Edinburgh Investment Trust Plc - Final Results and Declaration of Special Dividend
ANNUAL FINANCIAL REPORT
FOR THE YEAR ENDED
Financial Information and Performance Statistics
Year Ended Year Ended Total Return(1)(2)(3) (with dividends reinvested) 31 March 2021 31 March 2020 Net asset value (NAV) – debt at market value(1) +34.8% -26.7% Share price +46.4% -29.4% FTSE All-Share Index +26.7% -18.5%
The Company’s benchmark is the FTSE All-Share Index.
At 31 March At 31 March Change Capital Return(1) 2021 2020 % NAV – debt at market value 628.29p 490.40p +28.1 Share price(2) 600.00p 434.00p +38.2 FTSE All-Share Index(2) 3,831.05 3,107.42 +23.3 Discount(1)(3) – debt at market value (4.5)% (11.5)% Gearing (debt at market value)(1)(3) – gross 10.1% 13.4% gearing – net gearing 7.1% 8.3%
Year Ended Year Ended Change Revenue and Dividends(3) 31 March 2021 31 March 2020 % Revenue return per ordinary share 16.21p 27.83p -41.8 Dividends – first interim 6.00p 6.40p – second interim 6.00p 6.40p – third interim 6.00p 6.40p – proposed final 6.00p 9.45p – total dividends (excl special 24.00p 28.65p -16.2 dividend) – declared special dividend 4.65p nil – total dividends 28.65p 28.65p nil Retail Price Index(2) – annual change 1.5% 2.6% Consumer Price Index(2) – annual change 0.7% 1.5% Dividend Yield(1) 4.8% 6.6% Ongoing Charges Ratio(1)(3)(4) 0.43% 0.55%
(1) These terms are defined in the Glossary of Terms and Alternative Performance Measures, including reconciliations, on pages 79 to 81 of the Annual Report. NAV with debt at market value is widely used by the investment company sector for the reporting of performance, premium or discount, gearing and ongoing charges. Dividend yield is inclusive of the
(2) Source: Refinitiv.
(3) Key Performance Indicator.
(4) The Manager waived its investment management fee for the first three months of its appointment from
This time last year I began this statement describing the challenging times that faced us both economically and socially. This year, those challenges are still here but we are beginning to see some light at the end of the pandemic tunnel. Still, I would again like to take this opportunity to say that I hope you remain safe and well.
Since this marks the first full year of Majedie Asset Management’s tenure as portfolio manager, I think it would be helpful to start with a reminder of the context in which we should think about how to evaluate the performance of the Company.
You will no doubt be aware that the Company has two objectives:
1. An increase of the Net Asset Value per share in excess of the growth in the FTSE All-Share Index; and 2. Growth in dividends per share in excess of the rate of
In the five years before the start of the current period, the Company met its objective in terms of dividends – in fact, dividends grew by 3.7% per annum compared with 2.6% per annum for the
As I explained in last year’s annual report, in
We were impressed in particular by James’ emphasis on taking a ‘total return’ approach to stock selection and portfolio composition: to simplify considerably, this is an analytical approach that emphasises the long term returns from capital investment by companies as well as their immediate dividend paying capacity.
This was (and is) an important issue in current market circumstances. Many companies, such as banks, have been asked to reduce dividend payments because of pressures from regulators; competition (where, for example, the emergence of companies such as Amazon has seriously affected the profitability of high street retailers); environmental changes (such as those facing energy companies); and lastly the pandemic itself. It is worth noting that - while this is a worldwide issue - its impact on equity valuations is greater in the
On top of this, shareholders will be aware that in the past year, the prospect of a gradual long-term rise in interest rates has begun to be priced in the markets. This has come through a rise in long term interest rates as well as through market talk – but as yet no tangible sign – of a sustained rise in inflation. A sustained rise in long term interest rates – and its consequence, a steepening of the yield curve – would represent a significant change in market conditions.
This is a difficult environment for all portfolio managers. The Board believes that
Against this background, I am pleased to report that the Company’s Net Asset Value (NAV) on a total return basis, i.e. including reinvested dividends, returned 34.8% over the financial year ended
Further information on the portfolio, and contributors to returns, is set out in the Manager’s Report.
I would like to note that performance has come from a diversified range of stocks, with an additional boost from the effect of the Company’s borrowings. The portfolio is relatively concentrated, containing approximately 50 stocks. This means shareholders should expect performance to come in a lumpy fashion, as the last year illustrates: the bulk of the outperformance has come in the last six months, since the announcement of vaccines. Nonetheless, while still early days for Majedie in their role as the Company’s manager, I am delighted that they have made such a strong start – particularly given the challenging market backdrop.
This rebasing reflects as discussed above the fact that the overall yield on the
The Board recognises the importance of dividends to shareholders, especially in an uncertain environment and at a time when other sources of income are under pressure. An attractive feature of investment trusts is the ability to use revenue reserves, built up in years when revenues exceed dividends paid to shareholders, to smooth dividend distributions in years when revenues are weaker. On this front, your Company is in a strong position. Reflecting this, the Board will use revenue reserves to maintain the total dividend per share this year at the 2019/20 level through the payment of a special dividend. Therefore, in addition to recommending a final dividend of 6.00p per share, which shareholders will be asked to approve at the Annual General Meeting, the Board has decided to pay a special dividend of 4.65p. This will supplement the underlying distribution of 24.00p and result in a total distribution of 28.65p, unchanged from the previous financial year.
SHARE PRICE DISCOUNT TO NET ASSET VALUE
It is encouraging that the discount has narrowed by 7% percentage points in the last 12 months. This reflects not only improved sentiment towards the
The Board’s policy continues to be to manage the discount actively through share buy backs as appropriate. During the year we instructed the Company’s broker to repurchase 2,500,000 shares in the market. The amount and cumulative effect of these repurchases is noted in the table on page 15 of the Annual Report. The last buy back took place on
REAPPOINTMENT OF MANAGER
The Board considers that the reappointment of Majedie is in the best interest of shareholders.
At an operational level, the change this time last year to the new manager and a new company secretary, PraxisIFM, proceeded smoothly. I would like to thank the many colleagues both at Majedie and at PraxisIFM who have worked so hard to deliver this result, especially given the difficult circumstances due to the pandemic.
ANNUAL GENERAL MEETING (‘AGM’)
Details of the AGM are given in the Notice of Annual General Meeting on pages 73 to 76 of the Annual Report. We are planning for this event to take place in person. We had our first in person Board meeting last week and we look forward to meeting as many of you as possible in person in
Also standing down at this year’s AGM after ten years of service on the Board is
I am immensely grateful to both Max and Gordon for the huge contributions that both have made to the Board’s work and effectiveness over the years.
I was pleased to welcome
We will be asking for shareholders’ approval at the AGM for some changes to the Directors’ remuneration. Further details are set out on page 41 of the Annual Report.
Finally, as shareholders will be aware, my own term as a Director will come to an end at next year’s AGM in
I would like to take this opportunity to thank all the Directors on behalf of shareholders for the contributions that they have made in ensuring that the Company is better able to meet its objectives and satisfy the expectations of shareholders.
The successful development of vaccines against COVID-19 has been a major turning point, at least for those developed economies fortunate enough to be experiencing their roll out. Yet, the pandemic is far from over, as current events in parts of the world such as
In closing, I would like to thank shareholders for their patience in recent years.
Portfolio Manager’s Report
For the year ended
It has been our great privilege to complete our first full year as manager of your historic and prestigious Company. This has also been a year quite unlike any other that we have experienced, with an ongoing pandemic and stock market volatility. Nevertheless, we have maintained our focus on the two core objectives of the Company:
1. An increase of the Net Asset Value per share in excess of the growth in the FTSE All-Share Index; 2. Growth in dividends per share in excess of the rate of
To do this, we invest across global markets, with at least 80% of the Company's portfolio by value listed in the
The end result for shareholders is a differentiated portfolio that should enable the Company to meet its two investment objectives set out above. Our aspiration is for the Company to be a core part of investors' portfolios.
We have set out our core investment beliefs in more detail on page 13 of the Annual Report: we hope that these provide shareholders with a clear explanation of our process. We also keep the Company's website up to date with a range of materials including factsheets, videos, and other pieces of intellectual capital that explain our views and approach. Shareholders can subscribe to notifications for updates at www.edinburghinvestmenttrust.com.
INVESTMENT RESULTS OVER THE COMPANY'S FINANCIAL YEAR
Stock markets have staged a major recovery over this period. The Company's previously disappointing returns, prior to our appointment, were measured up to a point at which the stock market was not far from its pandemic-driven lows. The last year therefore represents a welcome recovery, more so as since 2016 the Company's shares had lagged the index. It is therefore pleasing to be able to report a rise in the Company's net asset value per share ('NAV') of 34.8%, and a share price rise of 46.4%, both on a total return basis. Over the same period, the FTSE All-Share Index returned 26.7%. The share price outperformed the NAV, reflecting a closing of the 'discount' – the term for the percentage by which the share price is below NAV. The discount moved in from 11.5% on
In our view, a twelve-month period is too short to assess an investment manager's performance. A three-year period is likely to be more realistic, particularly as we take multi-year views when assessing and making investment decisions. At this stage, we would simply note that things that are firmly in our control, such as the work ethic of our investment team, have been effective and productive – despite most of us working from home for much of the last year. Investment idea generation has been strong, with many of the Company's new holdings since our appointment contributing to the positive results of the last year. As we now begin to return to our open-plan
Given our stock-driven approach and bearing in mind our caution that one year is too short a period to assess manager skill, a factual appraisal of the positive and negative stock contributors should give shareholders an early sense of our investment approach. We will begin with those stocks that hindered returns. The key point here is that the portfolio avoided stocks with any major problems or issues and performance detractors were typically those companies whose shares modestly underperformed the market. Indeed, somewhat counterintuitively, one of the biggest negatives was the holding in Tesco, which had a strong year operationally. Its share price was subdued, even though it – along with the other
In terms of stock positive contributor, we are encouraged to see holdings in mid-sized businesses making prominent contributions. Top of the list is Ashtead, a business which rents out industrial equipment to a wide variety of commercial customers. As this description suggests, it is a cyclical business, with a positive structural undercurrent, and thus it has benefitted from economies emerging from lockdowns. For us, the more important feature is that management have maintained a clear focus on the long-term success of the business, despite the many challenges of the last fifteen months. This is a great example of what we describe as a Darwinian winner: one that is gently crunching the competition. It is emerging from the economic crisis even stronger.
Another positive contributor is a stock with an improving ESG profile: Weir. This business, with a rich Scottish heritage, has become a key supplier of engineering solutions that help improve their customers' safety, efficiency and sustainability. These customers are often major mining companies. In a similar vein, a third notable positive contributor is itself a miner: Anglo American. It has benefitted from rising commodity prices over the last year. More importantly, it has made changes to the profile of its business, including the welcome sale of its thermal coal assets – something we have been engaging with management on for some time.
As the above examples should illustrate, throughout our stock deliberations we are focused on the ESG profile of the businesses in which we invest the Company's assets. For us, ESG is not an add-on, but thoroughly integrated into our research and debate about stocks and their prospects. The portfolio's carbon footprint, in terms of carbon intensity, is also below the average of the index. This is in part due to the sale of BP, reflecting our lack of conviction in its management's energy transition plan.
Another significant contributor to the Company's NAV returns ahead of the index was that of borrowings. We discuss our thinking on this topic at greater length further below. But for now, it is important to note that our decision to invest most of the Company's long-term borrowings accounted for 3.5% of the 8.1% excess return.
Overall, we view the last year as an encouraging start in our role as the Company's manager. Clearly the market return was flattered by the depressed level of markets this time last year, but we are encouraged that in general the diversified range of stocks that we hold performed well at an operational level. For the Company's shareholders, it has also been encouraging to see the discount narrow.
ACTIVITY OVER THE YEAR
At the beginning of our tenure, last March, we moved the Company to a relatively defensive stance. The news then at a human level was, frankly, gut-wrenching. It was the same at an investment level. It is easy to forget how challenging things were then. The rapidly changing environment since then, and exceptionally high level of volatility, has presented us with an unusually high number of investment opportunities. Major net purchases over the year include Standard Chartered Bank, which should capitalise on recovering Asian economies, and Ascential, a global information services leader offering a unique collection of fast-growing ecommerce data analytics assets. Significant sales have included GlaxoSmithKline, Legal & General and Barrick Gold, all of which were sold or reduced, the latter two after strong share price recoveries. In aggregate, portfolio turnover (calculated by taking the lower of the value of purchases and sales, divided by the average portfolio value) during the year was 39%. This is higher than we would typically expect: longer-term turnover might more realistically be in the range of 25% to 33%, which is equivalent to holding periods of three to four years.
Despite this level of turnover, a key advantage of a relatively small boutique manager such as MAM is that we have been able to re-orientate the Company quickly and efficiently. This was particularly the case after the announcement of the approval of COVID-19 vaccines late in 2020. We have moved the portfolio to build gently on the pro-cyclical stance that has come from holdings such as Weir and Ashtead. These changes have made a difference to shareholder results.
There are many data points that indicate the potential for a strong recovery in the
Where there are attractive stocks or sectors that, for whatever reason, are listed outside the
We therefore think
Many companies cut dividends in the aftermath of the pandemic. The Company's holdings were not exempt from this, as the Revenue columns in the Income Statement illustrate. Revenue for the year was £32.84m, versus £58.96m in the prior twelve months. During the year we also received a significant special dividend from Tesco, following the sale of the Thai operation. For the Company this amounted to £10.98m and has been booked as a capital return. It does not form part of the Company's revenue for the year. As the Chairman has set out in his statement, the overall fall in revenue was a contributory factor to the decision by the Board last autumn to rebase the underlying dividend per share to
Today, we are in a position where the level of dividends paid across the market is generally more sustainable. As economic visibility steadily improves, more companies have begun to reinstate, or rebuild, dividends. A good example of this phenomenon, in an early phase, is in the banking sector where, for example, NatWest Group has set out a minimum monetary level of dividend that it expects to pay out annually in dividends over the period 2021 to 2023. Drawing all this together, we expect the Company's revenue from dividends to recover during this financial year and in the following year. As the Chairman has also noted, we aim for the dividends paid to the Company's shareholders to be covered by revenues in the medium term.
As managers of the Company, our core task is to construct a portfolio that generates an attractive positive return over the medium to long term. Assuming this positive result, borrowings should enhance shareholder returns over these time horizons. This is a key differentiator for investment trusts versus their open-ended 'fund' brethren. We support the concept of borrowings as an important investment trust tool that can enhance underlying equity returns. As we noted earlier, exactly this dynamic played out this year, with 3.5% of the Company's 8.1% NAV excess return being attributable to the effect of borrowings. However, as any homeowner with a mortgage in the early 1990's may recall, borrowings exaggerate financial losses too, particularly if assets are sold when prices are low. Here, again though, investment trusts have an advantage: because of their relatively stable equity capital base, closed-end investment trusts do not typically have to sell assets at market lows to satisfy redemptions. Taking all this together, we are supportive of the long-term role of borrowings for investment trusts, viewing their periodically unhelpful role in market falls as a price to be paid for the undoubted benefits of boosting long term returns.
At a practical level, the Company today has a long-term debt structure through a £100m debenture. There is also a bank facility of up to £50m, which has not been used during the year or since the year end. The market value of the debenture, and adjusting for the Company's modest cash balance, equates to net gearing (defined as net borrowing divided by net assets) of 7.1% at the year end. The debenture will redeem in
The stocks held by the Company are performing well operationally. At the same time, many of the
STRATEGY AND BUSINESS MODEL
The business model the Company has adopted to achieve its investment objective has been to contract the services of the Manager to manage and administer the portfolio in accordance with the Board’s strategy and under its oversight. The portfolio manager with individual responsibility for the day-to-day management of the portfolio is
In addition, the Company has contractual arrangements with Link Group to act as registrar,
INVESTMENT OBJECTIVE AND POLICY
The Company invests primarily in
1. an increase of the Net Asset Value per share in excess of the growth in the FTSE All-Share Index; and 2. growth in dividends per share in excess of the rate of
The Company will generally invest in companies quoted on a recognised stock exchange in the
The Company may borrow money to provide gearing to the equity portfolio of up to 25% of net assets.
Use of derivative instruments is monitored carefully by the Board and permitted within the following constraints: the writing of covered calls against securities which in aggregate amount to no more than 10% of the value of the portfolio and the investment in
RESULTS AND DIVIDENDS
At the year end the share price was 600.00p per ordinary share (2020: 434.00p). The net asset value (debt at market value) per ordinary share was 628.29p (2020 490.40p).
It is intended that a further payment of 10.65p should be made in respect of the year to
The Board reviews the Company’s performance by reference to a number of key performance indicators (KPIs) which are shown on Financial Information and Performance Statistics section. Notwithstanding that some KPIs are beyond its control, they are measures of the Company’s absolute and relative performance. The KPIs assist in managing performance and compliance and are reviewed by the Board at each meeting.
The Chairman’s Statement above gives a commentary on the performance of the Company during the year, the gearing and the dividend.
The Board reviews an analysis of expenditure at each Board meeting, and the Audit and Management Engagement Committees formally review the fees payable to the main service providers, including the Investment Manager, on an annual basis. The ongoing charges figure is calculated in accordance with the AIC methodology and is reviewed by the Board annually in comparison to peers.
The Board also regularly reviews the performance of the Company in relation to the 21 investment trusts in the
OUTLOOK, INCLUDING THE FUTURE OF THE COMPANY
The main trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the Portfolio Manager’s Report. Details of the principal risks affecting the Company can be found on the relevant section further above.
FINANCIAL POSITION AND BORROWINGS
The Company’s balance sheet shows the assets and liabilities at the year end. Borrowings at the year end comprised the £100 million 7 ¾% debenture which matures in 2022 and £nil (2020: £nil) drawn down on the Company’s £50 million bank revolving credit facility (2020: £150 million). Details of this bank facility are contained in note 11.
for year ended
31 March 2021% Total Return Basis(1) NAV (debt at market value) 34.8 Less: Benchmark 26.7 Relative outperformance 8.1 Analysis of Relative Performance Portfolio total return 31.8 Less: Benchmark total return(1) 26.7 Portfolio outperformance 5.1 Borrowings: Net gearing effect 3.5 Interest -0.8 Market value movement 0.6 Management fee -0.3 Other expenses -0.1 Tax -0.1 Share buybacks 0.2 Total 8.1
(1) Source: Refinitiv.
Performance Attribution – analyses the performance of the Company relative to its benchmark index. The Analysis of Relative Performance seeks to estimate the quantum of relative performance that is attributable to each of the factors set out in this table. The table is intended to be indicative rather than precise; the accuracy of each estimate is determined by a variety of factors such as the volatility of investment returns over the year and intra-month, and the timing of income receipts and expenditure payments.
Relative performance – represents the arithmetic difference between the NAV and benchmark returns.
Portfolio total return – represents the return of the holdings in the portfolio including transaction costs, cash and income received, but excluding expenses incurred by the Company.
Net gearing effect – measures the impact of the debenture stock, bank facility and cash on the Company’s relative performance. This will be positive if the portfolio has positive capital performance, total return is positive and negative if capital performance total return is negative.
Interest – the debenture stock and bank facility interest paid has a negative impact on performance.
Management fee – the base fee reduces the Company’s net assets and decreases returns.
Other expenses and tax – reduce the level of assets and therefore result in a negative effect on relative performance.
Share buybacks – measures the effect of ordinary shares bought back at a discount to net asset value on the Company’s relative performance.
Investments in Order of Valuation
Value % of Investment Sector £’000 Portfolio Royal Dutch Shell - B shares Oil, Gas and Coal 37,833 Royal Dutch Shell - A shares 28,516 66,349 5.8 Anglo American Precious Metals and Mining 50,187 4.4 Ashtead Industrial Support Services 49,367 4.3 AstraZeneca Pharmaceuticals and 46,119 4.0 Biotechnology Unilever Food Producers 45,255 3.9 Tesco Personal Care, Drug and 38,714 3.4 Grocery Stores Weir Industrial Engineering 36,962 3.2 Mondi Industrial Materials 36,107 3.1 NatWest Banks 35,967 3.1 Smith & Nephew Medical Equipment and Services 35,916 3.1 TEN TOP HOLDINGS 440,943 38.3 Electrocomponents Industrial Support Services 35,399 3.1 Hays Industrial Support Services 33,195 2.9 BAE Systems Aerospace and Defence 30,932 2.7 Direct Line Insurance Non-Life Insurance 30,804 2.7 Dunelm Retailers 30,427 2.6 Associated British Foods Food Producers 29,938 2.6 Diageo Beverages 29,823 2.6 HSBC Banks 25,383 2.2 Barclays Banks 25,379 2.2 Rio Tinto Precious Metals and Mining 24,859 2.2 TWENTY TOP HOLDINGS 737,082 64.1 Standard Chartered Banks 24,322 2.1 Newmont – US Listed Precious Metals and Mining 22,771 2.0 Wm Morrison Supermarkets Personal Care, Drug and 21,397 1.8 Grocery Stores Bellway Household Goods and Home 21,032 1.8 Construction Total – French Listed Oil, Gas and Coal 19,816 1.7 Koninklijke KPN – Dutch Telecommunications Service 19,777 1.7 Listed Providers Greggs Personal Care, Drug and 19,101 1.7 Grocery Stores WPP Media 17,777 1.5 Legal & General Life Insurance 17,719 1.5 NXP Semiconductors – US Technology Hardware and 17,110 1.5 Listed Equipment THIRTY TOP HOLDINGS 937,904 81.4 Ascential Media 16,813 1.5 Reckitt Benckiser Household Goods and Home 15,859 1.4 Construction RELX Media 15,548 1.4 Marshalls Construction and Materials 15,042 1.3 Daily Mail & General Trust Media 14,319 1.2 Polypipe Construction and Materials 14,306 1.2 Vodafone Telecommunications Service 13,949 1.2 Providers easyJet Travel and Leisure 13,640 1.2 Serco Industrial Support Services 12,790 1.1 Roche – Swiss Listed Pharmaceuticals and 12,393 1.1 Biotechnology FORTY TOP HOLDINGS 1,082,563 94.0 Compass Travel and Leisure 12,364 1.1 Convatec Medical Equipment and Services 12,152 1.1 QinetiQ Aerospace and Defence 11,834 1.0 Hargreaves Lansdown Investment Banking and 6,946 0.6 Brokerage Services A.P. Moller-Maersk – Danish Industrial Transportation 6,916 0.6 Listed Redrow Household Goods and Home 6,875 0.6 Construction Centrica Gas, Water and Multi-Utilities 5,594
0.5 Marks& Spencer Retailers 3,028 0.3 Raven Property – Preference Real Estate Investment and 2,631 0.2 shares Services EurovestechUQ Investment Banking and 105 0.0 Brokerage Services TOTAL HOLDINGS (50) 1,151,008 100.0
UQ Unquoted investment.
Principal Risks and Uncertainties
RISK MANAGEMENT AND MITIGATION
The Board, through the Audit Committee and with the assistance of the Manager, maintains and regularly reviews a report of potential risks to the Company in the form of a risk control summary. The document includes a description of each identified risk, the mitigating action taken, reporting and disclosure to the Board and an impact and probability risk rating. The rating is given both prior to and after the Board’s mitigation of each risk. The information is then displayed in matrix form which allows the Board to identify the Company’s key risks. As the changing risk environment in which the Company operates has evolved, the total number of risks has fluctuated, with certain risks having been removed and new risks added with emerging risks actively discussed as part of this process and, so far as practicable, mitigated.
The composition of the Board is regularly reviewed to ensure its members offer sufficient knowledge and experience to assess, anticipate and mitigate these risks, as far as possible.
The Company’s key long-term investment objectives are an increase in the net asset value per share in excess of the growth in the FTSE All-Share Index (the ‘benchmark’) and an increase in dividends in excess of the annual rate of inflation. The principal risks and uncertainties facing the Company are an integral consideration when assessing the operations in place to meet these objectives, including the performance of the portfolio, share price and dividends. The Board is ultimately responsible for the risk control systems but the day-to-day operation and monitoring is delegated to the Manager. The Board has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity with consideration being given to the effect of the COVID-19 pandemic and possible regulatory uncertainty arising from Brexit. The following sets out a description of the principal risks and how they are being managed or mitigated.
A great majority of the Company’s investments are traded on recognised stock exchanges. The principal risk for investors in the Company is a significant fall, and/or a prolonged period of decline in those markets. The Company’s investments, and the income derived from them, are influenced by many factors such as general economic conditions, interest rates, inflation, the severe impact of the COVID-19 pandemic, political events including Brexit and government policies as well as by supply and demand reflecting investor sentiment. Such factors are outside the control of the Board and Manager and may give rise to high levels of volatility in the prices of investments held by the Company. The asset value and price of the Company’s shares and its earnings and dividends may consequently also experience volatility and may decline.
Market risk is included in the risk control summary report that is reviewed by the Board at each meeting. Additionally, the Board receives reports on the performance of the portfolio at each meeting.
INVESTMENT PERFORMANCE RISK
The Board sets investment policy and risk guidelines, together with investment limits, and monitors adherence to these at each Board meeting. All Individual investment decisions are delegated to the Manager. The Manager’s approach is to construct a portfolio which should benefit from expected future trends in the
The Manager’s style may result in a concentrated portfolio with significant overweight or underweight positions in individual stocks or sectors compared to the index and consequently the Company’s performance may deviate significantly, possibly for extended periods, from that of the benchmark. In a similar way, the Manager manages other portfolios holding many of the same stocks as the Company which reflects the Manager’s high conviction style of investment management. This could significantly increase the liquidity and price risk of certain stocks under certain scenarios and market conditions. However, the Board and Manager believe that the investment process and policy outlined above should, over the long term, meet the Company’s objectives of capital growth in excess of the benchmark and real dividend growth. Investment selection is delegated to the Manager. The Board does not specify asset allocations. Information on the Company’s performance against the benchmark and peer group is provided to the Board at each Board meeting. The Board uses this to review the performance of the Company, taking into account how performance relates to the Company’s objectives. The Manager is responsible for monitoring the portfolio selected and seeks to ensure that individual stocks meet an acceptable risk-reward profile.
As described in the investment policy, derivatives may be used provided that the market exposure arising is less than 25% of the value of the portfolio.
Investment Performance risk is included in the risk control summary report that is reviewed by the Board at each meeting. The Board also receives reports on the performance of the portfolio and on compliance with the Company’s investment policy guidelines from the Manager at each meeting.
The Company may borrow to provide gearing to the equity portfolio of up to 25% of net assets. Borrowing is a mix of the Company’s £100 million debenture stock and the Company’s £50 million bank facility. Details of all borrowings are given in Notes 11 and 12. The principal gearing risk is that the level of gearing may have an adverse impact on performance. Secondary risks include whether the cost of borrowing is too high and whether the bank facility can be renewed and on terms acceptable to the Company.
Within an overall limit set by the Board, the Manager has full discretion over the amount of the borrowing it uses to gear its portfolio, whilst the issuance, repurchase, or restructuring of borrowing are for the Board to decide.
Borrowing and gearing risk is included in the risk control summary report that is reviewed by the Board at each meeting. Additionally, compliance with the Company’s investment policy guidelines is continuously monitored by the Manager and reported to the Board at each meeting.
The Company is subject to the risk that income generation from its investments fails to reach the level of income required to meet its objectives.
The Board monitors this risk through the review of detailed income forecasts and comparison against budget. These are contained within the Board papers and the Board considers the level of income at each meeting.
SHARE PRICE RISK
There is a risk that the Company’s prospects and NAV may not be fully reflected in the share price from time-to-time.
The share price is monitored on a daily basis and, at the request of the Board, the Company is empowered to repurchase shares within agreed parameters which are regularly reviewed with the Company’s broker. The discount at which the shares trade to NAV can be influenced by share repurchases. During the year, the Company repurchased 2,500,000 shares for holding in treasury (2020: 20,798,805) and the effect of these repurchases was to add 0.2% to the Net Asset Value of the Company.
Share Price risk is included in the risk control summary report that is reviewed by the Board at each meeting.
CORPORATE GOVERNANCE AND INTERNAL CONTROLS RISK
The Board has delegated to third party service providers the management of the investment portfolio, depositary and custody services (which include the safeguarding of the assets), registration services, accounting and company secretarial services.
The principal risks arising from the above contracts relate to performance of the Manager, the performance of administrative, registration, depositary, custodial and banking services, and the failure of information technology systems used by third party service providers. These risk areas could lead to the loss or impairment of the Company’s assets, inadequate returns to shareholders and loss of investment trust status. Consequently, in respect of these activities the Company is dependent on the Manager’s control systems and those of its administrator, depositary, custodian and registrar.
An annual review of the control environments of all service providers is carried out by the Company Secretary who provides an assessment of these risks and the operation of the controls for consideration by the Audit Committee and is formally reported to and considered by the Board.
RELIANCE ON THE MANAGER AND OTHER THIRD PARTY PROVIDERS RISK
The Company is reliant upon the performance of third party service providers for its executive function and other service provisions. The Company’s most significant contract is with the Manager, to whom responsibility for management of the Company’s portfolio is delegated. The Company has other contractual arrangements with third parties to act as administrator, company secretary, registrar, depositary and broker. The Company’s operational structure means that all cyber risk (information and physical security) arises at its third party service providers, including fraud, sabotage or crime against the Company. Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to pursue successfully its investment policy and expose the Company to risk of loss or to reputational risk.
In particular, the Manager performs services which are integral to the operation of the Company. The Manager may be exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its reputation. Any damage to the reputation of the Manager could result in counterparties and third parties being unwilling to deal with the Manager and by extension the Company. This could have an adverse impact on the ability of the Company to pursue its investment policy.
The Board seeks to manage these risks in a number of ways:
– The Company Secretary reviews the performance and the service organisation control reports of third party service providers and reports to the Board on an annual basis.
– The Board reviews the performance of the Manager at every Board meeting and otherwise as appropriate. The Board has the power to replace the Manager and reviews the management contract formally once a year.
– The day-to-day management of the portfolio is the responsibility of the named portfolio manager,
– The risk that the portfolio manager might be incapacitated or otherwise unavailable is mitigated by the fact that he works within, and is supported by, the wider Majedie team. Moreover,
– The Board has set guidelines within which the portfolio manager is permitted wide discretion. Any proposed variation outside these guidelines is referred to the Board and compliance with the guidelines and the guidelines themselves are reviewed at every Board meeting.
The Board has put in place robust procedures to assist with identifying emerging risks that arise from existing risks or from new situations. The Board is kept informed through its advisors and Manager regarding any political, economic or legal or regulatory changes that affect the Company.
Physical and Transitional Climate Change
Globally, climate change effects are already emerging in the form of changing weather patterns. Extreme weather events could potentially impair the operations of individual investee companies, potential investee companies, their supply chains and their customers. Legislative changes are driving an economic adjustment towards a low-carbon economy. There are considerable risks to the value, business model and operations of investee and potential investee companies due to stranded assets and how investors, financial regulators and policymakers respond to climate concerns. The Manager takes such risks into account, along with the downside risk to any company – whether in the form of its business prospects, market valuation or sustainability of dividends – that is perceived to be making a detrimental contribution to climate change. The Company invests in a broad portfolio of businesses with operations spread geographically, which should limit the impact of location-specific weather events.
The rapid spread of COVID-19 has caused governments to implement policies to restrict the gathering, interaction or movement of people. These policies have inevitably changed the nature of the operations of some aspects of the Company, its key service providers and the companies in which it invests. As cited in Market Risk, share prices respond to assessments of future economic activity as well as their own forecast performance and the COVID-19 pandemic has had a materially negative impact on the economy and will continue do so for a period of time. The Board and its manager have regular discussions to assess this impact on both the investment portfolio and on its ability to generate income for shareholders.
The Company is subject to laws and regulations by virtue of its status as an investment trust and is required to comply with certain regulatory requirements that are applicable to listed closed-ended investment companies. The Company is subject to the continuing obligations imposed by the
The Manager reviews compliance with investment trust tax conditions and other financial and regulatory requirements on a daily basis with any issues being immediately brought to the attention of the Board.
The Company may be exposed to other business, strategic and political risks in the future, as well as regulatory risks (such as an adverse change in the tax treatment of investment companies), credit, liquidity and concentration risks. The risk control summary report allows the Board to considers all these risks, the measures in place to control them and the possibility of any other risks that could arise.
The Board ensures that satisfactory assurances are received from the service providers. The Manager’s compliance officers produce regular reports for review by the Company’s Audit Committee.
Additionally, the depositary monitors stock, cash, borrowings and investment restrictions throughout the year. The depositary reports formally once a year and also has access to the Company Chairman and the Audit Committee Chairman if needed during the year.
The Board considered the market uncertainty arising from the effect of the negotiated trade deal with the EU at the end of the transition period. As the Company’s shares are not currently marketed in
The directors’ view of the Company’s viability has not changed since last year. The Company, as an investment trust, is a collective investment vehicle rather than a commercial business venture and is designed and managed for long term investment. The Company’s investment objective clearly sets this out. Long term for this purpose is considered by the Directors to be at least five years and accordingly they have assessed the Company’s viability over that period. However, the life of the Company is not intended to be limited to that or any other period.
There are no current plans to amend the investment strategy, which has delivered long term good investment performance for shareholders and, the directors believe, should continue to do so. The investment strategy and its associated risks are kept under constant review by the board.
In assessing the viability of the Company under various scenarios, the Directors undertook a robust assessment of the risks to which it is exposed (including the issues arising from the COVID-19 pandemic and climate change), as set out above together with mitigating factors. The risks of failure to meet the Company’s investment objective, and contributory market and investment risks, were considered to be of particular importance. The Directors also took into account: the investment capabilities of the portfolio manager; the liquidity of the portfolio, with nearly all investments being listed and readily realisable; the Company’s borrowings as considered in further detail in the Going Concern Statement below; the ability of the Company to meet its liabilities as they fall due; the Company’s annual operating costs and that, as a closed ended investment trust, the Company is not affected by the liquidity issues of open-ended companies caused by large or unexpected redemptions.
In taking account of these factors and on reviews conducted as part of the detailed internal controls and risk management processes set out on page 32, the Directors have concluded that the viability of the Company may start to be challenged if the value of investments reduced by over 80% from the aggregate level at the year end and the board considers this implausible having noted that since the inception of the Company’s All-Share Index Total Return benchmark in
Based on the above, and assuming there is no adverse change to the regulatory environment and tax treatment of
The financial statements have been prepared on a going concern basis. The Directors consider this is the appropriate basis as they have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future, being taken as twelve months after the signing of the balance sheet, for the same reasons as set out in the Viability Statement above. In considering this, the Directors took into account both ongoing expenses and any obligations under the Company’s borrowing (both the debenture and the bank facility). In reaching this conclusion, the Directors have considered the liquidity of the Company’s portfolio of investments as well as its cash position, income and expense flows. As at
Given the level of market volatility experienced due to the impact of the COVID-19 pandemic, the Manager has performed stress tests on the Company’s portfolio of investments under current conditions and the Board remain comfortable with the liquidity of the portfolio.
It is estimated that over 99% by value of the quoted investments held at the year end could be realised in one month under normal market conditions.
The Board also considered the Company’s obligations under the Company’s borrowing. The £100 million debenture matures in
The total ongoing charges (excluding taxation, non-recurring legal and professional fees and finance costs) for the year ended
Section 172 Statement, Company Sustainability and Stakeholders
As set out in the Directors’ Report on pages 33 to 39 of the Annual Report the Directors have a statutory duty to promote the success of the Company, whilst also having regard to certain broader matters, including the need to engage with employees, suppliers, customers and others, and to have regard to their interests (s172 Companies Act 2006). However, the Company has no employees and no customers in the traditional sense. Consistent with the Company’s nature as an investment trust, the Board’s principal concern has been, and continues to be, the interests of the Company’s shareholders taken as a whole.
COMPANY SUSTAINABILITY AND STAKEHOLDERS
As an externally managed investment company, the Company does not have any employees. The Board considers its main stakeholders to be its shareholders, service providers, investee companies and the Manager.
ENGAGEMENT WITH SHAREHOLDERS
Shareholder relations are given high priority by both the Board and the Manager and the Board welcomes feedback from shareholders throughout the year. The prime medium by which the Company communicates with shareholders is through the half-yearly and annual financial reports, which aim to provide shareholders with a full understanding of the Company’s activities and results. This information is supplemented by the daily publication of the net asset value, monthly factsheets as well as dividend and other announcements.
Feedback from shareholders forms part of the discussion at all Board meetings and at the Board’s annual strategy meeting which involves consideration of how the Company is meeting shareholder expectations.
Shareholders can also visit the Company’s website www.edinburghinvestmenttrust.com in order to access copies of the annual and half-yearly financial reports, pre-investment information, Key Information Documents (KIDs), proxy voting results, factsheets and stock exchange announcements. The Company’s website also hosts videos and other applicable written materials by the Manager to enhance the information available.
Typically at each AGM, a presentation is made by the Manager following the formal business of the meeting and shareholders have the opportunity to attend, vote and most importantly to communicate directly with the Manager and Board. Presentations to both institutional shareholders and analysts also follow the publication of the annual results. In addition to the AGM and presentation, the Board and Manager also host an annual Shareholder event in
Regular dialogue is maintained between the Manager and major institutional shareholders throughout the year to discuss aspects of investment performance, governance and strategy and to listen to shareholder views in order to help develop an understanding of their issues and concerns. All meetings between the Manager and shareholders are reported to the Board.
There is a clear channel of communication between the Board and the Company’s Shareholders via the Company Secretary. The Company Secretary has no express authority to respond to enquiries addressed to the Board and all communications, other than junk mail, are redirected to the Chairman.
During the year the Board considered the dividend strategy and following the perceived impact of the COVID-19 pandemic and in-depth discussions at the Board’s strategy meeting, the decision was taken to reduce the dividend to a more sustainable level. Feedback from the Manager and the Broker was taken into account in the decision making process and a full assessment on the impact of the decision on shareholders was considered against the long term success of the Company.
ENGAGEMENT WITH THE MANAGER, SERVICE PROVIDERS AND INVESTEE COMPANIES
At least annually the Board reviews the performance and services of all its service providers including the Manager, and receives and considers the internal control reports from them covering their operations, their policies and control environments. The Board has regular dialogue with and reporting from the Manager on the portfolio of investments and a representative of the Manager attends each Board meeting to provide updates and answer questions from the Board. Following the emergence of the COVID-19 pandemic, the Board has continued engagement with its service providers to ensure that their responses to the pandemic are adequate and also to provide them with additional support where required.
The Manager maintains regular dialogue with both investee and potential investee companies and reports back on these conversations to the Board. As described below the Board and Manager believe engagement with investee companies is positive, beneficial and welcomed and that consistent exercise of voting rights is a key activity in the dialogue with these companies.
The Directors believe that they have fulfilled their duties under s172 of the Companies Act 2006 in their deliberations on all matters. The Board takes into account the interests of all the Company’s key stakeholders, as outlined above, in its decision-making which reflects the Boards belief that the long term sustainable success of the Company is linked direct to its key stakeholders.
ENVIRONMENTAL SOCIAL AND GOVERNANCE (“ESG”) MATTERS
As an investment company with no employees, property or activities outside investment, environmental policy has limited application. The Manager considers various factors when evaluating potential investments. While a company’s policy towards the environment and social responsibility, including with regard to human rights, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not necessarily decide to, or not to, make an investment on environmental and social grounds alone. The Manager is a signatory to the
EXERCISE OF VOTING POWERS AND STEWARDSHIP CODE
The Board considers that the Company has a responsibility as a shareholder towards ensuring that high Environmental, Social and Governance standards are maintained in the companies in which it invests. To achieve this, the Board does not seek to intervene in daily management decisions, but aims to support high standards of governance and, where necessary, will take the initiative to ensure those standards are met. The principal means of putting shareholder responsibility into practice is through the exercise of voting rights. The Company’s voting rights are exercised on an informed and independent basis.
The Manager has adopted a clear and considered policy towards its stewardship responsibility on behalf of the Company. The Manager takes steps to satisfy itself about the extent to which the companies in which it invests look after shareholders’ value and comply with local recommendations and practices, such as the
Two members of the Manager’s investment team are responsible for overseeing all aspects of the Stewardship process, including voting on all resolutions at all Annual General Meetings and Extraordinary General Meetings in the
When voting against or abstaining in a vote the Manager may communicate with management beforehand, either setting out its position in its regular meetings with the management of investee companies or in a communication to management.
The Manager discloses its voting record to the Board at each meeting with notes explaining the reasons for any votes against resolutions.
In addition, the Manager discloses to all clients an annual Responsible Capitalism report, providing cumulative voting statistics, full disclosure on voting policy and extracts of engagement for the year. The Manager publishes an annual voting record for the previous year on its website www.majedie.com
MODERN SLAVERY DISCLOSURE
The Company aims to adopt the highest standards and is committed to integrating responsible business practices throughout its operations. The prevention of modern slavery is an important part of corporate good governance.
The Company is an investment vehicle and does not provide goods or services in the normal course of its business, or have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015.
ANTI-BRIBERY AND CORRUPTION
It is the Company’s policy to conduct all of its business in an honest and ethical manner. The Company takes a zero-tolerance approach to bribery and corruption and is committed to acting professionally, fairly and with integrity in all its business dealings and relationships wherever it operates. The Company’s policy and the procedures that implement it are designed to support that commitment.
PREVENTION OF THE FACILITATION OF TAX EVASION
The Board has adopted a zero-tolerance approach to the criminal facilitation of tax evasion.
GREENHOUSE GAS EMISSIONS AND STREAMLINED ENERGY AND CARBON REPORTING (SECR)
The Company has no employees, physical assets, property or operations of its own, does not provide goods or services and does not have its own customers. It follows that the Company has little or no direct environmental impact. In consequence, the Company has limited greenhouse gas emissions to report from its operations aside from travel to board meetings, nor does it have responsibility for any other sources of emissions under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013.
As the Company has no material operations and therefore has low energy usage, it has not included an energy and carbon report.
This Strategic Report was approved by the Board on
PRAXISIFM FUND SERVICES (
Statement of Directors’ Responsibilities
in respect of the preparation of the Annual Financial Report
The Directors are responsible for preparing the annual financial report and financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law they are required to prepare the financial statements in accordance with
The revised SORP issued in
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period.
In preparing these financial statements, the Directors are required to:
-- select suitable accounting policies and then apply them consistently; -- make judgements and estimates that are reasonable and prudent; -- state whether applicable
UKaccounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; -- assess the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and -- use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006.
They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website, which is maintained by the Company’s Manager. Legislation in the
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL FINANCIAL REPORT
We confirm that to the best of our knowledge:
-- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and -- the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
We consider the annual financial report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
Signed on behalf of the Board of Directors
For the year ended 31 March
2021 2020 Revenue Capital Total Revenue Capital Total Notes £’000 £’000 £’000 £’000 £’000 £’000 Gains/(losses) on 9(b) – 247,596 247,596 – (377,639) (377,639) investments held at fair value Gains on derivative – – – – 40 40 instruments Losses on foreign – (91) (91) – (625) (625) exchange Income 2 32,842 11,041 43,883 58,964 1,467 60,431 Investment management 3 (1,016) (2,371) (3,387) (1,778) (4,148) (5,926) fees Other expenses 4 (814) (13) (827) (1,635) (6) (1,641) Return/(loss) before 31,012 256,162 287,174 55,551 (380,911) (325,360) finance costs and taxation Finance costs 5 (2,438) (5,690) (8,128) (2,490) (5,810) (8,300) Return/(loss) before 28,574 250,472 279,046 53,061 (386,721) (333,660) taxation Taxation 6 (495) – (495) (1,440) – (1,440) Return/(loss) on 28,079 250,472 278,551 51,621 (386,721) (335,100) ordinary activities after taxation for the financial year Return/(loss) per ordinary share: Basic 7 16.21p 144.58p 160.79p 27.83p (208.52)p (180.69)p
The total column of this statement represents the Company’s income statement, prepared in accordance with
Statement of Changes in Equity
Capital Share Share Redemption Capital Revenue Capital Premium Reserve Reserve Reserve Total Notes £’000 £’000 £’000 £’000(1) £’000(1) £’000 Balance at 1 April 48,917 10,394 24,676 1,215,237 83,213 1,382,437 2019 (Loss)/Return on – – – (386,721) 51,621 (335,100) ordinary activities Dividends paid 8 – – – – (53,063) (53,063) Shares bought back – – – (121,790) – (121,790) and held in treasury Balance at 31 48,917 10,394 24,676 706,726 81,771 872,484 March 2020 Return on ordinary – – – 250,472 28,079 278,551 activities Dividends paid 8 – – – – (48,334) (48,334) Shares bought back – – – (11,470) – (11,470) and held in treasury Balance at 31 48,917 10,394 24,676 945,728 61,516 1,091,231 March 2021
(1) The revenue reserve and certain amounts of the capital reserve are distributable by way of dividend.
The accompanying notes are an integral part of these financial statements.
As at 31 March
2021 2020 Notes £’000 £’000 Fixed assets Investments held at fair value through profit or loss 9(a) 1,151,008 922,433 Current assets Debtors 10 7,974 7,399 Cash and cash equivalents 32,570 43,958 40,544 51,357 Creditors: amounts falling due within one year Other payables 11 (698) (1,934) (698) (1,934) Net current assets 39,846 49,423 Total assets less current liabilities 1,190,854 971,856 Creditors: amounts falling due after more than one year 12 (99,623) (99,372) Net assets 1,091,231 872,484 Capital and reserves Called up share capital 13 48,917 48,917 Share premium account 14 10,394 10,394 Capital redemption reserve 14 24,676 24,676 Capital reserve 14 945,728 706,726 Revenue reserve 14 61,516 81,771 Total Shareholders’ funds 1,091,231 872,484 Net asset value per ordinary share: Basic – debt at par value 15 633.54p 499.11p – debt at market value 15 628.29p 490.40p
These financial statements were approved and authorised for issue by the Board of Directors on
Signed on behalf of the Board of Directors
The accompanying notes are an integral part of these financial statements.
Notes to the Financial Statements
1. PRINCIPAL ACCOUNTING POLICIES
Accounting policies describe the Company’s approach to recognising and measuring transactions during the year and the position of the Company at the year end.
The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied during the year and the preceding year.
A. Basis of Preparation
Accounting Standards Applied
The financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (
The revised SORP issued in
The financial statements are issued on a going concern basis. Details of the Directors assessment of the going concern status of the Company, which considered the adequacy of the Company’s resources and the impacts of the COVID-19 Pandemic, are given above.
As an investment fund the Company has the option, which it has taken, not to present a cash flow statement. A cash flow statement is not required when an investment fund meets all the following conditions: substantially all investments are highly liquid and are carried at market value, and where a Statement of Changes in Equity is provided: all of which are satisfied.
Significant Accounting Estimates, Assumptions and Judgements
The preparation of the financial statements may require the use of estimates, assumptions and judgements which may affect the reported amounts of assets and liabilities at the reporting date. While estimates are based on best judgement using information and financial data available the actual outcome may differ from these estimates. The directors do not believe that any accounting estimates, assumptions or judgements have been applied to these accounting statements that have a significant risk of causing material adjustment to the carrying amount of assets and liabilities within the next financial year. The Directors do apply judgement as to the allocation of expenses between capital and revenue in the income statement. The allocation and rationale is set out in Note 1G.
B. Foreign Currency and Segmental Reporting
(i) Functional and presentational currency
The financial statements are presented in sterling, which is the Company’s functional and presentational currency and the currency in which the Company’s share capital and expenses, as well as its assets and liabilities, are denominated.
(ii) Transactions and balances
Transactions in foreign currency, whether of a revenue or capital nature, are translated to sterling at the rates of exchange ruling on the dates of such transactions. Foreign currency assets and liabilities are translated to sterling at the rates of exchange ruling at the balance sheet date. Any gains or losses, whether realised or unrealised, are taken to the capital reserve or to the revenue account, depending on whether the gain or loss is of a capital or revenue nature. All gains and losses are recognised in the income statement.
(iii) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single segment of business of investing in equity and debt securities, issued by companies quoted mainly on the
C. Financial Instruments
The Company has chosen to apply Section 11 and 12 of FRS102 in full in respect of the financial instruments.
(i) Recognition of financial assets and financial liabilities
The Company recognises financial assets and financial liabilities when the Company becomes a party to the contractual provisions of the instrument. The Company will offset financial assets and financial liabilities if the Company has a legally enforceable right to set off the recognised amounts and intends to settle on a net basis.
(ii) Derecognition of financial assets
The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial asset that is created or retained by the Company is recognised as an asset.
(iii) Derecognition of financial liabilities
The Company derecognises financial liabilities when its obligations are discharged, cancelled or have expired.
(iv) Trade date accounting
Purchases and sales of financial assets are recognised on trade date, being the date on which the Company commits to purchase or sell the assets.
(v) Classification and measurement of financial assets and financial liabilities
– Financial assets
The Company’s investments are classified as held at fair value through profit or loss.
Financial assets held at fair value through profit or loss are initially recognized as fair value, which is taken to be their acquisition price, with transaction costs expensed in the income statement. These are subsequently valued at fair value.
Fair value for investments that are actively traded in organised financial markets is determined by reference to stock exchange quoted bid prices at the balance sheet date. Fair value for investments that are actively traded but where active stock exchange quoted bid prices are not available is determined by reference to a variety of valuation techniques including broker quotes and price modelling. Unquoted, unlisted or illiquid investments are valued by the Directors at fair value using a variety of valuation techniques including earnings multiples, recent transactions and other market indicators, cash flows and net assets.
– Financial liabilities
Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method.
Cash and cash equivalents may comprise cash (including short term deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value) as well as cash equivalents, including money market funds. Investments are regarded as cash equivalents if they meet all of the following criteria: short term in duration (typically three months or less from the date of acquisition), highly liquid investments held in the Company’s base currency that are readily convertible to a known amount of cash, are subject to an insignificant risk of change in value and provide a return no greater than the rate of a three-month high quality government bond.
Forward currency contracts entered into for hedging purposes are valued at the appropriate forward exchange rate ruling at the balance sheet date. Profits or losses on the closure or revaluation of positions are recognised in the income statement and taken to capital reserves.
Interest income arising from fixed income securities and cash is recognised in the income statement using the effective interest method. Dividend income arises from equity investments held and is recognised on the date investments are marked ‘ex-dividend’.
Special dividends are looked at individually to ascertain the reason behind the payment. This will determine whether they are treated as income or capital in the income statement.
Deposit interest and underwriting commission receivable are taken into account on an accruals basis.
G. Expenses and Finance Costs
Expenses are recognised on an accruals basis and finance costs are recognised using the effective interest method in the income statement.
The investment management fee and finance costs are allocated 70% to capital and 30% to revenue. This is in accordance with the Board’s expected long-term split of returns, in the form of capital gains and income respectively, from the portfolio.
Transaction costs are recognised as capital in the income statement. All other expenses are allocated to revenue in the income statement.
The liability to corporation tax is based on net revenue for the year, excluding non-taxable dividends. The tax charge is allocated between the revenue and capital account on the marginal basis whereby revenue expenses are matched first against taxable income in the revenue account.
Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax or a right to pay less tax in the future have occurred. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements. Deferred taxation assets are recognised where, in the opinion of the Directors, it is more likely than not that these amounts will be realised in future periods.
A deferred tax asset is only recognised in respect of surplus management expenses, losses on loan relationships and eligible unrelieved foreign tax to the extent that it is probable that the Company will be able to recover them from future taxable revenue.
I. Dividends Payable
Dividends are not recognised in the accounts unless there is an obligation to pay at the balance sheet date. Proposed dividends are recognised in the year in which they are paid to shareholders.
J. Critical accounting estimates and judgements
The Directors made one material accounting judgement during the year as set out in the paragraph below.
Tesco PLC Capital Special Dividend - £10,981,000
Further to the announcement on
This Special Dividend was treated as Capital in nature due to the source being covered by the proceeds of disposal. The Special Dividend was approved by Shareholders’ at the Annual General Meeting on
Apart from the above, the Directors do not believe that any other accounting judgements have been made. There are no estimates that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year.
K. Accounting for reserves
The share premium comprises the net proceeds received by the Company following the issue of shares, after deduction of the nominal amount of
The capital reserve includes the investment holding gains/(losses), being the difference between cost and market value at the balance sheet date. It also includes cumulative realised gains/(losses) and costs related to share buybacks. Capital investment gains and losses are shown in note 9(b) and form part of the capital reserve.
The revenue reserve shows the net revenue reserve retained after payment of any dividends. The revenue reserve and certain amounts of the capital reserve are distributable by way of dividend.
This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.
2021 2020 £’000 £’000 Income from investments: UK dividends 26,028 44,556 UK special dividends 2,432 534 UK unfranked income – 1,509 Overseas dividends 4,368 11,650 Overseas special dividends – 475 Income from money market funds 11 237 32,839 58,961 Other income: Deposit interest 3 3 3 3 Total income 32,842 58,964
Special dividends of £11,041,000 were recognised in capital during the year (2020: £1,467,000).
3. INVESTMENT MANAGEMENT FEE
This note shows the fee due to the Manager. This is calculated and paid monthly.
2021 2020 Revenue Capital Total Revenue Capital Total £’000 £’000 £’000 £’000 £’000 £’000 Investment management fee 1,016 2,371 3,387 1,778 4,148 5,926
Details of the investment management agreement is disclosed on page 37 in the Directors’ Report of the Annual Report. At
4. OTHER EXPENSES
The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified.
2021 2020 Revenue Capital Total Revenue Capital Total £’000 £’000 £’000 £’000 £’000 £’000 Other expenses 814 13 827 1,635 6 1,641 Other expenses include the following: Directors’ remuneration (i) 187 – 187 193 – 193 Auditors’ fees (ii): – for audit of the Company’s annual 33 – 33 30 – 30 financial statements – additional fees in respect of 8 – 8 – – – COVID-19 audit procedures in prior year – audit related assurance services 3 – 3 3 – 3 in respect of the Debenture Stock
The maximum Directors’ fees authorised by the Articles of Association are £250,000 per annum.
i. There were seven directors for a period during the year and the Director’s Remuneration Report on page 41 of the Annual Report provides further information on Directors’ fees. ii. Auditor’s fees include expenses but excludes VAT. iii. Other expenses include:
– £18,000 (2020: £16,000) of employer’s
– custodian transaction charges of £14,000 (2020: £6,000). These are charged to capital.
– other expenses also include fees of £nil (2020: £704,000). These costs relate to fees and expenses incurred in relation to the review of the previous manager and subsequent change of manager.
5. FINANCE COSTS
Finance costs arise on any borrowing facilities the Company has used. Borrowing facilities are the £100 million debenture stock and a £50 million bank revolving credit facility.
2021 2020 Revenue Capital Total Revenue Capital Total £’000 £’000 £’000 £’000 £’000 £’000 Interest payable on borrowings repayable not by instalment: – commitment fees due on bank 38 89 127 67 156 223 facility – interest on bank facility – – – 23 53 76 – debenture stock repayable within 2 2,325 5,425 7,750 2,325 5,425 7,750 years Amortised debenture stock discount 75 176 251 75 176 251 and issue costs 2,438 5,690 8,128 2,490 5,810 8,300
6. TAX AND TOTAL RETURN ON ORDINARY ACTIVITIES
As an investment trust the Company pays no tax on capital gains. As the Company invests principally in
(a) Tax charge
2021 2020 £’000 £’000 Overseas taxation 495 1,440
(b) Reconciliation of tax charge
2021 2020 £’000 £’000 Total return/(loss) before taxation 279,046 (333,660) Theoretical tax at the current UK Corporation Tax rate of 19% 53,019 (63,395) (2020: 19%) Effects of: – Non-taxable UK dividends (4,945) (7,514) – Non-taxable UK special dividends (2,560) (471) – Non-taxable overseas dividends (830) (2,134) – Non-taxable (gains)/loss on investments (47,037) 71,745 – Non-taxable losses on foreign exchange 11 118 – Excess of allowable expenses over taxable income 2,340 1,650 – Disallowable expenses 2 1 – Overseas taxation 495 1,440 Tax charge for the year 495 1,440
(c) Deferred tax
Owing to the Company’s status as an investment company, and the Directors’ intention that it continues to meet the conditions required to maintain that approval in the foreseeable future, no deferred tax has been provided on any capital gains and losses arising on the revaluation or disposal of investments.
(d) Factors that may affect future tax changes
The Company has cumulative excess management expenses of £477,190,000 (2020: £464,617,000) that are available to offset future taxable revenue.
The deferred tax asset of £90,666,112 (2020: £88,277,000) at 19% (2020: 19%) has not been recognised in respect of these expenses, since the Directors believe that there will be no taxable profits in the future against which the deferred tax assets can be offset.
7. RETURN/(LOSS) PER ORDINARY SHARE
Return per share is the amount of gain generated for the financial year divided by the weighted average number of ordinary shares in issue.
The basic revenue, capital and total returns/(loss) per ordinary share is based on each of the returns on ordinary activities after taxation and on 173,236,905 (2020: 185,459,576) ordinary shares, being the weighted average number of ordinary shares in issue throughout the year.
8. DIVIDENDS ON ORDINARY SHARES
Dividends represent the distribution of income to shareholders. The Company pays four dividends a year – three interims and one final dividend.
2021 2020 pence £’000 pence £’000 Dividends paid and recognised in the year: – third interim paid in respect of previous year 6.40 11,180 6.25 12,218 – final paid in respect of previous year 9.45 16,492 9.25 18,027 – first interim paid 6.00 10,331 6.40 11,535 – second interim paid 6.00 10,331 6.40 11,283 27.85 48,334 28.30 53,063
2021 2020 pence £’000 pence £’000 Dividends payable in respect of the year: – first interim 6.00 10,331 6.40 11,535 – second interim 6.00 10,331 6.40 11,283 – third interim 6.00 10,331 6.40 11,180 – proposed final 6.00 10,331 9.45 16,492 Total dividends (excl. special dividends) 24.00 41,324 28.65 50,490 – declared special dividend 4.65 8,007 – – Total dividends 28.65 49,331 28.65 50,490
The proposed final dividend is subject to approval by ordinary shareholders at the AGM.
The portfolio comprises investments which are principally listed on a regulated stock exchange or traded on AIM. A very small proportion of investments are valued by the Directors as they are unlisted.
Gains or losses are either:
– realised, usually arising when investments are sold; or
– unrealised, being the difference from cost on those investments still held at the year end.
(a) Analysis of investments by listing status
2021 2020 £’000 £’000 Investments listed on a regulated stock exchange 1,150,903 922,279 Unquoted investments at Directors’ valuation 105 154 1,151,008 922,433
(b) Analysis of investment gains/(losses)
2021 2020 £’000 £’000 Opening book cost 1,068,853 1,390,495 Opening investment holding (losses)/gains (146,420) 110,656 Opening valuation 922,433 1,501,151 Movements in year: – purchases at cost 416,676 1,106,098 – sales proceeds (435,697) (1,307,177) Gains/(losses) on investments in the year 247,596 (377,639) Closing valuation 1,151,008 922,433 Closing book cost 1,026,675 1,068,853 Closing investment holding gains/(losses) 124,333 (146,420) Closing valuation 1,151,008 922,433
The Company received £435,697,000 (2020: £1,307,177,000) from investments sold in the year. The book cost of these investments when they were purchased was £458,854,000 (2020: £1,427,740,000) realising a loss of £23,157,000 (2020: £120,563,000). These investments have been revalued over time and until they were sold any unrealised profits/losses were included in the fair value of the investments.
The transaction costs included in gains on investments amount to £1,917,000 (2020: £4,856,000) on purchases and £167,000 (2020: £444,000) for sales.
Debtors are amounts which are due to the Company, such as monies due from brokers for investments sold and income which has been earned (accrued) but not yet received.
2021 2020 £’000 £’000 Amounts due from brokers 1,489 3,217 Overseas withholding tax recoverable 1,592 2,621 Prepayments and accrued income 4,893 1,561 7,974 7,399
11. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
Creditors are amounts which must be paid by the Company and are split between those payable within 12 months of the balance sheet date and those payable after that time. The main creditors are the debenture and bank borrowings. The other creditors include any amounts due to brokers for the purchase of investments or amounts owed to suppliers (accruals) such as the Manager and auditor.
2021 2020 £’000 £’000 Amounts due to brokers – 996 Share buybacks awaiting settlement – 68 Accruals 698 870 698 1,934
The Company has a 364 day committed revolving credit facility (the 'bank facility') of £50 million (2020: £150 million) with the lender,
12. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
These creditors are amounts that must be paid, as shown by note 11, but are due more than one year after the balance sheet date.
2021 2020 £’000 £’000 Debenture Stock 7¾% redeemable 30 September 2022 100,000 100,000 Unamortised discount and issue expenses on debenture stock (377) (628) 99,623 99,372
The debenture is secured by a floating charge on the Company, under which borrowing must not exceed a sum equal to the Adjusted Total of Capital and Reserves. The interest on the 7¾% debenture is payable in half-yearly instalments, in March and September, each year.
The effect on the net asset value of deducting the debenture stock at market value, rather than at par, is disclosed in note 15.
13. SHARE CAPITAL
Share capital represents the total number of shares in issue.
2021 2020 £’000 £’000 Share capital: Ordinary shares of 25p each 43,046 43,671
Treasuryshares of 25p each 5,871 5,246 48,917 48,917
2021 2020 Number of ordinary shares in issue: Brought forward 174,682,929 195,481,734 Shares bought back and held in treasury (2,500,000) (20,798,805) Carried forward 172,182,929 174,682,929 Number of treasury shares held: Brought forward 20,983,805 185,000 Shares bought back into treasury 2,500,000 20,798,805 Carried forward 23,483,805 20,983,805 Total ordinary shares 195,666,734 195,666,734
During the year the Company bought back, into treasury, 2,500,000 ordinary shares at an average price of 458.79p (including costs). Since the year end, no shares have been bought back into treasury.
The Directors’ Report on pages 37 and 38 of the Annual Report sets out the Company’s share capital structure, restrictions and voting rights.
This note explains the different reserves attributable to shareholders. The aggregate of the reserves and share capital (see previous note) make up total shareholders’ funds.
The share premium comprises the net proceeds received by the Company following the issue of shares, after deduction of the nominal amount of
The capital reserve includes the investment holding gains/(losses), being the difference between cost and market value at the balance sheet date. It also includes cumulative realised gains/(losses) and costs related to share buybacks. Capital investment gains and losses are shown in note 9(b) and form part of the capital reserve.
The revenue reserve shows the net revenue retained after payment of any dividends.. The capital and revenue reserves are distributable by way of dividend.
15. NET ASSET VALUE PER ORDINARY SHARE
The Company’s total net assets (total assets less total liabilities) are often termed shareholders’ funds and are converted into NAV per ordinary share by dividing by the number of shares in issue.
The NAV – debt at par is the NAV with the value of the £100 million debenture (the debt) at its nominal (equivalent to the par) value of £100 million. The NAV – debt at market value reflects the debenture stock at the value that a third party would be prepared to pay for the debt, and this amount fluctuates owing to various factors including changes in interest rates and the remaining life of the debt. The number of ordinary shares in issue at the year end was 172,182,929 (2020: 174,682,929).
(a) NAV – debt at par value
The shareholders’ funds in the balance sheet are accounted for in accordance with accounting standards; however, this does not reflect the rights of shareholders on a return of assets under the Articles of Association. These rights are reflected in the net assets with debt at par value and the corresponding NAV per share. A reconciliation between the two sets of figures follows:
2021 2020 NAV Shareholders’ NAV Shareholders’ per share funds per share funds pence £’000 pence £’000 Shareholders’ funds 633.76 1,091,231 499.47 872,484 Less: Unamortised discount and (0.22) (377) (0.36) (628) expenses arising from debenture issue NAV – debt at par 633.54 1,090,854 499.11 871,856
(b) NAV – debt at market value
The market value of the debenture stock is determined by reference to the daily closing price, and is subject to review against various data providers to ensure consistency between data providers and against the reference gilt.
The net asset value per share adjusted to include the debenture stock at market value rather than at par is as follows:
2021 2020 NAV Shareholders’ NAV Shareholders’ per share funds per share funds pence £’000 pence £’000 NAV – debt at par 633.54 1,090,854 499.11 871,856 Debenture stock – debt at par 58.08 100,000 57.25 100,000 – debt at market value (63.33) (109,041) (65.96) (115,209) NAV – debt at market value 628.29 1,081,813 490.40 856,647
16. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
Financial instruments comprise the Company’s investment portfolio, derivative instruments (if any) as well as cash, and any borrowings, debtors and creditors. This note sets out the Company’s financial instruments and the risks related to them.
The Company’s financial instruments mainly comprise its investment portfolio (as shown above), a debenture, a bank facility as well as its cash, debtors and creditors that arise directly from its operations such as sales and purchases awaiting settlement and accrued income. For the purpose of this note ‘cash’ should be taken to comprise cash and cash equivalents as defined in note 1D. The accounting policies in note 1C include criteria for the recognition and the basis of measurement applied for financial instruments. Note 1 also includes the basis on which income and expenses arising from financial assets and liabilities are recognised and measured.
The main financial risks that the Company faces from its financial instruments are market risk, liquidity risk, and credit risk. These are set out below:
Market risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk:
-- Currency risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in foreign exchange rates; -- Interest rate risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market interest rates; and -- Other price risk – arising from fluctuations in the fair value or future cash flows of a financial instrument for reasons other than changes in foreign exchange rates or market interest rates.
Liquidity risk – arising from any difficulty in meeting obligations associated with financial liabilities.
Credit risk – arising from financial loss for a company where the other party to a financial instrument fails to discharge an obligation.
Risk Management Policies and Procedures
The Directors have delegated to the Manager the responsibility for the day-to-day investment activities and management of gearing of the Company as more fully described in the Directors’ Report.
As an investment trust the Company invests in equities and other investments for the long-term so as to fulfil its investment policy (incorporating the Company’s investment objective). In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company’s net assets or a reduction of the profits available for dividends. The associated risk management policies are summarised below and have remained substantially unchanged for the two years under review.
16.1 Market Risk
The Company’s Manager assesses the Company’s exposure when making each investment decision, and monitors the overall level of market risk for the whole of the investment portfolio on an ongoing basis. The Board has meetings in each calendar quarter to assess risk and review investment performance, as disclosed in the Board Responsibilities on pages 33 and 34 of the Annual Report. Any borrowing to gear the investment portfolio is used to enhance returns but also increases the Company’s exposure to market risk and volatility. The Company has the ability to gear by using its £100 million debenture stock 2022 and its bank facility of £50 million (2020: £150 million). Debenture stock 2022 market value £109,041,000 (2020: £115,209,000).
16.1.1 Currency risk
The majority of the Company’s assets and all of its liabilities are denominated in sterling. There is some exposure to US dollar, Swiss franc and the Euro.
Management of the currency risk
The Manager monitors the Company’s direct exposure to foreign currencies on a daily basis and reports to the board on a regular basis. Forward currency contracts can be used to reduce the Company’s exposure to foreign currencies arising naturally from the Manager’s choice of securities. All contracts are limited to currencies and amounts commensurate with the assets denominated in currencies. No Forward currency contracts were used during the year (2020: none).
Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is included in the financial statements and its receipt.
The Company may invest up to 20% of the portfolio in securities listed on non-
The fair values of the Company’s monetary items that had a material currency exposure at 31 March are shown below. Where the Company’s equity investments (which are not monetary items) are priced in a foreign currency, they have been included separately in the analysis so as to show the overall level of exposure.
2021 2020 USD CHF EUR USD CHF EUR £’000 £’000 £’000 £’000 £’000 £’000 Foreign currency exposure on net 1,915 859 979 1,037 2,041 580 monetary items Investments at fair value through 39,881 12,393 39,593 33,652 – 33,593 profit or loss that are equities Total net foreign currency exposure 41,796 13,252 40,572 34,689 2,041 34,173
The above may not be representative of the exposure to risk during the year, because the levels of foreign currency exposure may change significantly throughout the year.
In respect of the Company’s material direct foreign currency exposure to investments denominated in currencies, if sterling had weakened by 4.1% (2020: 2.8%) for the US dollar, 2.6% (2020: 3.3%) for the Swiss franc and 1.9% (2020: 2.7%) for the Euro during the year, capital return and net assets of the Company would have increased by £3.0 million (2020: £2.0 million). Conversely, if sterling had strengthened to the same extent for the currencies mentioned above, the capital return and net assets of the Company would have decreased by the same amount. The exchange rate variances noted above have been based on market volatility in the year, using the standard deviation of sterling’s fluctuation to the applicable currency. This sensitivity takes no account of any impact on the market values of the Company’s investments arising from the foreign currency mix of their respective revenues, expenses, assets and liabilities.
16.1.2 Interest rate risk
Interest rate movements will affect the level of income receivable on cash deposits and money market funds, and the interest payable on variable rate borrowings. When the Company has cash balances, they are held on variable rate bank accounts yielding rates of interest dependent on the base rate determined by the custodian,
The Company has in place a revolving credit facility (the 'bank facility'), details of which are shown in note 11. The Company uses the bank facility when required at levels monitored by the Board. At the maximum possible bank facility gearing of £50 million (2020: £150 million), the effect of a 1% increase/decrease in the interest rate would result in a decrease/increase to the Company’s income of £500,000 (£2020: £1,500,000) per annum.
The Company also has an uncommitted bank overdraft facility which it uses for settlement purposes and the interest rate is dependent on the base rate as determined by the custodian. At the year end, no amounts were overdrawn (2020: none).
The Company’s debt of £100 million (2020: £100 million) of debenture stock is fixed which exposes the Company to changes in market value in the event that the debt is repaid before maturity. Details of the debenture stock interest is shown in note 12, with details of its market value and the affect on net asset value in note 15(b).
The Company held one fixed income security during the year (2020: one), being a short-term zero coupon government bond which matured on the
Interest rate exposure
At 31 March the exposure of financial assets and financial liabilities to interest rate risk is shown by reference to:
-- floating interest rates (giving cash flow interest rate risk) – when the interest rate is due to be re-set; and -- fixed interest rates (giving fair value interest rate risk) – when the financial instrument is due for repayment.
2021 2020 Within Between Within Between one one and one one and year five years Total year five years Total £’000 £’000 £’000 £’000 £’000 £’000 Exposure to floating interest rates: Cash and cash 32,570 – 32,570 43,958 – 43,958 equivalents Exposure to fixed interest rates: Debenture stock - debt – (100,000) (100,000) – (100,000) (100,000) at par value Total exposure to 32,570 (100,000) (67,430) 43,958 (100,000) (56,042) interest rates
16.1.3 Other price risk
Other price risks (i.e. changes in market prices other than those arising from interest rate risk or currency risk) may affect the value of the equity investments, but it is the business of the portfolio manager to manage the portfolio to achieve the best return that he can.
Management of the other price risk
The Directors manage the market price risks inherent in the investment portfolio by meeting regularly to monitor on a formal basis the Manager’s compliance with the Company’s stated objectives and policies, and to review investment performance.
The Company’s portfolio is the result of the Manager’s investment process and need not be highly correlated with the Company’s benchmark or the market in which the Company invests. The value of the portfolio will not move in line with the market but will move as a result of the performance of the company shares within the portfolio.
If the value of the portfolio fell by 10% at the balance sheet date, the profit after tax for the year and the net assets of the Company would decrease by £115.1 million (2020: £92.2 million). Conversely, if the value of the portfolio rose by 10%, the profit after tax and the net assets of the Company would increase by the same amounts.
16.2 Liquidity risk
Liquidity risk is minimised as the majority of the Company’s investments constitute a diversified portfolio of readily realisable securities which can be sold to meet funding commitments as necessary. In addition, the Company has a bank facility which it can use to provide short-term funding flexibility.
Liquidity risk exposure
The contractual maturities of the financial liabilities at the year end, based on the earliest date on which payment can be required, are as follows:
More than three months Three but months less than More than or less one year one year Total 2021 £’000 £’000 £’000 £’000 Debenture stock - debt at par value – – 100,000 100,000 Interest on debenture stock – 7,750 3,875 11,625 Accruals 698 – – 698 698 7,750 103,875 112,323
More than three months Three but months less than More than or less one year one year Total 2020 £’000 £’000 £’000 £’000 Debenture stock - debt at par value – – 100,000 100,000 Interest on debenture stock – 7,750 11,625 19,375 Amounts due to brokers 996 – – 996 Accruals 938 – – 938 1,934 7,750 111,625 121,309
16.3 Credit risk
Credit risk encompasses the failure by counterparties to deliver securities which the Company has paid for, or to pay for securities which the Company has delivered, and cash balances. Counterparty risk is minimised by using only approved counterparties. The Company’s ability to operate in the short-term may be adversely affected if the Company’s custodian suffers insolvency or other financial difficulties. However, with the support of the depositary’s restitution obligation the risk of outright credit loss on the investment portfolio is remote. The Board reviews the custodian’s annual controls report and the Manager’s management of the relationship with the custodian. Cash balances are limited to a maximum of 1% of net assets with any one deposit taker, with only approved deposit takers being used, and a maximum deposit of 6% of net assets in aggregate in liquidity funds with credit ratings of AAAm (or equivalent). These limits are at the discretion of the Board and are reviewed on a regular basis. The investment policy also allows for
17. FAIR VALUE
The values of the financial assets and financial liabilities are carried either at their fair value (investments), or at a reasonable approximation of fair value (amounts due from brokers, dividends receivable, accrued income, amounts due to brokers, accruals, cash and any drawings on the bank facility) or at amortised cost (debenture).
Fair Value Hierarchy Disclosures
All except one of the Company’s portfolio of investments are in the Level 1 category as defined in FRS 102 as amended for fair value hierarchy disclosures (
Level 1 – the unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly.
Level 3 – Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.
Categorisation within the hierarchy is determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability.
The valuation techniques used by the Company are explained in the accounting policies note.
2021 Level 1 Level 2 Level 3 Total £’000 £’000 £’000 £’000 Financial assets designated at fair value through profit or loss: Quoted investments: Equities and preference shares 1,150,903 – – 1,150,903 Unquoted investments – – 105 105 Total for financial assets 1,150,903 – 105 1,151,008
2020 Level 1 Level 2 Level 3 Total £’000 £’000 £’000 £’000 Financial assets designated at fair value through profit or loss: Quoted investments: Equities and preference shares 922,279 – – 922,279 Unquoted investments – – 154 154 Total for financial assets 922,279 – 154 922,433
The valuation techniques used by the Company are explained in the accounting policies note. At the end of the financial year there were no Level 2 investments. The investment in Level 3 is in the unquoted company Eurovestech. The holding in Eurovestech did not change during the year, but the fair value was reduced to £105,000 (2020: £154,000).
The book cost and fair value of the debenture stock, based on the offer value at the balance sheet date, are as follows:
2021 2020 Book Fair Book Fair Value Value Value Value £’000 £’000 £’000 £’000 Debenture stock repayable between one and five years: 7 ¾% Debenture Stock 2022 100,000 109,041 100,000 115,209 Discount on issue of debenture stock (377) – (628) – 99,623 109,041 99,372 115,209
Incorporating the fair value of the debenture, results in the reduction of the net asset value per ordinary share to 628.29p (2020: 490.40p).
18. CAPITAL MANAGEMENT
The Company’s total capital employed at
The Company’s total capital employed is managed to achieve the Company’s objective and investment policy as set out on above, including that borrowings may be used to provide gearing of the equity portfolio up to the maximum authorised by shareholders, currently 25% of net assets. Net gearing was 7.1% (2020: 8.3%) at the balance sheet date. The Company’s policies and processes for managing capital were unchanged throughout the year and the preceding year.
The main risks to the Company’s investments are shown in the Strategic Report under the ‘Principal Risks and Uncertainties’ section above. These also explain that the Company is able to use borrowings to gear and that gearing will amplify the effect on equity of changes in the value of the portfolio.
The Board can also manage the capital structure directly since it has taken the powers, which it is seeking to renew, to issue and buy-back shares and it also determines dividend payments.
The Company is subject to externally imposed capital requirements with respect to the obligation and ability to pay dividends by section 1158 Corporation Tax Act 2010 and by the Companies Act 2006, respectively, and with respect to the availability of the bank facility by the terms imposed by the lender. The Board regularly monitors, and has complied with, the externally imposed capital requirements. This is unchanged from the prior year. Borrowings comprise the debenture stock, details of which are contained in note 12, a bank facility and an uncommitted overdraft facility which may be used for short-term funding requirements.
19. CONTINGENCIES, GUARANTEES AND FINANCIAL COMMITMENTS
This note would show any liabilities the Company is committed to honour, and which are dependent on future circumstances or events occurring.
There are no contingencies, guarantees or financial commitments of the Company at the year end (2020: £nil).
20. RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH THE MANAGER
A related party is a company or individual who has direct or indirect control or who has significant influence over the Company. Under accounting standards, the Manager is not a related party.
Details of the Manager’s services and fees are disclosed in the Directors’ Report on page 37 of the Annual Report, and in note 3.
21. POST BALANCE SHEET EVENTS
There are no significant events or adjustment to the financial statements after the end of the reporting year requiring disclosure.
There are no significant events after the end of the reporting year requiring disclosure.
This announcement contains regulated information under the Disclosure Guidance and Transparency Rules of the
This announcement does not constitute the Company's statutory accounts. The financial information for 2021 is derived from the statutory accounts for 2021, which will be delivered to the registrar of companies. The statutory accounts for 2019 have been delivered to the registrar of companies. The auditors have reported on the 2021 and 2020 accounts; their reports were unqualified and did not include a statement under Section 498(2) or (3) of the Companies Act 2006.
The Annual Financial Report will be available from the Company’s website: www.edinburghinvestmenttrust.com
The Annual Financial Report will be submitted to the National Storage Mechanism and will shortly be available for inspection at: http://www.morningstar.co.uk/uk/NSM .
The Audited Annual Financial Report will be posted to shareholders shortly. Copies may be obtained during normal business hours from the Company’s registered office, Quartermile One,
A copy of the Annual Financial Report will be available from the Company’s website: www.edinburghinvestmenttrust.com
The Annual General Meeting of the Company will be held at
By order of the Board
Majedie Asset Management Limited
James Mowat + 44 20 7618 3900
Tom Skinner + 44 20 7597 4000
Shireen Farhana+44 7757 299250
Miles McKechnie+44 7788 546279
Founded over 130 years ago,
Established in 2002, Majedie is an independent boutique. It actively manages equities for institutional investors, wealth managers and endowments across a range of