THE EDINBURGH INVESTMENT TRUST PLC LEI No. 549300HV0VXCRONER808
The Edinburgh Investment Trust plc
Annual Financial Report Announcement
For the Year Ended 31 March 2020
Financial Information and Performance Statistics
| Total Return(1)(2)(3) (with dividends reinvested) | Year Ended 31 March 2020 | Year Ended 31 March 2019 |
| Net asset value(1) (NAV) – debt at market value | -26.7% | +2.9% |
| Share price | -29.4% | +4.6% |
| FTSE All-Share Index | -18.5% | +6.4% |
The Company’s benchmark is the FTSE All-Share Index.
| At 31 March 2020 | At 31 March 2019 | Change % | |
| Capital Return(1) | |||
| Net asset value – debt at market value | 490.40p | 696.91p | -29.6 |
| Share price(2) | 434.0p | 644.0p | -32.6 |
| FTSE All-Share Index(2) | 3,107.42 | 3,978.28 | -21.9 |
| Discount(1)(3) – debt at market value | (11.5)% | (7.6)% | |
| Gearing (debt at market value)1)(3) – gross gearing | 13.4% | 11.0% | |
| – net gearing | 8.3% | 10.8% | |
| Year Ended | Year Ended | Change | |
| Revenue and Dividends(3) | 31 March 2020 | 31 March 2019 | % |
| Revenue return per ordinary share(1) | 27.8p | 28.7p | -3.1 |
| Dividends – first interim | 6.40p | 6.25p | |
| – second interim | 6.40p | 6.25p | |
| – third interim | 6.40p | 6.25p | |
| – final proposed | 9.45p | 9.25p | |
| – total dividends | 28.65p | 28.00p | +2.3 (3) |
| Retail Price Index(2) – annual change | 2.6% | 2.4% | |
| Consumer Price Index(2) – annual change | 1.5% | 1.9% | |
| Dividend Yield(1) | 6.6% | 4.3% | |
| Ongoing Charges Ratio(1)(3) | 0.55% | 0.56% |
Notes:
(1) These terms are defined in the Glossary of Terms and Alternative Performance Measures, including reconciliations, in the annual financial report. NAV with debt at market value is widely used by the investment company sector for the reporting of performance, premium or discount, gearing and ongoing charges.
(2) Source: Refinitiv.
(3) Key Performance Indicator.
Chairman’s Statement
Dear Shareholder
These are challenging times, both economically and socially. I very much hope that you are safe and well.
This has been another disappointing year of investment performance: the Company’s Net Asset Value (NAV), including reinvested dividends, returned -26.7% over the financial year, and the share price returned -29.4%. These compare with a total return of -18.5% for the FTSE All-Share Index and come on top of three previous years of underperformance. Over the past three years, the Company’s NAV total return has been -28.6% cumulatively, with the Company’s benchmark index returning -12.2% over the same period. Over the past five years, the Company’s NAV total return has been -14.1% cumulatively, with the Company’s benchmark index returning 2.9% over the same period. In all these cases, the NAV is stated after deducting debt at market values.
These results reflect the fact that UK domestic-focused stocks continued to be out of favour for most of the year, a number of stock specific issues and the sharp falls in markets following the onset on the COVID-19 crisis and the associated lockdowns. These issues were discussed by the previous Manager in the half-year’s report and are covered below by the new Manager.
In last year’s report, I highlighted the steps the Board had taken to increase the scrutiny over the then Manager’s performance. During the past year, after further review, the Board decided that the interests of the Company and its shareholders would be better served by terminating the relationship with Invesco and appointing Majedie Asset Management Limited (Majedie) instead as its new Manager. James de Uphaugh, our new Portfolio Manager, assumed full control of the portfolio on 27 March after a transition period from 7 February to 26 March, during which the portfolio was restructured in accordance with his instructions. Given this, the performance over this year includes the period when Mark Barnett of Invesco was the Manager, a period of transition and a short period when James de Uphaugh has been the Manager.
On behalf of the Board, I would like to thank Mark Barnett for his service over the previous eight years. I would also like to welcome James de Uphaugh as our new Manager.
Change of investment manager
The decision to terminate Invesco as the Company’s manager was not taken lightly. The Board understands that all good conviction fund managers experience periods of underperformance and that a focus on long-term results sometimes requires shareholders to bear periods of relative weakness, especially during times when the fund manager’s style is out of favour. But the Board considered it appropriate to conduct a detailed assessment of Invesco’s continuing suitability as the Company’s manager. To this end the Board appointed Willis Towers Watson to advise us and, after much deliberation, we concluded that we should consider alternative approaches to the management of the Company’s portfolio.
We reviewed, with our advisors, possible managers based on their ability to meet both the Company’s objectives as well as the ability to manage a fund of this size. Based on this, we invited a short list of five of the most qualified firms, including Invesco, to present to the Board and its advisors. Following these interviews, we decided that it was in shareholders’ best interests to change manager. Accordingly, we announced in December that the Company would terminate its arrangements with Invesco and appoint Majedie, led by James de Uphaugh, as its new Manager.
The Board is particularly impressed by Majedie’s pragmatic style, its focus on total return, its deep understanding of the UK equity market and the depth of the team and resources that are at its disposal. Over time, we expect that this approach should lead to improved results for shareholders. Further information on the Portfolio Manager’s core investment beliefs are set out in the Annual Report.
Portfolio reorganisation and costs
As the portfolio that James de Uphaugh wanted to hold was substantially different from the one held by the Company under its previous Manager, it was necessary to restructure the portfolio. This took place in February and March 2020. Ninety-eight percent of intended trading was completed by 26 March. As you will see from the portfolio as set out below the Company is left with a small number of legacy positions which amount to about 1% of NAV. Total direct costs of reorganising the portfolio, representing the transition manager fee, dealing commission and stamp duty, as well as advisors’ fees, were 0.50% of average net assets during the transition. More detail on costs of transition are given below.
The investment management fee charged by the previous Manager was 0.55% per annum of the market value of the Company. As part of the new arrangements, the Board has agreed with Majedie a lower fee for investment management services of 0.48% per annum on the first £500 million of the Company’s market value and 0.465% on market value above £500 million, as well as a three month fee waiver to help with the costs of the transition. This excludes the cost of company secretarial services which will now be provided by PraxisIFM Fund Services (UK) Limited, for which the Company will pay a fixed fee separately.
Overall, this should mean future costs should be lower as a percentage of net assets. At the Company’s year-end, the annual Ongoing Charges Ratio was 0.55%, compared with 0.56% over the prior twelve months and is anticipated to be 0.51% for the current year.
Gearing
The Company has in place a £100m debenture, which was issued in 1997 and matures in September 2022. The cost of this debt is 7 3/4% per annum. This debenture in effect provides permanent gearing and is not subject to any covenants. There is also a bank credit facility, although this is currently undrawn and has not been used since July 2019. The Company’s Articles of Association stipulate that total borrowings must not exceed 25% of its net assets.
At the Company’s year end, the debenture (using its fair market value) represented 13.4% of NAV. In practice, the Manager also holds a balance of cash and cash equivalents. This was 5.1% at the year end. Adjusting for this, gearing was a more modest 8.3%. As the Manager describes in his report, he is comfortable with this level of gearing and may seek to increase it further in the event of any further equity market sell-off.
Discount and share buybacks
The Company’s share price at its year end was 434p, a decrease of 32.6% from a price of 644p twelve months before. This reflects the decrease in NAV and a widening of the discount: with debt at market value, the discount increased to 11.5% compared with 7.6% a year before.
During the year, the Company’s discount traded in a range of 5.4% to 21.8%, and the average discount was 11.7%.
As the discount widened during the year, the Company began a programme of share buybacks, which began on 5 June 2019 and lasted until 21 February 2020 when the discount began to narrow. The Company bought back a total of 20,798,805 shares, representing 10.6% of the opening issued share capital, at an average discount of 12.4%. The effect of these repurchases has been to enhance NAV by 1.3%.
At 10 June 2020, the latest practical date before the signing of this report, the NAV and share price had increased and were respectively 552.53p and 483.0p and the resultant discount was 12.6% with debt at fair market value.
Dividend
The Company flagged in its statement of 27 March that it would pay a third interim dividend in May. We also indicated that a final dividend would be paid in July. The Board is proposing, subject to shareholder approval, that this should be 9.45 pence and should be paid on 31 July 2020 to shareholders on the register on 26 June 2020. If this is approved, it would mean that shareholders will receive a total payout of 28.65 pence per share for the year. This compares with a total of 28.00 pence per share in the previous financial year, a rise of 2.3%, compared with an increase in the RPI of 2.6%.
Over the past few years, under the previous Manager, there has been strong income growth and as a result the Company’s reserves are strong. However, shareholders will be aware that even before the current economic crisis, the overall yield on the UK market had become increasingly dependent on the dividends paid by a small number of companies and sectors. In the previous decade, important dividend paying companies had been taken over, bank dividends following the 2008 crisis were smaller than before and a number of other companies cut dividends. The net effect is that before the current crisis, about 40 companies accounted for about 75% of total dividends in the Index.
During the current crisis, companies which account for a significant share of dividends paid out in the UK have cut or stopped their dividend payments, including Shell, BT and banks. This is further discussed in Manager’s Report. While there is considerable uncertainty over future payments from many of the companies that have temporarily stopped paying dividends, it is already clear that the underlying level of income generated by the UK market will decline.
The Board is working with the Manager to consider how best to give effect to the Company’s objective of growing dividends in excess of the rate of UK inflation given these circumstances, while also bearing in mind the Company’s reserves and the importance of dividends to our shareholders.
Relationship with stakeholders
The Board’s primary objective is to look after the interests of shareholders. This led us to review the Company’s investment manager last year, which required extensive additional oversight and engagement and time-commitment by all the Directors. There were ten additional board meetings, as well as a significant number of separate calls and meetings with our external advisors throughout the process. I would like to thank all my colleagues on the Board and our advisors for making themselves available throughout this process and for putting so much consideration into a better outcome for shareholders.
In this context, I should draw attention to the Company’s new website which is at www.edinburghinvestmenttrust.com. The website contains further information on the Manager and the Majedie team and includes videos, factsheets and a range of investment articles. Shareholders may register to receive their own updates, such as the notification of publication of monthly factsheets and Company announcements, through the website.
The Board has maintained oversight of all service providers in these challenging times. The Manager’s report sets out the positioning of the portfolio. The Board is encouraged by its well-diversified nature. We have also discussed with the Manager the range of different economic scenarios that could unfold in the months ahead. This interaction and challenge will continue in the months ahead. The Manager is keeping an open mind about the pace of economic recovery and is alert to those companies and sectors that have been impaired. As the Manager describes in his report, many aspects of consumer and corporate behaviour are likely to change as a result of the COVID-19 Pandemic. We are supportive of his open-minded approach to dealing with this.
Board composition and succession
Given the changes that have taken place during the year, the Nominations Committee has asked both Maxwell Ward and Gordon McQueen (who would normally have stepped down at this year’s AGM having served as directors for nine years) to continue for a further year to ensure a degree of continuity. In order to avoid having to make two new appointments next year, we propose to make one appointment this year, taking the Board temporarily to seven members and another appointment during 2021.
AGM plans
The Company will hold its Annual General Meeting on the 23 July 2020. However, current UK emergency measures mean that this will be a closed meeting and, regrettably, shareholders will be unable to attend in person. I would therefore strongly encourage shareholders to vote instead by proxy.
Full details of the Annual General Meeting, the resolutions proposed and how to vote by proxy are described in the Notice of Meeting and supporting explanatory notes. Shareholders who have questions that they would have raised at the Annual General Meeting should submit them by 16 July 2020 to the Company’s email address, edinburghinvestmenttrust@majedie.com. Answers will be published on the Company’s website in advance of the meeting. There will also be an on-line presentation on the Company’s website by the Manager on the day of the AGM. This presentation will be recorded and will be able to be viewed after the event on the website.
I would like to take this opportunity to thank all shareholders for their continued support and understanding in these exceptional circumstances. The Company will return to full shareholder engagement as soon as feasible.
Outlook
I am encouraged by the new portfolio put in place by Majedie. This should help our Company navigate the highly uncertain economic and market backdrop. Majedie is also thinking carefully about the ‘new normal’ and which companies will be best placed to generate attractive returns in the more challenging business climate. Through their investment process, the strong companies they identify should underpin attractive long-term returns for shareholders.
GLEN SUAREZ
CHAIRMAN
11 June 2020
Portfolio Manager’s Report
For the year ended 31 March 2020
Introduction
Despite the worrying COVID-19 healthcare crisis, this is an exciting time to take on the important responsibility of managing this Company. The pandemic has resulted in rapid changes to businesses and economies: the opportunities and threats that these bring to our investment universe are significant. While we do not underestimate the threats, we firmly believe that we can position the Company to capitalise on the many positive investment opportunities that are available now and in the future.
We apply a total return approach to managing the portfolio. This means that we have a flexible investment style when deciding on investments – the income paid by companies is an important factor, as is their potential for future growth. Our rigorous stock-driven investment analysis is designed to ensure that the Company owns strong, attractive businesses. The relevant Environmental, Social and Governance factors that affect these businesses are carefully considered throughout our work. After reviewing historic performance, the rest of this report sets out the new portfolio structure and how we are applying our investment process in this rapidly changing environment. We also set out our approach to the financial leverage that the Company can employ.
As the Chairman has also said, the Company’s new website is kept up to date with a range of documents and articles which set out our investment views. There will inevitably be evolution in our thoughts over time. We look forward to keeping shareholders abreast of our thinking, whether in person or through other media, in the months and years ahead.
Historic performance
For most of the twelve months to the Company’s 31 March 2020 year end, the UK stock market was exposed to regularly changing investor sentiment. Factors included the Brexit process, as a new Prime Minister attempted to agree a deal with the EU, and the global economic outlook. The latter was particularly affected by US-Sino trade tensions. In the second half of the period, there were initially encouraging signs about the direction of the UK economy and strong grounds for optimism. Helped by a clear outcome in the December general election, employment growth in the UK looked set to remain firm and real wages were set to increase further. Growth in government spending picked up and investment spending was likely to strengthen. On this basis, overall rates of economic growth were expected to accelerate throughout 2020. However, improving portfolio returns during the Company’s second half were undone by events in February and March, as the COVID-19 panic led shares lower on fears that the pandemic could pose a serious challenge to economic growth. The market sell-off was widespread but there was a disproportionate impact on UK domestic stocks. The NAV underperformed the benchmark by 8.2% over the year, of which 7.7% was in the first six months. Prominent negative contributors included Burford Capital, Amigo and the tobacco holdings.
Portfolio structure
We have set out the portfolio by company, sector and industry positions: this can be found below.
The COVID-19 virus has imposed a hard stop on chunks of the UK and the developed world economies. The resulting extreme uncertainty has also exposed weak links and interconnectedness. In this harsh new environment, companies have pulled all levers to conserve cash and increase liquidity. This includes passing dividends in many instances. Huge government packages in many countries have attempted to support employment levels. At the time of writing, despite the challenging economic backdrop, equity markets have rebounded sharply from the lows of March. Investors are focusing on the pace at which economies are reopening and the increasing scale of policy action.
Against this backdrop we have constructed a diversified portfolio of shares, with a focus on companies with strong market positions. Many of the larger positions are holdings that we judge to be leaders in their fields. Examples include Tesco, Smith & Nephew, Hays and Marshalls: they and other holdings should emerge from this crisis in even stronger shape. Despite the massive monetary and fiscal stimulus, weaker companies are likely to close or be taken over at depressed prices. In short, the competitive landscape will tighten yet further: this will be corporate Darwinism on steroids. Our focus on strong and sustainable business models will be even more important than before the crisis.
The holdings of Unilever and Hargreaves Lansdown illustrate this. Unilever has built leading market positions in these regions over many decades and there remains huge potential as low income levels grow at a faster pace than developed economies. Importantly, the group has moved the portfolio towards sectors with greater long-term potential such as Personal and Home Care: in many of these categories, it is the market leader. A renewed focus on innovation and sharper marketing should improve growth rates towards mid-single digits over time: this is not reflected in the current share price. The purchase of Hargreaves Lansdown reflects the fact that its wealth management platform is very well positioned to benefit from the structural growth forecast for the industry. It comes with strong management and a reputation for excellent customer service.
The bar chart on page 17 of the Annual Report illustrates the largest industry positions. Within these, prominent exposures include the food retailers, benefitting from selling essentials; the telecoms stocks, capitalising on changing working habits and with many customers trading up; and defence companies, with long duration earnings. We have also modestly used our ability to buy non-UK listed shares. We have, for example, invested in selected US-listed gold shares. These should provide a hedge against the unprecedented fiscal and monetary measures being used to mitigate the economic consequences of COVID-19.
Portfolio activity
In these unprecedented times, we have worked hard to balance the portfolio across robust, well run companies with strong management teams that we believe are well placed to ride out this volatility. We remain alert to the evolution of the market and will endeavour to act swiftly to take advantage of attractive pricing opportunities or rebalance the portfolio as the situation dictates. An important dimension to our work in the near term is identifying those companies with sufficiently robust business models, balance sheet and liquidity profiles to weather the social and economic storm. We see a role in the Edinburgh Investment Trust plc for both companies with attractive long-term earnings growth profiles, as well as those that may be out of favour but with the potential to recover. We also aim to hold companies at attractive valuations.
Risk management is carefully integrated in our investment process. Never has it been more important than now. The downside is considered for each position: protecting the Company’s capital over the long term is critical. Thus those shares in which we consider the downside to be more limited typically represent larger positions in the portfolio. In addition, an Investment Oversight Committee, chaired by our CEO, governs a separate risk oversight process which provides further challenge of individual stock selection as well as macroeconomic and market risks.
In the light of the changing environment, and as equity markets have fallen, what have we been doing? Our research focus moved swiftly to assessing each company’s resilience to a lockdown and the consequential collapse in revenue and in some cases, a zero-revenue environment. For all companies, now more than ever, cash and liquidity are king. For all our major holdings and those that were most vulnerable to a no revenue situation, we have modelled the number of days of liquidity that companies have with and without cost mitigation actions. The vast majority are well prepared. Some, such as the industrial supplier Electrocomponents, had seen from their Chinese operations what a lockdown entails; this gave them a head start. The best management teams are those that have one eye on the present and one eye on the future. We have been increasing the size of the holdings of those companies that can emerge into the new competitive landscape in a stronger way.
This market dislocation has given us an opportunity to invest in other companies such as Weir Group, which has a fantastic business selling aftermarket spares to the mining industry, and Ashtead, a successful operator in the US machine and equipment rental industry. Both have debt levels that have impacted their ratings.
Given the very short period from the end of the portfolio reorganisation to the Company’s year-end, there are no material sales to report. However, we have sold shares in BP. The level of its dividend is likely to be threatened by the lower oil price and changing patterns of energy consumption. Longer term, we question the rate of return that the oil majors will be able to generate on renewable investments.
The rapidly changing economic landscape
“The Coronavirus epidemic is testing governments across the world in ways which have not been seen before; they are trying to develop policy based on information which is often contradictory and changes from day to day, and at the same time civil servants and politicians are having to adapt to ways of working and decision-making which are very different from those used in previous crises. It is hardly surprising then, that all governments are feeling their way, taking decisions on the data they have in front of them, and often having to change direction on a moment's notice. Just as we are.”
Extract from Serco Group’s coronavirus trading update, 2 April 2020.[1]
As Serco’s statement eloquently describes, we are in a fast-moving environment. Today’s seeming certainties are tomorrow’s disproven theories. Fascinating though it has been to attempt to familiarise ourselves with the epidemiological studies of the coronavirus, we do not have an information edge in anticipating how the biological angle to the crisis unfolds. However, it is clear to us that there will be significant and profound changes to many aspects of life once the immediate health crisis passes. We are already starting to see these affect the thinking of corporate management teams.
Consumer behaviour and working patterns.
The length and nature of this pandemic will determine, for example, how quickly consumers return to travel – whether for business or pleasure. Companies themselves have also found that having some or all staff working from home (all in the case of the Majedie) has actually been good for staff efficiency. Technology has shown that the daily commute is not strictly necessary for large swathes of the working population. Call centres and offices in city centres are big overheads and it seems reasonable to expect many companies to reduce some of these. As employees working from home turn ever more to the convenience of home shopping, the pressure on retailers and their landlords is also likely to continue to increase.
Role of the state.
Effective nationalisation of parts of the economy now appears likely. An obviously affected industry is travel: air and rail companies face increased state ownership or subsidisation, especially if national borders remain closed for a prolonged period. The cost of the government programmes to support economies, while evidently enormous, will also have major consequences in terms of future taxation. UK Chancellor Rishi Sunak unveiled a stimulus package of £330bn or roughly 16% of GDP with a commitment to provide more support if necessarily. Fiscal stimulus packages in the US and Germany have come in at about 10% and 22% of GDP, respectively. The FT, in an editorial shortly after the Company’s year end, neatly summarised this new world:
“Governments will have to accept a more active role in the economy. They must see public services as investments rather than liabilities, and look for ways to make labour markets less insecure. Redistribution will again be on the agenda; the privileges of the elderly and wealthy in question. Policies until recently considered eccentric, such as basic income and wealth taxes, will have to be in the mix.”[2]
Corporate strategies.
At the more prosaic company level, we also expect to see major changes in how companies are managed. Notions of efficient balance sheets, implying a permanent state of indebtedness in order to maximise returns on equity, are likely to be consigned to the economic dustbin. Where previously some companies might have been condemned by some investors for holding a healthy cash balance, such criticism is likely to vanish.
Dividends.
Another consequence of less efficient balance sheets, and a greater emphasis on ready liquidity to see companies through crises, is that corporates will have less money available to pay out to their shareholders. This, plus the broader economic consequences of the abrupt halt to many parts of the economy, means that the UK’s 2020 dividend payments could be down by about 40% compared to 2019. We think such a decline is a reasonable working assumption for the Company’s holdings too. There is pressure on dividends on other fronts, too. For example, the Bank of England has instructed UK-listed banks to withhold dividends this year and put a shot across the bows of the major insurers.
More broadly, we view dividends as an output of profitability not as a payment that should be maintained at a cost to the long-term fabric of a business. Clearly in the current crisis, with corporates facing an unprecedented array of “unknown unknowns”, many have decided to cancel or defer their dividend decisions. Layered on this there is also a societal dimension: those companies that either access government employment support schemes, or access or are deemed to be beneficiaries of government credit facilities, are expected to pass on paying their dividends.
Thus the medium term outlook for dividends remains uncertain. Much will turn on the rate at which economies recover. While we expect the companies in the portfolio to emerge from this crisis stronger, it is unclear at what rate their dividends will grow. We do not underestimate the economic damage of the COVID-19 recession, which sadly is likely to be far ranging and severe. In such an environment, even the strongest of companies will, sensibly, seek to preserve cash even if that means reducing or cancelling dividends. Your Company’s dividend income will also be under pressure compared with historic norms. While we have some short-term flexibility to support dividends through use of its distributable reserves, we will be working with the Board in the months ahead to help the Board decide what might be a sustainable level payout for shareholders. We expect to be able to say more about this by the time of the Interim results in November.
Borrowings and gearing
One of the potential advantages of an investment trust is the ability to borrow funds to boost long term investment returns. This relies on investment returns exceeding the cost of the borrowed funds (borrowings plus falling investment values boosts losses too). Despite the current uncertainty, we believe that borrowing against the assets of the Company (“gearing”) remains attractive strategically, and potentially tactically too after the recent market sell-off. The opportunity to invest in a number of shares with sustainable business models at highly attractive valuations may be a sound reason to deploy additional gearing in time.
The Company has in place a £100m debenture which matures in 2022. It carries an annual coupon of 7 3/4%. When this debenture matures, we anticipate looking to replace it with an appropriate form of borrowing with a lower annual coupon. We are also able to access a 364-day revolving credit facility at the Bank of New York Mellon. This facility is not currently being used but we stand ready to draw down on it.
In the meantime, shareholders should expect the portfolio to be largely fully invested and, because of the debenture, to be geared. At the Company’s year-end, gearing (defined as the market value of all borrowings divided by the Company’s net assets) was 13.4%. Adjusting for cash and cash equivalents, the level of net gearing was 8.3%.
Conclusion
Drawing all this together, governments around the world have put in place important schemes to support companies and employees through this period of economic uncertainty. We are thinking carefully about what the ‘new normal’ will look like. In a rapidly changing environment, we believe it is more important than ever for our fundamental research to be stock driven. We believe that our experience in dealing with periods of market dislocations, our liquidity advantage and our fundamental research process will help us navigate your Company through this period of instability. We are already beginning to see which management teams are being most pro-active for corporate life post COVID-19. Our aim is to position your assets to benefit from this change in the corporate landscape through a portfolio dominated by companies that will thrive as the world economy emerges from this crisis. We are optimistic that such a portfolio will support attractive returns to shareholders – through both capital and income – over the medium to long term.
James de Uphaugh
Portfolio Manager
Chris Field
Deputy Portfolio Manager
11 June 2020
Business Review
Strategy and Business Model
The Edinburgh Investment Trust plc is an investment company and its investment objective is set out below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These are also set out below and have been approved by shareholders.
The business model the Company has adopted to achieve its investment objective has been to contract the services of Majedie Asset Management Limited (the ‘Manager’) to manage and administer the portfolio in accordance with the Board’s strategy and under its oversight. The portfolio manager with individual responsibility for the day-to-day management of the portfolio is James de Uphaugh and the deputy portfolio manager is Chris Field.
In addition, the Company has contractual arrangements with Link Asset Services to act as registrar, The Bank of New York Mellon (International) Limited as depositary and custodian, and PraxisIFM Fund Services (UK) Limited to act as Company Secretary.
Investment Objective and Policy
Investment Objective
The Company invests primarily in UK securities with the long-term objective of achieving:
1. an increase of the Net Asset Value per share in excess of the growth in the FTSE All-Share Index; and
2. growth in dividends per share in excess of the rate of UK inflation.
Investment Policy
The Company will generally invest in companies quoted on a recognised stock exchange in the UK. The Company may also invest up to 20% of the market value of the Company’s investment portfolio, measured at the time of any acquisition, in securities listed on stock exchanges outside the UK. The portfolio is selected by the Manager on the basis of its assessment of the fundamental value available in individual securities. Whilst the Company’s overall exposure to individual securities is monitored carefully by the Board, the portfolio is not primarily structured on the basis of industry weightings. No acquisition may be made which would result in a holding being greater than 10% of the market value of the Company’s investment portfolio. Similarly, the Company may not hold more than 5% of the issued share capital (or voting shares) in any one company. Investment in convertibles is subject to normal security limits. Should these or any other limit be exceeded by subsequent market movement, each resulting position is specifically reviewed by the Board.
The Company may borrow money to provide gearing to the equity portfolio of up to 25% of net assets.
Use of derivative instruments is monitored carefully by the Board and permitted within the following constraints: the writing of covered calls against securities which in aggregate amount to no more than 10% of the value of the portfolio and the investment in FTSE 100 futures which when exercised would equate to no more than 15% of the value of the portfolio. Other derivative instruments may be employed, subject to prior Board approval, provided that the cost (and potential liability) of exercise of all outstanding derivative positions at any time should not exceed 25% of the value of the portfolio at that time. The Company may hedge exposure to changes in foreign currency rates in respect of its overseas investments.
Results and Dividends
At the year end the share price was 434.0p per ordinary share (2019: 644.0p). The net asset value (debt at market value) per ordinary share was 490.4p (2019: 696.9p).
Subject to approval at the AGM, the final proposed dividend for the year ended 31 March 2020 of 9.45p (2019: 9.25p) per ordinary share will be payable on 31 July 2020 to shareholders on the register on 26 June 2020. The shares will be quoted ex-dividend on 25 June 2019. This will give total dividends for the year of 28.65p per share, an increase of 2.3% on the previous year’s dividends of 28.00p. The revenue return per share for the year was 27.8p, a 3.1% decrease on the 2019 return of 28.7p.
Performance
The Board reviews the Company’s performance by reference to a number of key performance indicators (KPIs) which are shown above. Notwithstanding that some KPIs are beyond its control, they are measures of the Company’s absolute and relative performance. The KPIs assist in managing performance and compliance and are reviewed by the Board at each meeting.
The Chairman’s Statement above gives a commentary on the performance of the Company during the year, the gearing and the dividend.
The Board reviews an analysis of expenditure at each Board meeting, and the Audit and Management Engagement Committees formally review the fees payable to the main service providers, including the Investment Manager, on an annual basis. The charges figure is calculated in accordance with the AIC methodology and is reviewed by the Board annually in comparison to peers. The change in investment manager and company secretary arrangements during the year has also enabled the Board to reduce the combined fees payable for these services; based on the market capitalisation of the Company as at 31 March 2020 we anticipate the annualised costs falling from £4.2m to £3.7m, and the Ongoing charges figure reducing from 0.55% to 0.51%. In addition, this does not account for the waiver of investment management fee for the first three months of the Majedie engagement which is expected to save the Company £0.9m between 04 March and 03 June 2020.
For the year being reported, except for long term disappointing performance which has been addressed through the change of Manager, all other KPIs are considered satisfactory.
The Board also regularly reviews the performance of the Company in relation to the 23 investment trusts in the UK Equity Income sector. As at 31 March 2020 the Company was ranked 18th by NAV performance in this sector over one year, three years and five years (source: Morningstar).
Financial Position and Borrowings
The Company’s balance sheet below shows the assets and liabilities at the year end. Borrowings at the year-end comprised the £100 million 7 3/4% debenture which matures in 2022 and £nil (2019: £30.8 million) drawn down on the Company’s £150 million bank revolving credit facility. Details of this facility are contained in note 11.
Outlook, including the Future of the Company
The main trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the Portfolio Manager’s Report. Details of the principal risks affecting the Company can be found below.
Performance Attribution
| for year ended 31 March 2020 % | |
| Total Return Basis(1) | |
| NAV (debt at market value) | (26.7) |
| Less: Benchmark | (18.5) |
| Relative underperformance | (8.2) |
| Analysis of Relative Performance | |
| Portfolio total return | (23.8) |
| Less: Benchmark total return(1) | (18.5) |
| Portfolio underperformance | (5.3) |
| Borrowings: | |
| Net gearing effect | (2.6) |
| Interest | (0.7) |
| Market value movement | 0.3 |
| Management fee | (0.5) |
| Portfolio transition costs | (0.5) |
| Other expenses | (0.1) |
| Tax | (0.1) |
| Share buybacks | 1.3 |
| Total | (8.2) |
(1) Source: Refinitiv.
Performance Attribution– analyses the performance of the Company relative to its benchmark index.
Relative performance – represents the arithmetic difference between the NAV and benchmark returns.
Portfolio total return – represents the return of the holdings in the portfolio including transaction costs, cash and income received, but excluding expenses incurred by the Company.
Net gearing effect – measures the impact of the debenture stock, bank loan and cash on the Company’s relative performance. This will be positive if the portfolio has positive capital performance and negative if capital performance is negative.
Interest – the debenture stock and bank loan interest paid has a negative impact on performance.
Management fee – the base fee reduces the Company’s net assets and decreases returns.
Other expenses and tax – reduce the level of assets and therefore result in a negative effect on relative performance.
Share buybacks – measures the effect of ordinary shares bought back at a discount to net asset value on the Company’s relative performance.
Investments in Order of Valuation
At 31 March 2020
UK listed ordinary shares unless otherwise stated
| Investment | Sector | Value £’000 | % of Portfolio |
| Unilever | Food Producers | 52,031 | 5.6 |
| Tesco | Food & Drug Retailers | 49,551 | 5.4 |
| Royal Dutch Shell – A shares | Oil & Gas Producers | 31,639 | |
| Royal Dutch Shell – B Shares | 17,868 | ||
| 49,507 | 5.4 | ||
| AstraZeneca | Pharmaceuticals & Biotechnology | 44,539 | 4.8 |
| BAE Systems | Aerospace & Defence | 39,702 | 4.3 |
| GlaxoSmithKline | Pharmaceuticals & Biotechnology | 39,016 | 4.2 |
| BP | Oil & Gas Producers | 38,067 | 4.1 |
| Mondi | Forestry & Paper | 35,918 | 3.9 |
| Direct Line Insurance | Non-Life Insurance | 34,641 | 3.8 |
| Anglo American | Mining | 34,250 | 3.7 |
| Ten Top Holdings | 417,222 | 45.2 | |
| Smith & Nephew | Health Care Equipment & Services | 33,399 | 3.6 |
| Legal & General | Life Insurance | 31,828 | 3.5 |
| Associated British Foods | Food Producers | 26,900 | 2.9 |
| Ashtead | Support Services | 24,394 | 2.6 |
| Hays | Support Services | 24,169 | 2.6 |
| Vodafone | Mobile Telecommunications | 21,081 | 2.3 |
| HSBC | Banks | 20,181 | 2.2 |
| Hargreaves Lansdown | Financial Services | 18,762 | 2.0 |
| Royal Bank of Scotland | Banks | 17,252 | 1.9 |
| Rio Tinto | Mining | 17,247 | 1.9 |
| Twenty Top Holdings | 652,435 | 70.7 | |
| Newmont - US Listed | Mining | 17,012 | 1.8 |
| Orange - French Listed | Fixed Line Telecommunications | 17,005 | 1.8 |
| Barrick Gold - US Listed | Mining | 16,640 | 1.8 |
| Koninklijke KPN- Dutch Listed | Fixed Line Telecommunications | 16,588 | 1.8 |
| 3i | Financial Services | 15,443 | 1.7 |
| Lloyds Bank | Banks | 15,252 | 1.7 |
| Electrocomponents | Support Services | 15,122 | 1.6 |
| Qinetiq Group | Aerospace & Defence | 14,608 | 1.6 |
| Barclays | Banks | 14,106 | 1.5 |
| WPP | Media | 12,737 | 1.4 |
| Thirty Top Holdings | 806,948 | 87.4 | |
| Diageo | Beverages | 12,560 | 1.4 |
| Sage Group | Software & Computer Services | 11,953 | 1.3 |
| Wm Morrison Supermarkets | Food & Drug Retailers | 11,840 | 1.3 |
| Weir Group | Industrial Engineering | 11,829 | 1.3 |
| Daily Mail & General Trust | Media | 11,798 | 1.3 |
| Marshalls | Construction & Materials | 10,342 | 1.1 |
| Dunelm | General Retailers | 10,084 | 1.1 |
| Travis Perkins | Support Services | 9,161 | 1.0 |
| CLS | Real Estate Investment & Services | 9,086 | 1.0 |
| Marks & Spencer | General Retailers | 6,860 | 0.7 |
| Forty Top Holdings | 912,461 | 98.9 | |
| Bellway | Household Goods & Home Construction | 6,041 | 0.7 |
| Raven Property - Preference shares | Real Estate Investment & Services | 2,133 | 0.2 |
| Vectura | Pharmaceuticals & Biotechnology | 1,644 | 0.2 |
| EurovestechUQ | Financial Services | 154 | 0.0 |
| Total Holdings (44) | 922,433 | 100.0 |
UQ Unquoted investment.
Principal Risks and Uncertainties
Risk management and mitigation
The Board, through the Audit Committee and with the assistance of the Manager, maintains and regularly reviews a report of the risks to the Company in the form of a risk control summary. The document includes a description of each identified risk, the mitigating action taken, reporting and disclosure to the Board and an impact and probability risk rating. The rating is given both prior to and after the Board’s mitigation of each risk. The information is then displayed in matrix form which allows the Board to identify the Company’s key risks. As the changing risk environment in which the Company operates has evolved, the total number of risks has fluctuated, with certain risks having been removed and new risks added with emerging risks actively discussed as part of this process and, so far as practicable, mitigated.
The composition of the Board is regularly reviewed to ensure its members offer sufficient knowledge and experience to assess, anticipate and mitigate these risks, as far as possible.
The Company’s key long-term investment objectives are an increase in the net asset value per share in excess of the growth in the FTSE All-Share Index (the ‘benchmark’) and an increase in dividends in excess of the growth in RPI. The principal risks and uncertainties facing the Company are an integral consideration when assessing the operations in place to meet these objectives, including the performance of the portfolio, share price and dividends. The Board is ultimately responsible for the risk control systems but the day-to-day operation and monitoring is delegated to the Manager. The Board has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity with consideration being given to the effect of the COVID-19 Pandemic and possible regulatory uncertainty arising from Brexit. The following sets out a description of the principal risks and how they are being managed or mitigated.
Market Risk
A great majority of the Company’s investments are traded on recognised stock exchanges. The principal risk for investors in the Company is a significant fall, and/or a prolonged period of decline in those markets. The Company’s investments, and the income derived from them, are influenced by many factors such as general economic conditions, interest rates, inflation, the severe impact of the COVID-19 Pandemic, political events including Brexit and government policies as well as by supply and demand reflecting investor sentiment. Such factors are outside the control of the Board and Manager and may give rise to high levels of volatility in the prices of investments held by the Company. The asset value and price of the Company’s shares and its earnings and dividends may consequently also experience volatility and may decline.
Market risk is included in the risk control summary report that is reviewed by the Board at each meeting. Additionally, the Board receives reports on the performance of the portfolio at each meeting.
Investment Performance Risk
The Board sets investment policy and risk guidelines, together with investment limits, and monitors adherence to these at each Board meeting. All Individual investment decisions are delegated to the fund manager. The Manager’s approach is to construct a portfolio which should benefit from expected future trends in the UK and global economies. The Manager is a long-term investor, prepared to take substantial positions in securities and sectors, across a range of different types of stock. This reflects the Manager’s high conviction, stock-driven investment process and total return approach. Strategy, asset allocation and stock selection decisions by the Manager can lead to underperformance of the portfolio relative to the benchmark and/or income targets.
The Manager’s style may result in a concentrated portfolio with significant overweight or underweight positions in individual stocks or sectors compared to the index and consequently the Company’s performance may deviate significantly, possibly for extended periods, from that of the benchmark. In a similar way, the Manager manages other portfolios holding many of the same stocks as the Company which reflects the Manager’s high conviction style of investment management. This could significantly increase the liquidity and price risk of certain stocks under certain scenarios and market conditions. However, the Board and Manager believe that the investment process and policy outlined above should, over the long term, meet the Company’s objectives of capital growth in excess of the benchmark and real dividend growth. Investment selection is delegated to the Manager. The Board does not specify asset allocations. Information on the Company’s performance against the benchmark and peer group is provided to the Board at each Board meeting. The Board uses this to review the performance of the Company, taking into account how performance relates to the Company’s objectives. The Manager is responsible for monitoring the portfolio selected and seeks to ensure that individual stocks meet an acceptable risk-reward profile.
As described in the investment policy, derivatives may be used provided that the market exposure arising is less than 25% of the value of the portfolio.
Investment Performance risk is included in the risk control summary report that is reviewed by the Board at each meeting. The Board also receives reports on the performance of the portfolio and on compliance with the Company’s investment policy guidelines from the manager at each meeting.
Borrowing Risk
The Company may borrow to provide gearing to the equity portfolio of up to 25% of net assets. Borrowing is a mix of the Company’s £100 million debenture stock and the Company’s £150 million bank facility. Details of all borrowings are given in Notes 11 and 12. The principal gearing risk is that the level of gearing may have an adverse impact on performance. Secondary risks include whether the cost of borrowing is too high and whether the bank facility can be renewed and on terms acceptable to the Company.
Within an overall limit set by the Board, the Manager has full discretion over the amount of the borrowing it uses to gear its portfolio, whilst the issuance, repurchase, or restructuring of borrowing are for the Board to decide.
Borrowing and gearing risk is included in the risk control summary report that is reviewed by the Board at each meeting. Additionally, compliance with the Company’s investment policy guidelines is continuously monitored by the manager and reported to the Board at each meeting.
Income/Dividend Risk
The Company is subject to the risk that income generation from its investments fails to reach the level of income required to meet its objectives.
The Board monitors this risk through the review of detailed income forecasts and comparison against budget. These are contained within the Board papers and the Board considers the level of income at each meeting.
Share Price Risk
There is a risk that the Company’s prospects and NAV may not be fully reflected in the share price from time-to-time.
The share price is monitored on a daily basis and the Board is empowered to repurchase shares within agreed parameters which are regularly reviewed with the Company’s Broker. The discount at which the shares trade to NAV can be influenced by share repurchases. During the year, the Company repurchased 20,798,805 shares for holding in treasury (2019: 185,000) and the effect of these repurchases was to add 1.3% to the Net Asset Value of the Company.
Share Price risk is included in the risk control summary report that is reviewed by the Board at each meeting.
Corporate governance and internal controls risk
The Board has delegated to third party service providers the management of the investment portfolio, depositary and custody services (which include the safeguarding of the assets), registration services, accounting and company secretarial services.
The principal risks arising from the above contracts relate to performance of the Manager, the performance of administrative, registration, depositary, custodial and banking services, and the failure of information technology systems used by third party service providers. These risk areas could lead to the loss or impairment of the Company’s assets, inadequate returns to shareholders and loss of investment trust status. Consequently, in respect of these activities the Company is dependent on the Manager’s control systems and those of its administrator, depositary, custodian and registrar.
An annual review of the control environments of all service providers is carried out by the Company Secretary who provides an assessment of these risks and the operation of the controls for consideration by the Audit Committee and is formally reported to and considered by the Board.
Reliance on the Manager and other Third Party Providers Risk
The Company is reliant upon the performance of third party providers for its executive function and other service provisions. The Company’s most significant contract is with the Manager, to whom responsibility for management of the Company’s portfolio is delegated. The Company has other contractual arrangements with third parties to act as administrator, company secretary, registrar, depositary and broker. The Company’s operational structure means that all cyber risk (information and physical security) arises at its third party service providers, including fraud, sabotage or crime against the Company. Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to pursue successfully its investment policy and expose the Company to risk of loss or to reputational risk.
In particular, the Manager performs services which are integral to the operation of the Company. The Manager may be exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its reputation. Any damage to the reputation of the Manager could result in counterparties and third parties being unwilling to deal with the Manager and by extension the Company. This could have an adverse impact on the ability of the Company to pursue its investment policy.
The Board seeks to manage these risks in a number of ways:
- The Company Secretary reviews the performance and the service organisation control reports of third party providers and reports to the Board on an annual basis.
- The Board reviews the performance of the Manager at every Board meeting and otherwise as appropriate. The Board has the power to replace the Manager and reviews the management contract formally once a year.
- The day-to-day management of the portfolio is the responsibility of the named portfolio manager, James de Uphaugh, Chairman and Chief Investment Officer of Majedie Asset Management. He is a Fund Manager and Analyst with 32 years’ investment experience in UK and international equity markets. James is responsible for co-managing the UK Equity Fund of Majedie and managing the Edinburgh Investment Trust.
- The risk that the portfolio manager might be incapacitated or otherwise unavailable is mitigated by the fact that he works within, and is supported by, the wider Majedie team. Moreover, Chris Field, as deputy portfolio manager, would be able to manage the portfolio if James de Uphaugh was unable to do so for any reason.
- The Board has set guidelines within which the portfolio manager is permitted wide discretion. Any proposed variation outside these guidelines is referred to the Board and compliance with the guidelines and the guidelines themselves are reviewed at every Board meeting.
Emerging Risks
Climate Change
Globally, climate change effects are already emerging in the form of changing weather patterns. Extreme weather events could potentially impair the operations of individual investee companies, potential investee companies, their supply chains and their customers. The Manager takes such risks into account, along with the downside risk to any company – whether in the form of its business prospects or market valuation or sustainability of dividends – that is perceived to be making a detrimental contribution to climate change. The Company invests in a broad portfolio of businesses with operations spread geographically, which should limit the impact of location-specific weather events.
Pandemic (COVID-19)
The rapid spread of COVID-19 has caused governments to implement policies to restrict the gathering, interaction or movement of people. These policies have inevitably changed the nature of the operations of some aspects of the Company, its key service providers and the companies in which it invests. As cited in Market Risk, share prices respond to assessments of future economic activity as well as their own forecast performance and the Pandemic has had a materially negative impact on the economy and will continue do so for a period of time. The Board and its manager have regular discussions to assess this impact on both the investment portfolio and on its ability to generate income for shareholders.
Other Risks
The Company is subject to laws and regulations by virtue of its status as an investment trust and is required to comply with certain regulatory requirements that are applicable to listed closed-ended investment companies. The Company is subject to the continuing obligations imposed by the UK Listing Authority on all companies whose shares are listed on the Official List.
The Manager reviews compliance with investment trust tax conditions and other financial and regulatory requirements on a daily basis with any issues being immediately brought to the attention of the Board.
The Company may be exposed to other business, strategic and political risks in the future, as well as regulatory risks (such as an adverse change in the tax treatment of investment companies), credit, liquidity and concentration risks. The risk control summary report allows the Board to considers all these risks, the measures in place to control them and the possibility of any other risks that could arise.
The Board ensures that satisfactory assurances are received from the service providers. The Manager’s compliance officers produce regular reports for review by the Company’s Audit Committee.
Additionally, the depositary monitors stock, cash, borrowings and investment restrictions throughout the year. The depositary reports formally once a year and also has access to the Company Chairman and the Audit Committee Chairman if needed during the year.
Brexit
The Board considered the market uncertainty arising from the effect of a negotiated trade deal or no trade deal with the EU at the end of the transition period. As the Company’s shares are not currently marketed in Europe, investee companies are predominantly listed in the UK and key counterparties of and service providers to the Company are UK domiciled with suitable contingency arrangements available as necessary, the Board does not expect the Company’s operations or performance over the longer term, to be materially affected by Brexit.
Viability Statement
The Company is a collective investment vehicle rather than a commercial business venture and is designed and managed for long term investment. The Company’s investment objective clearly sets this out. Long term for this purpose is considered by the Directors to be at least five years and accordingly they have assessed the Company’s viability over that period. However, the life of the Company is not intended to be limited to that or any other period.
In assessing the viability of the Company under various scenarios, the Directors considered the principal risks to which it is exposed (including the issues arising from the COVID-19 Pandemic), as set out below, together with mitigating factors. The risks of failure to meet the Company’s investment objective, and contributory market and investment risks, were considered to be of particular importance. The Directors also took into account: the investment capabilities of the portfolio manager; the liquidity of the portfolio, with nearly all investments being listed and readily realisable; the Company’s borrowings as considered in further detail in the Going Concern Statement below; the ability of the Company to meet its liabilities as they fall due; and the Company’s annual operating costs.
In taking account of these factors, the Directors have concluded that the viability of the Company may start to be challenged if the value of investments reduced by over 75% from the aggregate level at the year end. The Directors noted that since the inception of the Company’s FTSE All Share Total Return benchmark in December 1985, the largest fall over any calendar year has been 29.9%, the largest fall over any rolling five year period was 28.8% and the largest fall over any period was 42.9% (all based on benchmark calendar month end values). Based on the above, and assuming there is no significant adverse change to the regulatory environment and tax treatment of UK investment trusts, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of assessment.
Section 172 Statement, Company Sustainability and Stakeholders
Board Responsibilities
As set out in the Directors’ Report below the Directors have a statutory duty to promote the success of the Company, whilst also having regard to certain broader matters, including the need to engage with employees, suppliers, customers and others, and to have regard to their interests (s172 Companies Act 2006). However, the Company has no employees and no customers in the traditional sense. Consistent with the Company’s nature as an investment trust, the Board’s principal concern has been, and continues to be, the interests of the Company’s shareholders taken as a whole.
Company sustainability and stakeholders
As an externally managed investment company, the Company does not have any employees. The Board considers its main stakeholders to be its shareholders, service providers, investee companies and the Manager
Engagement with Shareholders
Shareholder relations are given high priority by both the Board and the Manager and the Board welcomes feedback from shareholders throughout the year. The prime medium by which the Company communicates with shareholders is through the half-yearly and annual financial reports, which aim to provide shareholders with a full understanding of the Company’s activities and results. This information is supplemented by the daily publication of the net asset value, monthly factsheets as well as dividend and other announcements.
Shareholders can also visit the Company’s website www.edinburghinvestmenttrust.com in order to access copies of the annual and half-yearly financial reports, pre-investment information, Key Information Documents (KIDs), proxy voting results, factsheets and stock exchange announcements. The Company’s website also hosts videos and other applicable written materials by the Manager to enhance the information available.
Typically at each AGM, a presentation is made by the Manager following the formal business of the meeting and shareholders have the opportunity to attend, vote and most importantly to communicate directly with the Manager and Board. Presentations to both institutional shareholders and analysts also follow the publication of the annual results. In addition to the AGM and presentation, the Board and Manager also host an annual Shareholder event in London. The Chairman uses these events to lead the Company’s engagement with its shareholders.
Regular dialogue is maintained between the Manager and major institutional shareholders throughout the year to discuss aspects of investment performance, governance and strategy and to listen to shareholder views in order to help develop an understanding of their issues and concerns. All meetings between the Manager and shareholders are reported to the Board.
There is a clear channel of communication between the Board and the Company’s Shareholders via the Company Secretary. The Company Secretary has no express authority to respond to enquiries addressed to the Board and all communications, other than junk mail, are redirected to the Chairman.
Engagement with the Manager, Service Providers and investee companies
At least annually the Board reviews the performance and services of all its service providers including the Manager, and receives and considers the internal control reports from them covering their operations, their policies and control environments. The Board has regular dialogue with and reporting from the Manager on the portfolio of investments and a representative of the Manager attends each Board meeting to provide updates and answer questions from the Board.
The Manager maintains regular dialogue with both investee and potential investee companies and reports back on these conversations to the Board. As described below the Board and Manager believe engagement with investee companies is positive, beneficial and welcomed and that consistent exercise of voting rights is a key activity in the dialogue with these companies.
Change of Manager
The Chairman shared his disappointment concerning the Trust‘s NAV performance in his reports to shareholders during 2018 and 2019, and as formally reported in the 2019 Financial Report, the Board increased scrutiny of the Manager and engaged Willis Towers Watson to provide an independent assessment of the Manager’s investment performance.
Willis Towers Watson also conducted a review into the Manager’s investment process in Spring 2019 and made a number of recommendations to the Board which were implemented by the manager.
In addition, a review of company strategy was prepared by the Company’s Broker and potential options available to the Board were discussed in the event the Board should lose confidence in the Manager.
The occurrence of further negative stock specific events in August and September, coupled with the strong feedback received at the shareholder event held in September 2019 led to further discussions between the Board, Willis Towers Watson and the Broker, culminating in the invitation to four external fund management companies to submit due diligence questionnaires from a longer list of considered candidates. Presentations and proposals were made to the Board, alongside one from the incumbent Manager for the future investment management of the Company and two proposals were taken forward for further due diligence. As well as investment philosophy, process and performance of potential candidates, it was also important to the Board that shareholders received straightforward access to company documents and information and that the company’s affairs continued to be well organised. The decision to appoint Majedie as the new investment manager reflected the board’s confidence in its flexible investment approach and team culture: both clearly distinguished the firm during the selection process. The decision to appoint Majedie to replace Invesco was communicated to the shareholders via a regulatory announcement on 12 December, along with the publication of the interim results. Throughout this period the Board convened on numerous occasions, both with its advisors and in private session, and utilised the services of its legal advisor, to minute any decisions and actions rightly requiring Board approval.
The previous manager had also provided company secretarial services to the Company and a similar process in terms of invitations to pitch and the submission of Due Diligence Questionnaires was undertaken for the role of Company Secretary during December and January. Following a day of presentations from experienced company secretarial service providers in this area, references being sought and Board consideration, the appointment was awarded to PraxisIFM Fund Services (UK) Limited and announced to the market on 4 March 2020.
The most cost effective way to transition the portfolio between the old and new Manager was carefully considered by the Board along with its advisors. Specialist transition management teams - both within Invesco and also with a third party - were used to reduce less liquid holdings and manage the process of transitioning the portfolio. Co-ordination with the incoming manager was frequent with the Board being regularly appraised of progress during what was a very volatile period for markets, culminating in the announcement made on 27 March 2020 that the transition had been completed and the full portfolio released to the market.
Environmental Social and Governance (“ESG”) Matters
As an investment company with no employees, property or activities outside investment, environmental policy has limited application. The Manager considers various factors when evaluating potential investments. While a company’s policy towards the environment and social responsibility, including with regard to human rights, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not necessarily decide to, or not to, make an investment on environmental and social grounds alone. The Manager is a signatory to the United Nations Principles for Responsible Investment.
Exercise of Voting Powers and Stewardship Code
Stewardship
The Board considers that the Company has a responsibility as a shareholder towards ensuring that high Environmental, Social and Governance standards are maintained in the companies in which it invests. To achieve this, the Board does not seek to intervene in daily management decisions, but aims to support high standards of governance and, where necessary, will take the initiative to ensure those standards are met. The principal means of putting shareholder responsibility into practice is through the exercise of voting rights. The Company’s voting rights are exercised on an informed and independent basis.
The Manager has adopted a clear and considered policy towards its stewardship responsibility on behalf of the Company. The Manager takes steps to satisfy itself about the extent to which the companies in which it invests look after shareholders’ value and comply with local recommendations and practices, such as the UK Corporate Governance Code. The Manager’s approach to corporate governance and the UK Stewardship Code can be found on the Manager’s website at www.majedie.com together with a copy of the Manager’s Stewardship Policy and the Manager’s global proxy voting policy.
Two members of the Manager’s investment team are responsible for overseeing all aspects of the Stewardship process, including voting on all resolutions at all Annual General Meetings and Extraordinary General Meetings in the UK and overseas ballots. The Manager assesses corporate governance, remuneration policies and if deemed necessary will challenge management where it is felt that the best interests of shareholders are not being met.
When voting against or abstaining in a vote the Manager may communicate with management beforehand, either setting out its position in its regular meetings with the management of investee companies or in a communication to management.
The Manager discloses its voting record to the Board at each meeting with notes explaining the reasons for any votes against resolutions.
In addition, the Manager discloses to all clients an annual Responsible Capitalism report, providing cumulative voting statistics, full disclosure on voting policy and extracts of engagement for the year. The Manager publishes an annual voting record for the previous year on its website www.majedie.com
Modern Slavery Disclosure
The Company aims to act to the highest standards and is committed to integrating responsible business practices throughout its operations. The prevention of modern slavery as an important part of corporate good governance.
The Company is an investment vehicle and does not provide goods or services in the normal course of its business, or have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015.
Anti-Bribery and Corruption
It is the Company’s policy to conduct all of its business in an honest and ethical manner. The Company takes a zero-tolerance approach to bribery and corruption and is committed to acting professionally, fairly and with integrity in all its business dealings and relationships wherever it operates. The Company’s policy and the procedures that implement it are designed to support that commitment.
Prevention of the Facilitation of Tax Evasion
The Board has adopted a zero-tolerance approach to the criminal facilitation of tax evasion.
Greenhouse Gas Emissions and Streamlined Energy and Carbon Reporting (SECR)
The Company has no employees, physical assets, property or operations of its own, does not provide goods or services and does not have its own customers. It follows that the Company has little to no direct environmental impact. In consequence, the Company has limited greenhouse gas emissions to report from its operations aside from travel to board meetings, nor does it have responsibility for any other sources of emissions under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013.
As the Company has no material operations and therefore has low energy usage, it has not included an energy and carbon report.
This Strategic Report was approved by the Board on 11 June 2020
PRAXISIFM FUND SERVICES (UK) LIMITED
Company Secretary
Statement of Directors’ Responsibilities
in respect of the preparation of the Annual Financial Report
The Directors are responsible for preparing the annual financial report and financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law they are required to prepare the financial statements in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period.
In preparing these financial statements, the Directors are required to:
– select suitable accounting policies and then apply them consistently;
– make judgements and estimates that are reasonable and prudent;
– state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements;
– assess the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
– use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website, which is maintained by the Company’s Manager. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the annual financial report
We confirm that to the best of our knowledge:
– the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
– the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
We consider the annual financial report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
Signed on behalf of the Board of Directors
GLEN SUAREZ
CHAIRMAN
11 JUNE 2020
For the year ended 31 March
Income Statement
| Notes | Revenue £’000 | 2020 Capital £’000 | Total £’000 | Revenue £’000 | 2019 Capital £’000 | TTTotal Total £’000 | |
| Losses on investments held at fair value | 9(b) | – | (377,639) | (377,639) | – | (8,567) | (8,567) |
| Gains on derivative instruments - futures | – | 40 | 40 | – | – | – | |
| Foreign exchange (losses)/gains | – | (625) | (625) | – | 22 | 22 | |
| Income | 2 | 58,964 | 1,467 | 60,431 | 62,916 | 1,002 | 63,918 |
| Investment management fee | 3 | (1,778) | (4,148) | (5,926) | (2,124) | (4,957) | (7,081) |
| Other expenses | 4 | (1,635) | (6) | (1,641) | (872) | (1) | (873) |
| Return/(loss) before finance costs and taxation | 55,551 | (380,911) | (325,360) | 59,920 | (12,501) | 47,419 | |
| Finance costs | 5 | (2,490) | (5,810) | (8,300) | (2,612) | (6,095) | (8,707) |
| Return/(loss) before taxation | 53,061 | (386,721) | (333,660) | 57,308 | (18,596) | 38,712 | |
| Tax | 6 | (1,440) | – | (1,440) | (1,251) | – | (1,251) |
| Return/(loss) on ordinary activities after taxation for the financial year | 51,621 | (386,721) | (335,100) | 56,057 | (18,596) | 37,461 | |
| Return/(loss) per ordinary share: | |||||||
| Basic | 7 | 27.8p | (208.5)p | (180.7)p | 28.7p | (9.5)p | 19.2p |
The total column of this statement represents the Company’s income statement, prepared in accordance with UK Accounting Standards. The return/(loss) after taxation is the total comprehensive income/(expense) and therefore no additional statement of comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the year.
Statement of Changes in Equity
| Notes | Share Capital £’000 | Share Premium £’000 | Capital Redemption Reserve £’000 | Capital Reserve £’000 (1) | Revenue Reserve £’000 (1) | Total £’000 | |
| Balance at 1 April 2018 | 48,917 | 10,394 | 24,676 | 1,235,091 | 80,791 | 1,399,869 | |
| Return on ordinary activities | – | – | – | (18,596) | 56,057 | 37,461 | |
| Dividends paid | 8 | – | – | – | - | (53,635) | (53,635) |
| Shares bought back and held in treasury | – | – | – | (1,258) | - | (1,258) | |
| Balance at 31 March 2019 | 48,917 | 10,394 | 24,676 | 1,215,237 | 83,213 | 1,382,437 | |
| (Loss)/Return on ordinary activities | – | – | – | (386,721) | 51,621 | (335,100) | |
| Dividends paid | 8 | – | – | – | – | (53,063) | (53,063) |
| Shares bought back and held in treasury | – | – | – | (121,790) | - | (121,790) | |
| Balance at 31 March 2020 | 48,917 | 10,394 | 24,676 | 706,726 | 81,771 | 872,484 |
The accompanying notes are an integral part of these financial statements.
(1) The capital and revenue reserves are distributable by way of dividend.
Financial Statements
As at 31 March
Balance Sheet
| Notes | 2020 £’000 | 2019 £’000 | |
| Fixed assets | |||
| Investments held at fair value through profit or loss | 9(a) | 922,433 | 1,501,151 |
| Current assets | |||
| Debtors | 10 | 7,399 | 8,987 |
| Cash and cash equivalents | 43,958 | 3,114 | |
| 51,357 | 12,101 | ||
| Creditors: amounts falling due within one year | |||
| Other payables | 11 | (1,934) | (894) |
| Bank facility | 11 | - | (30,800) |
| (1,934) | (31,694) | ||
| Net current assets/(liabilities) | 49,423 | (19,593) | |
| Total assets less current liabilities | 971,856 | 1,481,558 | |
| Creditors: amounts falling due after more than one year | 12 | (99,372) | (99,121) |
| Net assets | 872,484 | 1,382,437 | |
| Capital and reserves | |||
| Called up share capital | 13 | 48,917 | 48,917 |
| Share premium account | 14 | 10,394 | 10,394 |
| Capital redemption reserve | 14 | 24,676 | 24,676 |
| Capital reserve | 14 | 706,726 | 1,215,237 |
| Revenue reserve | 14 | 81,771 | 83,213 |
| Total Shareholders’ funds | 872,484 | 1,382,437 | |
| Net asset value per ordinary share | |||
| Basic – debt at par | 15 | 499.11p | 706.75p |
| – debt at market value | 15 | 490.40p | 696.91p |
These financial statements were approved and authorised for issue by the Board of Directors on 11 June 2020.
GLEN SUAREZ
CHAIRMAN
Signed on behalf of the Board of Directors
Notes to the Financial Statements
1. Principal Accounting Policies
Accounting policies describe the Company’s approach to recognising and measuring transactions during the year and the position of the Company at the year end.
The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied during the year and the preceding year.
A. Basis of Preparation
Accounting Standards Applied
The financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice (UK GAAP)) including FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ and with the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in October 2019 (SORP).
The revised SORP issued in October 2019 is applicable for accounting periods beginning on or after 1 January 2019. As a result, the presentation of gains and losses arising from disposals of investments and gains and losses on revaluation of investments have now been combined, as shown in note 9 with no impact to the net asset value or profit/(loss) reported for both the current or prior year. No other accounting policies or disclosures have changed as a result of the revised SORP.
The financial statements are issued on a going concern basis. Details of the Directors assessment of the going concern status of the Company, which considered the adequacy of the Company's resources and the impacts of the COVID-19 Pandemic, are given below.
As an investment fund the Company has the option, which it has taken, not to present a cash flow statement. A cash flow statement is not required when an investment fund meets all the following conditions: substantially all investments are highly liquid and are carried at market value, and where a Statement of Changes in Equity is provided: all of which are satisfied.
Significant Accounting Estimates, Assumptions and Judgements
The preparation of the financial statements may require the use of estimates, assumptions and judgements which may affect the reported amounts of assets and liabilities at the reporting date. While estimates are based on best judgement using information and financial data available the actual outcome may differ from these estimates. The directors do not believe that any accounting estimates, assumptions or judgements have been applied to these accounting statements that have a significant risk of causing material adjustment to the carrying amount of assets and liabilities within the next financial year. The Directors do apply judgement as to the allocation of expenses between capital and revenue in the income statement. The allocation and rationale is set out in Note 1G.
B. Foreign Currency and Segmental Reporting
(i) Functional and presentational currency
The financial statements are presented in sterling, which is the Company’s functional and presentational currency and the currency in which the Company’s share capital and expenses, as well as its assets and liabilities, are denominated.
(ii) Transactions and balances
Transactions in foreign currency, whether of a revenue or capital nature, are translated to sterling at the rates of exchange ruling on the dates of such transactions. Foreign currency assets and liabilities are translated to sterling at the rates of exchange ruling at the balance sheet date. Any gains or losses, whether realised or unrealised, are taken to the capital reserve or to the revenue account, depending on whether the gain or loss is of a capital or revenue nature. All gains and losses are recognised in the income statement.
(iii) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single segment of business of investing in equity and debt securities, issued by companies quoted mainly on the UK or other recognised stock exchanges.
C. Financial Instruments
The Company has chosen to apply Section 11 and 12 of FRS102 in full in respect of the financial instruments.
(i) Recognition of financial assets and financial liabilities
The Company recognises financial assets and financial liabilities when the Company becomes a party to the contractual provisions of the instrument. The Company will offset financial assets and financial liabilities if the Company has a legally enforceable right to set off the recognised amounts and intends to settle on a net basis.
(ii) Derecognition of financial assets
The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial asset that is created or retained by the Company is recognised as an asset.
(iii) Derecognition of financial liabilities
The Company derecognises financial liabilities when its obligations are discharged, cancelled or have expired.
(iv) Trade date accounting
Purchases and sales of financial assets are recognised on trade date, being the date on which the Company commits to purchase or sell the assets.
(v) Classification and measurement of financial assets and financial liabilities
– Financial assets
The Company’s investments are classified as held at fair value through profit or loss.
Financial assets held at fair value through profit or loss are initially recognised at fair value, which is taken to be their cost, with transaction costs expensed in the income statement, and are subsequently valued at fair value.
Fair value for investments that are actively traded in organised financial markets is determined by reference to stock exchange quoted bid prices at the balance sheet date. Fair value for investments that are actively traded but where active stock exchange quoted bid prices are not available is determined by reference to a variety of valuation techniques including broker quotes and price modelling. Unquoted, unlisted or illiquid investments are valued by the Directors at fair value using a variety of valuation techniques including earnings multiples, recent transactions and other market indicators, cash flows and net assets.
– Financial liabilities
Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method.
D. Cash and Cash Equivalents
Cash and cash equivalents may comprise cash (including short term deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value) as well as cash equivalents, including money market funds. Investments are regarded as cash equivalents if they meet all of the following criteria: short term in duration (typically three months or less from the date of acquisition), highly liquid investments held in the Company’s base currency that are readily convertible to a known amount of cash, are subject to an insignificant risk of change in value and provide a return no greater than the rate of a three-month high quality government bond.
E. Hedging
Forward currency contracts entered into for hedging purposes are valued at the appropriate forward exchange rate ruling at the balance sheet date. Profits or losses on the closure or revaluation of positions are recognised in the income statement and taken to capital reserves.
F. Income
Interest income arising from fixed income securities and cash is recognised in the income statement using the effective interest method. Dividend income arises from equity investments held and is recognised on the date investments are marked ‘ex-dividend’.
Special dividends are looked at individually to ascertain the reason behind the payment. This will determine whether they are treated as income or capital in the income statement.
Deposit interest and underwriting commission receivable are taken into account on an accruals basis.
G. Expenses and Finance Costs
Expenses are recognised on an accruals basis and finance costs are recognised using the effective interest method in the income statement.
The investment management fee and finance costs are allocated 70% to capital and 30% to revenue. This is in accordance with the Board’s expected long-term split of returns, in the form of capital gains and income respectively, from the portfolio.
Transaction costs are recognised as capital in the income statement. All other expenses are allocated to revenue in the income statement.
H. Taxation
The liability to corporation tax is based on net revenue for the year, excluding non-taxable dividends. The tax charge is allocated between the revenue and capital account on the marginal basis whereby revenue expenses are matched first against taxable income in the revenue account.
Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax or a right to pay less tax in the future have occurred. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements. Deferred taxation assets are recognised where, in the opinion of the Directors, it is more likely than not that these amounts will be realised in future periods.
A deferred tax asset is only recognised in respect of surplus management expenses, losses on loan relationships and eligible unrelieved foreign tax to the extent that it is probable that the Company will be able to recover them from future taxable revenue.
I. Dividends Payable
Dividends are not recognised in the accounts unless there is an obligation to pay at the balance sheet date. Proposed dividends are recognised in the year in which they are paid to shareholders.
J. Critical accounting estimates and judgements
The Directors do not believe that any accounting judgements or estimates have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year.
K. Accounting for reserves
The share premium comprises the net proceeds received by the Company following the issue of shares, after deduction of the nominal amount of 25 pence and any applicable issue costs. The capital redemption reserve maintains the equity share capital of the Company and arose from the nominal value of any shares bought back and cancelled; both are non-distributable.
The capital reserve includes the investment holding gains/(losses), being the difference between cost and market value at the balance sheet date. It also includes cumulative realised gains/(losses) and costs related to share buybacks. Capital investment gains and losses are shown in note 9(b) and form part of the capital reserve.
The revenue reserve shows the net revenue retained after payment of any dividends. The capital and revenue reserves are distributable by way of dividend.
2. Income
This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.
| 2020 £’000 | 2019 £’000 | |
| Income from investments: | ||
| UK dividends | 44,556 | 47,446 |
| UK special dividends | 534 | 955 |
| UK unfranked income | 1,509 | 2,785 |
| Overseas dividends | 11,650 | 11,705 |
| Overseas special dividends | 475 | - |
| Income from money market funds | 237 | 22 |
| 58,961 | 62,913 | |
| Other income: | ||
| Deposit interest | 3 | 3 |
| Total income | 58,964 | 62,916 |
Special dividends of £1,467,000 were recognised in capital during the year (2019: £1,002,000).
3. Investment Management Fee
This note shows the fee due to the Manager. This is calculated and paid monthly.
| 2020 | 2019 | |||||
| Revenue £’000 | Capital £’000 | Total £’000 | Revenue £’000 | Capital £’000 | Total £’000 | |
| Investment management fee | 1,778 | 4,148 | 5,926 | 2,124 | 4,957 | 7,081 |
Details of the investment management agreement is disclosed above. At 31 March 2020 investment management fees of £385,000 (2019: £577,000) were accrued.
4. Other Expenses
The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified.
| 2020 | 2019 | |||||
| Revenue £’000 | Capital £’000 | Total £’000 | Revenue £’000 | Capital £’000 | Total £’000 | |
| Other expenses | 1,635 | 6 | 1,641 | 872 | 1 | 873 |
| Other expenses include the following: | ||||||
|
Directors’ remuneration (i) Auditors fees (ii) | 193 | – | 193 | 174 | – | 174 |
| – the audit of the Company’s annual financial statements | 30 | – | 30 | 24 | – | 24 |
| – audit related assurance services | 3 | – | 3 | 7 | – | 7 |
The maximum Directors’ fees authorised by the Articles of Association are £250,000 per annum.
(i) There were seven directors for a period during the year and the Director's Remuneration Report on page 41 of the Annual Report provides further information on Directors’ fees.
(ii) Auditor’s fees include expenses but excludes VAT. The VAT is included in other expenses.
(iii) Other expenses include:
- £16,000 (2019: £16,000) of employer’s National Insurance payable on Directors’ remuneration. As at 31 March 2020, the amounts outstanding on Directors’ remuneration and employer’s National Insurance was £7,000 (2019: £9,000); and
- custodian transaction charges of £6,000 (2019: £1,000). These are charged to capital.
- other expenses also include fees of £704,000 (2019: £14,000). These costs relate to fees and expenses incurred in relation to the review of the previous manager and subsequent change of manager.
5. Finance costs
Finance costs arise on any borrowing facilities the Company has used. Borrowing facilities are the £100 million debenture stock and a £150 million bank revolving credit facility.
| 2020 | 2019 | |||||
| Revenue £’000 | Capital £’000 | Total £’000 | Revenue £’000 | Capital £’000 | Total £’000 | |
| Interest payable on borrowings repayable not by instalments: | ||||||
| – interest on bank facility | 90 | 209 | 299 | 212 | 494 | 706 |
| – debenture stock repayable within 3 years | 2,325 | 5,425 | 7,750 | 2,325 | 5,425 | 7,750 |
| Amortised debenture stock discount and issue costs | 75 | 176 | 251 | 75 | 176 | 251 |
| 2,490 | 5,810 | 8,300 | 2,612 | 6,095 | 8,707 | |
6. Tax and Total return on Ordinary Activities
As an investment trust the Company pays no tax on capital gains. As the Company invests principally in UK equities, it has little overseas tax and the overseas tax charge is the result of withholding tax deducted at source. This note also clarifies the basis for the Company having no deferred tax asset or liability.
(a) Tax charge
| 2020 £’000 | 2019 £’000 | |
| Overseas tax | 1,440 | 1,251 |
(b) Reconciliation of tax charge
| 2020 £’000 | 2019 £’000 | |
| Total (loss)/return before taxation | (333,660) | 38,712 |
| UK Corporation Tax rate of 19% (2019: 19%) | (63,395) | 7,355 |
| Effect of: | ||
| – non-taxable UK dividends | (7,514) | (7,939) |
| – non-taxable special dividends | (471) | (372) |
| – non-taxable overseas dividends | (2,134) | (2,175) |
| – non-taxable losses on investments | 71,745 | 1,628 |
| – non-taxable losses/(gains) on foreign exchange | 118 | (4) |
| – excess of allowable expenses over taxable income | 1,650 | 1,507 |
| – disallowable expenses | 1 | - |
| – overseas tax | 1,440 | 1,251 |
| Tax charge for the year | 1,440 | 1,251 |
(c) Deferred tax
Owing to the Company’s status as an investment company, and the Directors’ intention that it continues to meet the conditions required to maintain that approval in the foreseeable future, no deferred tax has been provided on any capital gains and losses arising on the revaluation or disposal of investments.
(d) Factors that may affect future tax changes
The Company has cumulative excess management expenses of £464,617,000 (2019: £455,650,000) that are available to offset future taxable revenue.
A deferred tax asset of £88,277,000 (2019: £77,461,000) at 19% (2019: 17%), has not been recognised in respect of these expenses since the Directors believe that there will be no taxable profits in the future against which the deferred tax assets can be offset.
7. Return/(loss) per Ordinary Share
Return per share is the amount of gain generated for the financial year divided by the weighted average number of ordinary shares in issue.
The basic revenue, capital and total returns/(loss) per ordinary share is based on each of the returns on ordinary activities after taxation and on 185,459,576 (2019: 195,560,762) ordinary shares, being the weighted average number of ordinary shares in issue throughout the year.
8. Dividends on Ordinary Shares
Dividends represent the distribution of income to shareholders. The Company pays four dividends a year – three interims and one final dividend.
| 2020 | 2019 | |||
| Dividends paid and recognised in the year: | pence | £’000 | pence | £’000 |
| – third interim paid in respect of previous year | 6.25 | 12,218 | 5.80 | 11,349 |
| – final paid in respect of previous year | 9.25 | 18,027 | 9.20 | 18,001 |
| – first interim paid | 6.40 | 11,535 | 6.25 | 12,218 |
| – second interim paid | 6.40 | 11,283 | 6.25 | 12,218 |
| 28.30 | 53,063 | 27.50 | 53,786 | |
| Return of unclaimed dividends from previous years | – | - | – | (151) |
| 28.30 | 53,063 | 27.50 | 53,635 | |
| 2020 | 2019 | |||
| Dividends per share payable in respect of the year: | pence | £’000 | pence | £’000 |
| – first interim | 6.40 | 11,535 | 6.25 | 12,218 |
| – second interim | 6.40 | 11,283 | 6.25 | 12,218 |
| – third interim | 6.40 | 11,180 | 6.25 | 12,218 |
| – proposed final | 9.45 | 16,492 | 9.25 | 18,027 |
| 28.65 | 50,490 | 28.00 | 54,681 | |
The proposed final dividend is subject to approval by ordinary shareholders at the AGM.
9. Investments
The portfolio comprises investments which are principally listed on a regulated stock exchange or traded on AIM. A very small proportion of investments are valued by the Directors as they are unlisted.
Gains or losses are either:
– realised, usually arising when investments are sold; or
– unrealised, being the difference from cost on those investments still held at the year end.
(a) Analysis of investments by listing status
| 2020 £’000 | 2019 £’000 | |
| Investments listed on a regulated stock exchange | 922,279 | 1,384,447 |
| AIM quoted investments | - | 116,458 |
| Unquoted investments at Directors’ valuation | 154 | 246 |
| 922,433 | 1,501,151 |
(b) Analysis of investments losses
| 2020 £’000 | 2019 £’000 | |
| Opening book cost | 1,390,495 | 1,305,093 |
| Opening investment holding gains | 110,656 | 230,836 |
| Opening valuation | 1,501,151 | 1,535,929 |
| Movements in year: | ||
| – purchases at cost | 1,106,098 | 221,902 |
| – sales proceeds | (1,307,177) | (248,113) |
| Losses on investments in the year | (377,639) | (8,567)* |
| Closing valuation | 922,433 | 1,501,151 |
| Closing book cost | 1,068,853 | 1,390,495 |
| Closing investment holding (losses)/gains | (146,420) | 110,656 |
| Closing valuation | 922,433 | 1,501,151 |
The Company received £1,307,177,000 (2019: £248,113,000) from investments sold in the year. The book cost of these investments when they were purchased was £1,427,740,000 (2019: £136,500,000) realising a loss of £120,563,000 (2019 profit: £111,613,000). These investments have been revalued over time and until they were sold any unrealised profits/losses were included in the fair value of the investments.
* Due to adoption of the revised SORP issued in October 2019 (see Note 1A). The loss on investments figure of £8,567,000 for the year ended 31 March 2019 is as follows:
| 2019 £’000 | ||
| Net realised profit on sales | 111,613 | |
| Investment holding loss in the year | (120,180) | |
| Loss on investments | (8,567) |
The transaction costs included in gains on investments amount to £4,856,000 (2019: £740,000) on purchases and £444,000 (2019: £149,000) for sales.
10. Debtors
Debtors are amounts which are due to the Company, such as monies due from brokers for investments sold and income which has been earned (accrued) but not yet received.
| 2020 £’000 | 2019 £’000 | |
| Amounts due from brokers | 3,217 | 2,219 |
| Overseas withholding tax recoverable | 2,621 | 2,437 |
| Prepayments and accrued income | 1,561 | 4,331 |
| 7,399 | 8,987 |
11. Creditors: amounts falling due within one year
Creditors are amounts which must be paid by the Company and are split between those payable within 12 months of the balance sheet date and those payable after that time. The main creditors are the debenture and bank borrowings. The other creditors include any amounts due to brokers for the purchase of investments or amounts owed to suppliers (accruals) such as the Manager and auditor.
| 2020 £’000 | 2019 £’000 | |
| Bank facility | - | 30,800 |
| Amounts due to brokers | 996 | - |
| Share buybacks awaiting settlement | 68 | - |
| Accruals and deferred income | 870 | 894 |
| 1,934 | 31,694 |
The Company has a 364 day committed revolving credit facility (the ‘facility’) of £150 million (2019: £150 million) with the lender, The Bank of New York Mellon. The facility is due for renewal on 17 June 2020. Interest is payable at 0.70% over LIBOR with a commitment fee for undrawn amounts. Under the facility’s covenants, the Company’s total indebtedness must not exceed 25% of net assets and net assets must not be less than £700 million (2019: £700 million).
12. Creditors: amounts falling due after more than one year
These creditors are amounts that must be paid, as shown by note 11, but are due more than one year after the balance sheet date.
| 2020 £’000 | 2019 £’000 | |
| Debenture Stock 7 ¾% redeemable 30 September 2022 | 100,000 | 100,000 |
| Unamortised discount and issue expenses on debenture stock | (628) | (879) |
| 99,372 | 99,121 |
The debenture is secured by a floating charge on the Company, under which borrowing must not exceed a sum equal to the Adjusted Total of Capital and Reserves. The interest on the 7¾% debenture is payable in half-yearly instalments, in March and September, each year.
The effect on the net asset value of deducting the debenture stock at market value, rather than at par, is disclosed in note 15.
13. Share Capital
Share capital represents the total number of shares in issue.
| 2020 | 2019 | |
| £’000 | £’000 | |
| Share capital: | ||
| Ordinary shares of 25p each | 43,671 | 48,871 |
| Treasury shares of 25p each | 5,246 | 46 |
| 48,917 | 48,917 | |
| 2020 | 2019 | |
| Number of ordinary shares in issue: | ||
| Brought forward | 195,481,734 | 195,666,734 |
| Shares bought back and held in treasury | (20,798,805) | (185,000) |
| Carried forward | 174,682,929 | 195,481,734 |
| Number of treasury shares held: | ||
| Brought forward | 185,000 | — |
| Shares bought back into treasury | 20,798,805 | 185,000 |
| Carried forward | 20,983,805 | 185,000 |
| Total ordinary shares and treasury shares | 195,666,734 | 195,666,734 |
During the year the Company bought back, into treasury, 20,798,805 ordinary shares at an average price of 585.56p (including costs). Since the year end, 165,000 shares have been bought back into treasury, at an average price of 461.01p.
The Directors’ Report above sets out the Company's share capital structure, restrictions and voting rights.
14. Reserves
This note explains the different reserves attributable to shareholders. The aggregate of the reserves and share capital (see previous note) make up total shareholders’ funds.
The share premium comprises the net proceeds received by the Company following the issue of shares, after deduction of the nominal amount of 25 pence and any applicable issue costs. The capital redemption reserve maintains the equity share capital of the Company and arose from the nominal value of any shares bought back and cancelled; both are non-distributable.
The capital reserve includes the investment holding gains/(losses), being the difference between cost and market value at the balance sheet date. It also includes cumulative realised gains/(losses) and costs related to share buybacks. Capital investment gains and losses are shown in note 9(b) and form part of the capital reserve.
The revenue reserve shows the net revenue retained after payment of any dividends. The capital and revenue reserves are distributable by way of dividend.
15. Net Asset Value per Ordinary Share
The Company’s total net assets (total assets less total liabilities) are often termed shareholders’ funds and are converted into NAV per ordinary share by dividing by the number of shares in issue.
The NAV – debt at par is the NAV with the value of the £100 million debenture (the debt) at its nominal (equivalent to the par) value of £100 million. The NAV – debt at market value reflects the debenture stock at the value that a third party would be prepared to pay for the debt, and this amount fluctuates owing to various factors including changes in interest rates and the remaining life of the debt. The number of ordinary shares in issue at the year end was 174,682,929 (2019: 195,481,734).
(a) NAV – debt at par value
The shareholders’ funds in the balance sheet are accounted for in accordance with accounting standards; however, this does not reflect the rights of shareholders on a return of assets under the Articles of Association. These rights are reflected in the net assets with debt at par value and the corresponding NAV per share. A reconciliation between the two sets of figures follows:
| 2020 | 2019 | |||
| NAV per share pence | Shareholders’ funds £’000 | NAV per share pence | Shareholders’ funds £’000 | |
| Shareholders’ funds | 499.47 | 872,484 | 707.20 | 1,382,437 |
| Less: | ||||
| Unamortised discount and expenses arising from debenture issue | (0.36) | (628) | (0.45) | (879) |
| NAV – debt at par value | 499.11 | 871,856 | 706.75 | 1,381,558 |
(b) NAV – debt at market value
The market value of the debenture stock is determined by reference to the daily closing price, and is subject to review against various data providers to ensure consistency between data providers and against the reference gilt.
The net asset value per share adjusted to include the debenture stock at market value rather than at par is as follows:
| 2020 | 2019 | |||
| NAV per share pence | Shareholders’ funds £’000 | NAV per share pence | Shareholders’ funds £’000 | |
| NAV – debt at par value | 499.11 | 871,856 | 706.75 | 1,381,558 |
| Debenture stock – debt at par value | 57.25 | 100,000 | 51.15 | 100,000 |
| – debt at market value | (65.96) | (115,209) | (60.99) | (119,220) |
| NAV – debt at market value | 490.40 | 856,647 | 696.91 | 1,362,338 |
16. Risk Management and Financial Instruments
Financial instruments comprise the Company’s investment portfolio, derivative instruments (if any) as well as cash, and any borrowings, debtors and creditors. This note sets out the Company’s financial instruments and the risks related to them.
Financial instruments
The Company’s financial instruments mainly comprise its investment portfolio (as shown above, a debenture, a bank loan as well as its cash, debtors and creditors that arise directly from its operations such as sales and purchases awaiting settlement and accrued income. For the purpose of this note ‘cash’ should be taken to comprise cash and cash equivalents as defined in note 1D. The accounting policies in note 1C include criteria for the recognition and the basis of measurement applied for financial instruments. Note 1 also includes the basis on which income and expenses arising from financial assets and liabilities are recognised and measured.
The main financial risks that the Company faces from its financial instruments are market risk, liquidity risk, and credit risk. These are set out below:
Market risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk:
– Currency risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in foreign exchange rates;
– Interest rate risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market interest rates; and
– Other price risk – arising from fluctuations in the fair value or future cash flows of a financial instrument for reasons other than changes in foreign exchange rates or market interest rates.
Liquidity risk – arising from any difficulty in meeting obligations associated with financial liabilities.
Credit risk – arising from financial loss for a company where the other party to a financial instrument fails to discharge an obligation.
Risk Management Policies and Procedures
The Directors have delegated to the Manager the responsibility for the day-to-day investment activities and management of gearing of the Company as more fully described in the Directors’ Report.
As an investment trust the Company invests in equities and other investments for the long-term so as to fulfil its investment policy (incorporating the Company’s investment objective). In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company’s net assets or a reduction of the profits available for dividends. These policies are summarised below and have remained substantially unchanged for the two years under review.
16.1 Market Risk
The Company’s Manager assesses the Company’s exposure when making each investment decision, and monitors the overall level of market risk for the whole of the investment portfolio on an ongoing basis. The Board has meetings in each calendar quarter to assess risk and review investment performance, as disclosed in the Board Responsibilities on pages 33 and 34 of the Annual Report. Any borrowing to gear the investment portfolio is used to enhance returns but also increases the Company’s exposure to market risk and volatility. The Company has the ability to gear by using its £100 million debenture stock 2022 and its bank facility of £150 million.
16.1.1 Currency risk
The majority of the Company’s assets and all of its liabilities are denominated in sterling. There is some exposure to US dollar, Swiss franc and the Euro.
Management of the currency risk
The Manager monitors the Company’s direct exposure to foreign currencies on a daily basis and reports to the board on a regular basis. Forward currency contracts can be used to reduce the Company’s exposure to foreign currencies arising naturally from the Manager’s choice of securities. All contracts are limited to currencies and amounts commensurate with the assets denominated in currencies. No forward currency contracts were used during the year (2019: none).
Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is included in the financial statements and its receipt.
The Company may invest up to 20% of the portfolio in securities listed on non-UK stock exchanges. At the year end holdings of non-UK securities total £67.2 million (2019: £138.3 million) representing 7.2% (2019: 9.2%) of the portfolio.
Currency exposure
The fair values of the Company’s monetary items that have currency exposure at 31 March are shown below. Where the Company’s equity investments (which are not monetary items) are priced in a foreign currency, they have been included separately in the analysis so as to show the overall level of exposure.
| 2020 | 2019 | |||||
| USD £’000 | CHF £’000 | EUR £’000 | USD £’000 | CHF £’000 | EUR £’000 | |
| Foreign currency exposure on net | ||||||
| monetary items | 1,037 | 2,041 | 580 | 1,474 | 2,189 | 249 |
|
Investments at fair value through profit or loss that are equities | 33,652 | - | 33,593 | 52,412 | 85,869 | – |
| Total net foreign currency exposure | 34,689 | 2,041 | 34,173 | 53,886 | 88,058 | 249 |
The above may not be representative of the exposure to risk during the year, because the levels of foreign currency exposure may change significantly throughout the year.
Currency sensitivity
In respect of the Company’s direct foreign currency exposure to investments denominated in currencies, if sterling had weakened by 2.8% (2019: 2.8%) for the US dollar, 3.4% (2019: 2.5%) for the Swiss franc and 2.7% (2019: 1.4%) for the Euro during the year, the income statement, capital return and net assets of the Company would have increased by £2.0 million (2019: £3.7 million). Conversely, if sterling had strengthened to the same extent for the currencies mentioned above, the capital return and net assets of the Company would have decreased by the same amount. The exchange rate variances noted above have been based on market volatility in the year, using the standard deviation of sterling’s fluctuation to the applicable currency. This sensitivity takes no account of any impact on the market values of the Company’s investments arising from the foreign currency mix of their respective revenues, expenses, assets and liabilities.
16.1.2 Interest rate risk
Interest rate movements will affect the level of income receivable on cash deposits and money market funds, and the interest payable on variable rate borrowings. When the Company has cash balances, they are held on variable rate bank accounts yielding rates of interest dependent on the base rate determined by the custodian, The Bank of New York Mellon.
The Company has in place a revolving credit facility (the ‘facility’), details of which are shown in note 11. The Company uses the facility when required at levels monitored by the Board. At the maximum possible facility gearing of £150 million, the effect of a 1% increase/decrease in the interest rate would result in a decrease/increase to the Company’s income of £1,500,000 per annum.
The Company also has an uncommitted bank overdraft facility which it uses for settlement purposes and interest is dependent on the base rate determined by the custodian. At the year end, no amounts were overdrawn (2019: none).
The Company’s debt of £100 million (2019: £100 million) of debenture stock is fixed which exposes the Company to changes in market value in the event that the debt is repaid before maturity. Details of the debenture stock interest is shown in note 12, with details of its market value and the affect on net asset value in note 15(b).
The Company held one fixed income security during the year (2019: nil), being a short-term zero coupon government bond which, due to its short term to maturity, was recognised as a Cash and Cash Equivalent at the Balance Sheet date..
Interest rate exposure
At 31 March the exposure of financial assets and financial liabilities to interest rate risk is shown by reference to:
– floating interest rates (giving cash flow interest rate risk) – when the interest rate is due to be re-set; and
– fixed interest rates (giving fair value interest rate risk) – when the financial instrument is due for repayment.
| 2020 | 2019 | |||||
| Within one year £’000 | Between one and five years £’000 | Total £’000 | Within one year £’000 | Between one and five years £’000 | Total £’000 | |
| Exposure to floating interest rates: | ||||||
| Cash and cash equivalents | 43,958 | – | 43,958 | 3,114 | – | 3,114 |
| Bank facility | – | – | – | (30,800) | – | (30,800) |
| Exposure to fixed interest rates: | ||||||
| Debenture stock - debt at par value | – | (100,000) | (100,000) | – | (100,000) | (100,000) |
| Total exposure to interest rates | 43,958 | (100,000) | (56,042) | (27,686) | (100,000) | (127,686) |
16.1.3 Other price risk
Other price risks (i.e. changes in market prices other than those arising from interest rate risk or currency risk) may affect the value of the equity investments, but it is the business of the portfolio manager to manage the portfolio to achieve the best return that he can.
Management of the other price risk
The Directors manage the market price risks inherent in the investment portfolio by meeting regularly to monitor on a formal basis the Manager’s compliance with the Company’s stated objectives and policies, and to review investment performance.
The Company’s portfolio is the result of the Manager’s investment process and need not be highly correlated with the Company’s benchmark or the market in which the Company invests. The value of the portfolio will not move in line with the market but will move as a result of the performance of the company shares within the portfolio.
If the value of the portfolio fell by 10% at the balance sheet date, the profit after tax for the year and the net assets of the Company would decrease by £92 million (2019: £150 million). Conversely, if the value of the portfolio rose by 10%, the profit after tax and the net assets of the Company would increase by the same amounts.
During the financial year a FTSE 100 Index futures contract was open and closed resulting in a realised gain of £40,000 (2019: nil) which was recognised in capital in the Income Statement. There were no derivative financial instruments outstanding at the financial year end (2019: nil).
16.2 Liquidity risk
Liquidity risk is minimised as the majority of the Company’s investments constitute a diversified portfolio of readily realisable securities which can be sold to meet funding commitments as necessary. In addition, the Company has an overdraft facility which it can use to provide short-term funding flexibility.
Liquidity risk exposure
The contractual maturities of the financial liabilities at the year end, based on the earliest date on which payment can be required, are as follows:
| 2020 | Three months or less £’000 | More than three months but less than one year £’000 | More than one year £’000 | Total £’000 |
| Debenture stock – debt at par value | – | – | 100,000 | 100,000 |
| Interest on debenture stock | – | 7,750 | 11,625 | 19,375 |
| Amounts due to brokers | 996 | – | – | 996 |
| Accruals | 938 | – | – | 938 |
| 1,934 | 7,750 | 111,625 | 121,309 |
| 2019 | Three months or less £’000 | More than three months but less than one year £’000 | More than one year £’000 | Total £’000 |
| Debenture stock – debt at par value | – | – | 100,000 | 100,000 |
| Bank facility | 30,800 | – | – | 30,800 |
| Interest on debenture stock | – | 7,750 | 19,375 | 27,125 |
| Accruals | 894 | – | – | 894 |
| 31,694 | 7,750 | 119,375 | 158,819 |
16.3 Credit risk
Credit risk encompasses the failure by counterparties to deliver securities which the Company has paid for, or to pay for securities which the Company has delivered, and cash balances. Counterparty risk is minimised by using only approved counterparties. The Company’s ability to operate in the short-term may be adversely affected if the Company’s custodian suffers insolvency or other financial difficulties. However, with the support of the depositary’s restitution obligation the risk of outright credit loss on the investment portfolio is remote. The Board reviews the custodian’s annual controls report and the Manager’s management of the relationship with the custodian. Cash balances are limited to a maximum of 1% of net assets with any one deposit taker, with only approved deposit takers being used, and a maximum deposit of 6% of net assets in aggregate in liquidity funds with credit ratings of AAAm (or equivalent). These limits are at the discretion of the Board and are reviewed on a regular basis. The investment policy also allows for UK Government Treasuries to be held. Such holdings are recorded as cash equivalents if they meet the criteria set out in Note 1D and above.
17. Fair Value
The values of the financial assets and financial liabilities are carried either at their fair value (investments), or at a reasonable approximation of fair value (amounts due from brokers, dividends receivable, accrued income, amounts due to brokers, accruals, cash and any drawings on the bank facility) or at amortised cost (debenture).
Fair Value Hierarchy Disclosures
All except one of the Company’s portfolio of investments are in the Level 1 category as defined in FRS 102 as amended for fair value hierarchy disclosures (March 16). The three levels set out in this follow.
Level 1 – the unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly.
Level 3 – Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.
Categorisation within the hierarchy is determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability.
The valuation techniques used by the Company are explained in the accounting policies note.
| 2020 | ||||
| Level 1 £’000 | Level 2 £’000 | Level 3 £’000 | Total £’000 | |
| Financial assets designated at fair value through profit or loss | ||||
| Quoted investments: | ||||
| Equity and preference shares | 922,279 | - | – | 922,279 |
| Unquoted investments | – | - | 154 | 154 |
| Total for financial assets | 922,279 | - | 154 | 922,433 |
| 2019 | ||||
| Level 1 £’000 | Level 2 £’000 | Level 3 £’000 | Total £’000 | |
| Financial assets designated at fair value through profit or loss | ||||
| Quoted investments: | ||||
| Equity and preference shares | 1,481,205 | 19,700 | – | 1,500,905 |
| Unquoted investments | – | – | 246 | 246 |
| Total for financial assets | 1,481,205 | 19,700 | 246 | 1,501,151 |
The valuation techniques used by the Company are explained in the accounting policies note. At the end of the financial year there were no level 2 investments, the prior year level 2 holding in Honeycomb Investment Trust of £19,700,000 had been sold during the year. The investment in Level 3 is in the unquoted company Eurovestech. The holding in Eurovestech did not change during the year, but the fair value was reduced to £154,000 (2019: £246,000).
The book cost and fair value of the debenture stock, based on the offer value at the balance sheet date, are as follows:
| 2020 | 2019 | |||
| Book Value £’000 | Fair Value £’000 | Book Value £’000 | Fair Value £’000 | |
| Debenture stock repayable between one and five years: | ||||
| 7 ¾% Debenture Stock 2022 | 100,000 | 115,209 | 100,000 | 119,220 |
| Discount on issue of debenture stock | (628) | – | (879) | – |
| 99,372 | 115,209 | 99,121 | 119,220 | |
Incorporating the fair value of the debenture, results in the reduction of the net asset value per ordinary share to 490.40p (2019: 696.91p).
18. Capital Management
The Company’s total capital employed at 31 March 2020 was £971,856,000 (2019: £1,512,358,000) comprising borrowings of £99,372,000 (2019: £129,921,000) and equity share capital and other reserves of £872,484,000 (2019: £1,382,437,000).
The Company’s total capital employed is managed to achieve the Company’s objective and investment policy as set out above, including that borrowings may be used to provide gearing of the equity portfolio up to the maximum authorised by shareholders, currently 25% of net assets. Net gearing was 8.3% (2019: 10.8%) at the balance sheet date. The Company's policies and processes for managing capital were unchanged throughout the year and the preceding year.
The main risks to the Company’s investments are shown in the Strategic Report under the ‘Principal Risks and Uncertainties’ section above. These also explain that the Company is able to use borrowings to gear and that gearing will amplify the effect on equity of changes in the value of the portfolio.
The board can also manage the capital structure directly since it has taken the powers, which it is seeking to renew, to issue and buy-back shares and it also determines dividend payments.
The Company is subject to externally imposed capital requirements with respect to the obligation and ability to pay dividends by section 1158 Corporation Tax Act 2010 and by the Companies Act 2006, respectively, and with respect to the availability of the facility by the terms imposed by the lender. The Board regularly monitors, and has complied with, the externally imposed capital requirements. This is unchanged from the prior year. Borrowings comprise the debenture stock, details of which are contained in note 12, a bank facility and an overdraft facility which may be used for short-term funding requirements.
19. Contingencies, Guarantees and Financial Commitments
This note would show any liabilities the Company is committed to honour, and which are dependent on future circumstances or events occurring.
There are no contingencies, guarantees or financial commitments of the Company at the year end (2019: £nil).
20. Related Party Transactions and Transactions with the Manager
A related party is a company or individual who has direct or indirect control or who has significant influence over the Company. Under accounting standards, the Manager is not a related party.
Under UK GAAP, the Company has identified the Directors as related parties. The Directors’ remuneration and interests have been disclosed in pages 42 and 43 of the Annual Report with additional disclosure in note 4. No other related parties have been identified.
Details of the Manager’s services and fees are disclosed in the Directors’ Report on page 37 of the Annual Report, and in note 3.
21. Post Balance Sheet Events
There are no significant events after the end of the reporting year requiring disclosure.
This announcement contains regulated information under the Disclosure Guidance and Transparency Rules of the FCA.
This announcement does not constitute the Company's statutory accounts. The financial information for 2020 is derived from the statutory accounts for 2020, which will be delivered to the registrar of companies. The statutory accounts for 2019 have been delivered to the registrar of companies. The auditors have reported on the 2020 and 2019 accounts; their reports were unqualified and did not include a statement under Section 498(2) or (3) of the Companies Act 2006.
The Annual Financial Report will be available from the Company’s website: www.edinburghinvestmenttrust.com
The Annual Financial Report will be submitted to the National Storage Mechanism and will shortly be available for inspection at: http://www.morningstar.co.uk/uk/NSM .
The Audited Annual Financial Report will be posted to shareholders shortly. Copies may be obtained during normal business hours from the Company’s registered office, Quartermile One, 15 Lauriston Place, Edinburgh EH3 9EP.
A copy of the Annual Financial Report will be available from the Company’s website: www.edinburghinvestmenttrust.com
The Annual General Meeting of the Company will be held at 2.00 pm on 23 July 2020 at Quartermile One, 15 Lauriston Place, Edinburgh EH3 9EP.
By order of the Board
PraxisIFM Fund Services (UK) Limited
Company Secretary
11 June 2020
Enquiries
Edinburgh Investment Trust plc
Glen Suarez (Chairman) via Majedie below
Majedie Asset Management Limited
James Mowat + 44 (0) 20 7618 3900
Harry Steel
Investec Bank plc
Tom Skinner + 44 (0) 20 7597 4000
Montfort Communications
Nick Bastin + 44 (0) 7931 500066
Shireen Farhana + 44 (0) 7757 299250
[1] https://www.serco.com/media-and-news/2020/trading-update-regarding-coronavirus
[2] https://www.ft.com/content/7eff769a-74dd-11ea-95fe-fcd274e920ca
