TIDMFSV
FIDELITY SPECIAL VALUES PLC
Final Results for the year ended 31 August 2023
Financial Highlights:
· Fidelity Special Values PLC reports a +5.9% NAV and a +5.6% share price rise
against a Benchmark return of +5.2%.
· The Board recommends a final dividend of 6.27 pence per share which together
with the interim dividend payment of 2.53 pence per share (totalling 8.80 pence)
represents an increase of 13.5% over the prior year.
· In an environment of rising interest rates, the overweight exposure to banks
was the largest contributor to performance.
· The Portfolio Manager believes we are potentially in the very early stages
of a long-term rally in value stocks.
Contacts
For further information, please contact:
Smita Amin
Company Secretary
01737 836347
FIL Investments International
CHAIRMAN'S STATEMENT
The global backdrop for the year under review remains unsettled. The prolonged
Russia/Ukraine war has affected energy prices and global trade as well as
contributing to an increasingly fractious geopolitical environment. More
recently, the developing conflict in the Middle East has added concerns about
the impact on oil prices and disruption to global supply chains and commodity
markets. In the banking sector, the collapse of Credit Suisse in Europe and
several regional banks in the US raised fears of systemic contagion not seen
since the Global Financial Crisis of 2008/9. Fortunately, this did not
materialise. The year under review has certainly been an interesting one for the
UK, featuring three Prime Ministers and as many Chancellors of the Exchequer,
seven months of double-digit CPI inflation and eight consecutive base rate
increases. Against this background, the UK stock market delivered rather dull
returns, with the FTSE All-Share Index ("Benchmark") delivering a total return
of a little over 5% and the mid-cap and small-cap indices essentially flat year
-on-year.
Your Company marginally outperformed the Benchmark, with a net asset value
("NAV") total return of 5.9% and a share price total return of 5.6% compared
with the 5.2% return for the Benchmark. While this may look unremarkable at face
value, it is notable given the significant differences between the Company's
portfolio and the Benchmark. More than 80% of the Benchmark is accounted for by
the largest stocks that make up the FTSE 100 Index (total return of 6.3% for the
year), whereas your Company only has around a quarter of its holdings which are
in the FTSE 100 Index. Overall, the weighting in small-cap and mid-cap companies
hurt relative returns in the year under review, while stock selection in banks
and financials, where the portfolio is overweight compared to the Benchmark,
contributed most to the outperformance.
As your Portfolio Manager, Alex Wright, outlines in his report, while mid-cap
and small-cap exposure detracted from returns relative to the Benchmark, these
under-researched companies currently offer particularly attractively valued
opportunities and have historically been a strong contributor to the Company's
long-term outperformance. Over the ten years to 31 August 2023, the Company's
NAV and share price total returns of 107.1% and 100.0% respectively are well
ahead of the Benchmark total return of 70.6%. It is pleasing to see that Alex's
long-term, value-focused strategy is still working well, even as the UK remains
out of favour compared with other developed markets. He is well supported by
Jonathan Winton, the co-Portfolio Manager, and by Fidelity's extensive
investment research team.
DIVID
Dividends are an important component of long-term total returns and the Board's
policy is to pay dividends twice yearly in order to smooth the dividend payments
for the Company's financial year.
The Company's revenue return for the year to 31 August 2023 was 10.67 pence per
share (2022: 9.42 pence). An interim dividend of 2.53 pence per share (2022:
2.30 pence) was paid on 21 June 2023. The Board recommends a final dividend of
6.27 pence per share for the year ended 31 August 2023 (2022: 5.45 pence) for
approval by Shareholders at the Annual General Meeting ("AGM") on 14 December
2023. The interim and final dividends (total of 8.80 pence) represent an
increase of 1.05 pence (13.5%) over the 7.75 pence paid for the year ended 31
August 2022. The dividend will be payable on 10 January 2024 to Shareholders on
the register at close of business on 1 December 2023 (ex-dividend date 30
November 2023).
The interim and final dividends for the year will provide Shareholders with a
14th consecutive year of sustained annual dividend growth. While income is not a
core objective of your Company's investment strategy, we as a Board understand
the value of being `paid to wait' in times of more muted stock market
performance.
GEARING
Gearing has remained relatively low during the year under review, beginning the
period at 10.0% and ending at 6.5%. This reflects Alex's caution on the economic
environment and, while he can find value in individual companies, there is a
risk that the economic outlook may undermine their ability to deliver on
forecast earnings. As he explains in his report, the current modest level of
gearing means Alex has plenty of `dry powder' that he can use to take advantage
of any new investment opportunities in the coming year.
The Board has agreed with the Portfolio Manager that if he is able to find
attractive opportunities in the market, then the Company's gearing should be
allowed to rise. Combined with Alex's contrarian and value-focused investment
philosophy, and also making effective use of the Company's structural advantages
over its open-ended counterparts, this should continue to add value for
Shareholders over the long-term.
It is the current intention of the Board that, in normal market conditions, the
Portfolio Manager will maintain gearing in the range of 0% to 25%. The Company
remained within these levels throughout the reporting year. The maximum level of
gearing allowed is 40%.
DISCOUNT
Investment trust discounts have widened significantly in the past 18 months, and
at the time of writing, the investment trust sector average discount was 18.7%.
After several years of trading close to, or at a premium to NAV, your Company
has not been immune to this trend of widening discounts. However, in the year
under review, the discount to NAV remained relatively stable, beginning the year
at 8.5% and ending it at 8.8%. Under the Company's discount management policy,
the Board seeks to maintain the discount in single digits in normal market
conditions and during the year it briefly reached the 10% level before quickly
reverting back into single digits. While a number of our peers have elected to
repurchase shares this year because of the pressure of rising discounts, we have
not undertaken any share repurchases, and as at 31 August 2023, your Company
remains the only one in its UK All Companies peer group to be trading at a
single-digit discount to NAV. The average discount for the other companies in
the peer group was 12.3%.
The Board continues to monitor the level of the Company's discount closely and
will take action when it believes to do so will be effective and to the benefit
of Shareholders.
RAISING OUR PROFILE
While the strength of Alex's investment performance over many years will have
been a key factor in limiting the rise in the discount, your Board and Fidelity
have also been working hard to raise the Company's profile with both retail and
institutional investors. You may have seen Alex's articles in The Sunday Times
or the Daily Express; his views on investing and the UK stock market attract a
lot of media interest, and he also regularly appears at professional investor
roadshows. A discount to NAV tends to arise when there are more sellers than
buyers in the market, and we appreciate Alex's efforts to make the time to
ensure that your Company remains high on investors' buy lists. External
recognition is always a bonus, and we were delighted that in November 2022, the
Company was named as the best UK All Companies Trust in the Investment Company
of the Year awards from Investment Week magazine.
BOARD OF DIRECTORS
As part of the Board's succession plan, Andy Irvine retired from the Board at
the conclusion of the AGM on 14 December 2022, having served on the Board as a
non-executive Director since 2010 and as Chairman since 2016, and we thank him
for his significant contribution to the Company during this period. At the same
time, I succeeded him as Chairman of the Board and Nigel Foster succeeded me as
Senior Independent Director. There have been no other Board changes during the
reporting year.
In accordance with the UK Corporate Governance Code for Directors of FTSE 350
companies, all Directors are subject to annual re-election at the AGM on 14
December 2023. The Directors' biographies can be found in the Annual Report,
and, between them, they have a wide range of appropriate skills and experience
to form a balanced Board for the Company.
ANNUAL GENERAL MEETING
The Company's AGM is at 11.00 am on Thursday, 14 December 2023.
This is a great opportunity for Shareholders to hear Alex's thoughts at first
hand and also to meet your Company's Directors. The Board and I hope to see as
many of you as possible on the day. Details of the Company's AGM are below.
OUTLOOK
The UK equity market has remained distinctly out of favour in a global context,
particularly when compared with the US. The macro headwinds are undeniable:
inflation has been stubbornly higher than in other developed economies, interest
rates have risen further and faster, and there is the added uncertainty of a
General Election at some point in the next 15 months. However, there are also
reasons for optimism: both core and headline inflation have begun to trend
downwards, there is an increasing expectation that the Bank of England base rate
is at or close to a cyclical peak and upward revisions to UK GDP numbers suggest
a greater likelihood of avoiding recession. Added to this, the UK stock market
remains at low valuation levels compared to other developed markets, reducing
downside risk and providing the potential for significant upside when sentiment
becomes more positive.
Against this backdrop, we are fortunate to have a Portfolio Manager with an
active and contrarian approach to stock picking that allows him to seek out
pockets of opportunity that may be under-appreciated by investors both at home
and internationally.
As Alex points out in his Portfolio Manager Review, there are many UK-listed
stocks that may be affected by the economic cycle in the short-term but which
have compelling company-specific stories that can be important drivers of their
share price over time. By favouring attractively valued businesses with lower
levels of debt and the resilience to navigate the climate of uncertainty, we are
confident that Alex's selections have the potential to deliver solid longer-term
returns, as has been demonstrated in your Company's strong performance compared
to the Benchmark over many years.
On a final note, it was very pleasing to see at the Company's AGM on 14 December
2022 that the Company's three-yearly continuation resolution was passed with
99.89% of votes in favour. We thank our Shareholders for this overwhelming vote
of confidence in Alex's long-term approach and look forward to continuing to
justify your support of Fidelity Special Values PLC in the years ahead.
DEAN BUCKLEY
Chairman
6 November 2023
ANNUAL GENERAL MEETING - THURSDAY, 14 DECEMBER 2023 AT 11.00 AM
The AGM of the Company will be held at 11.00 am on Thursday, 14 December 2023 at
4 Cannon Street, London EC4M 5AB (nearest tube stations are St Paul's or Mansion
House) and virtually via the online Lumi AGM meeting platform. Full details of
the meeting are given in the Notice of Meeting in the Annual Report.
For those shareholders who are unable to attend in person, we will live-stream
the formal business and presentations of the meeting online.
Alex Wright, the Portfolio Manager, will be making a presentation to
shareholders highlighting the achievements and challenges of the year past and
the prospects for the year to come. He and the Board will be very happy to
answer any questions that shareholders may have. Copies of his presentation can
be requested by email at investmenttrusts@fil.com or in writing to the Secretary
at FIL Investments International, Beech Gate, Millfield Lane, Lower Kingswood,
Tadworth, Surrey KT20 6RP.
Properly registered Shareholders joining the AGM virtually will be able to vote
on the proposed resolutions. Please see Note 9 to the Notes to the Notice of
Meeting in the Annual Report for details on how to vote virtually. Investors
viewing the AGM online will be able to submit live written questions to the
Board and the Portfolio Manager and we will answer as many of these as possible
at an appropriate juncture during the meeting.
Further information and links to the Lumi platform may be found on the Company's
website www.fidelity.co.uk/specialvalues. On the day of the AGM, in order to
join electronically and ask questions via the Lumi platform, shareholders will
need to connect to the website https://web.lumiagm.com.
Please note that investors on platforms such as Fidelity Personal Investing,
Hargreaves Lansdown, Interactive Investor or AJ Bell Youinvest will need to
request attendance at the AGM in accordance with the policies of your chosen
platform. They may request that you submit electronic votes in advance of the
meeting. If you are unable to obtain a unique IVC and PIN from your nominee or
platform, we will also welcome online participation as a guest. Once you have
accessed https://web.lumiagm.com from your web browser on a tablet or computer,
you will need to enter the Lumi Meeting ID which is 102-255-614. You should then
select the `Guest Access' option before entering your name and who you are
representing, if applicable. This will allow you to view the meeting and ask
questions, but you will not be able to vote.
PORTFOLIO MANAGER'S REVIEW
QUESTION
How has the Company performed in the year to 31 August 2023?
ANSWER
The Company recorded a net asset value ("NAV") and share price total return of
5.9% and 5.6% respectively, which was slightly ahead of the FTSE All-Share Index
(Benchmark) return of 5.2%. The positive returns conceal what proved to be
another volatile period as markets grappled with political uncertainties at
home, culminating in last October's mini-budget debacle, persistent weaker
economic indicators, stubbornly elevated inflation, and sharply rising interest
rates.
In an environment of rising interest rates, our overweight exposure to banks was
the largest contributor to performance, given the low starting point for
valuations and the meaningful impact of higher rates on bank profits. The
largest individual contributors were AIB Group, the leading personal bank and
mortgage provider in Ireland, UK-listed TBC Bank Group, the largest banking
group in Georgia, and Kaspi.kz, the dominant consumer finance, e-commerce and
payments platform in Kazakhstan.
Despite the rising cost of living, retailer Marks & Spencer Group bucked the
trend, reporting strong trading in clothing and food, taking meaningful market
share in both areas. Similarly, the resurgence in travel demand after the COVID
pandemic saw the share prices of low-cost airline Ryanair Holdings and passport
photo booth operator ME Group International (formerly known as Photo-Me
International) recover strongly. Outsourcer Mitie Group reported record full
-year revenues as it posted an increase in operating profits, boosted by
contract wins, renewals and acquisitions. It is now a much-improved business,
with a healthier balance sheet, simplified structure and huge investments in
systems and technology, allowing it to win more work at better margins.
We make a concerted effort to look for opportunities across the market, and our
resulting bias to small- and mid-cap companies, which account for about 60% of
the portfolio, hurt relative returns as they were seen as more vulnerable to
economic weakness. However, this is an under-researched area where we continue
to find particularly attractively valued opportunities.
Sector-wise, our oil and gas positions proved a drag on performance, with our
holding in North Sea producer Ithaca Energy the largest detractor. The stock was
affected by the introduction of a windfall tax, a policy that will hurt North
Sea investments generally, and largely undermine the UK's energy security goal.
The Government is now looking to partially reverse this decision.
Government outsourcer Serco Group was a surprising underperformer given that it
has delivered strong profits and recently upgraded its full year earnings
forecast. It is a well-run business that is diversified both geographically and
services-wise and should be capable of producing inflation protected organic
growth with the potential for some margin expansion over the medium-term. Its
exposure to defence and immigration contracts is particularly attractive in the
current political environment, and its strong balance sheet provides mergers and
acquisitions ("M&A") and buyback optionality.
Drink distributor C&C Group suffered from a slow recovery in pub demand post
-COVID, rising costs and problems with implementing a new IT system. The market
seems to be assuming those issues are permanent, but we believe that C&C has an
unusually dominant position as one of the only national distributors and should
be able to gradually pass on price increases and overcome its operational
challenges to deliver strong profitability growth over the medium-term as
margins improve towards historical levels.
QUESTION
High inflation and the cost-of-living crisis persist. How has this affected the
Company's portfolio this year?
ANSWER
Overall, we have been pleased by the earnings resilience of the holdings in the
Company's portfolio. Last year, we materially reduced our consumer exposure,
selling our holdings in domestic housebuilders and cutting exposure to areas
more susceptible to a demand slowdown, such as big-ticket items and advertising.
These decisions contributed positively to this year's performance given the
profit warnings in those industries, and with the housing market experiencing a
marked slowdown. However, the profit warnings have not been as widespread as
feared and in general the consumer has proved relatively resilient, helping
Marks & Spencer, travel companies and airlines to beat earnings expectations.
This reflects economic indicators that have been weak but not excessively so.
QUESTION
With interest rates at their highest level for 15 years, how will this affect
markets and the Company's current portfolio?
ANSWER
Rising interest rates have led to a meaningful de-rating in some areas of the
market where business models are heavily dependent on debt, such as real estate
and infrastructure, and have caused significant weakness in the UK housing
market. These are industries where we had very low exposure.
Conversely, higher interest rates have benefited sectors such as banks and life
insurers, which we favour, and which had been shunned since the global financial
crisis. More generally, the combination of higher rates and the weaker economic
environment is likely to remain challenging in the near-term for corporates and
consumers who need to refinance their debts. As a result, we remain selective
and favour companies with lower levels of debt and the resilience to navigate
the uncertainty.
M&A activity has been prevalent over recent years given cheap financing and
attractive valuations on offer in the UK. Holdings that exited the Company's
portfolio as a result of successful bids over the past 12 months include
international power producer ContourGlobal, consultancy firm RPS Group and
teleradiology services provider Medica Group. The jump in funding costs may
deter some bids, especially at the larger-cap end of the market, but smaller
-sized deals should be more manageable and valuations in smaller-cap companies
are more appealing.
QUESTION
Value stocks have outperformed growth stocks over the last three years, do you
think this will continue?
ANSWER
Over the past decade, we have experienced a prolonged period of subdued
inflation, low interest rates and modest economic growth. This has favoured
growth companies at the expense of those that we favour - unloved stocks with
lower downside risk. While this trend began to reverse towards the end of 2020,
value stocks still have significant ground to catch up.
The current market environment of higher and stickier inflation, rising interest
rates and economic volatility is more aligned to the long-term pattern seen over
the last 100 years. History suggests that over the long-term value tends to
outperform, given generally higher discount rates and a reversion to the mean.
We, therefore, believe that we are in the very early stages of a long-term rally
in value stocks.
QUESTION
How is the UK market valued compared to the rest of the world? Does the UK still
present a good opportunity for investors?
ANSWER
UK equities are pricing in extreme pessimism and, as a result, trade at a
significant discount to other markets. While the near-term outlook is uncertain
and corporate earnings could still disappoint in the UK, this is also true of
other markets such as the US, where valuations are meaningfully more expensive.
To provide some context, at the time of writing (September 2023), our analysts
estimate that the UK equity market (FTSE All-Share Index) trades on 10.9x 2024
earnings; continental European equities (MSCI Europe ex UK Index) trades on
13.4x earnings and the US (S&P 500 Index) trades on 18.6x earnings. Our
portfolio, which trades on only 7.7x earnings, is at the very bottom of the
valuation range seen over my ten year tenure, despite offering better sales and
profit growth prospects, and carrying significantly less debt. When considering
that the Company's shares as at 31 August 2023 were available at a discount of
8.8% to the NAV, we believe that this could be a great investment opportunity on
a three to five year view.
QUESTION
The Company's portfolio is overweight in banking and life insurers. Why do you
prefer these sectors currently?
ANSWER
Financials form the biggest part of the Company's portfolio, with banks and life
insurers comprising 16% and 8% respectively of the portfolio. Higher interest
rates have enabled banks to significantly improve their profitability at a time
when earnings in many industries are under pressure. Yet many investors continue
to avoid banks because they are scarred from the 2008 global financial crisis.
As a result, banks trade on attractive valuations. UK and Irish banks have
become much higher quality businesses since the changes to the regulatory
environment over the past decade. They have strengthened their balance sheets,
trimmed bloated cost bases and withdrawn from riskier lending.
Our holdings in the sector are diversified both geographically and through
business models, with idiosyncratic factors driving their growth. For example,
our largest holding is AIB Group which is not only an interest rate story but
also benefits from an improvement in Ireland's banking industry, where the
number of competing groups has recently shrunk from five to three. The rising
interest rate environment is also positive for life insurers, which benefit from
an acceleration in pension fund re-risking.
While our holdings in these two sectors remain attractively valued, we have
taken some profits following the strong returns achieved over the past year. We
have redeployed some of the proceeds into non-life insurance companies, adding
to our modest exposure (c. 4% of the portfolio at the time of writing) given the
improving pricing environment and moderating cost of insurance claims.
QUESTION
What do you think are the biggest risks and opportunities for the next 12
months?
ANSWER
The biggest risk is a recession and its impact on corporate earnings. While
there is increasing talk of a soft landing, there is considerable historical
evidence on the impact of monetary tightening to keep us cautious on company
prospects in the near-term. In this uncertain environment, we favour companies
with lower levels of debt and the resilience to navigate the uncertainty. We are
wary of stocks where fundamentals and margins have been strong, and a
deterioration is not priced in.
While we consider the current macroeconomic backdrop when we forecast financials
for our holdings and potential new ideas, we feel our time is best spent on
researching stocks from a bottom-up perspective and taking a long-term view of
their prospects. Many of these companies will be affected by the economic cycle
but have compelling company specific stories that can be important drivers of
their share price over time.
Given the nature of the post-pandemic environment, there are companies that have
already exhibited fundamental weakness resembling a recessionary scenario, and
while corporate earnings have generally performed better than expected, there
have been profit warnings in the small-and mid-cap companies' space. Many of
these companies have seen their earnings rebased and trade on low valuations
with limited downside and significant upside once the environment normalises.
This is starting to present us with some interesting opportunities, and we have
begun to build positions in some of these stocks, particularly in smaller
companies.
Nonetheless, our caution is reflected in the Company's modest gearing. While
valuations are attractive and we are finding new ideas, we are conscious of the
near-term uncertainty and want to retain some dry powder to take advantage of
any forced sellers and new opportunities.
ALEX WRIGHT
Portfolio Manager
6 November 2023
Strategic Report
Principal Risks and Uncertainties and Risk Management
As required by provisions 28 and 29 of the 2018 UK Corporate Governance Code,
the Board has a robust ongoing process for identifying, evaluating and managing
the principal risks and uncertainties faced by the Company, including those that
could threaten its business model, future performance, solvency or liquidity.
The Board, with the assistance of the Alternative Investment Fund Manager (FIL
Investment Services (UK) Limited/the "Manager"), has developed a risk matrix
which, as part of the risk management and internal controls process, identifies
the key existing and emerging risks and uncertainties that the Company faces.
The Audit Committee continues to identify any new emerging risks and take any
action necessary to mitigate their potential impact. The risks identified are
placed on the Company's risk matrix and graded appropriately. This process,
together with the policies and procedures for the mitigation of existing and
emerging risks, is updated and reviewed regularly in the form of comprehensive
reports by the Audit Committee. The Board determines the nature and extent of
any risks it is willing to take in order to achieve its strategic objectives.
Climate change, which refers to a large scale shift in the planet's weather
patterns and average temperatures, continues to be a key emerging as well as a
principal risk confronting asset managers and their investors. The Board notes
that the Manager has integrated ESG considerations, including climate change,
into the Company's investment process. Further details are in the Annual Report.
The Board will continue to monitor how this may impact the Company as a risk to
investment valuations and potentially Shareholder returns.
The Manager also has responsibility for risk management for the Company. It
works with the Board to identify and manage the principal and emerging risks and
uncertainties and to ensure that the Board can continue to meet its UK corporate
governance obligations.
The Board considers the risks listed below as the principal risks and
uncertainties faced by the Company.
Principal Risks Description and Risk Mitigation
Market, Economic and Political Risks The Company may be affected by market
and economic risks. The principal
market related risks are market
downturn, interest rate movements,
inflation and market shocks, such as
the post pandemic UK economy recovery,
volatility from the war in Ukraine and
more recently conflict in the Middle
East. The Company may also be impacted
by concerns over global economic growth
and major political events affecting
the UK market and economy and the
consequences of this. Inflation remains
elevated across most economies driven
by a combination of increased demand
following the pandemic restrictions
being lifted, global labour shortages
in some sectors and supply chain
shortages, including energy and food
security. Inflation and economic
instability are leading to a prolonged
cost-of-living crisis and potentially
impacting investors' risk appetite.
The Company is exposed to a number of
geopolitical risks. The fast-changing
global geopolitical landscape is
largely shaped by the Russia and
Ukraine war effects, deglobalisation
trends and significant supply
disruption, as well as fears of global
recession amid inflationary pressures
and financial distress. Russia and
Ukraine are both significant net
exporters of oil, natural gas and a
variety of soft commodities and supply
limitations have fuelled global
inflation and economic instability,
specifically within Western nations.
The Company's portfolio is made up
mainly of listed securities. The
Portfolio Manager's success or failure
to protect and increase the Company's
value against the above background is
core to the Company's continued
success. The investment philosophy of
stock-picking and investing in
attractively valued companies should
outperform the Benchmark over time.
The risk from the likely effects of
unforeseen economic and market events
is somewhat mitigated by the Company's
investment trust structure which means
no forced sales need to take place to
deal with any redemptions. Therefore,
investments can be held over a longer
time horizon.
The Board reviews market, economic and
political risks and legislative changes
at each Board meeting.
Risks to which the Company is exposed
to in the market risk category are
included in Note 17 to the Financial
Statements below together with
summaries of the policies for managing
these risks.
Investment Performance Risk The Board relies on the Portfolio
(including the use of derivatives and Manager's skills and judgement to make
gearing) investment decisions based on research
and analysis of individual stocks and
sectors. The Board reviews the
performance of the asset value of the
portfolio against the Company's
Benchmark and its competitors and also
considers the outlook for the market
with the Portfolio Manager at each
Board meeting. The emphasis is on long
-term investment performance as there
is a risk for the Company of volatility
of performance in the shorter-term.
Derivative instruments are used to
protect and enhance investment returns.
There is a risk that the use of
derivatives may lead to higher
volatility in the NAV and the share
price than might otherwise be the case.
The Board has put in place policies and
limits to control the Company's use of
derivatives and exposures. These are
monitored on a daily basis by the
Manager's Compliance team and regular
reports are provided to the Board.
Further detail on derivative
instruments risk is included in Note 17
to the Financial Statements below.
The Company gears through the use of
long CFDs which provide greater
flexibility and are generally cheaper
than bank loans as a form of financing.
The principal risk is that the
Portfolio Manager fails to use gearing
effectively, resulting in a failure to
outperform in a rising market or
increasing underperformance in a
falling market. The Board regularly
considers the level of gearing and
gearing risk and sets limits within
which the Manager must operate.
Cybercrime and Information Security The operational risk from cybercrime is
Risks significant. Cybercrime threats evolve
rapidly and consequently the risk is
regularly re-assessed and the Board
receives regular updates from the
Manager in respect of the type and
possible scale of cyberattacks. The
Manager's technology team has developed
a number of initiatives and controls in
order to provide enhanced mitigating
protection to this ever-increasing
threat. The risk is frequently re
-assessed by Fidelity's information
security teams and has resulted in the
implementation of new tools and
processes, including improvements to
existing ones. Fidelity has a dedicated
cybersecurity team which provides
regular awareness updates and best
practice guidance.
Risks are increased due to the
Russia/Ukraine conflict and the trend
to more working from home following the
pandemic. These primarily relate to
phishing, remote access threats,
extortion and denial of services
attacks. The Manager has dedicated
detect and respond resources
specifically to monitor the cyber
threats associated within the workplace
and increased cyber activity following
Russia's invasion of Ukraine. There are
a number of mitigating actions in place
including, control strengthening, geo
-blocking and phishing mitigants,
combined with enhanced resilience and
recovery options.
The Company's third-party service
providers also provide assurances and
have similar control measures in place
to detect and respond to cuber threats
and activity.
Environmental, Social and Governance There is a risk that the value of the
("ESG") Risk assets of the Company are negatively
impacted by ESG related risks,
including climate change risk. ESG
risks include investor expectations and
how the Company is positioned from a
marketing perspective and whether it is
compliant with its ESG disclosure
requirements. Fidelity has embedded ESG
factors in its investment decision
-making process. ESG integration is
carried out at the fundamental research
analyst level within its investment
teams, primarily through Fidelity's
Proprietary Sustainability Rating which
is designed to generate a forward
-looking and holistic assessment of a
company's ESG risks and opportunities
based on sector-specific key
performance indicators across 127
individual and unique sub-sectors. The
Portfolio Manager is also active in
analysing the effects of ESG when
making investment decisions. The Board
continues to monitor developments in
this area and the positioning of the
Company's portfolio considering ESG
factors.
Further detail on ESG considerations in
the investment process and sustainable
investing is in the Annual Report. ESG
ratings of the companies within the
Company's portfolio compared to MSCI
ratings are provided in the Annual
Report.
Competition Risk Threats facing the Company are loss of
Shareholders if the demand for
investment trusts declines, and the
demand for passive funds and active
ETFs (Exchange-Traded Funds) continue
to increase. ESG funds offered by
competitors may pose competition
threats with funds or companies that
may offer higher ESG credentials,
especially for younger investors. The
Board reviews the strategic direction
of the Company on an ongoing basis to
ensure that it offers a relevant
product to Shareholders. It also
regularly reviews the Shareholder
profile of the Company with the
Company's Broker. ESG factors are
embedded into the Portfolio Manager's
investment decision process.
Business Continuity Risk There continues to be increased focus
from financial services regulators
around the world on the contingency
plans of regulated financial firms. The
top risks globally are cybersecurity,
geopolitical events and natural
disasters. There are also ongoing risks
from the Russia/Ukraine war,
specifically regarding the potential
loss of power and/or broadband
services. Variants of COVID continue to
evolve and some risks remain.
The Manager continues to take all
reasonable steps to meet its regulatory
obligations, assess its ability to
continue operating and the steps it
needs to take to support its clients,
including the Board and has an
appropriate control environment in
place. The Manager has provided the
Board with assurance that the Company
has appropriate business continuity
plans and the provision of services has
continued to be supplied without
interruption.
Specific risks posed by the pandemic
continue to ease with increasing levels
of staff returning to routine office
-based working, albeit under hybrid
working arrangements which allows
greater flexibility on remote working
as part of the new operating model.
The Company relies on a number of third
-party service providers, principally
the Registrar, Custodian and
Depositary. They are all subject to a
risk-based programme of internal audits
by the Manager and their own internal
controls reports are received by the
Board on an annual basis and any
concerns are investigated. The third
-party service providers have also
confirmed the implementation of
appropriate measures to ensure no
business disruption.
Risks associated with these services
are generally rated as low, but the
financial consequences could be
serious, including reputational damage
to the Company.
Key Person and Operational Support The loss of the Portfolio Manager or
Risks key individuals could lead to potential
performance, operational or regulatory
issues. The Manager identifies key
dependencies which are then addressed
through succession plans, particularly
for portfolio managers.
The Portfolio Manager, Alex Wright, has
a differentiated style in relation to
his peers. This style is intrinsically
linked with the Company's investment
philosophy and strategy and, therefore,
the Company has a key person dependency
on him. Fidelity has succession plans
in place for its portfolio managers
which have been discussed with the
Board and provides some assurance in
this regard. There is a Co-Portfolio
Manager who works alongside the
Portfolio Manager and has extensive
experience in the markets and
companies, and shares a common
investment approach and complementary
investment experience with the
Portfolio Manager. There is also a risk
that the Manager has inadequate
succession plans for other key
operational individuals.
Discount Control Risk Due to the nature of investment
companies, the price of the Company's
shares and its discount to NAV are
factors which are not totally within
the Company's control. The Board has a
discount management policy in place and
some short-term influence over the
discount may be exercised by the use of
share repurchases at acceptable prices
and within the parameters set by the
Board. The demand for shares can be
influenced through good performance and
an active investor relations program.
The Company's share price, NAV and
discount volatility are monitored daily
by the Manager with the Company's
Broker and considered by the Board on a
regular basis.
Regulatory Risk The Company may be impacted by changes
in legislation, taxation, regulation or
other external influence that require
changes to the business. These are
monitored regularly by the Board and
managed through active engagement with
regulators and trade bodies by the
Manager.
Continuation Vote
A continuation vote takes place every three years. There is a risk that
Shareholders do not vote in favour of continuation during periods when
performance of the Company's NAV and share price is poor. At the AGM held on 14
December 2022, 99.89% of Shareholders voted in favour of the continuation of the
Company. The next continuation vote will take place at the AGM in 2025.
Viability Statement
In accordance with provision 31 of the 2018 UK Corporate Governance Code, the
Directors have assessed the prospects of the Company over a longer period than
the twelve month period required by the "Going Concern" basis. The Company is an
investment trust with the objective of achieving long-term capital growth. The
Board considers long-term to be at least five years, and accordingly, the
Directors believe that five years is an appropriate investment horizon to assess
the viability of the Company, although the life of the Company is not intended
to be limited to this or any other period.
In making an assessment of the viability of the Company, the Board has
considered the following:
?The ongoing relevance of the investment objective in prevailing market
conditions;
?The Company's level of gearing;
?The Company's NAV and share price performance compared to its Benchmark;
?The principal and emerging risks and uncertainties facing the Company and their
potential impact, as set out above;
?The likely future demand for the Company's shares;
?The Company's share price discount to the NAV;
?The liquidity of the Company's portfolio;
?The level of income generated by the Company; and
?Future income and expenditure forecasts.
The Company's performance for the five year reporting period to 31 August 2023
was a NAV total return of +22.6% and a share price total return of +10.3%
compared to the Benchmark total return of +18.4%. The Board regularly reviews
the investment policy and considers whether it remains appropriate. The Board
has concluded that there is a reasonable expectation that the Company will be
able to continue in operation and meet its liabilities as they fall due over the
next five years based on the following considerations:
?The Investment Manager's compliance with the Company's investment objective and
policy, its investment strategy and asset allocation;
?The fact that the portfolio comprises sufficient readily realisable securities
which can be sold to meet funding requirements if necessary;
?The Board's discount management policy; and
?The ongoing processes for monitoring operating costs and income which are
considered to be reasonable in comparison to the Company's total assets.
In preparing the Financial Statements, the Directors have considered the impact
of climate change as detailed above. The Board has also considered the impact of
regulatory changes, unforeseen market events and the ongoing implications of the
Russia and Ukraine war and developing conflicts in the Middle East and how this
may affect the Company.
In addition, the Directors' assessment of the Company's ability to operate in
the foreseeable future is included in the Going Concern Statement below.
GOING CONCERN STATEMENT
The Directors have considered the Company's investment objective, risk
management policies, liquidity risk, credit risk, capital management policies
and procedures, the nature of its portfolio and its expenditure and cash flow
projections. The Directors, having considered the liquidity of the Company's
portfolio of investments (being mainly securities which are readily realisable)
and the projected income and expenditure, are satisfied that the Company is
financially sound and has adequate resources to meet all of its liabilities and
ongoing expenses and continue in operational existence for the foreseeable
future. The Board has, therefore, concluded that the Company has adequate
resources to continue to adopt the going concern basis for the period to 30
November 2024 which is at least twelve months from the date of approval of the
Financial Statements. This conclusion also takes into account the Board's
assessment of the ongoing risks from the war in Ukraine and significant market
events.
Accordingly, the Financial Statements of the Company have been prepared on a
going concern basis.
The prospects of the Company over a period longer than twelve months can be
found in the Viability Statement above.
PROMOTING THE SUCCESS OF THE COMPANY
Under Section 172(1) of the Companies Act 2006, the Directors of a company must
act in a way they consider, in good faith, would be most likely to promote the
success of the Company for the benefit of its members as a whole, and in doing
so have regard (amongst other matters) to the likely consequences of any
decision in the long-term; the need to foster relationships with the Company's
suppliers, customers and others; the impact of the Company's operations on the
community and the environment; the desirability of the Company maintaining a
reputation for high standards of business conduct; and the need to act fairly as
between members of the company.
As an externally managed Investment Trust, the Company has no employees or
physical assets, and a number of the Company's functions are outsourced to third
parties. The key outsourced function is the provision of investment management
services by the Manager, but other professional service providers support the
Company by providing administration, custodial, banking and audit services. The
Board considers the Company's key stakeholders to be the existing and potential
Shareholders, the external appointed Manager (FIL Investment Services (UK)
Limited) and other third-party professional service providers. The Board
considers that the interest of these stakeholders is aligned with the Company's
objective of delivering long-term capital growth to investors, in line with the
Company's stated objective and strategy, while providing the highest standards
of legal, regulatory and commercial conduct.
The Board, with the Portfolio Manager, sets the overall investment strategy and
reviews this at an annual strategy day which is separate from the regular cycle
of board meetings. In order to ensure good governance of the Company, the Board
has set various limits on the investments in the portfolio, whether in the
maximum size of individual holdings, the use of derivatives, the level of
gearing and others. These limits and guidelines are regularly monitored and
reviewed and are set out in the Annual Report.
The Board places great importance on communication with Shareholders. The Annual
General Meeting ("AGM") provides the key forum for the Board and the Portfolio
Manager to present to the Shareholders on the Company's performance and future
plans and the Board encourages all Shareholders to attend in person or virtually
and raise any questions or concerns. The Chairman and other Board members are
available to meet Shareholders as appropriate. Shareholders may also communicate
with Board members at any time by writing to them at the Company's registered
office at FIL Investments International, Beech Gate, Millfield Lane, Tadworth,
Surrey KT20 6RP or via the Company Secretary in writing at the same address or
by email at investmenttrusts@fil.com. The Portfolio Manager meets with major
Shareholders, potential investors, stock market analysts, journalists and other
commentators throughout the year. These communication opportunities help inform
the Board in considering how best to promote the success of the company over the
long-term.
The Board seeks to engage with the Manager and other service providers and
advisers in a constructive and collaborative way, promoting a culture of strong
governance, while encouraging open and constructive debate, in order to ensure
appropriate and regular challenge and evaluation. This aims to enhance service
levels and strengthen relationships with service providers, with a view to
ensuring Shareholders' interests are best served, by maintaining the highest
standards of commercial conduct while keeping cost levels competitive.
Whilst the Company's direct operations are limited, the Board recognises the
importance of considering the impact of the Company's investment strategy on the
wider community and environment. The Board believes that a proper consideration
of Environmental, Social and Governance ("ESG") issues aligns with the
investment objective to deliver long-term capital growth, and the Board's review
of the Manager includes an assessment of their ESG approach, which is set out in
the Annual Report.
In addition to ensuring that the Company's investment objective was being
pursued, key decisions and actions taken by the Directors during the reporting
year, and up to the date of approval of this report, have included:
?As part of the Board's succession plan, the appointment of Dean Buckley as
Chairman of the Board when Andy Irvine stepped down from the Board at the last
AGM. As a result of the change in Mr Buckley's role, the decision to appoint
Nigel Foster as Senior Independent Director, both appointments with effect from
14 December 2022;
?The decision to carry out an external Board evaluation using the services of
Lintstock Ltd. in accordance with the UK Corporate Governance Code;
?The decision to pay an interim dividend of 2.53 pence per share and to
recommend the payment of a final dividend of 6.27 pence per share (a total of
8.80 pence per share), to maintain the 14 year track record of increasing
dividends, while retaining funds for reinvestment, consistent with the objective
of long-term capital growth; and
?The decision to once again hold a hybrid AGM in 2023 in order to make it more
accessible to those investors who are unable to or prefer not to attend in
person.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and Financial
Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Financial Statements for each
financial period. Under that law, the Directors have elected to prepare the
Financial Statements in accordance with UK Generally Accepted Accounting
Practice (UK Accounting Standards and applicable law), including Financial
Reporting Standard FRS 102: The Financial Reporting Standard applicable in the
UK and Republic of Ireland ("FRS 102"). Under company law the Directors must not
approve the Financial Statements unless they are satisfied that they give a true
and fair view of the state of affairs of the Company and of the profit or loss
for the reporting period.
In preparing these Financial Statements the Directors are required to:
?Select suitable accounting policies in accordance with Section 10 of FRS 102
and then apply them consistently;
?Make judgements and estimates that are reasonable and prudent;
?Present information, including accounting policies, in a manner that provides
relevant, reliable, comparable and understandable information;
?State whether applicable UK Accounting Standards, including FRS 102, have been
followed, subject to any material departures disclosed and explained in the
Financial Statements; and
?Prepare the Financial Statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and to
enable them to ensure that the Company and the Financial Statements comply with
the Companies Act 2006. They are also responsible for safeguarding the assets of
the Company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, a Directors' Report, a Corporate Governance
Statement and a Directors' Remuneration Report which comply with that law and
those regulations.
The Directors have delegated the responsibility for the maintenance and
integrity of the corporate and financial information included on the Company's
pages of the Manager's website at www.fidelity.co.uk/specialvalues to the
Manager. Visitors to the website need to be aware that legislation in the UK
governing the preparation and dissemination of the Financial Statements may
differ from legislation in their jurisdictions.
The Directors confirm that to the best of their knowledge:
?The Financial Statements, prepared in accordance with UK Generally Accepted
Accounting Practice, including FRS 102, give a true and fair view of the assets,
liabilities, financial position and profit of the Company;
?The Annual Report, including 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 it faces;
and
?The Annual Report and Financial Statements, taken as a whole, are fair,
balanced and understandable and provide the information necessary for
Shareholders to assess the Company's performance, business model and strategy.
The Statement of Directors' Responsibility was approved by the Board on 6
November 2023 and signed on its behalf by:
DEAN BUCKLEY
Chairman
Income Statement for the year ended 31 August 2023
Year Year
ended 31 ended 31
August August
2023 2022
Notes Revenue Capital Total Revenue Capital
Total
£'000 £'000 £'000 £'000 £'000
£'000
Losses on 10 - (12,021) (12,021) - (64,441)
(64,441)
investments
Gains/(losse 11 - 35,770 35,770 - (14,992)
(14,992)
s) on
long CFDs
Investment 3 43,717 - 43,717 37,135 -
37,135
and
derivative
income
Other 3 2,971 - 2,971 877 - 877
interest
Investment 4 (5,698) - (5,698) (5,607) -
(5,607)
management
fees
Other 5 (948) - (948) (838) -
(838)
expenses
Foreign - (4,032) (4,032) - 5,874
5,874
exchange
(losses)/gai
ns
--------- --------- --------- --------- --------- ----
-----
------ ------ ------ ------ ------ ----
--
Net 40,042 19,717 59,759 31,567 (73,559)
(41,992)
return/(loss
)
on ordinary
activities
before
finance
costs and
taxation
Finance 6 (4,774) - (4,774) (1,243) -
(1,243)
costs
--------- --------- --------- --------- --------- ----
-----
------ ------ ------ ------ ------ ----
--
Net 35,268 19,717 54,985 30,324 (73,559)
(43,235)
return/(loss
)
on ordinary
activities
before
taxation
Taxation on 7 (672) - (672) (196) -
(196)
return/(loss
) on
ordinary
activities
--------- --------- --------- --------- --------- ----
-----
------ ------ ------ ------ ------ ----
--
Net 34,596 19,717 54,313 30,128 (73,559)
(43,431)
return/(loss
)
on ordinary
activities
after
taxation
for the
year
========= ========= ========= ========= =========
=========
Return/(loss 8 10.67p 6.08p 16.75p 9.42p (23.00p)
(13.58p)
) per
ordinary
share
========= ========= ========= ========= =========
=========
The Company does not have any other comprehensive income. Accordingly, the net
return/(loss) on ordinary activities after taxation for the year is also the
total comprehensive income for the year and no separate Statement of
Comprehensive Income has been presented.
The total column of this statement represents the Income Statement of the
Company. The revenue and capital columns are supplementary and presented for
information purposes as recommended by the Statement of Recommended Practice
issued by the AIC.
No operations were acquired or discontinued in the year and all items in the
above statement derive from continuing operations.
The Notes below form an integral part of these Financial Statements.
Balance Sheet as at 31 August 2023 Company number 2972628
Notes 2023 2022
£'000 £'000
Fixed assets
Investments 10 882,692 835,672
--------------- ---------------
Current assets
Derivative instruments 11 1,769 28
Debtors 12 8,937 10,940
Amounts held at futures - 8,190
clearing houses and
brokers
Cash and cash equivalents 59,460 80,450
--------------- ---------------
70,166 99,608
========= =========
Current liabilities
Derivative instruments 11 (949) (9,200)
Other creditors 13 (860) (3,481)
--------------- ---------------
(1,809) (12,681)
========= =========
Net current assets 68,357 86,927
========= =========
Net assets 951,049 922,599
========= =========
Capital and reserves
Share capital 14 16,205 16,205
Share premium account 15 238,442 238,442
Capital redemption 15 3,256 3,256
reserve
Other non-distributable 15 5,152 5,152
reserve
Capital reserve 15 648,795 629,078
Revenue reserve 15 39,199 30,466
--------------- ---------------
Total Shareholders' funds 951,049 922,599
========= =========
Net asset value per 16 293.44p 284.67p
ordinary share
========= =========
The Financial Statements above and below were approved by the Board of Directors
on 6 November 2023 and were signed on its behalf by:
DEAN BUCKLEY
Chairman
The Notes below form an integral part of these Financial Statements.
Statement of Changes in Equity for the year ended 31 August 2023
Notes Share Share Capital Other Capital
Revenue Total
capital premium redemption non- reserve
reserve Share-
£'000 account reserve distributable £'000
£'000 holders'
£'000 £'000 reserve
funds
£'000
£'000
Total 16,205 238,442 3,256 5,152 629,078
30,466 922,599
Shareholders'
funds at 31
August 2022
Net return on - - - - 19,717
34,596 54,313
ordinary
activities
after
taxation
for the year
Dividends 9 - - - - -
(25,863) (25,863)
paid to
Shareholders
--------- --------- ---------- ------------- ---------
--------- ---------
------ ------ ----- -- ------
------ ------
Total 16,205 238,442 3,256 5,152 648,795
39,199 951,049
Shareholders'
funds at 31
August 2023
========= ========= ========= ========= =========
========= =========
Total 15,651 205,466 3,256 5,152 702,637
21,928 954,090
Shareholders'
funds at 31
August 2021
New ordinary 14 554 33,118 - - -
- 33,672
shares issued
Costs - (142) - - -
- (142)
associated
with the
issue of
new ordinary
shares
Net - - - - (73,559)
30,128 (43,431)
(loss)/return
on ordinary
activities
after
taxation for
the
year
Dividends 9 - - - - -
(21,590) (21,590)
paid to
Shareholders
--------- --------- ---------- ------------- ---------
--------- ---------
------ ------ ----- -- ------
------ ------
Total 16,205 238,442 3,256 5,152 629,078
30,466 922,599
Shareholders'
funds at 31
August 2022
========= ========= ========= ========= =========
========= =========
The Notes below form an integral part of these Financial Statements.
Cash Flow Statement for the year ended 31 August 2023
Notes Year ended Year ended
31.08.23 31.08.22
£'000 £'000
Operating activities
Investment income received 39,436 25,034
Net derivative income 5,934 9,133
Interest received 2,971 493
Investment management fees paid (5,699) (5,597)
Directors' fees paid (173) (157)
Other cash payments (777) (618)
--------------- ---------------
Net cash inflow from operating 20 41,692 28,288
activities before finance costs and
taxation
========= =========
Finance costs paid (4,622) (1,186)
Overseas taxation suffered (1,119) (783)
--------------- ---------------
Net cash inflow from operating 35,951 26,319
activities
========= =========
Investing activities
Purchases of investments (429,178) (359,829)
Sales of investments 368,171 347,076
Receipts on long CFDs 70,856 73,743
Payments on long CFDs (45,085) (80,763)
Movement on amounts held at futures 8,190 (8,150)
clearing houses and brokers
--------------- ---------------
Net cash outflow from investing (27,046) (27,923)
activities
========= =========
Net cash inflow/(outflow) before 8,905 (1,604)
financing activities
========= =========
Financing activities
Dividends paid 9 (25,863) (21,590)
Net proceeds from issue of shares - 34,132
Costs associated with the issue of - (142)
new ordinary shares
--------------- ---------------
Net cash (outflow)/inflow from (25,863) 12,400
financing activities
========= =========
Net (decrease)/increase in cash and (16,958) 10,796
cash equivalents
Cash and cash equivalents at the 80,450 63,780
beginning of the year
Effect of movement in foreign (4,032) 5,874
exchange
Cash and cash equivalents at the end 59,460 80,450
of the year
--------------- ---------------
Represented by:
Cash at bank 2,028 2,014
Amount held in Fidelity Institutional 57,432 78,436
Liquidity Fund
--------------- ---------------
59,460 80,450
========= =========
The Notes below form an integral part of these Financial Statements.
Notes to the Financial Statements
1 Principal Activity
Fidelity Special Values PLC is an Investment Company incorporated in England and
Wales with a premium listing on the London Stock Exchange. The Company's
registration number is 2972628, and its registered office is Beech Gate,
Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP. The Company has been
approved by HM Revenue & Customs as an Investment Trust under Section 1158 of
the Corporation Tax Act 2010 and intends to conduct its affairs so as to
continue to be approved.
2 Accounting Policies
The Company has prepared its Financial Statements in accordance with UK
Generally Accepted Accounting Practice ("UK GAAP"), including FRS 102 "The
Financial Reporting Standard applicable in the UK and Republic of Ireland",
issued by the Financial Reporting Council ("FRC"). The Financial Statements have
also been prepared in accordance with the Statement of Recommended Practice:
Financial Statements of Investment Trust Companies and Venture Capital Trusts
("SORP") issued by the Association of Investment Companies ("AIC"), in July
2022.
a) Basis of accounting - The Financial Statements have been prepared on a going
concern basis and under the historical cost convention, except for the
measurement at fair value of investments and derivative instruments. The
Directors have a reasonable expectation that the Company has adequate resources
to continue in operational existence up to 30 November 2024 which is at least
twelve months from the date of approval of these Financial Statements. In making
their assessment the Directors have reviewed income and expense projections,
reviewed the liquidity of the investment portfolio and considered the Company's
ability to meet liabilities as they fall due. This conclusion also takes into
account the Director's assessment of the risks faced by the Company as detailed
in the Going Concern Statement above.
In preparing these Financial Statements the Directors have considered the impact
of climate change risk as an emerging and a principal risk as set out above, and
have concluded that there was no further impact of climate change to be taken
into account as the investments are valued based on market pricing. In line with
FRS 102, investments are valued at fair value, which in active markets are
quoted bid prices at the balance sheet date. Investments which are unlisted are
priced using market-based valuation approaches. All investments therefore
reflect the market participants view of climate change risk on the investments
held by the Company.
The Company's Going Concern Statement above takes account of all events and
conditions up to 30 November 2024 which is at least twelve months from the date
of approval of these Financial Statements.
b) Significant accounting estimates and judgements - The Directors make
judgements and estimates concerning the future. Estimates and judgements are
continually evaluated and are based on historical experience and other factors,
such as expectations of future events, and are believed to be reasonable under
the circumstances. Actual results may differ from these estimates. The
judgements required in order to determine the appropriate valuation methodology
of level 3 financial instruments have a risk of causing an adjustment to the
carrying amounts of assets. These judgements include making assessments of the
possible valuations in the event of a listing or other marketability related
risks.
c) Segmental reporting - The Company is engaged in a single segment business
and, therefore, no segmental reporting is provided.
d) Presentation of the Income Statement - In order to reflect better the
activities of an investment company and in accordance with guidance issued by
the AIC, supplementary information which analyses the Income Statement between
items of a revenue and capital nature has been prepared alongside the Income
Statement. The net revenue return after taxation for the year is the measure the
Directors believe appropriate in assessing the Company's compliance with certain
requirements set out in Section 1159 of the Corporation Tax Act 2010.
e) Income - Income from equity investments is accounted for on the date on which
the right to receive the payment is established, normally the ex-dividend date.
Overseas dividends are accounted for gross of any tax deducted at source.
Amounts are credited to the revenue column of the Income Statement. Where the
Company has elected to receive its dividends in the form of additional shares
rather than cash, the amount of the cash dividend foregone is recognised in the
revenue column of the Income Statement. Any excess in the value of the shares
received over the amount of the cash dividend is recognised in the capital
column of the Income Statement. Special dividends are treated as a revenue
receipt or a capital receipt depending on the facts and circumstances of each
particular case. Interest for securities is accounted for on an accruals basis
and is credited to the revenue column of the Income Statement.
Derivative instrument income received from dividends on long contracts for
difference ("CFDs") is accounted for on the date on which the right to receive
the payment is established, normally the ex-dividend date. The amount net of tax
is credited to the revenue column of the Income Statement.
Interest received on CFDs, bank deposits, collateral and money market funds is
accounted for on an accruals basis and credited to the revenue column of the
Income Statement. Interest received on CFDs represents the finance costs
calculated by reference to the notional value of the CFDs.
f) Investment management fees and other expenses - Investment management fees
and other expenses are accounted for on an accruals basis and are charged as
follows:
?Investment management fees are allocated in full to revenue; and
?All other expenses are allocated in full to revenue with the exception of those
directly attributable to share issues or other capital events.
g) Functional currency and foreign exchange - The functional and reporting
currency of the Company is UK sterling, which is the currency of the primary
economic environment in which the Company operates. Transactions denominated in
foreign currencies are reported in UK sterling at the rate of exchange ruling at
the date of the transaction. Assets and liabilities in foreign currencies are
translated at the rates of exchange ruling at the Balance Sheet date. Foreign
exchange gains and losses arising on translation are recognised in the Income
Statement as a revenue or a capital item depending on the nature of the
underlying item to which they relate.
h) Finance costs - Finance costs comprise interest on bank overdrafts and
collateral and finance costs paid on CFDs, which are accounted for on an
accruals basis. Finance costs are charged in full to the revenue column of the
Income Statement.
i) Taxation - The taxation charge represents the sum of current taxation and
deferred taxation.
Current taxation is taxation suffered at source on overseas income less amounts
recoverable under taxation treaties. Taxation is charged or credited to the
revenue column of the Income Statement, except where it relates to items of a
capital nature, in which case it is charged or credited to the capital column of
the Income Statement. Where expenses are allocated between revenue and capital
any tax relief in respect of the expenses is allocated between revenue and
capital returns on the marginal basis using the Company's effective rate of
corporation tax for the accounting period. The Company is an approved Investment
Trust under Section 1158 of the Corporation Tax Act 2010 and is not liable for
UK taxation on capital gains.
Deferred taxation is the taxation expected to be payable or recoverable on
timing differences between the treatment of certain items for accounting
purposes and their treatment for the purposes of computing taxable profits.
Deferred taxation is based on tax rates that have been enacted or substantively
enacted when the taxation is expected to be payable or recoverable. Deferred tax
assets are only recognised if it is considered more likely than not that there
will be sufficient future taxable profits to utilise them.
j) Dividend paid - Dividends payable to equity Shareholders are recognised when
the Company's obligation to make payment is established.
k) Investments - The Company's business is investing in financial instruments
with a view to profiting from their total return in the form of income and
capital growth. This portfolio of investments is managed and its performance
evaluated on a fair value basis, in accordance with a documented investment
strategy, and information about the portfolio is provided on that basis to the
Company's Board of Directors. Investments are measured at fair value with
changes in fair value recognised in profit or loss, in accordance with the
provisions of both Section 11 and Section 12 of FRS 102. The fair value of
investments is initially taken to be their cost and is subsequently measured as
follows:
?Listed investments are valued at bid prices, or last market prices, depending
on the convention of the exchange on which they are listed; and
?Unlisted investments are not quoted, or are not frequently traded, and are
stated at the best estimate of fair value. The Manager's Fair Value Committee
(`FVC'), which is independent of the Portfolio Manager's team, meets quarterly
to determine the fair value of unlisted investments.
The FVC provide a recommendation of fair values to the Board using market-based
approaches such as multiples, industry valuation benchmarks and available market
prices. Consideration is given to the cost of the investment, recent arm's
length transactions in the same or similar investments and the financial
performance of the investment since purchase. This pricing methodology is
subject to a detailed review and appropriate challenge by the Directors.
In accordance with the AIC SORP, the Company includes transaction costs,
incidental to the purchase or sale of investments, within losses on investments
in the capital column of the Income Statement and has disclosed these costs in
Note 10 below.
l) Derivative instruments - When appropriate, permitted transactions in
derivative instruments are used. Derivative transactions into which the Company
may enter include long and short CFDs, futures, options and warrants.
Derivatives are classified as other financial instruments and are initially
accounted for and measured at fair value on the date the derivative contract is
entered into and subsequently measured at fair value as follows:
?Long CFDs - the difference between the strike price and the value of the
underlying shares in the contract;
?Futures - the difference between the contract price and the quoted trade price;
and
?Options - value based on similar instruments or the quoted trade price for the
contract.
Where transactions are used to protect or enhance income, if the circumstances
support this, the income and expenses derived are included in net income in the
revenue column of the Income Statement. Where such transactions are used to
protect or enhance capital, if the circumstances support this, the income and
expenses derived are included: for long CFDs, as gains or losses on long CFDs,
and for short CFDs, futures and options as gains or losses on short CFDs,
futures and options in the capital column of the Income Statement. Any positions
on such transactions open at the year end are reflected on the Balance Sheet at
their fair value within current assets or current liabilities.
m) Debtors - Debtors include securities sold for future settlement, amounts
receivable on settlement of derivatives, accrued income, taxation recoverable
and other debtors and prepayments incurred in the ordinary course of business.
If collection is expected in one year or less (or in the normal operating cycle
of the business, if longer) they are classified as current assets. If not, they
are presented as non-current assets. They are recognised initially at fair value
and, where applicable, subsequently measured at amortised cost using the
effective interest rate method.
n) Amounts held at futures clearing houses and brokers - These are amounts held
in segregated accounts as collateral on behalf of brokers and are carried at
amortised cost.
o) Cash and cash equivalents - Cash and cash equivalents may comprise cash at
bank and money market funds which are short-term, highly liquid and are readily
convertible to a known amount of cash. These are subject to an insignificant
risk of changes in value.
p) Other creditors - Other creditors include securities purchased for future
settlement, finance costs payable, investment management fees and other
creditors and expenses accrued in the ordinary course of business. If payment is
due within one year or less (or in the normal operating cycle of the business,
if longer) they are classified as current liabilities. If not, they are
presented as non-current liabilities. They are recognised initially at fair
value and, where applicable, subsequently measured at amortised cost using the
effective interest rate method.
q) Capital reserve - The following are accounted for in the capital reserve:
?Gains and losses on the disposal of investments and derivative instruments;
?Changes in the fair value of investments and derivative instruments held at the
year end;
?Foreign exchange gains and losses of a capital nature;
?Dividends receivable which are capital in nature; and
?Costs of repurchasing or issuing ordinary shares.
Technical guidance issued by the Institute of Chartered Accountants in England
and Wales in TECH 02/17BL, guidance on the determination of realised profits and
losses in the context of distributions under the Companies Act 2006, states that
changes in the fair value of investments which are readily convertible to cash,
without accepting adverse terms at the Balance Sheet date, can be treated as
realised. Capital reserves realised and unrealised are shown in aggregate as
capital reserve in the Statement of Changes in Equity and the Balance Sheet. At
the Balance Sheet date, the portfolio of the Company consisted of investments
listed on a recognised stock exchange and derivative instruments contracted with
counterparties having an adequate credit rating, and the portfolio was
considered to be readily convertible to cash, with the exception of the level 3
investments which had unrealised investment holding losses of £9,684,000 (2022:
losses of £9,389,000).
3 Income
Year ended Year ended
31.08.23 31.08.22
£'000 £'000
Investment income
UK dividends 29,189 20,437
UK scrip dividends - 85
Interest on securities 805 -
Overseas dividends 10,543 6,684
Overseas scrip dividends - 23
--------------- ---------------
40,537 27,229
========= =========
Derivative income
Dividends received on long CFDs 3,180 9,906
--------------- ---------------
Investment and derivative income 43,717 37,135
========= =========
Other interest
Interest received on bank 2,965 493
deposits, collateral and money
market funds
Interest received on tax reclaims 6 -
Interest received on long CFDs* - 384
--------------- ---------------
2,971 877
========= =========
Total income 46,688 38,012
========= =========
Special dividends of £1,904,000 (2022: £372,000) have been recognised in capital
during the year.
*Due to negative interest rates in the prior year, the Company received interest
on some of its long CFDs.
4 Investment Management Fees
Year ended Year ended
31.08.23 31.08.22
£'000 £'000
Investment management fees 5,698 5,607
========= =========
FIL Investment Services (UK) Limited is the Company's Alternative Investment
Fund Manager and has delegated portfolio management to FIL Investments
International ("FII"). Both companies are Fidelity group companies.
FII charges investment management fees at an annual rate of 0.60% of net assets.
Fees are accrued on a daily basis and payable monthly.
5 Other Expenses
Year Year ended
ended 31.08.22
31.08.23 £'000
£'000
AIC fees 21 21
Custody fees 35 42
Depositary fees 57 71
Directors' expenses 17 6
Directors' fees1 172 159
Legal and professional fees 82 95
Marketing expenses 303 191
Printing and publication expenses 116 115
Registrars' fees 68 70
Fees payable to the Company's Independent 50 46
Auditor for the audit of the Financial
Statements2
Sundry other expenses 27 22
--------- ---------------
------
Other expenses 948 838
========= =========
1Details of the breakdown of Directors' fees are disclosed in the Directors'
Remuneration Report in the Annual Report.
2The VAT payable on audit fees is included in sundry other expenses.
6 Finance Costs
Year ended Year ended
31.08.23 31.08.22
£'000 £'000
Interest paid on long CFDs 4,761 1,231
Interest on bank overdrafts and collateral 13 12
--------------- ---------------
4,774 1,243
========= =========
7 Taxation on Return/(Loss) on Ordinary Activities
Year ended Year ended
31.08.23 31.08.22
£'000 £'000
a) Analysis of the
taxation charge for the
year
Overseas taxation 672 196
--------------- ---------------
Taxation charge for the 672 196
year (see Note 7b)
========= =========
b) Factors affecting the taxation charge for the year
The taxation charge for the year is lower than the standard rate of UK
corporation tax for an investment trust company of 25.00% (2022: 19.00%). A
reconciliation of the standard rate of UK corporation tax to the taxation charge
for the year is shown below:
Year ended Year ended
31.08.23 31.08.22
£'000 £'000
Net return/(loss) on ordinary activities 54,985 (43,235)
before taxation
--------------- ---------------
Net return/(loss) on ordinary activities 11,833 (8,215)
before taxation multiplied by the blended
rate of UK corporation tax of 21.52% (2022:
19.00%)
Effects of:
Capital (gains)/losses not taxable* (4,243) 13,976
Income not taxable (8,550) (5,173)
Excess management expenses 960 (588)
Overseas taxation 672 196
--------------- ---------------
Total taxation charge for the year (see Note 672 196
7a)
========= =========
*The Company is exempt from UK taxation on capital gains as it meets the HM
Revenue & Customs criteria for an investment company set out in Section 1159 of
the Corporation Tax Act 2010.
c) Deferred taxation
A deferred tax asset of £17,235,000 (2022: £16,119,000), in respect of excess
expenses of £68,940,000 (2022: £64,476,000) available to be set off against
future taxable profits has not been recognised as it is unlikely that there will
be sufficient future taxable profits to utilise these expenses.
The UK corporation tax rate increased from 19.00% to 25.00% from 1 April 2023.
The rate of 25.00% has been applied to calculate the unrecognised deferred tax
asset for the current year (2022: 25.00%).
8 Return/(Loss) per Ordinary Share
Year ended Year ended
31.08.23 31.08.22
Revenue return per ordinary share 10.67p 9.42p
Capital return/(loss) per ordinary share 6.08p (23.00p)
--------------- ---------------
Total return/(loss) per ordinary share 16.75p (13.58p)
========= =========
The return/(loss) per ordinary share is based on the net return/(loss) on
ordinary activities after taxation for the year divided by the weighted average
number of ordinary shares held outside of Treasury during the year, as shown
below:
£'000 £'000
Net revenue return on ordinary 34,596 30,128
activities after taxation
Net capital return/(loss) on 19,717 (73,559)
ordinary activities after
taxation
--------------- ---------------
Net total return/(loss) on 54,313 (43,431)
ordinary activities after
taxation
========= =========
Number Number
Weighted average number of 324,098,920 319,869,879
ordinary shares held outside of
Treasury
========= =========
9 Dividends Paid to Shareholders
Year Year ended
ended 31.08.22
31.08.23 £'000
£'000
Dividends paid
Interim dividend of 2.53 pence per ordinary 8,200 -
share paid for the year ended 31 August 2023
Final dividend of 5.45 pence per ordinary 17,663 -
share paid for the year ended 31 August 2022
Interim dividend of 2.30 pence per ordinary - 7,454
share paid for the year ended 31 August 2022
Final dividend of 4.50 pence per ordinary - 14,136
share paid for the year ended 31 August 2021
--------- ---------------
------
25,863 21,590
========= =========
Dividends proposed
Final dividend proposed of 6.27 pence per 20,321 -
ordinary share for the year ended 31 August
2023
Final dividend proposed of 5.45 pence per - 17,663
ordinary share for the year ended 31 August
2022
--------- ---------------
------
20,321 17,663
========= =========
The Directors have proposed the payment of a final dividend of 6.27 pence per
ordinary share for the year ended 31 August 2023 which is subject to approval by
Shareholders at the Annual General Meeting on 14 December 2023 and has not been
included as a liability in these Financial Statements. The dividend will be paid
on 10 January 2024 to Shareholders on the register at the close of business on 1
December 2023 (ex-dividend date 30 November 2023).
10 Investments
2023 2022
£'000 £'000
Listed investments 880,839 835,398
Unlisted investments 1,853 274
--------------- ---------------
Total investments at fair value 882,692 835,672
========= =========
Opening book cost 813,135 726,247
Opening investment holding gains 22,537 160,463
--------------- ---------------
Opening fair value 835,672 886,710
========= =========
Movements in the year
Purchases at cost 426,404 361,407
Sales - proceeds (367,363) (348,004)
Losses on investments (12,021) (64,441)
--------------- ---------------
Closing fair value 882,692 835,672
========= =========
Closing book cost 914,377 813,135
Closing investment holding (losses)/gains (31,685) 22,537
--------------- ---------------
Closing fair value 882,692 835,672
========= =========
The Company received £367,363,000 (2022: £348,004,000) from investments sold in
the year. The book cost of these investments when they were purchased was
£325,162,000 (2022: £274,519,000). These investments have been revalued over
time and until they were sold any unrealised gains/(losses) were included in the
fair value of the investments.
Investment transaction costs
Transaction costs incurred in the acquisition and disposal of investments, which
are included in the losses on investments above, were as follows:
Year ended Year ended
31.08.23 31.08.22
£'000 £'000
Purchases transaction costs 1,688 1,544
Sales transaction costs 167 195
--------------- ---------------
1,855 1,739
========= =========
The portfolio turnover rate for the year was 44.2% (2022: 42.8%).
11 Derivative Instruments
Year ended Year ended
31.08.23 31.08.22
£'000 £'000
Gains/(losses) on long CFD 25,778 (7,013)
positions closed
Movement in investment 9,992 (7,979)
holding gains/(losses) on
long CFDs
--------------- ---------------
35,770 (14,992)
========= =========
2023 2022
Fair value Fair value
£'000 £'000
Derivative instruments
recognised on the Balance
Sheet
Derivative instrument 1,769 28
assets
Derivative instrument (949) (9,200)
liabilities
--------------- ---------------
820 (9,172)
========= =========
Fair 2023 Fair 2022
value Asset value Asset
£'000 exposure £'000 exposure
£'000 £'000
At the year end the Company held
the following derivative
instruments
Long CFDs 820 130,073 (9,172) 178,898
========= ========= ========= =========
12 Debtors
2023 2022
£'000 £'000
Securities sold for 117 924
future settlement
Amounts receivable on 14 7
settlement of
derivatives
Accrued income 7,058 8,711
Overseas taxation 1,720 1,273
recoverable
Other debtors and 28 25
prepayments
--------------- ---------------
8,937 10,940
========= =========
13 Other Creditors
2023 2022
£'000 £'000
Securities purchased for future settlement - 2,774
Finance costs payable 209 57
Creditors and accruals 651 650
--------------- ---------------
860 3,481
========= =========
14 Share Capital
2023 2022
Number of £'000 Number of £'000
shares shares
Issued, allotted and fully paid
ordinary shares of 5 pence each
Total share capital - Beginning 324,098,920 16,205 313,028,920 15,651
of the year
New ordinary shares issued - - 11,070,000 554
----------- --------- ----------- ---------
---- ------ ---- ------
Total share capital - End of 324,098,920 16,205 324,098,920 16,205
the year
========= ========= ========= =========
During the year, no new ordinary shares were issued (2022: 11,070,000 shares).
The premium received on the issue of new ordinary shares for the prior year
ended 31 August 2022 was £33,118,000 and was credited to the share premium
account. At 31 August 2023, no shares were held in Treasury.
15 Capital and Reserves
Share Share Capital Other Capital
Revenue Total
capital premium redemption non- reserve
reserve Share-
£'000 account reserve distributable £'000 £'000
holders'
£'000 £'000 reserve
funds
£'000
£'000
At 1 16,205 238,442 3,256 5,152 629,078 30,466
922,599
September
2022
Losses on - - - - (12,021) -
(12,021)
investments
(see
Note
10)
Gains on - - - - 35,770 -
35,770
long
CFDs (see
Note
11)
Foreign - - - - (4,032) -
(4,032)
exchange
losses
Revenue - - - - - 34,596
34,596
return
on ordinary
activities
after
taxation for
the year
Dividends - - - - -
(25,863) (25,863)
paid
to
Shareholders
(see Note 9)
--------- --------- ---------- ------------- --------- ------
--- ---------
------ ------ ----- -- ------ ------
------
At 31 August 16,205 238,442 3,256 5,152 648,795 39,199
951,049
2023
========= ========= ========= ========= =========
========= =========
Share Share Capital Other Capital
Revenue Total
capital premium redemption non- reserve
reserve Share-
£'000 account reserve distributable £'000 £'000
holders'
£'000 £'000 reserve
funds
£'000
£'000
At 1 15,651 205,466 3,256 5,152 702,637 21,928
954,090
September
2021
Losses on - - - - (64,441) -
(64,441)
investments
(see Note
10)
Losses on - - - - (14,992) -
(14,992)
long
CFDs (see
Note
11)
Costs - (142) - - - -
(142)
associated
with
the issue
of new
ordinary
shares
Foreign - - - - 5,874 -
5,874
exchange
gains
New ordinary 554 33,118 - - - -
33,672
shares
issued
Revenue - - - - - 30,128
30,128
return
on ordinary
activities
after
taxation
for
the year
Dividends - - - - -
(21,590) (21,590)
paid
to
Shareholders
(see Note 9)
--------- --------- ---------- ------------- --------- ------
--- ---------
------ ------ ----- -- ------ ------
------
At 31 August 16,205 238,442 3,256 5,152 629,078 30,466
922,599
2022
========= ========= ========= ========= =========
========= =========
The capital reserve balance at 31 August 2023 includes investment holding losses
of £31,685,000 (2022: gains of £22,537,000) as detailed in Note 10 above. The
revenue and capital reserves are distributable by way of dividend. See Note 2
(q) above for further details.
16 Net Asset Value per Ordinary Share
The calculation of the net asset value per ordinary share is based on the total
Shareholders' funds divided by the number of ordinary shares held outside of
Treasury.
2023 2022
Total Shareholders' funds £951,049,000 £922,599,000
Ordinary shares held outside of Treasury at year end 324,098,920 324,098,920
Net asset value per ordinary share 293.44p 284.67p
========= =========
It is the Company's policy that shares held in Treasury will only be reissued at
net asset value per ordinary share or at a premium to net asset value per
ordinary share and, therefore, shares held in Treasury have no dilutive effect.
17 FINANCIAL INSTRUMENTS
Management of risk
The Company's investing activities in pursuit of its investment objective
involve certain inherent risks. The Board confirms that there is an ongoing
process for identifying, evaluating and managing the risks faced by the Company.
The Board with the assistance of the Manager, has developed a risk matrix which,
as part of the internal control process, identifies the risks that the Company
faces. Principal risks identified are market, economic and political, investment
performance (including the use of derivatives and gearing), cybercrime and
information security, environmental, social and governance ("ESG"), competition,
business continuity, key person and operational support, discount control and
regulatory. Risks are identified and graded in this process, together with steps
taken in mitigation, and are updated and reviewed on an ongoing basis. These
risks and how they are identified, evaluated and managed are shown above.
This note refers to the identification, measurement and management of risks
potentially affecting the value of financial instruments. The Company's
financial instruments may comprise:
?Equity shares (listed and unlisted) and bonds held in accordance with the
Company's investment objective and policies;
?Derivative instruments which comprise CFDs, futures and options on listed
stocks and equity indices; and
?Cash, liquid resources and short-term debtors and creditors that arise from its
operations.
The risks identified arising from the Company's financial instruments are market
price risk (which comprises interest rate risk, foreign currency risk and other
price risk), liquidity risk, counterparty risk, credit risk and derivative
instrument risk. The Board reviews and agrees policies for managing each of
these risks, which are summarised below. These policies are consistent with
those followed last year.
MARKET PRICE RISK
Interest rate risk
The Company finances its operations through its share capital and reserves. In
addition, the Company has gearing through the use of derivative instruments. The
Board imposes limits to ensure gearing levels are appropriate. The Company is
exposed to a financial risk arising as a result of any increases in interest
rates associated with the funding of the derivative instruments.
Interest rate risk exposure
The values of the Company's financial instruments that are exposed to movements
in interest rates are shown below:
2023 2022
£'000 £'000
Exposure to financial
instruments that bear
interest
Long CFDs - exposure less 129,253 188,070
fair value
--------------- ---------------
Exposure to financial
instruments that earn
interest
Amounts held at futures - 8,190
clearing houses and brokers
Cash and cash equivalents 59,460 80,450
--------------- ---------------
59,460 88,640
========= =========
Net exposure to financial 69,793 99,430
instruments that bear
interest
========= =========
Due to negative interest rates in the prior year, the Company received interest
on some of its long CFD positions.
Foreign currency risk
The Company does not carry out currency speculation. The Company's net
return/(loss) on ordinary activities after taxation for the year and its net
assets can be affected by foreign exchange movements because the Company has
income and assets which are denominated in currencies other than the Company's
functional currency which is UK sterling. The Company can also be subject to
short-term exposure to exchange rate movements, for example, between the date
when an investment is purchased or sold and the date when settlement of the
transaction occurs.
Three principal areas have been identified where foreign currency risk could
impact the Company:
?Movements in currency exchange rates affecting the value of investments and
derivative instruments;
?Movements in currency exchange rates affecting short-term timing differences;
and
?Movements in currency exchange rates affecting income received.
The portfolio management team monitor foreign currency risk but it is not the
Company's policy to hedge against currency risk.
Currency exposure of financial assets
The currency exposure profile of the Company's financial assets is shown below:
2023
Currency Investments Long Debtors Cash Total
held at exposure to £'000 and cash £'000
fair derivative equivalents2
value instruments1 £'000
£'000 £'000
Euro 67,412 77,457 823 - 145,692
US dollar 31,515 - 722 36,855 69,092
Swiss 36,842 - 224 - 37,066
franc
Swedish 14,175 - - - 14,175
krona
Australian 7,782 - 49 - 7,831
dollar
Norwegian 4,841 - - - 4,841
krone
South 2,468 - - - 2,468
African
rand
Canadian 1,703 - - 29 1,732
dollar
UK 715,954 52,616 7,119 22,576 798,265
sterling
----------- ------------ --------- ------------ ---------
---- --- ------ --- ------
882,692 130,073 8,937 59,460 1,081,162
========= ========= ========= ========= =========
1The exposure to the market of long CFDs.
2Cash and cash equivalents are made up of £2,028,000 cash at bank and
£57,432,000 held in Fidelity Institutional Liquidity Fund.
2022
Currency Investments Long Debtors2 Cash Total
held at exposure to £'000 and cash £'000
fair derivative equivalents3
value instruments1 £'000
£'000 £'000
Euro 69,765 71,606 316 - 141,687
US dollar 6,665 - 117 39,679 46,461
Swiss 20,631 - 376 - 21,007
franc
Swedish 16,309 - - - 16,309
krona
Australian 12,179 - - - 12,179
dollar
Norwegian 6,377 - - - 6,377
krone
Emirati 4,780 - - - 4,780
dirham
South 2,711 142 - - 2,853
African
rand
Danish - - 71 - 71
krone
Canadian - - - 33 33
dollar
UK 696,255 107,150 18,250 40,738 862,393
sterling
----------- ------------ --------- ------------ ---------
---- --- ------ --- ------
835,672 178,898 19,130 80,450 1,114,150
========= ========= ========= ========= =========
1The exposure to the market of long CFDs.
2Debtors include amounts held at futures clearing houses and brokers.
3Cash and cash equivalents are made up of £2,014,000 cash at bank and
£78,436,000 held in Fidelity Institutional Liquidity Fund.
Currency exposure of financial liabilities
The Company finances its investment activities through its ordinary share
capital and reserves. The Company's financial liabilities comprise other
creditors. The currency profile of these financial liabilities is shown below:
Currency 2023 2022
Other
Other creditors
£'000
Creditors
£'000
Euro - 6
Swiss franc 135 2,141
UK sterling 725 1,334
--------------- ---------------
860 3,481
========= =========
Other price risk
Other price risk arises mainly from uncertainty about future prices of financial
instruments used in the Company's business. It represents the potential loss the
Company might suffer through holding market positions in the face of price
movements. The Board meets quarterly to consider the asset allocation of the
portfolio and the risk associated with particular industry sectors within the
parameters of the investment objective. The Portfolio Manager is responsible for
actively monitoring the existing portfolio selected in accordance with the
overall asset allocation parameters described above and seeks to ensure that
individual stocks also meet an acceptable risk/reward profile. Other price risks
arising from derivative positions, mainly due to the underlying exposures, are
estimated using Value at Risk and Stress Tests as set out in the Company's
internal Risk Management Process Document.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulties in
meeting obligations associated with financial liabilities. The Company's assets
mainly comprise readily realisable securities and derivative instruments which
can be sold easily to meet funding commitments if necessary. Short-term
flexibility is achieved by the use of a bank overdraft, if required.
Liquidity risk exposure
At 31 August 2023, the undiscounted gross cash outflows of the financial
liabilities were all repayable within one year and consisted of derivative
instrument liabilities of £949,000 (2022: £9,200,000) and other creditors of
£860,000 (2022: £3,481,000).
Counterparty risk
Certain derivative instruments in which the Company may invest are not traded on
an exchange but instead will be traded between counterparties based on
contractual relationships, under the terms outlined in the International Swaps
and Derivatives Association's ("ISDA") market standard derivative legal
documentation. These are known as Over the Counter ("OTC") trades. As a result,
the Company is subject to the risk that a counterparty may not perform its
obligations under the related contract. In accordance with the risk management
process which the Investment Manager employs, this risk is minimised by only
entering into transactions with counterparties which are believed to have an
adequate credit rating at the time the transaction is entered into, by ensuring
that formal legal agreements covering the terms of the contract are entered into
in advance, and through adopting a counterparty risk framework which measures,
monitors and manages counterparty risk by the use of internal and external
credit agency ratings and by evaluating derivative instrument credit risk
exposure.
For derivative transactions, collateral is used to reduce the risk of both
parties to the contract. All collateral amounts are held in UK sterling and are
managed on a daily basis for all relevant transactions. At 31 August 2023,
£580,000 (2022: £nil) was held by the brokers in a segregated collateral account
on behalf of the Company, to reduce the credit risk exposure of the Company.
This collateral comprised: J.P. Morgan Securities plc £220,000 (2022: £nil) and
HSBC Bank plc £360,000 (2022: £nil). At 31 August 2023, there were no amounts
held by the Company at futures clearing houses and brokers, in a segregated
collateral account, on behalf of the brokers, to reduce the credit risk exposure
of the brokers (2022: £8,190,000). In the year to 31 August 2022, this
collateral comprised: J.P. Morgan Securities plc £5,140,000 in cash and HSBC
Bank plc £3,050,000 in cash.
Credit risk
Financial instruments may be adversely affected if any of the institutions with
which money is deposited suffer insolvency or other financial difficulties. All
transactions are carried out with brokers that have been approved by the Manager
and are settled on a delivery versus payment basis. Limits are set on the amount
that may be due from any one broker and are kept under review by the Manager.
Exposure to credit risk arises on unsettled security transactions and derivative
instrument contracts and cash at bank.
Derivative instrument risk
The risks and risk management processes which result from the use of derivative
instruments, are set out in a documented Derivative Risk Measurement and
Management Document. Derivative instruments are used by the Manager for the
following purposes:
?To gain unfunded long exposure to equity markets, sectors or single stocks.
Unfunded exposure is exposure gained without an initial flow of capital;
?To hedge equity market risk using derivatives with the intention of at least
partially mitigating losses in the exposures of the Company's portfolio as a
result of falls in the equity market; and
?To position short exposures in the Company's portfolio. These uncovered
exposures benefit from falls in the prices of shares which the Portfolio Manager
believes to be over-valued. These positions, therefore, distinguish themselves
from other short exposures held for hedging purposes since they are expected to
add risk to the portfolio.
RISK SENSITIVITY ANALYSIS
Interest rate risk sensitivity analysis
Based on the financial instruments held and interest rates at 31 August 2023, an
increase of 1.00% in interest rates throughout the year, with all other
variables held constant, would have decreased the Company's net gain on ordinary
activities after taxation for the year and decreased the net assets of the
Company by £698,000 (2022: increased the net loss and decreased the net assets
by £994,000). A decrease of 1.00% in interest rates throughout the year would
have had an equal but opposite effect.
Foreign currency risk sensitivity analysis
Based on the financial instruments held and currency exchange rates at 31 August
2023, a 10% strengthening of the UK sterling exchange rate against foreign
currencies, with all other variables held constant, would have decreased the
Company's net gain on ordinary activities after taxation for the year and
decreased the net assets of the Company by £25,706,000 (2022: increased the net
loss and decreased the net assets by £22,692,000). A 10% weakening of the UK
sterling exchange rate against foreign currencies, with all other variables held
constant, would have increased the Company's net gain on ordinary activities
after taxation for the year and increased the net assets of the Company by
£31,418,000 (2022: decreased the net loss and increased the net assets by
£27,734,000).
Other price risk - exposure to investments sensitivity analysis
Based on the listed investments held and share prices at 31 August 2023, an
increase of 10% in share prices, with all other variables held constant, would
have increased the Company's net return on ordinary activities after taxation
for the year and increased the net assets of the Company by £88,084,000 (2022:
decreased the net loss and increased the net assets by £83,540,000). A decrease
of 10% in share prices would have had an equal and opposite effect.
An increase of 10% in the valuation of unlisted investments held at 31 August
2023, would have increased the Company's net gain on ordinary activities after
taxation for the year and increased the net assets of the Company by £185,300
(2022: decreased the net loss after taxation and increased the net assets by
£27,000). A decrease of 10% in the valuation would have had an equal and
opposite effect.
Other price risk - net exposure to derivative instruments sensitivity analysis
Based on the derivative instruments held and share prices at 31 August 2023, an
increase of 10% in the share prices underlying the derivative instruments, with
all other variables held constant, would have increased the Company's net gain
on ordinary activities after taxation for the year and increased the net assets
of the Company by £13,007,000 (2022: decreased the net loss and increased the
net assets by £17,890,000). A decrease of 10% in share prices would have had an
equal and opposite effect.
Fair Value of Financial Assets and Liabilities
Financial assets and liabilities are stated in the Balance Sheet at values which
are not materially different to their fair values. As explained in Notes 2 (k)
and (l) above, investments and derivative instruments are shown at fair value.
Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that classifies its
financial instruments measured at fair value at one of three levels, according
to the relative reliability of the inputs used to estimate the fair values.
Classification Input
Level 1 Valued using quoted prices in active markets for identical
assets
Level 2 Valued by reference to inputs other than quoted prices
included in level 1 that are observable (i.e. developed using
market data) for the asset or liability, either directly or
indirectly
Level 3 Valued by reference to valuation techniques using inputs that
are not based on observable market data
Categorisation within the hierarchy has been determined on the basis of the
lowest level input that is significant to the fair value measurement of the
relevant asset. The valuation techniques used by the Company are explained in
Notes 2 (l) and (m) above. The table below sets out the Company's fair value
hierarchy:
Financial assets at fair Level 1 Level 2 Level 3 2023
value through profit or loss £'000 £'000 £'000 Total
£'000
Investments 857,351 23,246 2,095 882,692
Derivative instrument assets - 1,769 - 1,769
---------- ---------- ---------- ----------
------- ------- ------- -------
857,351 25,015 2,095 884,461
========== ========== ========== ==========
Financial liabilities at fair
value through profit or loss
Derivative instrument - (949) - (949)
liabilities
========== ========== ========== ==========
Financial assets at fair Level 1 Level 2 Level 3 2022
value through profit or loss £'000 £'000 £'000 Total
£'000
Investments 835,224 - 448 835,672
Derivative instrument assets - 28 - 28
---------- ---------- ---------- ----------
------- ------- ------- -------
835,224 28 448 835,700
========== ========== ========== ==========
Financial liabilities at fair
value through profit or loss
Derivative instrument - (9,200) - (9,200)
liabilities
========== ========== ========== ==========
The table below sets out the movements in level 3 financial instruments during
the year:
Year ended Year ended
31.08.23 31.08.22
£'000 £'000
Beginning of the year 448 957
Sales - proceeds - (716)
Sales - gains - 278
Transfer into level 3 at cost - Prax 1,942 9,499
Exploration & Production and Unbound
Group*
Movement in investment holding losses (295) (9,570)
----------------- -----------------
End of the year 2,095 448
========== ==========
*Financial instruments are transferred into level 3 on the date they are
suspended, delisted or when they have not traded for thirty days.
Marwyn Value Investors
Marwyn Value Investors is a closed-ended fund incorporated in the United
Kingdom. The fund is highly illiquid and the valuation at 31st August 2023 is
based on the indicative bid price in the absence of a last trade price. As at 31
August 2023, its fair value was £242,000 (2022: £174,000).
TVC Holdings
TVC Holdings is an unlisted investment holding company incorporated in Ireland.
The valuation at 31 August 2023 is based on the NAV from the 2022 audited
company's financial report. As at 31 August 2023, its fair value was £254,000
(2022: £274,000).
Studio Retail Group
Studio Retail Group operated as a multi-channel retail company. On 14 February
2022, the company was suspended from trading on the London Stock Exchange. The
company is now delisted and in administration. As at 31 August 2023, its fair
value was £nil (2022: £nil).
McColl's Retail Group
McColl's Retail Group owns and operates convenience and newsagent stores. The
company was suspended from trading on 6 May 2022 after appointing
administrators. As at 31 August 2023, its fair value was £nil (2022: £nil).
Prax Exploration & Production
Hurricane Energy plc, an oil and gas exploration company, delisted from the
London Stock Exchange in June 2023, after it was acquired by Prax Exploration &
Production plc. The valuation at 31 August 2023 of Prax Exploration & Production
plc is based on the last trade of Hurricane Energy less the cash payment
received from the acquisition. As at 31 August 2023, its fair value was
£1,599,000 (2022: £nil).
Unbound Group
Unbound Group plc is a UK based company engaged in selling a range of brands
focused on the over 55 age demographics. On 17 July 2023, the company stopped
trading and has subsequently gone into administration. As at 31 August 2023, its
fair value was £nil (2022: £nil).
18 Capital Resources and Gearing
The Company does not have any externally imposed capital requirements. The
financial resources of the Company comprise its share capital and reserves, as
disclosed in the Balance Sheet above and any gearing, which is managed by the
use of derivative instruments. Financial resources are managed in accordance
with the Company's investment policy and in pursuit of its investment objective,
both of which are detailed in the Strategic Report in the Annual Report. The
principal risks and their management are disclosed above and in Note 17 above.
The Company's gearing at the year end is set out below:
2023 2022
Asset Asset exposure
exposure
£'000 %1 £'000 %1
Investments 882,692 92.8 835,672 90.6
Long CFDs 130,073 13.7 178,898 19.4
---------- ---------- ----------------- -----------------
------- -------
Total asset 1,012,765 106.5 1,014,570 110.0
exposures
========== ========== ========== ==========
Shareholders' 951,049 922,599
funds
Gearing2 6.5% 10.0%
========== ==========
1Asset exposure to the market expressed as a percentage of Shareholders' funds.
2Gearing is the amount by which Asset Exposure exceeds Shareholders' funds
expressed as a percentage of Shareholders' funds.
19 Transactions with the Manager and Related Parties
FIL Investment Services (UK) Limited is the Company's Alternative Investment
Fund Manager and has delegated portfolio management and the role of company
secretary to FIL Investments International ("FII"). Both companies are Fidelity
group companies.
Details of the current fee arrangements are given in the Directors' Report in
the Annual Report and in Note 4 above. During the year, fees payable to FII for
portfolio management services were £5,698,000 (2022: £5,607,000). At the Balance
Sheet date, fees for portfolio management services of £483,000 (2022: £484,000)
were accrued and included in other creditors. FII also provides the Company with
marketing services. The total amount payable for these services during the year
was £303,000 (2022: £191,000). At the Balance Sheet date, marketing services of
£nil (2022: £13,000) were accrued and included in other creditors.
Disclosures of the Directors' interests in the ordinary shares of the Company
and Director's fees and taxable expenses relating to reasonable travel expenses
payable to the Directors are given in the Directors' Remuneration Report in the
Annual Report. In addition to the fees and taxable expenses disclosed in the
Directors' Remuneration Report, £18,000 (2022: £17,000) of Employers' National
Insurance contributions were paid by the Company. At the Balance Sheet date,
Directors' fees of £14,000 (2022: £15,000) were accrued and payable.
20 Reconciliation of Net Return/(Loss) on Ordinary Activities before Finance
Costs and Taxation to Net Cash Inflow from Operating Activities before Finance
Costs and Taxation
Year ended Year ended
31.08.23 31.08.22
£'000 £'000
Net total return/(loss) on ordinary 59,759 (41,992)
activities before finance costs and
taxation
Net capital (return)/loss on ordinary (19,717) 73,559
activities before finance costs and
taxation
---------- -----------------
-------
Net revenue return on ordinary activities 40,042 31,567
before finance costs and taxation
========== ==========
Scrip dividends - (108)
Decrease/(increase) in debtors 1,650 (3,208)
Increase in other creditors - 37
Net cash inflow from operating activities 41,692 28,288
before finance costs and taxation
========== ==========
Alternative Performance Measures
Discount/Premium
The discount/premium is considered to be an Alternative Performance Measure. It
is the difference between the NAV per ordinary share of the Company and the
ordinary share price and is expressed as a percentage of the NAV per ordinary
share. Details of the Company's discount/premium are on the Financial Highlights
page in the Annual Report and are both defined in the Glossary of Terms in the
Annual Report.
Gearing
Gearing is considered to be an Alternative Performance Measure. See Note 18
above for details of the Company's gearing.
Net Asset Value ("NAV") per Ordinary Share
The NAV per ordinary share is considered to be an Alternative Performance
Measure. See the Balance Sheet and Note 16 above for further details.
Ongoing Charges Ratio
Ongoing charges ratio are considered to be an Alternative Performance Measure.
The ongoing charges ratio has been calculated in accordance with guidance issued
by the AIC as the total of management fees and other expenses expressed as a
percentage of the average net assets throughout the year.
2023 2022
Investment management fees (£'000) 5,698 5,607
Other expenses (£'000) 948 838
Ongoing charges (£'000) 6,646 6,445
Average net assets (£'000) 949,787 934,785
Ongoing charges ratio 0.70% 0.69%
========== ==========
Revenue, Capital and Total Returns per Share
Revenue, capital and total returns per share are considered to be Alternative
Performance Measures. See the Income Statement and Note 8 above for further
details.
Total Return Performance
Total return performance is considered to be an Alternative Performance Measure.
The NAV per ordinary share total return includes reinvestment of the dividend in
the NAV of the Company on the ex-dividend date. The ordinary share price total
return includes the reinvestment of the net dividend in the month that the share
price goes ex-dividend.
The tables below provide information relating to the NAV per ordinary share and
the ordinary share price of the Company, the impact of the dividend
reinvestments and the total returns for the years ended 31 August 2023 and 31
August 2022.
2023 Net asset Share
value per price
ordinary
share
31 August 2022 284.67p 260.50p
31 August 2023 293.44p 267.50p
Change in year +3.1% +2.7%
Impact of dividend reinvestment +2.8% +2.9%
----------------- -----------------
Total return for the year +5.9% +5.6%
========== ==========
2022 Net asset Share
value per price
ordinary
share
31 August 2021 304.79p 308.50p
31 August 2022 284.67p 260.50p
Change in year -6.6% -15.6%
Impact of dividend reinvestment +2.2% +2.1%
----------------- -----------------
Total return for the year -4.4% -13.5%
========== ==========
The Annual Financial Report Announcement is not the Company's statutory
accounts. The above results for the year ended 31 August 2023 are an abridged
version of the Company's full Annual Report and Financial Statements, which have
been approved and audited with an unqualified report. The 2022 and 2023
statutory accounts received unqualified reports from the Company's Auditor and
did not include any reference to matters to which the Auditor drew attention by
way of emphasis without qualifying the reports and did not contain a statement
under s.498 of the Companies Act 2006. The financial information for 2022 is
derived from the statutory accounts for 2022 which have been delivered to the
Registrar of Companies. The 2023 Financial Statements will be filed with the
Registrar of Companies in due course.
A copy of the Annual Report will shortly be submitted to the National Storage
Mechanism and will be available for inspection at: www.morningstar.co.uk/uk/NSM
The Annual Report will be posted to Shareholders later this month and additional
copies will be available from the registered office of the Company and on the
Company's website: www.fidelity.co.uk/specialvalues where up to date information
on the Company, including daily NAV and share prices, factsheets and other
information can also be found.
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on the Company's website (or any other website) is
incorporated into, or forms part of, this announcement.
ENDS
This information was brought to you by Cision http://news.cision.com
https://news.cision.com/fidelity-special-values-plc/r/annual-financial-report,c3870347
END
(END) Dow Jones Newswires
November 07, 2023 02:00 ET (07:00 GMT)
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