TIDMSCF
RNS Number : 3394T
Schroder Income Growth Fund PLC
14 November 2019
14 November 2019
ANNUAL REPORT AND ACCOUNTS
Schroder Income Growth Fund plc (the "Company") hereby submits
its annual report for the year ended 31 August 2019 as required by
the UK Listing Authority's Disclosure Guidance and Transparency
Rule 4.1.
The Company's annual report and accounts for the year ended 31
August 2019 are also being published in hard copy format and an
electronic copy will shortly be available to download from the
Company's webpages www.schroders.co.uk/incomegrowth. Please click
on the following link to view the document:
http://www.rns-pdf.londonstockexchange.com/rns/3394T_1-2019-11-13.pdf
The Company has submitted its annual report and accounts to the
National Storage Mechanism and it will shortly be available for
inspection at www.morningstar.co.uk/uk/NSM.
Enquiries:
Matthew Riley
Schroder Investment Management Limited
Tel: 020 7658 6596
Chairman's Statement
Performance
Your Company's record of declaring a rising dividend each year
since launch remained unbroken in the year ended 31 August 2019,
with a total distribution of 12.4 pence per share representing a
rise of 5.1% over the previous year. This increase also compares
favourably to the rise of 1.7% in the Consumer Price Index over the
same period, and has helped the Company to continue meeting one of
its primary objectives: to provide real growth of income, being
growth of income in excess of the rate of inflation.
Revenue and dividend
Over the same period the revenue return per share rose by 11.2%,
partly reflecting continued dividend growth from the holdings and
also the impact of a somewhat weaker pound on foreign-currency
denominated dividends. The increase in dividend is well covered by
this year's income.
Your Company's net asset value ("NAV") fell by 1.9% in total
return terms, behind the FTSE All-Share Index, which grew by 0.4%.
The reasons for this are discussed in the Manager's Review, which
includes detailed commentary on the portfolio and its performance
during the year.
Share price discount and buybacks
Your Company's share price fell by 5.4% in total return terms
over the year reflecting a widening in the share price discount to
NAV - which increased from 4.6% to 8.3%, with an average discount
over the year of 6.5%.
This level of discount remains a concern to the board, which
continues to closely monitor it relative to the Company's peer
group and to consider whether it would be appropriate to buy back
shares, while taking into account prevailing market conditions.
While, in the event, no shares were bought back (or issued) during
the year, your board continues to believe that retaining the
ability to do so is a valuable potential tool in reducing the
volatility of the share price discount to NAV and will therefore be
seeking to renew the existing authority through the resolutions set
out in the notice of annual general meeting.
Gearing
During the year, gearing was increased from 8.3% at 1 September
2018 to 15.5% as at 31 August 2019 consistent
with the Manager's conviction in its chosen investment strategy
and the Company's investment policy. The original GBP20 million
facility with Scotiabank Europe plc expired on 22 August 2019 and
was replaced by a GBP35 million facility with Sumitomo Mitsui
Banking Corporation Europe plc, which will mature on 23 August
2020.
Board composition and succession planning
I wrote last year that the board was prioritising its succession
planning to ensure both progressive refreshment and the retention
of an appropriate blend of skills. The Nomination and Remuneration
Committee, chaired by Bridget Guerin, reviewed the board's
composition, balance and diversity over the year and as a result,
Victoria Muir was appointed as a non-executive director on 23 July
2019. Fraser McIntyre is also proposed for election by shareholders
at the AGM, as an additional non-executive director. Fraser has
extensive experience as a chief operating officer and a chief
financial officer in the investment management sector and is a
qualified accountant. The board has already benefited from
Victoria's extensive marketing and distribution skills and I am
confident that Fraser's relevant and recent financial and
operations experience will bolster the board further.
I am also pleased to announce that Bridget Guerin, an existing,
very experienced non-executive director, will succeed me as chair
of the Company after the AGM on 17 December 2019. Leadership of
your Company will therefore be in good hands.
I should also add that notwithstanding the length of service of
David Causer, who chairs your Audit Committee, the board considers
that he remains independent both in character and judgement. David
intends to retire at the Company's 2020 AGM.
As I described in the 2019 half year report, at the last AGM, a
number of votes were cast against the resolutions to re-elect David
and myself, totalling around 2% of the Company's shares in issue,
and approximately 26% of the votes cast in respect of such
resolutions.
We have liaised with the shareholder responsible for the
majority of these votes and we have been advised that it voted in
line with its policy that key board committees should be comprised
of directors with a tenure of less than nine years due to potential
concerns regarding independence. As a result, David and I received
votes against our re-appointment to the board.
The two planned director resignations described above, agreed by
the board prior to the votes against our reappointments, and the
new appointments to the board, will mitigate the concerns of this
shareholder, whilst allowing for orderly succession.
Amendment to investment policy
After careful consideration and consultation with your
investment manager, your board has decided to ask shareholders to
approve at the forthcoming AGM (details of which are set out below)
the removal of the words 'above average yielding' (preceding 'UK
Equities') from the Company's investment policy. We believe that
the current wording restricts your Manager's discretion and its
removal will allow investment in more stocks having a high
likelihood of growing their dividends materially over time,
alongside the traditional, higher-yielding stocks in the portfolio.
This change supports the Company's objective of increasing the
Company's dividend over time. The full amended text is set out on
page 50 of the 2019 annual report .
Annual general meeting
The Company's AGM will be held on Tuesday, 17 December 2019 at
12:00 noon. As in previous years, the meeting will include a
presentation by the manager on the Company's investment strategy
and market prospects, and shareholders are encouraged to
attend.
Outlook
As this is my last Chairman's Statement I am encouraged to look
back over the 14 years that I have been privileged to be a member
of your board, and in particular to record my pleasure in the
Company's success. Our objective has always been clear: to provide
real growth of income, and capital growth as a consequence. In this
context, the dividend has risen 86% since 2005, more than double
the 34% increase in UK consumer prices, while GBP1,000 invested in
the shares then - would be worth GBP2,670 today.
Will my successor, Bridget, have it so good? I suspect that the
extent of the gains may be harder to duplicate, not so much because
of factors like the Brexit turmoil and the possible cyclical
downturn in global growth, but rather because we may have moved
into an era where returns on many assets will be lower than in the
past. The corollary of a lower-return world, however, is that
income growth - the Company's raison d'être - has a demonstrable
role in many portfolios. In summary, the shares yield 4.3% at the
time of writing, 2.6% above the rise in consumer prices; your board
prides itself on the history of increasing the dividend every year
since launch; there is a good income reserve; and the Manager's
Review speaks of the opportunities to be found in the quality,
soundly-financed domestic companies in the portfolio. On this basis
I believe that our shareholders should look forward to the future
with confidence.
Ian Barby
Chairman
13 November 2019
Manager's Review
The NAV total return in the 12 months to 31 August 2019 was
-1.9%. This compares to +0.4% from the FTSE All-Share Index and
-2.2% from the median of the peer group (the AIC UK Equity Income
Sector, excluding funds that joined the sector this year). The
share price total return was -5.4% (source:
Morningstar/Schroders).
Income from investments grew 9.1%, driven by four factors.
Firstly, and most significantly, income benefited from six months
of additional gearing (of around 6% of assets) which was deployed
in March. Secondly, the Company benefited from a broadly based
increase in dividend payments from many parts of the portfolio. In
particular, we were pleased to see strong distributions from
student property provider Unite Group, speciality finance and
alternatives asset manager Intermediate Capital, leisure company
Hollywood Bowl, software business Micro Focus and Portuguese energy
company Galp Energia.
Thirdly, there was a 29% increase in special dividends, which
compares to a decline of almost half in the year ended 31 August
2018. Income from special dividends is by definition unpredictable
and we have cautioned for some time that the level of special
dividends could be at unsustainable levels. Those received this
year were from the same holdings as in 2018, namely Taylor Wimpey,
John Laing and Hollywood Bowl, as well as a new payment from miner
Rio Tinto which related to strong financial results (as distinct
from the distribution taken to capital from the company's sale of a
stake in a mine). Special dividends in 2019 are around two thirds
of those in 2017. We received an additional income payment from the
holding in British American Tobacco compared with the prior year
due to the timing of payments around the Company's year end.
Furthermore, the Company had exited positions in stocks earlier in
the year which subsequently cut their dividends (Centrica, Nordea,
Vodafone).
Lastly, sterling weakness provided a tailwind to income as the
exchange rate was beneficial both to translated dividends declared
in overseas currencies and to the boost to profits from many
companies with overseas operations.
Market background
The FTSE All-Share rose by 0.4% in what was a mixed period for
global stock markets. The final calendar quarter of 2018 was one of
the worst quarters for global equities in many years as fears over
the outlook for the world economy came to a head against the
backdrop of tightening global monetary conditions at the time,
US-China trade tensions and European political uncertainty.
Equities globally bounced back sharply in Q1 in response to dovish
commentary from central banks, with the US Federal Reserve (Fed)
and European Central Bank (ECB) tempering expectations for tighter
monetary policy. Expectations for monetary policy then shifted over
Q2, notably so in the US where the market began to speculate that
the Fed could cut interest rates.
The Fed subsequently cut base rates in July, the first reduction
since 2008. This also had the effect of spurring other central
banks to loosen monetary policy. Latest GDP data confirms that
growth in the world's major economies has decelerated in 2019, with
both the UK and German economies contracting in Q2. Meanwhile,
forward-looking indicators pointed to a further softening in the
economic and inflation outlook, with the prognosis for
manufacturing particularly weak. Brexit and domestic political
uncertainty remained elevated as Boris Johnson took over as the
UK's new prime minister on a "do or die" pledge to depart the EU by
the revised exit date of 31 October.
Portfolio performance
The Company's NAV total return underperformed the FTSE All-Share
Index, as stock selection detracted from relative performance.
The Company's lack of exposure for the majority of the period to
beverage firm Diageo, which has been sought after by investors for
its significant defensive growth characteristics, has been the
greatest single stock detractor of relative performance. We do not
invest in the company for valuation reasons; believing the stock's
attractive characteristics are more than reflected in current
valuations.
Stock selection in industrials also detracted from performance.
The holding in security services company G4S has struggled but we
have increased the position recently, encouraged by solid trading
in the security business and the potential for strategic value
creation from the sale of their customer cash management division.
Meanwhile, not owning certain highly valued perceived growth
stocks, such as credit and marketing services business Experian,
also detracted.
The Company's holding in broadcasting services company ITV
weighed on relative returns as investor concerns over both
structural (Free-to-air model versus subscription service models)
and cyclical (Brexit related advertising) issues depressed the
share price.
Bookmaking company William Hill has been negatively impacted by
profit headwinds brought on by tighter regulation in the UK and
investor concerns about the scale of investment required for its US
expansion. However, we remain positive as management change and an
exciting US outlook have led to some recovery in the stock's
performance more recently.
Our holding in overseas company Galp Energia suffered as a
result of the decline in oil prices. We maintain our conviction in
the company because of its rapidly growing Exploration &
Production division, driven principally by offshore Brazil
operations, as well as the potential for attractive dividend growth
compared to other oil companies.
On the positive side, performance benefited from stock selection
in mid-sized companies. Shares in Pets At Home have done well on
the back of better-than-expected results and growing market
confidence in the company's veterinary business strategy. Shares in
designer, builder and investor in GP and primary care buildings
Assura have benefited from the reduction in bond yields.
Intermediate Capital Group shares were re-rated in recognition of
its strong franchise within alternatives investment management.
Lastly, shares in John Laing, one of the top contributors last
year, re-rated on increased optimism about the prospects of growth
in the US infrastructure market.
Portfolio activity
We have continued to increase the Company's UK domestic
exposure, adding to selected companies on share price weakness and
where valuations are attractive, such as Lloyds Banking, Tesco and
new holdings in Whitbread and Crest Nicholson.
Whitbread is the UK's largest operator of hotels, restaurants
and coffee shops. We believe the sale of Costa Coffee at a
significant premium to expectations gives financial flexibility to
invest in its remaining business whilst maintaining a strong
balance sheet. The proceeds enable continued expansion of UK hotels
and accelerated development in Germany, a bolstering of the pension
fund and the potential for enhanced shareholder returns. The market
underappreciates the quality of the brand and the growth potential
of the franchise due to fears over the prospects for UK consumer
businesses in the face of Brexit. We have been prepared to take a
longer-term view given the strength of the balance sheet and the
business model.
Weak trading in house builder Crest Nicholson's end markets
resulted in a period of relatively poor share performance. With the
shares trading at around tangible book value, we saw this as
offering compelling value in a sector which generates attractive
returns and has favourable long-term supply/demand dynamics. These
characteristics are being muddied by short-term trading concerns,
in some part related to Brexit. We are granted additional comfort
by the strength of the balance sheet and management team buying
shares. The shares yielded over 10% on purchase and we considered
the dividend to be sustainable given it was twice covered by
earnings. The purchase was in part funded by switching out of the
longstanding holding in Bellway.
Later in the Company's financial year, we added Empiric Student
Property REIT, an owner and operator of student accommodation in
university towns. The stock had de-rated from a premium to net
assets to a discount during 2017 as management failed to control
administration costs as it moved to a more full integrated
operational business. This also led to a rebasing of the dividend
and a change in management. We believe the shares offer an
attractive opportunity given cost control has tightened and the
dividend (c.5% yield) appears sustainable.
Other additions have included G4S as noted above, and BAE
Systems on weakness. We believe investors are giving too little
credit to the strength of its order book. We also increased
exposure to Pearson, the publishing and education firm, where we
were more confident in the group's medium-term prospects than what
was in our view a pessimistic market consensus. Unfortunately, in
news after the Company's year end, the company has warned that this
year's profits would be at the low end of consensus.
The additions have in part been funded by sales in Centrica,
Halfords and Vodafone, where we believed weak operating performance
threatened the sustainability of the dividends. We have also
reduced the exposure to industrials given the deterioration in
global growth. We sold out of paper manufacturer Smurfit Kappa,
autos and aerospace components manufacturer Melrose and mining and
oil & gas services company Weir. Part of the proceeds were used
to augment the holding in specialty chemicals company Johnson
Matthey, where we believe the valuation is unduly low.
Regarding the Company's overseas exposure, we took the decision
to sell out of the long-standing position in Nordea following
another quarter of poor results. Revenues declined further with
little prospect of the inflection point we had been looking for.
Cost control was insufficient to prevent further slippage in
earnings forecasts, leaving dividends in both the current and next
year exposed with cover reducing to 91% and 101% respectively. Our
confidence in the path of future revenues eroded such that we
believed a dividend cut was a strong possibility and post period
end has become a reality. The position in German property company
Deutsche Wohnen was also sold due to the fact that politicians in
Berlin were proposing to cap rental increases, thereby negating our
investment thesis. Proceeds were subsequently redeployed in Empiric
Student Property REIT, mentioned above.
We have reduced the positions in Aviva and HSBC in favour of
Legal & General and Lloyds Banking. We believe L&G has
brighter prospects for growth, while we believe HSBC is
fully-valued and Lloyds attractively priced.
Outlook
The global nature of UK equities has resulted in international
developments setting the tone for the market. Recent global
economic data increasingly points to deteriorating fundamentals.
This has caused central banks to again loosen monetary policy in
order to try and keep economies stable.
One particular market distortion resulting from the loose
monetary policy of the last decade has been the outperformance of
growth companies versus value stocks. Growth has become an
increasingly sought after commodity and these companies have been
valued off the back of very low bond yields (which have declined
further over the course of the period), a dangerous yardstick to
use.
As bottom-up stock pickers, our job is to calculate the
fundamental value of a business in order to identify mispriced
opportunities and dividend opportunities that will help the
portfolio deliver attractive levels of income that grow in real
terms. However, given the valuation distortions, while we admire
many of the aspects of the business models of some highly-valued
'quality growth' stocks, in many instances we cannot justify buying
the shares at the current extended valuations. Accordingly the
portfolio has a slight bias towards more lowly-valued stocks, where
we can find companies that are not priced for perfection. We
continue to seek out companies able to grow their profits and
dividends, but where valuations are reasonable, such as BAE
Systems, Johnson Matthey, Intermediate Capital and Rio Tinto, as
well as certain turnaround situations where we have confidence in
management's ability to effect change or to release value to the
benefit of shareholders, such as GlaxoSmithKline, G4S and
Burberry.
In addition to the global trends influencing UK equities, Brexit
continues to dominate sentiment, creating considerable uncertainty
for the UK economy and political environment. As a result, we are
presented with a compelling valuation opportunity in some good
quality, soundly-financed domestic companies taking a long-term
perspective. This is reflected in holdings such as Crest Nicholson,
Hollywood Bowl, Legal & General, Lloyds Bank, Pets At Home,
Tesco and Whitbread. We continue to be very selective in the types
of business model and financial characteristics we choose to invest
in. We are wary of companies whose business models are particularly
susceptible to disruption, such as areas of general retail. In
addition, we place a large emphasis on balance sheets and
accounting, as a weak balance sheet can hamper the ability of a
company to invest in its operations or respond to changing market
conditions.
Dividend outlook
The Company's future income is likely to be subject to foreign
exchange moves in either direction given the current political
situation in the UK. Approximately 30% of income is receivable in
foreign currency. While in absolute terms a strengthening of
sterling would provide a headwind to the Company's income, it would
be less than that experienced by the market as a whole given that
the Company is overweight the domestic areas of the market.
Looking at UK market dividends more generally, there has been a
moderation in underlying dividend growth. Headline rates have
remained buoyant but this reflects both the exchange rate tailwind
of sterling weakness, which may change depending on how Brexit
plays out, and from a substantial special dividend contribution,
which may be a consequence of corporate uncertainty over the
economic environment and a lack of confidence to invest for
longer-term projects.
Investment policy
We remain disciplined investors using a long-term fundamental
approach and the team's significant investment experience. We are
acutely conscious of the need to balance the risks relative to the
potential reward from opportunities that can be thrown up in such
unpredictable markets. Our investment process focuses on building a
diversified portfolio within a risk-controlled framework, aiming to
deliver attractive levels of income growth ahead of inflation over
time. This is reflected in some of the Company's highest conviction
positions, such as BAE Systems, GlaxoSmithKline and John Laing
Group.
We continue to actively monitor the holdings and the investment
universe to identify mispriced opportunities. We are working
closely with our in-house analysts who provide proprietary research
to help to identify attractive investment candidates and to assess
the validity of the investment case for current holdings. We
continue to prioritise balance sheet strength and sustainable
dividend yields, and have kept faith in stocks with short-term
issues provided we have conviction in the long-term investment
case.
Schroder Investment Management Limited
13 November 2019
Principal risks and uncertainties
The board is responsible for the Company's system of risk
management and internal control and for reviewing its
effectiveness. The board has adopted a detailed matrix of principal
risks affecting the Company's business as an investment trust and
has established associated policies and processes designed to
manage and, where possible, mitigate those risks, which are
monitored by the audit and risk committee on an ongoing basis. This
system assists the board in determining the nature and extent of
the risks it is willing to take in achieving the Company's
strategic objectives. The principal risks, emerging risks and the
monitoring system are also subject to robust assessment at least
annually. The last assessment took place in October 2019.
Although the board believes that it has a robust framework of
internal control in place this can provide only reasonable, and not
absolute, assurance against material financial misstatement or loss
and is designed to manage, not eliminate, risk.
The principal risks and uncertainties faced by the Company have
remained unchanged throughout the year under review, save for the
addition of currency and cyber risk.
Actions taken by the board and, where appropriate, its
committees, to manage and mitigate the Company's principal risks
and uncertainties are set out in the table below.
Emerging risks and uncertainties
During the year, the board also discussed and monitored risks
that could potentially impact the Company's ability to meet its
strategic objectives. These were political risk and climate change
risk. The board has determined that they are not currently material
for the Company.
Political risk includes Brexit. The board continues to monitor
developments for the UK's departure from the European Union and to
assess the potential consequences for the Company's future
activities, but believes that the Company's investments'
geographically diversified exposures, positions the Company to be
suitably insulated from Brexit related risks. The board is also
mindful that changes to public policy in the UK, or in other
regions in which the Company invests, could impact the Company in
the future.
Climate change risk includes how climate change could affect the
Company's investments, and potentially shareholder returns.
Risk Mitigation and management
Strategic
The Company's investment objectives The appropriateness of the Company's
may become out of line with the investment remit is periodically
requirements of investors, resulting reviewed and success of the Company
in a wide discount of the share in meeting its stated objectives
price to underlying NAV per share is monitored.
Share price relative to NAV per
share is monitored and the use of
buy back authorities is considered
on a regular basis.
Marketing and distribution activity
is actively reviewed.
Proactive engagement with investors.
The Company's cost base could become The ongoing competitiveness of all
uncompetitive, particularly in light service provider fees is subject
of open-ended alternatives. to periodic benchmarking against
its competitors.
Annual consideration of management
fee levels is undertaken.
Investment management
The Manager's investment strategy, Review of: the Manager's compliance
if inappropriate, may result in with the agreed investment restrictions,
the Company underperforming the investment performance and risk
market and/or peer group companies, against investment objectives and
leading to the Company and its objectives strategy; relative performance;
becoming unattractive to investors. the portfolio's risk profile; and
appropriate strategies employed
to mitigate any negative impact
of substantial changes in markets.
Annual review of the ongoing suitability
of the Manager, including resources
and key personnel risk.
Market
The Company is exposed to the effect The risk profile of the portfolio
of market fluctuations due to the is considered and appropriate strategies
nature of its business. A significant to mitigate any negative impact
fall in equity markets could have of substantial changes in markets
an adverse impact on the market are discussed with the Manager.
value of the Company's underlying
investments.
Currency
Currency risk is the risk that changes The Manager monitors the impact
in foreign currency exchange rates of foreign currency movements on
impact negatively the value or level the portfolio and is able to rebalance
of dividend of the Company's investments. the portfolio towards stocks which
are less impacted by changes in
foreign currency exchange rates
if required.
Custody
Safe custody of the Company's assets The depositary reports on the safe
may be compromised through control custody of the Company's assets,
failures by the depositary, including including cash and portfolio holdings,
cyber hacking. which are independently reconciled
with the Manager's records.
Review of audited internal controls
reports covering custodial arrangements
is undertaken.
An annual report from the depositary
on its activities, including matters
arising from custody operations
is reviewed.
Gearing and leverage
The Company utilises a credit facility. Gearing is monitored and strict
This arrangement increases the funds restrictions on borrowings are imposed:
available for investment through gearing continues to operate within
borrowing. While this has the potential pre-agreed limits so as not to exceed
to enhance investment returns in 25% of shareholders' funds.
rising markets, in falling markets
the impact could be detrimental
to performance.
Accounting, legal and regulatory
In order to continue to qualify Confirmation of compliance with
as an investment trust, the Company relevant laws and regulations by
must comply with the requirements key service providers.
of section 1158 of the Corporation
Tax Act 2010. Shareholder documents and announcements,
including the Company's published
Breaches of the UK Listing Rules, annual report are subject to stringent
the Companies Act or other regulations review processes.
with which the Company is required
to comply, could lead to a number Procedures have been established
of detrimental outcomes. to safeguard against disclosure
of inside information.
Service provider
The Company has no employees and Service providers are appointed
has delegated certain functions subject to due diligence processes
to a number of service providers, and with clearly-documented contractual
principally the Manager, depositary arrangements detailing service expectations.
and registrar. Failure of controls,
including as a result of cyber hacking, Regular reports are provided by
and poor performance of any service key service providers and the quality
provider could lead to disruption, of services provided are monitored.
reputational damage or loss.
Review of annual audited internal
controls reports from key service
providers, including confirmation
of business continuity arrangements.
Cyber
The Company's service providers Service providers report on cyber
are all exposed to the risk of cyber risk mitigation and management at
attacks. Cyber attacks could lead least annually, which includes confirmation
to loss of personal or confidential of business continuity capability
information or disrupt operations. in the event of a cyber attack.
Risk assessment and internal controls
Risk assessment includes consideration of the scope and quality
of the system of internal controls operating within key service
providers, and ensures regular communication of the results of
monitoring by such providers to the audit and risk committee,
including the incidence of significant control failings or
weaknesses that have been identified at any time and the extent to
which they have resulted in unforeseen outcomes or contingencies
that may have a material impact on the Company's performance or
condition. No significant control failings or weaknesses were
identified from the audit and risk committee's ongoing risk
assessment which has been in place throughout the financial year
and up to the date of this report.
A full analysis of the financial risks facing the Company is set
out in note 19 on pages 45 to 48 of the 2019 annual report.
Viability statement
The directors have assessed the viability of the Company over a
five year period, taking into account the Company's position at 31
August 2019 and the potential impact of the principal risks and
uncertainties it faces for the review period.
A period of five years has been chosen as the board believes
that this reflects a suitable time horizon for strategic planning,
taking into account the investment policy, liquidity of
investments, potential impact of economic cycles, nature of
operating costs and dividends.
In their assessment the directors have considered each of the
Company's principal risks and uncertainties detailed on pages 13
and 14 of the 2019 annual report and in particular the impact of a
significant fall in the UK equity market on the value of the
Company's investment portfolio. The directors have also considered
the Company's income and expenditure projections and the fact that
the Company's investments comprise readily realisable securities
which can be sold to meet funding requirements if necessary.
Based on the Company's processes for monitoring operating costs,
the share price discount, the Manager's compliance with the
investment objectives, asset allocation, the portfolio risk
profile, gearing, counterparty exposure, liquidity risk and
financial controls, the directors have 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 five
year period to 31 August 2024.
In reaching this decision, the board has taken into account the
Company's next continuation vote, to be put forward at the AGM in
2020. The directors have no reason to believe that such a
resolution will not be passed by shareholders.
Going concern
Having assessed the principal risks and the other matters
discussed in connection with the viability statement set out above,
and the "Guidance on Risk Management, Internal Control and Related
Financial and Business Reporting" published by the Financial
Reporting Council ("FRC") in 2014, the directors consider it
appropriate to adopt the going concern basis in preparing the
accounts.
Statement of Directors' Responsibilities in respect of the
Annual Report and Accounts
The directors are responsible for preparing the annual report,
Strategic Report, the Directors' Report, the Corporate Governance
Statement, the Directors' Remuneration Report and the financial
statements in accordance with applicable law and regulation.
Company law requires the directors to prepare financial
statements for each financial year. Under that law the directors
have prepared the financial statements in accordance with United
Kingdom Generally Accepted Accounting Practice (United Kingdom
Accounting Standards and applicable law). 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 return or loss of the Company for
that period. In preparing these financial statements, the directors
are required to:
- select suitable accounting policies and then apply them consistently;
- state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the financial statements;
- make judgements and accounting estimates that are reasonable and prudent; 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 enable them to ensure that
the financial statements and the Directors' Remuneration Report
comply with the Companies Act 2006.
The directors 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.
The manager is responsible for the maintenance and integrity of
the Company's webpages. Legislation in the United Kingdom governing
the preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
The directors consider that the annual report and accounts,
taken as a whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the Company's
position and performance, business model and strategy.
Each of the directors, whose names and functions are listed on
pages 16 and 17 of the 2019 annual report, confirm that to the best
of their knowledge:
- the Company's financial statements, which have been prepared
in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS 102
"The Financial Reporting Standard applicable in the UK and Republic
of Ireland" and applicable law), give a true and fair view of the
assets, liabilities, financial position and loss of the Company;
and
- the Strategic Report includes a fair review of the development
and performance of the business and the position of the Company,
together with a description of the principal risks and
uncertainties that it faces.
Income Statement for the year ended 31 August 2019
2019 2018
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------- ------- -------- -------- ------- ------- -------
(Losses)/gains on
investments held at
fair value through
profit or loss - (13,721) (13,721) - 752 752
Net foreign currency
gains/(losses) - 23 23 - (24) (24)
Income from investments 11,023 673 11,696 10,102 - 10,102
Other interest receivable
and similar income 6 - 6 11 - 11
-------------------------- ------- -------- -------- ------- ------- -------
Gross return/(loss) 11,029 (13,025) (1,996) 10,113 728 10,841
Investment management
fee (713) (713) (1,426) (853) (853) (1,706)
Administrative expenses (350) - (350) (318) - (318)
-------------------------- ------- -------- -------- ------- ------- -------
Net return/(loss)
before finance costs
and taxation 9,966 (13,738) (3,772) 8,942 (125) 8,817
Finance costs (181) (181) (362) (101) (101) (202)
-------------------------- ------- -------- -------- ------- ------- -------
Net return/(loss)
on ordinary activities
before taxation 9,785 (13,919) (4,134) 8,841 (226) 8,615
Taxation on ordinary
activities (41) - (41) (74) - (74)
-------------------------- ------- -------- -------- ------- ------- -------
Net return /(loss)
on ordinary activities
after taxation 9,744 (13,919) (4,175) 8,767 (226) 8,541
-------------------------- ------- -------- -------- ------- ------- -------
Return/(loss) per
share 14.19p (20.26)p (6.07)p 12.76p (0.33)p 12.43p
The "Total" column of this statement is the profit and loss
account of the Company. The "Revenue" and "Capital" columns
represent supplementary information prepared under guidance issued
by The Association of Investment Companies. The Company has no
other items of other comprehensive income, and therefore the net
return on ordinary activities after taxation is also the total
comprehensive income for the year.
All revenue and capital items in the above statement derive from
continuing operations. No operations were acquired or discontinued
in the year.
Statement of Changes in Equity for the year ended 31 August
2019
Called-up Capital Warrant Share
share Share redemption exercise purchase Capital Revenue
capital premium reserve reserve reserve reserves reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------ --------- -------- ----------- --------- --------- --------- -------- --------
At 31 August 2017 6,869 7,404 2,011 1,596 34,936 153,627 10,275 216,718
Net (loss)/return
on ordinary activities - - - - - (226) 8,767 8,541
Dividends paid in
the year - - - - - - (8,519) (8,519)
------------------------ --------- -------- ----------- --------- --------- --------- -------- --------
At 31 August 2018 6,869 7,404 2,011 1,596 34,936 153,401 10,523 216,740
Net (loss)/return
on ordinary activities - - - - - (13,919) 9,744 (4,175)
Dividends paid in
the year - - - - - - (8,107) (8,107)
------------------------ --------- -------- ----------- --------- --------- --------- -------- --------
At 31 August 2019 6,869 7,404 2,011 1,596 34,936 139,482 12,160 204,458
------------------------ --------- -------- ----------- --------- --------- --------- -------- --------
Statement of Financial Position at 31 August 2019
2019 2018
GBP'000 GBP'000
------------------------------------------------- -------- --------
Fixed assets
Investments held at fair value through profit or
loss 234,862 233,741
Current assets
Debtors 2,009 1,900
Cash at bank and in hand 347 1,978
------------------------------------------------- -------- --------
2,356 3,878
------------------------------------------------- -------- --------
Current liabilities
Creditors: amounts falling due within one year (32,760) (20,879)
------------------------------------------------- -------- --------
Net current liabilities (30,404) (17,001)
------------------------------------------------- -------- --------
Total assets less current liabilities 204,458 216,740
------------------------------------------------- -------- --------
Net assets 204,458 216,740
------------------------------------------------- -------- --------
Capital and reserves
Called-up share capital 6,869 6,869
Share premium 7,404 7,404
Capital redemption reserve 2,011 2,011
Warrant exercise reserve 1,596 1,596
Share purchase reserve 34,936 34,936
Capital reserves 139,482 153,401
Revenue reserve 12,160 10,523
------------------------------------------------- -------- --------
Total equity shareholders' funds 204,458 216,740
------------------------------------------------- -------- --------
Net asset value per share 297.66p 315.54p
Notes to the accounts
1. Accounting Policies
Basis of accounting
The accounts are prepared in accordance with the Companies Act
2006, United Kingdom Generally Accepted Accounting Practice ("UK
GAAP"), in particular in accordance with Financial Reporting
Standard (FRS) 102 "The Financial Reporting Standard applicable in
the UK and Republic of Ireland", and with the Statement of
Recommended Practice "Financial Statements of Investment Trust
Companies and Venture Capital Trusts" (the "SORP") issued by the
Association of Investment Companies in November 2014 and updated in
February 2018. All of the Company's operations are of a continuing
nature.
2. Taxation on ordinary activities
The Company's effective corporation tax rate is nil, as
deductible expenses exceed taxable income. Taxation on ordinary
activities comprises irrecoverable overseas withholding tax.
3. Dividends
Dividends paid and declared
2019 2018
GBP'000 GBP'000
------------------------------------------------------ ------- -------
2018 fourth interim dividend of 4.6p (2017: 5.2p) 3,160 3,572
First interim dividend of 2.4p (2018: 2.4p) 1,649 1,649
Second interim dividend of 2.4p (2018: 2.4p) 1,649 1,649
Third interim dividend of 2.4p (2018: 2.4p) 1,649 1,649
------------------------------------------------------ ------- -------
Total dividends paid in the year 8,107 8,519
------------------------------------------------------ ------- -------
2019 2018
GBP'000 GBP'000
------------------------------------------------------ ------- -------
Fourth interim dividend declared of 5.2p (2018: 4.6p) 3,572 3,160
------------------------------------------------------ ------- -------
All dividends paid and declared to date have been paid, or will
be paid, out of revenue profits.
4. (Loss)/return per share
2019 2018
GBP'000 GBP'000
---------------------------------------------------- ---------- ----------
Revenue return 9,744 8,767
Capital loss (13,919) (226)
---------------------------------------------------- ---------- ----------
Total (loss)/return (4,175) 8,541
---------------------------------------------------- ---------- ----------
Weighted average number of ordinary shares in issue
during the year 68,688,343 68,688,343
Revenue return per share 14.19p 12.76p
Capital loss per share (20.26)p (0.33)p
---------------------------------------------------- ---------- ----------
Total (loss)/return per share (6.07)p 12.43p
---------------------------------------------------- ---------- ----------
5. Called-up share capital
2019 2018
GBP'000 GBP'000
---------------------------------------------------- ------- -------
Ordinary shares allotted, called-up and fully paid:
68,688,343 (2018: 68,688,343) shares of 10p each 6,869 6,869
---------------------------------------------------- ------- -------
6. Net asset value per share
2019 2018
----------------------------------------------------- ---------- ----------
Net assets attributable to the Ordinary shareholders
(GBP'000) 204,458 216,740
Shares in issue at the year end 68,688,343 68,688,343
----------------------------------------------------- ---------- ----------
Net asset value per share 297.66p 315.54p
----------------------------------------------------- ---------- ----------
7. Disclosures regarding financial instruments measured at fair value
The Company's financial instruments within the scope of FRS 102
that are held at fair value comprise its investment portfolio.
FRS 102 requires financial instruments to be categorised into a
hierarchy consisting of the three levels below.
Level 1 - valued using unadjusted quoted prices in active
markets for identical assets.
Level 2 - valued using observable inputs other than quoted
prices included within Level 1.
Level 3 - valued using inputs that are unobservable.
Details of the valuation techniques used by the Company are
given in note 1(b) on page 38 of the 2019 annual report.
At 31 August 2019, all investments in the Company's portfolio
are categorised as Level 1 (2018: same).
8. Status of announcement
2018 Financial Information
The figures and financial information for 2018 are extracted
from the published annual report and accounts for the year ended 31
August 2018 and do not constitute the statutory accounts for that
year. The 2018 annual report and accounts have been delivered to
the Registrar of Companies and included the Report of the
Independent Auditors which was unqualified and did not contain a
statement under either section 498(2) or section 498(3) of the
Companies Act 2006.
2019 Financial Information
The figures and financial information for 2019 are extracted
from the annual report and accounts for the year ended 31 August
2019 and do not constitute the statutory accounts for the year. The
2019 annual report and accounts include the Report of the
Independent Auditors which is unqualified and does not contain a
statement under either section 498(2) or section 498(3) of the
Companies Act 2006. The 2019 annual report and accounts will be
delivered to the Registrar of Companies in due course.
Neither the contents of the Company's webpages nor the contents
of any website accessible from hyperlinks on the Company's webpages
(or any other website) is incorporated into, or forms part of, this
announcement.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR FFAFWDFUSEEF
(END) Dow Jones Newswires
November 14, 2019 02:00 ET (07:00 GMT)
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