Fidelity Platform or
a nominee (and not directly in your own name) proxy forms are not provided and
you are advised to contact the company with which you hold your shares to
determine alternative options (if available) for lodging your voting
instructions.
We encourage all investors who have any questions or comments to contact the
Secretary so that she can relay your comments to the Board, and we will respond
in due course.
We thank you for your cooperation and sincerely hope to resume the meeting's
usual format in the future.
KATE BOLSOVER
Chairman
13 October 2020
PORTFOLIO MANAGER'S REVIEW
Nitin Bajaj was appointed as the Portfolio Manager of Fidelity Asian Values PLC
on 1 April 2015. He is based in Singapore and has over 19 years' investment
experience. He is also the Portfolio Manager for the Fidelity Asian Smaller
Companies Fund. He first joined Fidelity in 2003 as an Investment Analyst and
then took over the Fidelity India Special Situations Fund and subsequently
started the Fidelity India Value Fund. He managed these funds until November
2012, when Fidelity decided to sell its India business.
QUESTION
How has the Company performed in the year under review?
ANSWER
It has been a difficult year and the Company's NAV declined 16.7% over the
period, compared to an annualised return of 14.1% up to the prior year during
my tenure as Portfolio Manager of the Company. As always, responsibility for
performance sits solely with me in both good and bad years.
In order to get a better perspective on performance, I think it's also
important to understand what happened over the last year and the market
environment we are operating in.
STOCK PICKING
There are two kinds of errors that an investor can make: errors of omission and
errors of commission. Errors of omission are stocks that we don't own that go
up. Errors of commission are stocks we own that go down.
Errors of omission are inevitable. There will always be stocks that we do not
own that go up a lot. This year these were concentrated in technology and
health care - but more generally, in categories of stocks which can be broadly
labelled as 'momentum'. These are stocks which we are very unlikely to own as
they are expensive, with high expectations and very little margin of error.
When they are appreciating, no one questions them.
Unfortunately, we also made a few errors of commission this year - most
notably, our investment in mortgage companies in India. The country has been in
a housing downcycle for almost eight years resulting in significantly improved
housing affordability (house prices compared to household income) - its best
level in the last 25 years. Our analysis showed that we should be on the cusp
of a turn in the cycle for the better. In a weak economy the recovery was
delayed, and it got worse due to COVID-19, which led to unprecedented economic
hardship and liquidity stress on households, property developers and the
financial system. I feel our analysis was sound and the risk-reward was in our
favour when we made the investment - but our bet size was not. At 6% of the
Company's NAV, it was too big a position.
Position sizing is tricky - when you get it right, you always feel you should
have had more, and when you get it wrong, it's the opposite.
In addition, there have been a few other stock specific detractors like Cebu
Air. Cebu Air is a low-cost airline with 55% market share in the Philippines.
It has an almost insurmountable lead on its competition in terms of its cost
structure. The management team is best in class and it has a well-funded
balance sheet. The business has been hit hard by COVID-19, and like most
airlines, its stock price has declined. I continue to own my position in Cebu
Air as they should be able to get through this period given the balance sheet
strength and emerge in a stronger competitive position.
In terms of positive stock contribution, our investment in e-bike battery
company Tianneng Power International performed exceptionally well as the stock
was discovered by mainstream investors. Also, our investment in rubber glove
company Riverstone has performed well during COVID-19 due to the huge demand
for medical grade gloves. I continue to own shares in both these businesses.
Our objective is to not lose money when we are wrong, so that our correct
decisions can add up. It did not happen this year. In fact, this was the first
year since I have managed Asian portfolios that I have had negative
contribution from stock selection. This was partly due to: 1) stock picking;
and 2) due to the number of business we own being currently unloved in the
stock market. This meant that our bucket of positive contributors was smaller.
COUNTRY ALLOCATION
Country allocation for us is an outcome of stock selection rather than a top
down view. Going into COVID-19 we had a significant portion of our assets
invested in India, Indonesia and Philippines (38.7% at the end of February
2020; and 30% at the end of July 2020 as we adjusted some of our positions). We
have historically found exceptional businesses, with significant growth
opportunities at attractive valuations in these countries.
However, all three are densely populated countries and have had to impose
stringent lockdowns. This was essential and does not change the long-term
dynamics of these economies. However, it has led to a significant stock market
sell off in these three countries - more than the rest of Asia. Some of this
stock market correction is justified but I would argue that quite a few stocks
in these countries have been sold off irrespective of fundamentals.
An example would be Power Grid Corporation of India, our 2nd largest holding.
Power Grid is a high-quality regulated monopoly for electricity transmission in
India and has an enviable track record of growth, stability and return on
equity. Irrespective of the strong fundamentals, the stock has been sold off
due to COVID-19 and now looks very compelling from a valuation perspective.
I have adjusted the Company's portfolio in these countries to concentrate our
focus on businesses which can endure this economic hardship even if it lasts
another two years. COVID-19 will pass, but these businesses will still be
around, and having enhanced their competitive position through this period,
emerge stronger.
STYLE BIAS
Value investing is what I do and investing in interesting but unloved companies
has been the key driver of returns in every portfolio I have managed over the
last decade. However, my value bias was a significant headwind to performance
last year as there was a sentiment swing in favour of growth companies - both
large and small. On a relative basis, this hit the Company twice - as stocks I
did not own went up, while the ones I did own fell. A number of stocks in the
portfolio, despite being attractively valued and delivering good operating
performance, have not appreciated, as a narrow group of stocks (in a few
specific sectors) have carried the stock markets in Asia.
Smaller value companies are now trading at a 55% discount to growth companies.
This compares to a 65% discount seen during the peak of the tech bubble in
1999-2000 (peak of the previous growth cycle). Similarly, if you compare the
lowest quintile of stocks in Asia to the most expensive quintile of stocks, the
valuation discount is even more extreme and stands at 90%.
VALUE DISPERSION OVER THE PAST 20 YEARS
Source: Fidelity International, Bloomberg, 31 July 2020. Index: MSCI All
Countries Asia ex Japan Small Cap (net) Index.
Active weight denotes differences in fund weighting versus Index weighting.
Past performance is not an indicator of future returns.
LOWER PRICE TO EARNINGS RATIO VERSUS INDICES
HIGHER RETURNS ON EQUITY VERSUS INDICES
Source: Fidelity International, FactSet, 31 July 2020. Indices: MSCI AC Asia ex
Japan Small-Cap Index and MSCI AC Asia ex Japan Small-Cap Value Index. Price to
Earnings (P/E) Ratio is a measure for valuing a company's share price versus
its earnings. Price to Earnings based on FY1 estimates. Low P/E can indicate
that a company may currently be undervalued. Price to Book (P/B) Ratio is a
measure for valuing a company's share price versus its book value. Low P/B can
indicate that a company may currently be undervalued.
The most interesting fact for me is that over time "value" companies in Asia
normally grow earnings faster than "growth" companies. Not only do these stocks
provide you with a better starting margin of safety but these businesses are
also able to grow earnings faster.
Hence, it's not surprising that over the long-term it has paid to be invested
in small cap value stocks. They have outperformed growth companies by a
significant margin over the last 20 years.
There is no doubt that currently our style is at the wrong end of the pendulum
swing. But I feel that these extreme valuations offer a unique opportunity, not
too different from 1999-2000, to invest in these overlooked businesses.
Our investment philosophy is based on owning good businesses, run by competent
management teams and buying them at a price that leaves a sufficient margin of
safety. Unloved smaller companies with high-quality underlying business have
always been a lucrative hunting ground for this philosophy. While the portfolio
has strong reflections of the small cap value index and is currently trading at
a 32% discount to the broader small cap index (the valuation discount is much
bigger versus large cap and growth indices), its return on equity versus the
indices is substantially higher.
To conclude, style biases are cyclical - an investment process should not be.
QUESTION
Historically value stocks have tended to perform better than average in market
dips, but that doesn't seem to have been the case this time round. Why? What
might trigger a reversal in fortunes for value investors?
ANSWER
There are two reasons in my opinion.
Firstly, fundamentally 'growth' companies have delivered reasonably good
operating results during the economic downturn as a lot of them are in the
technology and health care sectors. These businesses benefited during lockdown
due to an accelerated shift towards online services as well as the trend
towards "working from home", which has led to an increase in demand for
computers and peripherals.
Secondly, the valuations of these businesses have expanded even further. We are
seeing extreme valuations which approximate to what we witnessed during the
tech bubble in 1999-2000. In my opinion, this multiple expansion is not
supported by facts, as on average, there is a big difference in perception of
growth and actual earnings delivery.
Growth has significantly outperformed value as a style in almost all markets.
We are looking at a value drawdown which is the most extreme in 200 years. Even
though data going this far back is bound to have some errors, it is indicative
of where we stand versus history. These cycles have always levelled out over
time. It would take a brave man to say that "this time it's different".
QUESTION
Small caps have lagged large caps quite markedly for some time. What are the
drivers behind that? What might be the catalyst(s) for small cap
outperformance?
ANSWER
This has been primarily driven by huge appreciation in large cap growth stocks.
If you look at the earnings of small cap value stocks over time, they have
easily outperformed large cap stocks. Even in the last five years, the earnings
of small cap value stocks have outperformed the large growth companies despite
COVID-19.
So fundamentally, I find it hard to justify, based on earnings or cash flows,
why small cap value stocks in Asia (or small caps in general) have lagged
materially in the last three years (and particularly in the last 12 months). It
basically comes down to the price earnings ratio expansion of large growth
companies.
As a fundamental investor, the primary anchor for valuing any business must be
earnings and cash flows. This has always been the case and I do not think it is
different now. I have no doubt, therefore, that this situation will reverse.
The catalyst for and timing of that change is, however, difficult to forecast.
In the meantime, current market factors are giving us an opportunity to own
high quality companies at attractive prices. This does not happen often and
hence it's important to maintain our discipline and take advantage.
I do understand that being patient is not easy, especially when some of the
growth stocks seem to go up every day. I empathise with our investors (I am one
of them and have a substantial personal investment in the Company) as it has
not been easy. But making money in the markets is not easy. If it was, everyone
would be rich.
QUESTION
How has COVID-19 impacted your companies - both operationally and from an
earnings perspective?
ANSWER
None of the businesses in the Company's portfolio have ever experienced
anything like COVID-19.
It is a shock that impacts the internal systems of businesses, demand for their
products, government policy and social structure. I think everyone is still
learning how to deal with it.
So far, most companies seemed to have managed internal operations quite well
and productive capacities are starting to normalise, except for a few
industries such as travel and hospitality. Businesses are now trying to figure
out the "new normal" in demand, especially once the government support stops.
We will have to wait and see.
The impact of COVID-19 on earnings has been mixed. Like I said, companies
operating in technology, health care, consumer staples, infrastructure and
utilities have not really been impacted materially, while those in
discretionary consumption, travel and hospitality have seen an adverse impact.
QUESTION
How have valuations changed in the period under review?
ANSWER
The last six months have been unprecedented. We went from a financial crisis to
euphoria in a period of three months. What I see today is a two-speed market
where we can find stocks at both valuation extremes.
I am excited by our holdings today. We own a portfolio of businesses which are
dominant in their industries, earn good returns on capital and are available at
attractive valuations.
QUESTION
There is a greater focus than ever on ESG matters. How does Fidelity think
about ESG?
ANSWER
Fidelity believes that businesses which flout laws or do not respect their
employees, customers or communities will not be able to sustain high returns
over time. It is simply not a sustainable way to do business. Fidelity is
encouraged that the investment community in general is paying more attention to
these issues.
Adherence by corporates to the principles of sustainability will have a growing
impact on the demand for those companies' goods and services. Monitoring the
actions of the corporates and engaging with them to improve, is a core pillar
of Fidelity's strategy and embedded into the research methodology which we use
to assess companies.
QUESTION
As we move through the early stage of a new decade, what should investors be
focusing on in the months and years ahead? Which stocks look the most promising
to you?
ANSWER
I think fundamental analysis and owning good businesses, run by competent
managements at attractive prices will continue to be important. If you can
combine businesses which can grow revenues through time while earning high
returns on capital with attractive purchase prices, then it should go a long
way towards helping investors attain their financial objectives.
This is what I am focused on and I and the Fidelity analyst team are working
harder than ever to find these businesses and then test every assumption we are
making about the business fundamentals going forward. A sound investment
process, hard work, discipline and patience have always been important for
investing success. I don't think this will change in this decade.
NITIN BAJAJ
Portfolio Manager
13 October 2020
STRATEGIC REPORT
PRINCIPAL RISKS AND UNCERTAINTIES AND RISK MANAGEMENT
As required by provisions 28 and 29 of the 2018 UK Corporate Governance Code,
the Board has a robust ongoing process for identifying, evaluating and managing
the principal risks and uncertainties faced by the Company. The Board, with the
assistance of the Alternative Investment Fund Manager (FIL Investment Services
(UK) Limited/the "Manager"), has developed a risk matrix which identifies the
key risks that the Company faces and assigns a rating to each risk. This is
reviewed by the Audit Committee at least once annually. The Board has also
established associated policies and processes designed to manage and where
possible, mitigate those risks which are monitored in the form of comprehensive
reports considered by the Audit Committee. The Board determines the nature and
extent of any risks it is willing to take in order to achieve its strategic
objectives.
EMERGING RISKS AND UNCERTAINTIES
The Board held a strategy meeting on 29 January 2020. Among wider strategic
matters discussed at this meeting, an exercise was carried out to identify any
new emerging risks and take any action necessary to mitigate their potential
impact. The Board identified the pandemic risk as having a material effect on
the Company and took the decision to include this with its principal risks.
The Board considers the risks listed below to be the principal risks and
uncertainties faced by the Company. The wording of these risks has been revised
but they remain unchanged at a high level from those reported in the prior
year, apart from the addition of the "Pandemic Risk".
Principal Risks Description and Risk Mitigation
Market, Economic and The Company's portfolio is made up mainly of listed securities. The principal
Political risk risks are, therefore, market related such as market downturn, interest rate
movements and exchange rate movements. Political change or protectionism can
also have an impact on the Company's assets, such as a US-led trade war, North
Korean conflict, political tensions in the Eurozone and Brexit risks. The
Portfolio Manager's success or failure to protect and increase the Company's
value against this background is core to the Company's continued success.
The risk of the likely effects of COVID-19 on the markets is discussed in the
Chairman's Statement and in the Portfolio Manager's Review. These risks are
somewhat lessened by the investment trust structure which means no forced sales
will need to take place to deal with any redemptions. Therefore, investments
can be held over a longer time horizon.
Risks to which the Company is exposed in the market risk category are included
in Note 17 to the Financial Statements together with summaries of the policies
for managing these risks.
Investment Performance risk The Portfolio Manager's investment strategy, if inappropriate, may result in
the Company underperforming the market and/or peer group companies, leading to
the Company and its objectives becoming unattractive to investors. In order to
manage this risk, the Board reviews Fidelity's compliance with agreed
investment restrictions; investment performance and risk; relative performance;
the portfolio's risk profile; and whether appropriate strategies are employed
to mitigate any negative impact of substantial changes in markets. The Board
also regularly canvasses major shareholders for their views with respect to
company matters.
Key Person risk The Portfolio Manager has a differentiated style in relation to his peers. This
style is intrinsically linked with the Company's investment philosophy and
strategy and, therefore, the Company has a key person dependency on Nitin
Bajaj. Fidelity has succession plans in place for its portfolio managers which
have been discussed with the Board and provide some assurance in this regard.
Discount Control risk The price of the Company's shares and its premium or discount to NAV are
factors which are not within the Company's total control. The Board has a
discount management policy in place and some short-term influence over the
discount may be exercised by the use of share repurchases at acceptable prices
within the parameters set by the Board. The Company's share price, NAV and
discount volatility are monitored daily by the Manager and considered by the
Board on a regular basis.
Gearing risk The Company has the option to invest up to the total of any loan facilities or
to use CFDs to invest in equities. The principal risk is that while in a rising
market the Company will benefit from gearing, in a falling market the impact
would be detrimental. Other risks are that the cost of gearing may be high or
that the term of the gearing inappropriate in relation to market conditions.
The Company currently has no bank loans and gears through the use of long CFDs
which provide greater flexibility and are currently cheaper than bank loans.
The Board regularly considers the level of gearing and gearing risk and sets
limits within which the Manager must operate.
Derivatives risk Derivative instruments are used to enable both the protection and enhancement
of investment returns. There is a risk that the use of derivatives may lead to
higher volatility in the NAV and the share price than might otherwise be the
case. The Board has put in place policies and limits to control the Company's
use of derivatives and exposures. These are monitored on a daily basis by the
Manager's Compliance team and regular reports are provided to the Board.
Further details on derivative instruments risk is included in Note 17 to the
Financial Statements.
Currency risk The base currency of the Company is Sterling. Most of its assets and its income
are denominated in other currencies. Consequently, it is subject to currency
risk on exchange rate movements between Sterling and these other currencies.
The Company has no formal policy for hedging currency risk but may use foreign
currency contracts to limit exposure.
Further details can be found in Note 17 to the Financial Statements.
Cybercrime risk Cybercrime threats evolve rapidly and consequently the risk is regularly
re-assessed and the Board receives regular updates from the Manager in respect
of the type and possible scale of cyberattacks. The Manager's technology team
has developed a number of initiatives and controls in order to provide enhanced
mitigating protection to this ever increasing threat and the Board is updated
on these as part of the reporting it receives from the Manager.
Risks are increased due to the COVID-19 crisis, primarily related to phishing,
remote access threats, extortion and DDoS (Distributed Denial of Service)
attacks. The Manager has a dedicated detect and respond resource specifically
to monitor the cyber threats associated with COVID-19.
Pandemic risk As the COVID-19 outbreak continues to spread, there has been increased focus
from financial services regulators around the world on the contingency plans of
regulated financial firms. The Manager reviews its business continuity plans
and operational resilience strategies on an ongoing basis and will take all
reasonable steps to continue meeting its regulatory obligations and to assess
operational risks, the ability to continue operating and the steps it needs to
take to serve and support its clients, including the Board. For example, to
enhance its resilience, the Manager has mandated work from home arrangements
and implemented split team working for those whose work is deemed necessary to
be carried out in an office. The Manager has also imposed self-isolation
arrangements on staff in line with Government recommendations and guidance.
Investment team key activities, including portfolio managers, analysts and
trading/support functions, are performing well despite the operational
challenges posed by working from home or split team arrangements.
The Company's other third party service providers have also confirmed the
implementation of similar measures to ensure no business disruption.
Other risks facing the Company include:
TAX AND REGULATORY RISKS
A breach of Section 1158 of the Corporation Tax Act 2010 could lead to a loss
of investment trust status resulting in the Company being subject to tax on
capital gains. The Board monitors tax and regulatory changes at each Board
meeting and through active engagement with regulators and trade bodies by the
Manager.
OPERATIONAL RISKS
The Company relies on a number of third party service providers, principally
the Manager, Registrar, Custodian and Depositary. It is dependent on the
effective operation of the Manager's control systems and those of its service
providers with regard to the security of the Company's assets, dealing
procedures, accounting records and the maintenance of regulatory and legal
requirements. The Registrar, Custodian and Depositary are all subject to a
risk-based programme of internal audits by the Manager. In addition, service
providers' own internal control reports are received by the Board on an annual
basis and any concerns investigated.
GOING CONCERN STATEMENT
The Directors have considered the Company's investment objective, risk
management policies, liquidity risk, credit risk, capital management policies
and procedures, the nature of its portfolio (being mainly securities which are
readily realisable) and its expenditure and cash flow projections and have
concluded that the Company has adequate resources to continue to adopt the
going concern basis for at least twelve months from the date of this Annual
Report. This conclusion also takes into account the Board's assessment of the
risks arising from COVID-19 as set out in the Pandemic Risk. The prospects of
the Company over a period longer than twelve months can be found in the
Viability Statement below.
VIABILITY STATEMENT
In accordance with provision 31 of the 2018 UK Corporate Governance Code, the
Directors have assessed the prospects of the Company over a longer period than
the twelve month period required by the "Going Concern" basis above. The Board
considers long-term to be at least five years, and accordingly, the Directors
believe that five years is an appropriate investment horizon to assess the
viability of the Company, although the life of the Company is not intended to
be limited to this or any other period.
In making an assessment on the viability of the Company, the Board has
considered the following:
· The ongoing relevance of the investment objective in prevailing market
conditions;
· The Company's NAV and share price performance;
· The principal and emerging risks and uncertainties facing the Company
and their potential impact;
· The future demand for the Company's shares;
· The Company's share price relative to the NAV;
· The liquidity of the Company's portfolio;
· The level of income generated by the Company; and
· Future income and expenditure forecasts.
The Company's performance over the five year reporting period to 31 July 2020,
was a NAV total return of 47.0%, a share price total return of 51.9% and a
Comparative Index return of 67.5%. The Board regularly reviews the investment
policy and considers it to be appropriate. The Board has concluded that there
is a reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the next five years
based on the following considerations:
· The Manager's compliance with the Company's investment
objective, its investment strategy and asset allocation;
· The fact that the portfolio comprises sufficient readily
realisable securities which can be sold to meet funding requirements if
necessary;
· The Board's discount management policy; and
· The ongoing processes for monitoring operating costs and income
which are considered to be reasonable in comparison to the Company's total
assets.
In addition, the Company is subject to a continuation vote at the AGM in 2021
and the Board expect that the vote, when due, will be approved.
PROMOTING THE SUCCESS OF THE COMPANY
Under Section 172(1) of the Companies Act, the Directors have a duty to promote
the success of the Company for the benefit of its stakeholders. This includes
having regard (amongst other matters) to fostering relationships with the
Company's stakeholders and maintaining a reputation for high standards of
business conduct. The Company has no employees, premises, assets or operations.
The shareholders in the Company are its key stakeholders and while the Board
holds the Manager to account in managing the Company's assets, it recognises
that this is also a key relationship. The Directors recognise that carrying out
their statutory duty is fundamental to achieving longer-term success, and to
this effect continue to work closely with the Manager to further develop the
Company's investment strategy and underlying policies. The intention is not
simply to achieve the Company's investment objective but to ensure that it is
done in an effective and responsible way in the interests of shareholders,
future investors and society at large.
It is one of the Board's long-term intentions that the share price should trade
at a level close to the underlying net asset value of the shares. In order to
achieve this, the Board has implemented a discount policy in order to reduce
discount volatility and will, when appropriate, execute share repurchases (in
normal market conditions).
The Board is mindful that investors expect their assets to be managed for a
competitive fee. The Board negotiated a variable management fee with Fidelity
in 2018. The Board believes that this fee arrangement fairly rewards the
Manager for any outperformance against the Comparative Index while remaining
competitive against fees charged by the Company's peer group. The Board,
therefore, believes that this fee also benefits shareholders. Fees for the
reporting year were GBP1,655,000 (2019: GBP2,262,000). Further information about
the variable fee arrangement can be found in the Directors' Report.
It is important that shareholders have access to both the Portfolio Manager and
the Board. The Portfolio Manager meets with major shareholders, stock market
analysts, journalists and other commentators during the year. Since COVID-19,
most of these meetings have been virtual in nature. In the run-up to the final
subscription share exercise in November 2019, the Chairman, through the Broker,
proactively offered to meet with major shareholders without representatives
from Fidelity present to discuss any concerns investors may have had. However,
no concerns were raised and shareholders did not feel the need to meet with the
Chairman privately.
Long-term investors look to the future - the Portfolio Manager in constructing
the portfolio and the Board in governing the Company. The performance of the
Company and its reputation for transparency and good governance are paramount
to its long-term success.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Financial
Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law they have elected to prepare the Financial
Statements in accordance with UK Generally Accepted Accounting Practice,
including FRS 102: The Financial Reporting Standard applicable in the UK and
Republic of Ireland. The Financial Statements are required by law to give a
true and fair view of the state of affairs of the Company and of the profit or
loss for the 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; and
· prepare the Financial Statements on the going concern basis unless it is
inappropriate to assume that the Company will continue in business.
The Directors are responsible for ensuring that adequate accounting records are
kept which disclose with reasonable accuracy at any time the financial position
of the Company and to enable them to ensure that the Financial Statements
comply with the Companies Act 2006. They are also responsible for safeguarding
the assets of the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, a Directors' Report, a Corporate Governance
Statement and a Directors' Remuneration Report that comply with that law and
those regulations.
The Directors have delegated the responsibility for the maintenance and
integrity of the corporate and financial information included on the Company's
pages of the Manager's website at www.fidelity.co.uk/asianvalues. Visitors to
the website need to be aware that legislation in the UK governing the
preparation and dissemination of the Financial Statements may differ from
legislation in their jurisdictions.
The Directors confirm that to the best of their 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 loss of the Company; and
· The Annual 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 it faces.
The Directors consider that the Annual Report and Financial Statements, taken
as a whole, are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company's performance, business model
and strategy.
Approved by the Board on 13 October 2020 and signed on its behalf by:
KATE BOLSOVER
Chairman
INCOME STATEMENT FOR THE YEARED 31 JULY 2020
year ended 31 July 2020 year ended 31 July 2019
Notes
revenue capital total revenue capital total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
(Losses)/gains on 10 - (66,743) (66,743) - 16,606 16,606
investments
Gains/(losses) on 11 - 6,285 6,285 - (573) (573)
derivative instruments
Income 3 10,602 - 10,602 11,481 - 11,481
Investment management fees 4 (1,967) 312 (1,655) (2,030) (232) (2,262)
Other expenses 5 (797) - (797) (772) (39) (811)
Foreign exchange (losses)/ - (1,532) (1,532) - 879 879
gains
======== ======== ======== ======== ======== ========
Net return/(loss) on 7,838 (61,678) (53,840) 8,679 16,641 25,320
ordinary activities before
finance costs and taxation
Finance costs 6 (686) - (686) (678) - (678)
======== ======== ======== ======== ======== ========
Net return/(loss) on 7,152 (61,678) (54,526) 8,001 16,641 24,642
ordinary activities before
taxation
Taxation on return/(loss) 7 (731) 7 (724) (492) 4 (488)
on ordinary activities
======== ======== ======== ======== ======== ========
Net return/(loss) on 6,421 (61,671) (55,250) 7,509 16,645 24,154
ordinary activities after
taxation for the year
======== ======== ======== ======== ======== ========
Basic return/(loss) per 8 8.64p (82.95p) (74.31p) 10.70p 23.71p 34.41p
ordinary share
======== ======== ======== ======== ======== ========
Diluted return per 8 n/a n/a n/a 10.58p 23.46p 34.04p
ordinary share
======== ======== ======== ======== ======== ========
The Company does not have any other comprehensive income. Accordingly, the net
return/(loss) on ordinary activities after taxation for the year is also the
total comprehensive income for the year and no separate Statement of
Comprehensive Income has been presented.
The total column of this statement represents the Income Statement of the
Company. The revenue and capital columns are supplementary and presented for
information purposes as recommended by the Statement of Recommended Practice
issued by the AIC.
No operations were acquired or discontinued in the year and all items in the
above statement derive from continuing operations.
The Notes form an integral part of these Financial Statements.
STATEMENT OF CHANGES IN EQUITY FOR THE YEARED 31 JULY 2020
Other
share capital non- total
share premium redemption distributable other capital revenue shareholders'
capital account reserve reserve reserve reserve reserve funds
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Total shareholders' funds at 31 18,058 38,073 3,197 7,367 8,613 237,954 9,737 322,999
July 2019
Net (loss)/return on ordinary - - - - - (61,671) 6,421 (55,250)
activities after taxation for
the year
Repurchase of ordinary shares 14 - - - - (5,234) - - (5,234)
Issue of ordinary shares on the 14 770 11,332 - - - - - 12,102
exercise of rights attached to
subscription shares
Issue of new ordinary shares 14 67 1,096 - - - - - 1,163
Dividend paid to shareholders 9 - - - - - - (6,380) (6,380)
-------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
Total shareholders' funds at 31 18,895 50,501 3,197 7,367 3,379 176,283 9,778 269,400
July 2020
======== ======== ======== ======== ======== ======== ======== ========
Total shareholders' funds at 31 17,167 24,316 3,197 7,367 8,613 221,309 6,005 287,974
July 2018
Net return on ordinary - - - - - 16,645 7,509 24,154
activities after taxation for
the year
Issue of ordinary shares on the 14 303 4,327 - - - - - 4,630
exercise of rights attached to
subscription shares
Issue of new ordinary shares 14 588 9,430 - - - - - 10,018
Dividend paid to shareholders 9 - - - - - - (3,777) (3,777)
-------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
Total shareholders' funds at 31 18,058 38,073 3,197 7,367 8,613 237,954 9,737 322,999
July 2019
======== ======== ======== ======== ======== ======== ======== ========
The Notes form an integral part of these Financial Statements.
BALANCE SHEET AS AT 31 JULY 2020
Company number 3183919
2020 2019
Notes GBP'000 GBP'000
Fixed assets
Investments 10 241,271 312,681
Current assets
Derivative instruments 11 7,299 1,537
Debtors 12 1,886 3,325
Amounts held at futures clearing houses and brokers 1,115 2,905
Cash at bank 21,262 5,796
-------------- --------------
31,562 13,563
======== ========
Creditors
Derivative instruments 11 (1,149) (2,192)
Other creditors 13 (2,284) (1,053)
-------------- --------------
(3,433) (3,245)
======== ========
Net current assets 28,129 10,318
======== ========
Net assets 269,400 322,999
======== ========
Capital and reserves
Share capital 14 18,895 18,058
Share premium account 15 50,501 38,073
Capital redemption reserve 15 3,197 3,197
Other non-distributable reserve 15 7,367 7,367
Other reserve 15 3,379 8,613
Capital reserve 15 176,283 237,954
Revenue reserve 15 9,778 9,737
-------------- --------------
Total shareholders' funds 269,400 322,999
======== ========
Net asset value per ordinary share 16 364.39p 447.16p
======== ========
Diluted net asset value per ordinary share 16 n/a 439.91p
======== ========
The Financial Statements were approved by the Board of Directors on 13 October
2020 and were signed on its behalf by:
KATE BOLSOVER
Chairman
The Notes on form an integral part of these Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
1 PRINCIPAL ACTIVITY
Fidelity Asian Values PLC is an Investment Company incorporated in England and
Wales with a premium listing on the London Stock Exchange. The Company's
registration number is 3183919, and its registered office is Beech Gate,
Millfield Lane, Lower Kingswood, Tadworth, Surrey, KT20 6RP. The Company has
been approved by HM Revenue & Customs as an Investment Trust under Section 1158
of the Corporation Tax Act 2010 and intends to conduct its affairs so as to
continue to be approved.
2 ACCOUNTING POLICIES
The Company has prepared its Financial Statements in accordance with UK
Generally Accepted Accounting Practice ("UK GAAP"), including FRS 102 "The
Financial Reporting Standard applicable in the UK and Republic of Ireland",
issued by the Financial Reporting Council ("FRC"). The Financial Statements
have also been prepared in accordance with the Statement of Recommended
Practice: Financial Statements of Investment Trust Companies and Venture
Capital Trusts ("SORP") issued by the Association of Investment Companies
("AIC") in October 2019. The Company is exempt from presenting a Cash Flow
Statement as a Statement of Changes in Equity is presented and substantially
all of the Company's investments are highly liquid and are carried at market
value.
a) Basis of accounting - The Financial Statements have been prepared on a going
concern basis and under the historical cost convention, except for the
measurement at fair value of investments and derivative instruments. The
Company's Going Concern Statement in the Strategic Report takes account of all
events and conditions up to the date of approval of these Financial Statements
and includes the Company's investment objective, risk management policies,
liquidity risk, credit risk, capital management policies and procedures, the
nature of its portfolio (being mainly securities which are readily realisable)
and its expenditure and cash flow projections and have concluded that the
Company has adequate resources to adopt the going concern basis for at least
twelve months from the date of this Annual Report.
b) Significant accounting estimates and judgements - The Directors make
judgements and estimates concerning the future. Estimates and judgements are
continually evaluated and are based on historical experience and other factors,
such as expectations of future events, and are believed to be reasonable under
the circumstances. Actual results may differ from these estimates. The
judgements required in order to determine the appropriate valuation methodology
of level 3 financial instruments have a risk of causing an adjustment to the
carrying amounts of assets. These judgements include making assessments of the
possible valuations in the event of a listing or other marketability related
risks.
c) Segmental reporting - The Company is engaged in a single segment business
and, therefore, no segmental reporting is provided.
d) Presentation of the Income Statement - In order to reflect better the
activities of an investment company and in accordance with guidance issued by
the AIC, supplementary information which analyses the Income Statement between
items of a revenue and capital nature has been prepared alongside the Income
Statement. The net revenue return after taxation for the year is the measure
the Directors believe appropriate in assessing the Company's compliance with
certain requirements set out in Section 1159 of the Corporation Tax Act 2010.
e) Income - Income from equity investments is accounted for on the date on
which the right to receive the payment is established, normally the ex-dividend
date. Overseas dividends are accounted for gross of any tax deducted at source.
Amounts are credited to the revenue column of the Income Statement. Where the
Company has elected to receive its dividends in the form of additional shares
rather than cash, the amount of the cash dividend foregone is recognised in the
revenue column of the Income Statement. Any excess in the value of the shares
received over the amount of the cash dividend is recognised in the capital
column of the Income Statement. Special dividends are treated as a revenue
receipt or a capital receipt depending on the facts and circumstances of each
particular case.
Derivative instrument income received from dividends on long contracts for
difference ("CFDs") are accounted for on the date on which the right to receive
the payment is established, normally the ex-dividend date. The amount net of
tax is credited to the revenue column of the Income Statement.
Interest received on CFDs, collateral and bank deposits are accounted for on an
accruals basis and credited to the revenue column of the Income Statement.
f) Investment management fees and other expenses - Investment management fees
and other expenses are accounted for on an accruals basis and are charged as
follows:
· The base investment management fee is allocated in full to revenue;
· The variable investment management fee, which took effect from 1
November 2018, is charged/credited to capital as it is based on the performance
of the net asset value per share relative to the Comparative Index; and
· All other expenses are allocated in full to revenue with the exception
of those directly attributable to share issues or other capital events.
g) Functional currency and foreign exchange - The functional and reporting
currency of the Company is UK Sterling, which is the currency of the primary
economic environment in which the Company operates. Transactions denominated in
foreign currencies are reported in UK Sterling at the rate of exchange ruling
at the date of the transaction. Assets and liabilities in foreign currencies
are translated in the rates of exchange ruling at the Balance Sheet date.
Foreign exchange gains and losses arising on the translation are recognised in
the Income Statement as a revenue or a capital item depending on the nature of
the underlying item to which they relate.
h) Finance costs - Finance costs comprise interest on bank overdrafts and
interest paid on CFDs, which are accounted for on an accruals basis, and
dividends paid on short CFDs, which are accounted for on the date on which the
obligation to incur the cost is established, normally the ex-dividend date.
Finance costs are charged in full to the revenue column of the Income
Statement.
i) Taxation - The taxation charge represents the sum of current taxation and
deferred taxation.
Current taxation is taxation suffered at source on overseas income less amounts
recoverable under taxation treaties. Taxation is charged or credited to the
revenue column of the Income Statement, except where it relates to items of a
capital nature, in which case it is charged or credited to the capital column
of the Income Statement. Where expenses are allocated between revenue and
capital any tax relief in respect of the expenses is allocated between revenue
and capital returns on the marginal basis using the Company's effective rate of
corporation tax for the accounting period. The Company is an approved
Investment Trust under Section 1158 of the Corporation Tax Act 2010 and is not
liable for UK taxation on capital gains.
Deferred taxation is the taxation expected to be payable or recoverable on
timing differences between the treatment of certain items for accounting
purposes and their treatment for the purposes of computing taxable profits.
Deferred taxation is based on tax rates that have been enacted or substantively
enacted when the taxation is expected to be payable or recoverable. Deferred
tax assets are only recognised if it is considered more likely than not that
there will be sufficient future taxable profits to utilise them.
j) Dividend paid - Dividends payable to equity shareholders are recognised when
the Company's obligation to make payment is established.
k) Investments - The Company's business is investing in financial instruments
with a view to profiting from their total return in the form of income and
capital growth. This portfolio of investments is managed and its performance
evaluated on a fair value basis, in accordance with a documented investment
strategy, and information about the portfolio is provided on that basis to the
Company's Board of Directors. Investments are measured at fair value with
changes in fair value recognised in profit or loss, in accordance with the
provisions of both Section 11 and Section 12 of FRS 102. The fair value of
investments is initially taken to be their cost and is subsequently measured as
follows:
· Listed investments are valued at bid prices, or last market prices,
depending on the convention of the exchange on which they are listed; and
· Unlisted investments, are investments which are not quoted, or are not
frequently traded, and are stated at the Directors' best estimate of fair
value. The Manager's Fair Value Committee, which is independent of the
Portfolio Manager's team, provide a recommendation of fair values to the
Directors based on recognised valuation techniques that take account of the
cost of the investment, recent arm's length transactions in the same or similar
investments and financial performance of the investment since purchase.
Consideration is also given to the valuations received from an external valuer.
In accordance with the AIC SORP, the Company includes transaction costs,
incidental to the purchase or sale of investments, within (losses)/gains on
investments in the capital column of the Income Statement and has disclosed
these costs in Note 10 below.
l) Derivative instruments - When appropriate, permitted transactions in
derivative instruments are used. Derivative transactions into which the Company
may enter include long and short CFDs, futures, options and forward currency
contracts. Derivatives are classified as other financial instruments and are
initially accounted and measured at fair value on the date the derivative
contract is entered into and subsequently measured at fair value as follows:
· Long and short CFDs - the difference between the strike price and the
value of the underlying shares in the contract;
· Futures - the difference between the contract price and the quoted trade
price;
· Options - valued based on similar instruments or the quoted trade price
for the contract; and
· Forward currency contracts - valued at the appropriate quoted forward
foreign exchange rate ruling at the Balance Sheet date.
Where transactions are used to protect or enhance income, if the circumstances
support this, the income and expenses derived are included in net income in the
revenue column of the Income Statement. Where such transactions are used to
protect or enhance capital, if the circumstances support this, the income and
expenses derived are included in gains on derivative instruments in the capital
column of the Income Statement. Any positions on such transactions open at the
year end are reflected on the Balance Sheet at their fair value within current
assets or creditors.
m) Debtors - Debtors include securities sold for future settlement, accrued
income and other debtors and prepayments incurred in the ordinary course of
business. If collection is expected in one year or less (or in the normal
operating cycle of the business, if longer) they are classified as current
assets. If not, they are presented as non-current assets. They are recognised
initially at fair value and, where applicable, subsequently measured at
amortised cost using the effective interest rate method.
n) Amounts held at futures clearing houses and brokers - These are amounts held
in segregated accounts as collateral on behalf of brokers and are carried at
amortised cost.
o) Other creditors - Other creditors include securities purchased for future
settlement, investment management fees, secretarial and administration fees and
other creditors and expenses accrued in the ordinary course of business. If
payment is due within one year or less (or in the normal operating cycle of the
business, if longer) they are classified as current liabilities. If not, they
are presented as non-current liabilities. They are recognised initially at fair
value and, where applicable, subsequently measured at amortised cost using the
effective interest rate method.
p) Capital reserve - The following are accounted for in the capital reserve:
· Gains and losses on the disposal of investments and derivative
instruments;
· Changes in the fair value of investments and derivative instruments held
at the year end;
· Foreign exchange gains and losses of a capital nature;
· Variable investment management fees;
· Dividends receivable which are capital in nature;
· Other expenses which are capital in nature; and
· Taxation charged or credited relating to items which are capital in
nature.
As a result of technical guidance issued by the Institute of Chartered
Accountants in England and Wales in TECH 02/17BL, the determination of realised
profits and losses in the context of distributions under the Companies Act
2006, states that changes in the fair value of investments which are readily
convertible to cash, without accepting adverse terms at the Balance Sheet date,
can be treated as realised. Capital reserves realised and unrealised are shown
in aggregate as capital reserve in the Statement of Changes in Equity and the
Balance Sheet. At the Balance Sheet date, the portfolio of the Company
consisted of investments listed on a recognised stock exchange and derivative
instruments contracted with counterparties having an adequate credit rating,
and the portfolio was considered to be readily convertible to cash, with the
exception of the level 3 investments which had unrealised investment holding
losses of GBP68,000 (2019: gains of GBP393,000). See Note 17 for further details on
the level 3 investments.
3 INCOME
year ended year ended
31.07.20 31.07.19
GBP'000 GBP'000
Investment income
Overseas dividends 9,817 10,694
Overseas scrip dividends 45 370
-------------- --------------
9,862 11,064
======== ========
Derivative income
Dividends received on long CFDs 536 126
Interest received on short CFDs 154 201
-------------- --------------
690 327
======== ========
Other income
Interest received on collateral and deposits 50 90
-------------- --------------
Total income 10,602 11,481
======== ========
No special dividends have been recognised in capital (2019: GBPnil).
4 INVESTMENT MANAGEMENT FEES
year ended 31 July 2020 year ended 31 July 2019
revenue capital1 total revenue capital1 total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investment management fees 1,967 (312) 1,655 2,030 232 2,262
======== ======== ====== ======== ======== ======
== ==
1 For the calculation of the variable management fee element, the Company's
NAV return was compared to the Comparative Index return for the period from 1
August 2018 to the relevant reporting dates. This has resulted in an
underperformance of the NAV and, therefore, a credit to the Company in the
current period. Further details of the Fee Arrangement are given in the
Directors' Report.
FIL Investment Services (UK) Limited is the Company's Alternative Investment
Fund Manager and has delegated portfolio management to FIL Investments
International ("FII"). Both companies are Fidelity group companies.
Since 1 August 2018, the Company pays base investment management fees at a rate
of 0.70% of net assets per annum. In addition, with effect from 1 November
2018, there is +/- 0.20% variation fee based on the NAV per share performance
relative to the Comparative Index. Fees are payable monthly in arrears and are
calculated on a daily basis.
5 OTHER EXPENSES
year ended 31 July 2020 year ended 31 July 2019
revenue capital revenue capital
GBP'000 GBP'000 GBP'000 GBP'000
AIC fees 21 - 21 -
Custody fees 134 - 133 -
Depositary fees 26 - 27 -
Directors' expenses 9 - 26 -
Directors' fees* 164 - 137 -
Legal and professional fees 93 - 63 -
Marketing expenses 118 - 146 -
Printing and publication expenses 74 - 68 -
Registrars' fees 34 - 35 -
Secretarial and administration fees payable to the 75 - 75 -
Investment Manager
Sundry other expenses 16 - 13 -
Fees payable to the Company's Independent Auditor 33 - 28 -
for the audit of the Financial Statements
Cost of the issue of new ordinary shares - - - 39
-------------- -------------- -------------- --------------
797 - 772 39
======== ======== ======== ========
* Details of the breakdown of Directors' fees are disclosed in the
Directors' Remuneration Report.
6 FINANCE COSTS
year ended year ended
31.07.20 31.07.19
GBP'000 GBP'000
Interest on bank overdrafts 2 4
Interest paid on CFDs 428 341
Dividends paid on short CFDs 256 333
-------------- --------------
686 678
======== ========
7 TAXATION ON RETURN/(LOSS) ON ORDINARY ACTIVITIES
year ended 31 July 2020 year ended 31 July 2019
revenue capital total revenue capital total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
a) Analysis of the taxation charge
for the year
Overseas taxation 731 - 731 492 - 492
Indian capital gains tax received - (7) (7) - (4) (4)
-------------- -------------- -------------- -------------- -------------- --------------
Taxation charge for the year (see 731 (7) 724 492 (4) 488
Note 7b)
======== ======== ======== ======== ======== ========
b) Factors affecting the taxation charge for the year
The taxation charge for the year is lower than the standard rate of UK
corporation tax for an investment trust company of 19.00% (2019: 19.00%). A
reconciliation of the standard rate of UK corporation tax to the taxation
charge for the year is shown below:
year ended 31 July 2020 year ended 31 July 2019
revenue capital total revenue capital total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Net return/(loss) on ordinary 7,152 (61,678) (54,526) 8,001 16,641 24,642
activities before taxation
-------------- -------------- -------------- -------------- -------------- --------------
Net return/(loss) on ordinary 1,359 (11,719) (10,360) 1,520 3,162 4,682
activities before taxation
multiplied by the standard rate of
UK corporation tax of 19% (2019:
19%)
Effects of:
Capital losses/(gains) not taxable* - 11,778 11,778 - (3,213) (3,213)
Income not taxable (1,826) - (1,826) (2,058) - (2,058)
Excess management expenses 467 (44) 423 488 44 532
Expenses not deductible - - - - 7 7
Excess interest paid - (15) (15) 50 - 50
Overseas taxation 731 - 731 492 - 492
Indian capital gains tax received - (7) (7) - (4) (4)
Taxation charge for the year (see 731 (7) 724 492 (4) 488
Note 7a)
======== ======== ======== ======== ======== ========
* The Company is exempt from UK corporation tax on capital gains as it
meets the HM Revenue & Customs criteria for an investment company set out in
Section 1159 of the Corporation Tax Act 2010.
c) Deferred taxation
A deferred tax asset of GBP5,354,000 (2019: GBP4,425,000), in respect of excess
management expenses of GBP24,531,000 (2019: GBP22,304,000) and excess interest paid
of GBP3,648,000 (2019: GBP3,728,000), has not been recognised as it is unlikely
that there will be sufficient future taxable profits to utilise these expenses.
8 RETURN/(LOSS) PER ORDINARY SHARE
year ended 31 July 2020 year ended 31 July 2019
revenue capital total revenue capital total
Basic return/(loss) per ordinary 8.64p (82.95p) (74.31p) 10.70p 23.71p 34.41p
share
Diluted return per ordinary share n/a n/a n/a 10.58p 23.46p 34.04p
======== ======== ======== ======== ======== ========
The basic return/(loss) per ordinary share are based on, respectively; the net
revenue return on ordinary activities after taxation for the year of GBP6,421,000
(2019: GBP7,509,000), the net capital loss on ordinary activities after taxation
for the year of GBP61,671,000 (2019: return of GBP16,645,000), and the net total
loss on ordinary activities after taxation for the year of GBP55,250,000 (2019:
return of GBP24,154,000), and on 74,348,836 ordinary shares (2019: 70,193,856),
being the weighted average number of ordinary shares held outside Treasury
during the year.
There is no diluted return/(loss) per ordinary share for the current period as
all the subscription shares were exercised or cancelled (see Note 14 for
further details).
In the prior year, the diluted returns per ordinary share reflected the
notional dilutive effect that would have occurred if the rights attached to
subscription shares had been exercised and additional ordinary shares had been
issued. The returns on ordinary activities after taxation used in the prior
year diluted calculation are the same as those for the basic returns above.
These returns are divided by the notional weighted average number of ordinary
shares in issue of 70,964,574. This number of shares reflected the additional
number of ordinary shares that could have been purchased at the average
ordinary share price for the year with the proceeds from the excess of the
subscription share rights exercise price over the average ordinary share price.
9 DIVIDS PAID TO SHAREHOLDERS
year ended year ended
31.07.20 31.07.19
GBP'000 GBP'000
Dividend paid
Dividend paid of 8.80 pence per Ordinary Share paid for the year ended 6,380 -
31 July 2019
Dividend paid of 5.50 pence per ordinary share for the year ended 31 - 3,777
July 2018
-------------- --------------
6,380 3,777
======== ========
Dividend proposed
Dividend proposed of 8.50 pence per Ordinary Share paid for the year 6,250 -
ended 31 July 2020
Dividend proposed of 8.80 pence per Ordinary Share paid for the year - 6,380
ended 31 July 2019
-------------- --------------
6,250 6,380
======== ========
The Directors have proposed the payment of a dividend for the year ended 31
July 2020 of 8.50 pence per ordinary share which is subject to approval by
shareholders at the Annual General Meeting on 8 December 2020 and has not been
included as a liability in these Financial Statements. The dividend will be
paid on 10 December 2020 to shareholders on the register at the close of
business on 23 October 2020 (ex-dividend date 22 October 2020).
10 INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS
2020 2019
GBP'000 GBP'000
Listed investments 240,932 312,139
Unlisted investments 339 542
-------------- --------------
Investments at fair value 241,271 312,681
======== ========
Opening book cost 289,167 260,237
Opening investment holding gains 23,514 13,477
-------------- --------------
Opening fair value 312,681 273,714
======== ========
Movements in the year
Purchases at cost 173,591 157,608
Sales - proceeds (178,258) (135,247)
(Losses)/gains on investments (66,743) 16,606
-------------- --------------
Closing fair value 241,271 312,681
======== ========
Closing book cost 266,633 289,167
Closing investment holding (losses)/gains (25,362) 23,514
-------------- --------------
Closing fair value 241,271 312,681
======== ========
The Company received GBP178.3m (2019: GBP135.2m) from investments sold in the year.
The book cost of these investments when they were purchased was GBP196.1m (2019:
GBP128.7m). These investments have been revalued over time and until they were
sold any unrealised gains/losses were included in the fair value of the
investments.
Investment transaction costs
Transaction costs incurred in the acquisition and disposal of investments,
which are included in the (losses)/gains on the investments above, were as
follows:
year ended year ended
31.07.20 31.07.19
GBP'000 GBP'000
Purchases transaction costs 268 207
Sales transaction costs 360 292
-------------- --------------
628 499
======== ========
The portfolio turnover rate of the year was 67.0% (2019: 52.2%).
11 DERIVATIVE INSTRUMENTS
year ended year ended
31.07.20 31.07.19
GBP'000 GBP'000
Gains/(losses) on derivative instruments
Realised losses on long CFD positions closed (1,741) (36)
Realised gains on short CFD positions closed 430 636
Realised gains on futures contracts closed 142 284
Realised gains/(losses) on options contracts closed 1,162 (2,506)
Realised losses on forward currency contracts (238) (431)
Movement in investment holding gains/(losses) on long CFDs 6,745 (903)
Movement in investment holding (losses)/gains on short CFDs (757) 497
Movement in investment holding gains/(losses) on futures 732 (245)
Movement in investment holding (losses)/gains on options (142) 2,230
Movement in investment holding (losses)/gains on forward currency (48) 26
contracts
Movement in investment holding losses on warrants - (125)
-------------- --------------
6,285 (573)
======== ========
2020 2019
fair value fair value
GBP'000 GBP'000
Derivative instruments recognised on the Balance Sheet
Derivative instrument assets 7,299 1,537
Derivative instrument liabilities (1,149) (2,192)
-------------- --------------
6,150 (655)
======== ========
2020 2019
gross asset gross asset
fair value exposure fair value exposure
GBP'000 GBP'000 GBP'000 GBP'000
At the year end the Company held the following
derivative instruments
Long CFDs 5,675 23,230 (1,070) 5,654
Long future 487 6,791 (330) 13,532
Short CFDs 105 5,393 862 13,055
Short futures - - 85 1,401
Written put option - - (133) 1,101
Forward currency contracts (hedging exposure) (117) (117) (69) (69)
-------------- -------------- -------------- --------------
6,150 35,297 (655) 34,674
======== ======== ======== ========
12 DEBTORS
2020 2019
GBP'000 GBP'000
Securities sold for future settlement 619 1,559
Accrued income 1,183 1,499
Other debtors and prepayments 84 267
-------------- --------------
1,886 3,325
======== ========
13 OTHER CREDITORS
2020 2019
GBP'000 GBP'000
Securities purchased for future settlement 1,780 644
Creditors and accruals 504 409
-------------- --------------
2,284 1,053
======== ========
14 SHARE CAPITAL
2020 2019
number of number of
shares GBP'000 shares GBP'000
Issued, allotted and fully paid
Ordinary shares of 25 pence each held outside
Treasury
Beginning of the year 72,233,453 18,058 68,669,402 17,167
Ordinary shares issued on the exercise of rights 3,081,455 770 1,213,003 303
New ordinary shares issued 265,981 67 2,351,048 588
Ordinary shares repurchased into Treasury (1,648,782) (412) - -
-------------------- -------------------- -------------------- --------------------
End of the year 73,932,107 18,483 72,233,453 18,058
=========== =========== =========== ===========
Ordinary shares of 25 pence each held in Treasury1
Beginning of the year - - - -
Ordinary shares repurchased into Treasury 1,648,782 412 - -
-------------------- -------------------- -------------------- --------------------
End of the year 1,648,782 412 - -
=========== =========== =========== ===========
Subscription shares of 0.001 pence
Beginning of the year 11,103,030 - 12,316,033 -
Cancellation of subscription shares on the exercise (3,081,455) - (1,213,003) -
of rights
Cancellation of subscription shares (8,021,575) - - -
-------------------- -------------------- -------------------- --------------------
End of the year - - 11,103,030 -
=========== =========== =========== ===========
Total share capital 18,895 18,058
=========== ===========
1 Ordinary shares held in Treasury carry no rights to vote, to receive a
dividend or to participate in a winding up of the Company.
The cost of ordinary shares repurchased into Treasury during the year was GBP
5,234,000 (2019: GBPnil).
A bonus issue of subscription shares to ordinary shareholders on the basis of
one subscription share for every five ordinary shares held took place on 5
December 2016. Each subscription share gave the holder the right, but not the
obligation, to subscribe for one ordinary share upon payment of the
subscription price. The subscription price was based on the published unaudited
NAV per ordinary share at 2 December 2016, plus a premium (rounded to the
nearest quarter penny) depending upon the year in which the right was
exercised. The subscription share rights could have been exercised annually in
the 25 business days prior to the relevant subscription date (on which the
exercise would take effect). The subscription dates, subscription prices and
premiums were as follows:
Exercise Exercise Premium
date price
First exercise date 30 370.75p 1%
November
2017
Second exercise date 30 381.75p 4%
November
2018
Final exercise date 29 392.75p 7%
November
2019
After the final subscription date of 29 November 2019, the Company appointed a
Trustee to exercise any rights remaining that were not exercised by
shareholders, providing that by doing so a profit could be realised. To realise
a profit, the sale proceeds from selling the resulting ordinary shares in the
market would need to be in excess of the 392.75 pence per share price of
exercising the rights, plus any related expenses and fees. On 13 December 2019,
the Board announced that the Trustee had not exercised any of the unexercised
subscription rights of the 8,021,575 outstanding subscription shares. The
Trustee determined the net proceeds of sale, after deduction of all costs and
expenses, would not have exceeded the costs of exercising the subscription
share rights. Therefore, all subscription share rights for the outstanding
subscription shares lapsed with nil value.
During the year, the Company issued 3,081,455 ordinary shares (2019: 1,213,003
shares) on the exercise of rights attached to subscription shares. The
subscription share price of 392.75 pence per ordinary share issued represented
a premium of 367.75 pence per share over the 25 pence nominal value of each
share. The total premium received in the year on the issue of ordinary shares
of GBP11,332,000 (2019: GBP4,327,000) was credited to the share premium account.
The Company issued 265,981 new ordinary shares during the year (2019: 2,351,048
shares). The total premium received in the year on the issue of new ordinary
shares of GBP1,096,000 (2019: GBP9,430,000) was credited to the share premium
account.
15 RESERVES
The "share premium account" represents the amount by which the proceeds, from
the issue of new ordinary shares or the issue of ordinary shares on the
exercise of rights attached to subscription shares, exceeded the nominal value
of those ordinary shares. It is not distributable by way of dividend. It cannot
be used to fund share repurchases.
The "capital redemption reserve" maintains the equity share capital of the
Company and represents the nominal value of shares repurchased and cancelled.
It is not distributable by way of dividend. It cannot be used to fund share
repurchases.
The "other non-distributable reserve" represents amounts transferred from the
warrant reserve in prior years with High Court approval. It is not
distributable by way of dividend. It cannot be used to fund share repurchases.
The "other reserve" represents amounts transferred from the share premium
account and the capital redemption reserve in prior years with High Court
approval. It is not distributable by way of dividend. It can be used to fund
share repurchases.
The "capital reserve" reflects realised gains or losses on investments and
derivative instruments sold, unrealised increases and decreases in the fair
value of investments and derivative instruments held and other income and costs
recognised in the capital column of the Income Statement. Refer to Notes 10 and
11 for information on investment holding gains/(losses) included in this
reserve. See Note 2(p) above for further details. It can be used to fund share
repurchases and it is distributable by way of dividend. The Board has stated
that it has no current intention to pay dividends out of capital.
The "revenue reserve" represents retained revenue surpluses recognised through
the revenue column of the Income Statement. It is distributable by way of
dividend.
16 NET ASSET VALUE PER ORDINARY SHARE
The basic net asset value per ordinary share is based on net assets of GBP
269,400,000 (2019: GBP322,999,000) and on 73,932,107 (2019: 72,233,453) ordinary
shares, being the number of ordinary shares of 25 pence each held outside of
Treasury at the year end. It is the Company's policy that shares held in
Treasury will only be reissued at net asset value per ordinary share or at a
premium to net asset value per ordinary share and, therefore, shares held in
Treasury have no dilutive effect.
There is no diluted net asset value per ordinary share as all the subscription
shares were exercised or cancelled during the year (see Note 14 for further
details).
The diluted net asset value per ordinary share at 31 July 2019 reflects the
potential dilution in the net asset value per ordinary share if the rights of
the 11,103,030 subscription shares in issue had been exercised on 31 July 2019
at the next exercise date price of 392.75 pence per share. The basis of the
calculation is in accordance with the guidelines laid down by the AIC.
17 FINANCIAL INSTRUMENTS
Management of risk
The Company's investing activities in pursuit of its investment objective
involve certain inherent risks. The Board confirms that there is an ongoing
process for identifying, evaluating and managing the risks faced by the
Company. The Board with the assistance of the Manager, has developed a risk
matrix which, as part of the internal control process, identifies the risks
that the Company faces. Principal risks identified are market, economic and
political, investment performance, key person, discount control, gearing,
derivatives, currency, cybercrime and pandemic risks. Other risks identified
are tax and regulatory and operational risks, including those relating to third
party service providers covering investment management, marketing and business
development, company secretarial, fund administration and operations and
support functions. Risks are identified and graded in this process, together
with steps taken in mitigation, and are updated and reviewed on an ongoing
basis. These risks and how they are identified, evaluated and managed are shown
in the Strategic Report.
This Note refers to the identification, measurement and management of risks
potentially affecting the value of financial instruments. The Company's
financial instruments may comprise:
· Equity shares (listed and unlisted) and equity linked notes held in
accordance with the Company's investment objective and policies;
· Derivative instruments which comprise CFDs, forward currency contracts,
futures and options on listed stocks and equity indices; and
· Cash, liquid resources and short-term debtors and creditors that arise
from its operations.
The risks identified arising from the Company's financial instruments are
market price risk (which comprises interest rate risk, foreign currency risk
and other price risk), liquidity risk, counterparty risk, credit risk and
derivative instrument risk. The Board reviews and agrees policies for managing
each of these risks, which are summarised below. These policies are consistent
with those followed last year.
Market price risk
Interest rate risk
The Company finances its operations through its share capital and reserves. In
addition, the Company has gearing through the use of derivative instruments.
The level of gearing is reviewed by the Board and the Portfolio Manager. The
Company is exposed to a financial risk arising as a result of any increases in
interest rates associated with the funding of the derivative instruments.
Interest rate risk exposure
The values of the Company's financial instruments that are exposed to movements
in interest rates are shown below:
2020 2019
GBP'000 GBP'000
Exposure to financial instruments that earn interest
Cash at bank 21,262 5,796
Short CFDs - exposure plus fair value 5,498 13,917
Amounts held at futures clearing houses and brokers 1,115 2,905
-------------- --------------
27,875 22,618
======== ========
Exposure to financial instruments that bear interest
Long CFDs - exposure less fair value 17,555 6,724
-------------- --------------
Net exposure to financial instruments that earn interest 10,320 15,894
======== ========
Foreign currency risk
The Company's net return/(loss) on ordinary activities after taxation for the
year and its net assets can be affected by foreign exchange rate movements
because the Company has income, assets and liabilities which are denominated in
currencies other than the Company's functional currency which is UK Sterling.
The Portfolio Manager may seek to manage exposure to currency movements by
using forward and spot foreign exchange contracts. The Company can also be
subject to short-term exposure to exchange rate movements, for example, between
the date when an investment is purchased or sold and the date when settlement
of the transaction occurs.
Three principal areas have been identified where foreign currency risk could
impact the Company:
· Movements in currency exchange rates affecting the value of investments
and derivative instruments;
· Movements in currency exchange rates affecting short-term timing
differences; and
· Movements in currency exchange rates affecting income received.
Currency exposure of financial assets
The currency exposure profile of the Company's financial assets is shown below:
long
exposure to
investments derivative cash at
at fair value instruments1 debtors2 bank 2020 Total
Currency GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Hong Kong dollar 59,135 15,730 474 50 75,389
Indian rupee 51,163 - 1,234 162 52,559
South Korean won 31,527 - 106 150 31,783
Taiwan dollar 23,098 - 312 89 23,499
Indonesian rupiah 21,064 - 362 - 21,426
Australian dollar 15,230 2,755 117 - 18,102
US dollar 9,616 9,549 66 19,665 38,896
Philippine peso 6,390 (117) 216 - 6,489
Singapore dollar 5,672 1,987 30 - 7,689
Sri Lankan rupee 4,948 - - - 4,948
Thai baht 3,809 - - - 3,809
Other overseas currencies 8,562 - - 1,146 9,708
UK Sterling 1,057 - 84 - 1,141
-------------- -------------- -------------- -------------- --------------
241,271 29,904 3,001 21,262 295,438
======== ======== ======== ======== ========
1 The exposure to the market of long CFDs and long futures after the
netting of hedging exposures.
2 Debtors include amounts held at futures clearing houses and brokers.
investments long
held exposure to cash 2019
at fair value derivative debtors2 at bank total
Currency GBP'000 instruments1 GBP GBP'000 GBP'000 GBP'000
'000
Hong Kong dollar 74,204 5,654 776 - 80,634
Indian rupee 69,495 - 1,016 446 70,957
Indonesian rupiah 33,872 - 5 - 33,877
South Korean won 29,967 - - 7 29,974
Taiwan dollar 28,157 - 1,475 282 29,914
Philippine peso 17,359 (69) 27 - 17,317
Singapore dollar 13,419 - 25 - 13,444
Australian dollar 11,777 - 20 - 11,797
Thai baht 10,562 - - - 10,562
Sri Lankan rupee 6,504 14,633 2,255 3,035 26,427
US dollar 6,429 - - - 6,429
Other overseas currencies 10,936 - 365 1,867 13,168
UK Sterling - - 266 159 425
-------------- -------------- -------------- -------------- --------------
312,681 20,218 6,230 5,796 344,925
======== ======== ======== ======== ========
1 The exposure to the market of long CFDs, long futures and options after
the netting of hedging exposures.
2 Debtors include amounts held at futures clearing houses and brokers.
Currency exposure of financial liabilities
The Company finances its investment activities through its ordinary share
capital and reserves. The Company's financial liabilities comprise short
positions on derivative instruments and other payables. The currency profile of
these financial liabilities is shown below:
short
exposure to
derivative other 2020
instruments1 creditors total
Currency GBP'000 GBP'000 GBP'000
US dollar 1,834 1,440 3,274
Hong Kong dollar 1,756 188 1,944
Australian dollar 1,114 83 1,197
Singapore dollar 689 - 689
Indian rupee - 69 69
UK Sterling - 504 504
-------------- -------------- --------------
5,393 2,284 7,677
======== ======== ========
1 The exposure to the market of short CFDs.
Currency short other 2019
exposure to creditors total
derivative GBP'000 GBP'000
instruments1
GBP'000
US dollar 6,680 90 6,770
Australian dollar 3,341 - 3,341
Hong Kong dollar 3,034 54 3,088
Indian rupee 1,401 366 1,767
Other overseas currencies - 134 134
UK Sterling - 409 409
-------------- -------------- --------------
14,456 1,053 15,509
======== ======== ========
1 The exposure to the market of short CFDs and short futures.
Other price risk
Other price risk arises mainly from uncertainty about future prices of
financial instruments used in the Company's business. It represents the
potential loss the Company might suffer through holding market positions in the
face of price movements.
The Board meets quarterly to consider the asset allocation of the portfolio and
the risk associated with particular industry sectors within the parameters of
the investment objective.
The Portfolio Manager is responsible for actively monitoring the existing
portfolio selected in accordance with the overall asset allocation parameters
described above and seeks to ensure that individual stocks also meet an
acceptable risk/reward profile. Other price risks arising from derivative
positions, mainly due to the underlying exposures, are estimated using Value at
Risk and Stress Tests as set out in the Company's internal Derivative Risk
Measurement and Management Document.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulties in
meeting obligations associated with financial liabilities. The Company's assets
mainly comprise readily realisable securities and derivative instruments which
can be sold easily to meet funding commitments if necessary. Short-term
flexibility is achieved by the use of a bank overdraft, if required.
Liquidity risk exposure
At 31 July 2020, the undiscounted gross cash outflows of the financial
liabilities were all repayable within one year and consisted of derivative
instrument liabilities of GBP1,149,000 (2019: GBP2,192,000) and creditors of GBP
2,284,000 (2019: GBP1,053,000).
Counterparty risk
Certain derivative instruments in which the Company may invest are not traded
on an exchange but instead will be traded between counterparties based on
contractual relationships, under the terms outlined in the International Swaps
and Derivatives Association's ("ISDA") market standard derivative legal
documentation. As a result, the Company is subject to the risk that a
counterparty may not perform its obligations under the related contract. In
accordance with the risk management process which the Manager employs, the
Manager will seek to minimise such risk by only entering into transactions with
counterparties which are believed to have an adequate credit rating at the time
the transaction is entered into, by ensuring that formal legal agreements
covering the terms of the contract are entered into in advance, and through
adopting a counterparty risk framework which measures, monitors and manages
counterparty risk by the use of internal and external credit agency ratings and
by evaluating derivative instrument credit risk exposure.
For Over The Counter ("OTC") derivative transactions, collateral is used to
reduce the risk of both parties to the contract. Collateral is managed on a
daily basis for all relevant transactions. At 31 July 2020, GBP5,758,000 (2019: GBP
nil) was held by the brokers in cash in a segregated collateral account on
behalf of the Company, to reduce the credit risk exposure of the Company. This
collateral comprised: Goldman Sachs International Ltd GBP350,000 in cash
denominated in US dollars, HSBC Bank plc GBP1,424,000 in cash denominated in US
dollars and UBS AG GBP3,984,000 in cash denominated in US dollars. GBP1,115,000
(2019: GBP2,905,000), shown as amounts held at futures clearing houses and
brokers on the Balance Sheet, was held by the Company in a segregated
collateral account, on behalf of the brokers, to reduce the credit risk
exposure of the brokers. This collateral is comprised of: UBS AG GBP1,115,000
(2019: GBP2,610,000) in cash and HSBC Bank Plc GBPnil (2019: GBP295,000) in cash.
Credit risk
Financial instruments may be adversely affected if any of the institutions with
which money is deposited suffer insolvency or other financial difficulties. All
transactions are carried out with brokers that have been approved by the
Manager and are settled on a delivery versus payment basis. Limits are set on
the amount that may be due from any one broker and are kept under review by the
Manager. Exposure to credit risk arises on unsettled security transactions and
derivative instrument contracts and cash at bank.
Derivative instruments risk
The risks and risk management processes which result from the use of derivative
instruments, are set out in a documented Derivative Risk Measurement and
Management Document. Derivative instruments are used by the Manager for the
following purposes:
· to gain unfunded long exposure to equity markets, sectors or single
stocks. Unfunded exposure is exposure gained without an initial flow of
capital;
· to hedge equity market risk using derivatives with the intention of at
least partially mitigating losses in the exposures of the Company's portfolio
as a result of falls in the equity market; and
· to position short exposures in the Company's portfolio. These uncovered
exposures benefit from falls in the prices of shares which the Portfolio
Manager believes to be over valued. These positions, therefore, distinguish
themselves from other short exposures held for hedging purposes since they are
expected to add risk to the portfolio.
RISK SENSITIVITY ANALYSIS
Interest rate risk sensitivity analysis
Based on the financial instruments held and interest rates at 31 July 2020, an
increase of 0.25% in interest rates throughout the year, with all other
variables held constant, would have decreased the net loss on ordinary
activities after taxation for the year and increased the net assets of the
Company by GBP26,000 (2019: increased the net return and net assets by GBP40,000).
A decrease of 0.25% in interest rates throughout the year would have had an
equal but opposite effect.
Foreign currency risk sensitivity analysis
Based on the financial instruments held and currency exchange rates at the
Balance Sheet date, a 10% strengthening of the UK Sterling exchange rate
against other currencies would have increased the Company's net loss on
ordinary activities after taxation for the year and decreased the net assets
(2019: decreased the net return and net assets) by the following amounts:
2020 2019
Currency GBP'000 GBP'000
Hong Kong dollar 6,677 7,611
Indian rupee 4,772 6,611
US dollar 3,238 3,018
South Korean won 2,889 2,729
Taiwan dollar 2,136 2,721
Indonesian rupiah 1,948 3,080
Australian dollar 1,537 1,376
Singapore dollar 636 1,222
Philippine peso 590 1,574
Sri Lankan rupee 450 584
Thai baht 346 960
Other overseas currencies 883 1,204
-------------- --------------
26,102 32,690
======== ========
Based on the financial instruments held and currency exchange rates at the
Balance Sheet date, a 10% weakening of the UK Sterling exchange rate against
other currencies would have decreased the Company's net loss on ordinary
activities after taxation for the year and increased the net assets (2019:
increased the net return and net assets) by the following amounts:
2020 2019
Currency GBP'000 GBP'000
Hong Kong dollar 8,161 9,302
Indian rupee 5,832 8,080
US dollar 3,958 3,689
South Korean won 3,531 3,335
Taiwan dollar 2,611 3,325
Indonesian rupiah 2,381 3,764
Australian dollar 1,878 1,682
Singapore dollar 778 1,494
Philippine peso 721 1,924
Sri Lankan rupee 550 714
Thai baht 423 1,174
Other overseas currencies 1,079 1,471
-------------- --------------
31,903 39,954
======== ========
Other price risk - exposure to investments sensitivity analysis
Based on the investments held and share prices at 31 July 2020, an increase of
10% in share prices, with all other variables held constant, would have
decreased the Company's net loss on ordinary activities after taxation for the
year and increased the net assets of the Company by GBP24,127,000 (2019:
increased the net return and net assets by GBP31,268,000). A decrease of 10% in
share prices would have had an equal and opposite effect.
Other price risk - net exposure to derivative instruments sensitivity analysis
Based on the derivative instruments held and share prices at 31 July 2020, an
increase of 10% in the share prices underlying the derivative instruments, with
all other variables held constant, would have decreased the Company's net loss
on ordinary activities after taxation for the year and increased the net assets
of the Company by GBP2,463,000 (2019: increased the net return and net assets by
GBP583,000). A decrease of 10% in share prices would have had an equal and
opposite effect.
Fair Value of Financial Assets and Liabilities
Financial assets and liabilities are stated in the Balance Sheet at values
which are not materially different to their fair values. As explained in Notes
2 (k) and (l) above, investments and derivative instruments are shown at fair
value. In the case of cash at bank, book value approximates to fair value due
to the short maturity of the instruments.
Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that classifies
its financial instruments measured at fair value at one of three levels,
according to the relative reliability of the inputs used to estimate the fair
values.
Classification Input
Level 1 Valued using quoted prices in active markets for identical assets
Level 2 Valued by reference to 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 Valued by reference to valuation techniques using inputs that are not
based on observable market data
Categorisation within the hierarchy has been determined on the basis of the
lowest level input that is significant to the fair value measurement of the
relevant asset. The valuation techniques used by the Company are explained in
Notes 2 (k) and (l) above. The table below sets out the Company's fair value
hierarchy:
2020
level 1 level 2 level 3 total
Financial assets at fair value through profit or GBP'000 GBP'000 GBP'000 GBP'000
loss
Investments 238,836 2,096 339 241,271
Derivative instrument assets 487 6,812 - 7,299
-------------- -------------- -------------- --------------
239,323 8,908 339 248,570
======== ======== ======== ========
Financial liabilities at fair value through profit
or loss
Derivative instrument liabilities - (1,149) - (1,149)
======== ======== ======== ========
2019
level 1 level 2 level 3 total
Financial assets at fair value through profit or GBP'000 GBP'000 GBP'000 GBP'000
loss
Investments 311,753 386 542 312,681
Derivative instrument assets 85 1,194 258 1,537
-------------- -------------- -------------- --------------
311,838 1,580 800 314,218
======== ======== ======== ========
Financial liabilities at fair value through profit
or loss
Derivative instrument liabilities (463) (1,729) - (2,192)
======== ======== ======== ========
The table below sets out the movements in level 3 financial instruments during
the year:
year ended year ended
31.07.20 31.07.19
GBP'000 GBP'000
Beginning of the year 800 407
Transfer into level 3 - China Ding Yi Feng Holdings (Short CFD)* - 258
Proceeds from closing of the China Ding Yi Feng Holdings (Short CFD) (208) -
position
(Losses)/gains on investments (253) 135
-------------- --------------
End of the year 339 800
======== ========
* Financial instruments are transferred into level 3 on the date they are
suspended, delisted or when they have not traded for thirty days.
JHL Biotech Inc
JHL Biotech Inc develops biosimilars and is also engaged in providing process
development and contract manufacturing solutions to the biopharmaceutical
industry. On 26 February 2018, JHL Biotech voluntarily delisted from the Taipei
Exchange. The valuation at 31 July 2020 is based on the company's financial
information and benchmarking the position to a range of comparable companies.
Chime Biologics
Chime Biologics is a China-based Contract Development and Manufacturing
Organization (CDMO) that provides a solution supporting customers from
early-stage biopharmaceutical development through to late-stage clinical and
commercial manufacturing. The valuation at 31 July 2020 is based on the price
of the shares when US$277 million of funding was raised in February 2020.
18 CAPITAL RESOURCES AND GEARING
The Company does not have any externally imposed capital requirements. The
financial resources of the Company comprise its share capital and reserves, as
disclosed in the Balance Sheet, and any gearing, which is managed by the use of
derivative instruments. Financial resources are managed in accordance with the
Company's investment policy and in pursuit of its investment objective, both of
which are detailed in the Strategic Report. The principal risks and their
management are disclosed in the Strategic Report and in Note 17 above.
The Company's gearing at the year end is set out below:
2020 2019
gross asset gross asset
exposure exposure
GBP'000 GBP'000
Long exposure to shares and equity linked notes 241,271 312,681
Long CFDs 23,230 5,654
Long future 6,791 13,532
Written put option - 1,101
-------------- --------------
Total long exposures 271,292 332,968
Less: hedging exposure to forward currency contracts (117) (69)
-------------- --------------
Total long exposures after the netting of hedges 271,175 332,899
Short CFDs 5,393 13,055
Short futures - 1,401
-------------- --------------
Gross Asset Exposure 276,568 347,355
======== ========
Total Shareholders' Funds 269,400 322,999
======== ========
Gearing* 2.7% 7.5%
======== ========
* Gross Asset Exposure less Total Shareholders' Funds expressed as a
percentage of Total Shareholders' Funds.
19 TRANSACTIONS WITH THE MANAGER AND RELATED PARTIES
FIL Investment Services (UK) Limited is the Company's Alternative Investment
Fund Manager and has delegated portfolio management and the role of company
secretary to FIL Investments International ("FII"). Both companies are Fidelity
group companies.
Details of the current fee arrangements are given in the Directors' Report.
During the year, management fees of GBP1,655,000 (2019: GBP2,262,000), and
secretarial and administration fees of GBP75,000 (2019: GBP75,000) were payable to
FII. At the Balance Sheet date, management fees of GBP117,000 (2019: GBP217,000),
and secretarial and administration fees of GBP6,000 (2019: GBP6,000) were accrued
and included in other creditors. FII also provides the Company with marketing
services. The total amount payable for these services was GBP118,000 (2019: GBP
146,000). At the Balance Sheet date, GBP25,000 (2019: GBP20,000) for marketing
services was accrued and included in other creditors.
Disclosures of the Directors' interests in the ordinary shares of the Company
and Director's fees and taxable expenses relating to reasonable travel expenses
payable to the Directors are given in the Directors' Remuneration Report. In
addition to the fees and taxable expenses disclosed in the Directors'
Remuneration Report, GBP16,000 (2019: GBP13,000) of employers' National Insurance
contributions were paid by the Company. At the Balance Sheet date, Directors'
fees of GBP12,000 (2019: GBP11,000) were accrued and payable.
ALTERNATIVE PERFORMANCE MEASURES
TOTAL RETURN
Total return is considered to be an Alternative Performance Measure. NAV and
diluted NAV total return includes reinvestment of the dividend in the NAV/
diluted NAV of the Company on the ex-dividend date. Share price total return
includes the reinvestment of the net dividend in the month that the share price
goes ex-dividend.
The tables below provide information relating to the NAVs and share prices of
the Company, the impact of the dividend reinvestments and the total returns for
the years ended 31 July 2020 and 31 July 2019.
Net asset Net asset
value per value per
ordinary ordinary
share - share - Share
2020 undiluted diluted price
31 July 2019 447.16p 439.91p 455.50p
31 July 2020 364.39p n/a 335.00p
Change in year -18.5% n/a -26.5%
Impact of dividend reinvestment +1.8% n/a +1.7%
-------------- -------------- --------------
Total return for the year -16.7% n/a -24.8%
======== ======== ========
Net asset Net asset
value per value per
ordinary ordinary
share - share - Share
2019 undiluted diluted price
31 July 2018 419.36p 413.64p 412.00p
31 July 2019 447.16p 439.91p 455.50p
Change in year +6.6% +6.4% +10.6%
Impact of dividend reinvestment +1.6% +1.5% +1.7%
-------------- -------------- --------------
Total return for the year +8.2% +7.9% +12.3%
======== ======== ========
ONGOING CHARGES
Ongoing charges are considered to be an Alternative Performance Measure. The
ongoing charges ratio has been calculated in accordance with guidance issued by
the AIC as the total of investment management fees and other expenses expressed
as a percentage of the average net asset values throughout the year.
2020 2019
Investment management fees (GBP'000) 1,967 2,030
Other expenses (GBP'000) 797 811
Ongoing charges (GBP'000) 2,764 2,841
Variable element of management fees (GBP'000) (312) 232
Average net assets (GBP'000) 280,521 289,809
Ongoing charges ratio 0.98% 0.98%
Ongoing charges ratio including variable element of management fee 0.87% 1.06%
======== ========
GEARING
Gearing is considered to be an Alternative Performance Measure. See Note 18 for
details of the Company's gearing.
The Annual Financial Report Announcement is not the Company's statutory
accounts. The above results for the year ended 31 July 2020 are an abridged
version of the Company's full Annual Report and Financial Statements, which
have been approved and audited with an unqualified report. The 2019 and 2020
statutory accounts received unqualified reports from the Company's Auditor and
did not include any reference to matters to which the Auditor drew attention by
way of emphasis without qualifying the reports, and did not contain a statement
under s.498 of the Companies Act 2006. The financial information for 2019 is
derived from the statutory accounts for 2018 which have been delivered to the
Registrar of Companies. The 2020 Financial Statements will be filed with the
Registrar of Companies in due course.
A copy of the Annual Report will shortly be submitted to the National Storage
Mechanism and will be available for inspection at www.morningstar.co.uk/uk/NSM
The Annual Report will be posted to shareholders in due course and additional
copies will be available from the registered office of the Company and on the
Company's website: www.fidelityinvestmenttrusts.com where up to date
information on the Company, including daily NAV and share prices, factsheets
and other information can also be found.
The Annual General Meeting will be held at 11.00 on 8 December 2020
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on the Company's website (or any other website) is
incorporated into, or forms part of, this announcement.
ENDS
END
(END) Dow Jones Newswires
October 13, 2020 09:38 ET (13:38 GMT)
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