Final Results
BLACKROCK SUSTAINABLE AMERICAN INCOME TRUST PLC (FORMERLY BLACKROCK NORTH AMERICAN INCOME TRUST PLC)
LEI: 549300WWOCXSC241W468
Annual results announcement for the year ended 31 October 2021
PERFORMANCE RECORD
|
|
As at 31 October 2021 |
As at 31 October 2020 |
| Net assets (£000)1 | 165,334 | 126,410 |
| Net asset value per ordinary share (pence) | 206.08 | 158.06 |
| Ordinary share price (mid-market) (pence) | 198.25 | 145.50 |
| Discount to cum income net asset value2 | 3.8% | 7.9% |
| Russell 1000 Value Index | 1647.89 | 1215.24 |
| --------------- | --------------- | |
| Performance (with dividends reinvested) | ||
| Net asset value per share2 | 36.0% | (8.9%) |
| Ordinary share price2 | 42.4% | (17.9%) |
| Russell 1000 Value Index | 35.6% | (7.5%) |
| ========= | ========= |
|
|
Year ended 31 October 2021 |
Year ended 31 October 2020 |
Change % |
| Revenue | |||
| Net profit after taxation (£000) | 3,248 | 5,367 | -39.5 |
| Revenue earnings per ordinary share (pence)3 | 4.06 | 6.65 | -38.9 |
| --------------- | --------------- | --------------- | |
| Interim dividends (pence) | |||
| 1st interim | 2.00 | 2.00 | – |
| 2nd interim | 2.00 | 2.00 | – |
| 3rd interim | 2.00 | 2.00 | – |
| 4th interim | 2.00 | 2.00 | – |
| --------------- | --------------- | --------------- | |
| Total dividends paid/payable | 8.00 | 8.00 | – |
| ========= | ========= | ========= |
1 The change in net assets reflects market movements, shares reissued/bought back and dividends paid during the year.
2 Alternative Performance Measures, see Glossary in the Company’s Annual Report for the year ended 31 October 2021.
3 Further details are given in the Glossary in the Company’s Annual Report for the year ended 31 October 2021.
CHAIRMAN’S STATEMENT
CHANGES TO INVESTMENT OBJECTIVE AND POLICY
As reported in my statement in the Half Yearly Financial Report, the Board proposed in June that the Company’s investment mandate be altered to incorporate explicit Environmental, Social and Governance (ESG) objectives.
I am delighted to report that shareholders overwhelmingly approved the proposals and the Company is now embarking on an exciting new chapter in its development, one your Board is convinced will bring strong investment returns over the long run and broaden its appeal to a wider audience.
The Board believed that this change in strategy was appropriate in order for the Company to remain a relevant and attractive investment opportunity for its shareholders. Approval was obtained at a General Meeting held on 29 July 2021, and since this date the Company’s portfolio has changed to reflect the new objective of investing in a manner consistent with the principles of sustainable investing. The exposure to mid-cap companies has also increased and the number of portfolio holdings has reduced.
Following the policy to adopt a more active approach to gearing, with a range of 0% to 10% and a neutral level of 5% of net asset value, the Company reduced its cash holdings to become substantially fully invested and has therefore been at the lower bound of this new range. However, since the financial year-end and market uncertainty brought on by the emergence of the Omicron COVID-19 variant, the opportunity has been taken to increase the Company’s gearing which at 4 February 2022 stood at 2.9%.
PERFORMANCE OVERVIEW
Following the COVID-19 pandemic outbreak and subsequent ramifications in 2020, the restart of economic recovery has gathered pace and Europe and other major regions are catching up with the more advanced recovery in the U.S. At the time of writing, however, the full impact of the Omicron variant remains unclear. Strong company earnings helped the stock market reach new highs early in the calendar year. Overall, companies have beaten analyst expectations on both earnings per share and revenue growth, with the latter having been particularly strong.
Against this backdrop, over the year to 31 October 2021, the Company’s net asset value per share (NAV) returned 36.0%1 and the share price returned 42.4%1. This compares with a rise of 35.6%1 in the Russell 1000 Value Index. At the close of business on 4 February 2022, the Company’s NAV had increased by 2.8% (with dividends reinvested) since the year end.
REVENUE EARNINGS AND DIVIDENDS
The Company’s revenue earnings per share (EPS), based on the weighted average number of shares in issue for the year, amounted to 4.06p (2020: 6.65p), a decrease of 38.9%. Four quarterly interim dividends of 2.00p per share were paid on 29 April 2021, 2 July 2021, 1 October 2021 and 4 January 2022. This is in line with the payments made in the previous financial year. The dividend paid represents a yield of 4.0% on the share price at the year end.
Whilst the Company continues to retain a bias to high yielding value stocks, the changes to the mandate and the fact that we have stopped writing covered calls will both impact the Company’s underlying income level. However, your Board considers that it remains appropriate to continue with the current enhanced dividend policy for the new financial year which will be supported through both revenue and other distributable reserves. Consequently, the Board will be seeking shareholder authority at the forthcoming Annual General Meeting to cancel the Company’s share premium reserve, effectively converting it into a distributable reserve. The Board continues to believe that this dividend policy provides an attractive option for current and prospective shareholders who wish to achieve exposure to the U.S. equity market whilst at the same time receiving a competitive dividend.
SHARE ISSUES AND DISCOUNT CONTROL
As at 4 February 2022, the Company was trading on a 5.9% discount and has largely done so since the start of 2020, reflecting the headwinds for value investing following the outbreak of the COVID-19 pandemic. However, in April 2021 the Company’s shares traded at a premium, reflecting the rally in value stocks following the announcement of the success in vaccine trials and their subsequent rollout. Since this time, the discount has widened a little as growth stocks returned to favour for a time.
In November 2020, the Company purchased 190,000 ordinary shares at an average discount of 6.8% for a total cost of £295,000 including expenses. All shares purchased have been placed in treasury. Whilst the shares were trading at a premium in April 2021, the Company reissued 445,000 shares from treasury at a premium to NAV for a total gross consideration of £888,000 at an average price of 199.58p per share and an average 1.7% premium to NAV. Subsequent to the year end and up to the date of this report, no further shares have been bought back or reissued.
The Board will continue to use its authorities to issue and buy back shares when it considers it is in shareholders’ interests to do so. Resolutions to renew the authorities to issue and buy back shares will be put to shareholders at the forthcoming Annual General Meeting.
ENGAGEMENT ON GOVERNANCE ISSUES
An important element of our approach to sustainable investing is an active engagement with the companies in which your Company invests.
During the year under review, the Investment Manager voted on 1,277 proposals at 85 general meetings on behalf of the Company. At these meetings the Investment Manager voted in favour of most resolutions, as should be expected when investing in well run companies, but voted against 90 (6.9%) resolutions, abstained on 2 (0.2%) and withheld 7 votes (0.5%). Most of the votes against were in respect of resolutions relating to Directors’ remuneration arrangements, independence and time commitments, or to elect or remove directors, and to amend articles, which were deemed by the Investment Manager as not being in the best interests of shareholders.
BOARD COMPOSITION
Andrew Irvine has announced his intention to retire as a Director of the Company following the Annual General Meeting in March 2022 and, accordingly, will not be seeking re-election. His contribution to the Board over the nine years since the formation of the Company has been outstanding and on behalf of both shareholders and the Board, I would like to express our appreciation.
The Board, having carefully considered its composition and need to ensure that a suitable balance of skills, knowledge, experience, independence and diversity was maintained, commenced a search and selection process at the end of 2021 to identify a new Director which is now nearing completion. It is my intention to retire at the end of the Company’s financial year in October and I am delighted that Alice Ryder will succeed me as Chairman.
OUTLOOK
The Board believes that following the changes implemented last year the Company now offers an even more attractive investment opportunity and the incorporation of explicit ESG objectives underpins this.
The outlook for U.S. equities remains uncertain, although we continue to believe that the economy will normalise during the course of the year. The year will not be without its risks and returns are expected to be lower than 2021 (the S&P 500 Index has more than doubled since 2019) with decelerating economic growth and if current inflation turns out to be more persistent than envisaged, the likelihood of further interest rate rises.
The Portfolio Managers also consider that US value investing remains a compelling opportunity given the current inflationary environment, as value stocks are likely to show much greater resilience than their more expensive growth counterparts in an environment when inflation and interest rates are rising.
ANNUAL GENERAL MEETING (AGM)
The AGM of the Company will be held at the offices of BlackRock at 12 Throgmorton Avenue, London EC2N 2DL on Tuesday, 22 March 2022 at 12 noon. Details of the business of the meeting and attendance at the meeting are set out in the Directors’ Report. In light of the ongoing COVID-19 pandemic, shareholders are strongly encouraged to submit a proxy vote in advance of the AGM, either by completing the hard copy Form of Proxy or online by following the instructions set out in the Notice of Annual General Meeting.
SIMON MILLER
Chairman
8 February 2022
1 All percentages calculated in Sterling terms with dividends reinvested.
INVESTMENT MANAGER’S REPORT
A NEW INVESTMENT APPROACH
The year under review was marked by important changes in how the Company will be managed in the future. The Company adopted several changes to its investment strategy and was renamed the BlackRock Sustainable American Income Trust plc following shareholder approval on 29 July 2021.
We are excited by the opportunities afforded by the adoption of the new investment strategy and we moved quickly to reposition the portfolio to reflect the changes. Given the liquidity of the portfolio we were able to execute the transactions necessary very swiftly and the new portfolio is set out below.
These changes are intended to enhance the experience of existing shareholders and to increase the Company’s appeal to new investors. The enhancements include evolving the Company’s mandate to pursue specific sustainability objectives, expanding the Company’s investment universe to include meaningful exposure to mid-cap companies, narrowing the range of portfolio holdings to 30-60 stocks, utilising structural portfolio gearing (a 5% of NAV neutral level typically with a range of 0% to 10%), and ceasing the Company’s systematic use of an active options overlay strategy. Meanwhile, the Company is maintaining its primary exposure to North American equities, preserving its value investment style and focus on dividend-paying stocks and will continue to target an attractive level of income with long-term capital appreciation.
The Company’s investment objective is to provide an attractive level of income with capital appreciation over the long term in a manner consistent with the principles of sustainable investing. We believe these dual objectives are best achieved through an investment approach driven by fundamental research and ESG analysis. Philosophically, we seek to build a high conviction portfolio of attractively priced, high-quality dividend-paying companies that are classified as either ESG Leaders, ESG Improvers or Sustainability Enablers. ESG Leaders are best-in-class companies that effectively manage environmental, social and governance factors to benefit all stakeholders. ESG Improvers are companies showing demonstratable progress on their ESG journey, where active engagements may lead to improving ESG practices and more sustainable outcomes. Finally, Sustainability Enablers are companies advancing the transition to sustainable solutions. For example, companies contributing to greater energy efficiency and a lower carbon footprint. A fuller explanation of our investment process is set out in the Company’s Annual Report for the year ended 31 October 2021.
MARKET OVERVIEW
U.S. large-cap stocks, as represented by the S&P 500® Index, advanced by 42.9% in US Dollar terms for the year ended 31 October 2021. In Sterling terms, the S&P 500 appreciated by 34.8% during the year.
U.S. large-cap stocks rallied in the fourth quarter of 2020 as election clarity and the emergence of viable COVID-19 vaccines boosted investor optimism. Cyclical value stocks, those most beaten down in the COVID-19 crisis, staged a particularly strong late-year rally as financial markets anticipated an end to global lockdowns and a positive inflection in economic growth. Policymakers also continued to provide accommodative measures to combat the effects of the pandemic. This included passing the US$900 billion COVID-19 Relief Bill, an aid package signed into law in late December 2020, that provided new direct payments to Americans, as well as additional paycheck protection programme loans and unemployment benefits.
Markets encountered bouts of volatility in the early stages of 2021 but ended the first quarter on an upbeat tone, reaching all-time highs. The U.S. economy was fuelled on multiple fronts. Firstly, monetary policy support continued to persist with the Federal Reserve (the Fed) signalling its intention to keep the federal funds rate (i.e. the target interest rate for commercial bank overnight lending) near zero through at least 2023. Secondly, fiscal policy remained stimulative with the signing into law in March 2021 of the American Rescue Plan, a US$1.9 trillion fiscal stimulus package. Thirdly, further progress on vaccine supply and distribution aided a rebound in economic activity levels. These elements stayed in place for the duration of the annual reporting period and functioned as a notable tailwind for financial markets.
U.S. stocks extended their rally in the second and third quarters despite bouts of volatility and investor concerns related to rising inflation, supply chain bottlenecks and the emergence of new COVID-19 variants. For example, broad market indices traded lower in September as investors focused on potential systemic risks in China related to Evergrande, a debt-challenged real estate developer, before posting their strongest month of the year in October. Stronger corporate earnings were the primary driver of rising stock prices, as companies beat consensus expectations on both earnings and revenues, albeit versus easy year-on-year comparisons. Revenue growth was particularly strong, as companies flexed their pricing power in passing through higher input costs to end customers via higher prices.
PORTFOLIO OVERVIEW
For the annual period ended 31 October 2021, the Company returned 36.0% and 42.4% on a net asset value and share price basis, respectively. This compares to a 35.6% return for the reference index, the Russell 1000 Value Index. Following the adoption of the new investment strategy on 29 July the sector composition of the portfolio shifted to reflect the new approach. The table below provides a comparison of the sector split immediately prior to the changes and at the calendar year end.
|
GICS Sector |
29 July 2021 Portfolio Weight |
31 October 2021 Portfolio Weight |
Change |
| Consumer Discretionary | 7.1% | 11.3% | 4.2% |
| Information Technology | 10.9% | 14.8% | 3.9% |
| Materials | 1.9% | 3.8% | 1.9% |
| Real Estate | 0.0% | 0.9% | 0.9% |
| Utilities | 4.4% | 5.2% | 0.8% |
| Financials | 24.8% | 25.2% | 0.4% |
| Health Care | 18.1% | 18.4% | 0.3% |
| Communication Services | 6.0% | 5.7% | -0.3% |
| Energy | 6.3% | 5.3% | -1.0% |
| Consumer Staples | 6.5% | 4.0% | -2.5% |
| Industrials | 8.0% | 4.9% | -3.1% |
| Cash | 6.0% | 0.5% | -0.5% |
| ========= | ========= | ========= |
The largest contributor to relative performance was stock selection and allocation decisions in financials. Notably, stock selection and an overweight to the banks and insurance industries proved beneficial during the period. In consumer discretionary, stock selection in the specialty retail and textiles, apparel and luxury goods industries boosted relative returns. Furthermore, stock selection and allocation decisions in industrials proved beneficial, including a combination of stock selection and allocation decisions in the industrial conglomerates and aerospace and defence industries.
The largest detractor from relative performance was stock selection and allocation decisions in real estate. Our large underweight to the sector accounted for the majority of underperformance, although stock selection in the equity real estate investment trusts (REITs) industry proved costly as well. In health care, stock selection and an overweight to the health care equipment and supplies industry proved detrimental, as did selection decisions among health care providers and services companies. Another modest detractor from relative results was stock selection among metals and mining companies within the materials sector. Lastly, the portfolio’s cash allocation, which is our preferred method of defensive exposure, hurt relative performance amid sharply rising U.S. stock prices.
Writing covered call options in the portfolio enhanced the Company’s income generation for the annual period. Within the context of rising U.S. stock prices, the covered call options also capped the portfolio’s upside participation and ultimately weighed on absolute and relative performance. In conjunction with the changes to the Company’s investment strategy at the end of July 2021, portfolio management has discontinued its use of an options overlay strategy.
Below is a comprehensive overview of our allocations (in Sterling) at the end of the period.
Consumer Discretionary: 5.7% overweight (11.3% of the portfolio)
The portfolio’s largest overweight allocation is to the consumer discretionary sector and we are finding ample investment opportunities due to the strength of the U.S. consumer. The current market environment is unique as U.S. household balance sheets are strong, while consumers have historically exited recessions with limited capacity for spending due to depressed household savings and high levels of unemployment. The catalyst for this set-up is a combination of exceptionally low interest rates, direct stimulus payments, bonus unemployment, and strong stock and housing markets over the past 12 plus months. Within the sector, our preferred areas of investment include apparel, retail and firms with auto-related exposure. Disruption risks persist in the sector and we believe these risks are best mitigated through identifying stock-specific investment opportunities that either trade at discounted valuations or have business models that are somewhat insulated from disruptive pressures. For example, we believe companies such as General Motors (autos: 2.2% of the portfolio) and Ralph Lauren (apparel: 2.5% of the portfolio) offer investors exposure to underappreciated franchises at discounted valuations. Furthermore, retailers such as Lowe's Companies (home improvement: 2.3% of the portfolio) and Dollar General (dollar store: 1.0% of the portfolio) provide us access to businesses that can potentially compound earnings and are more immune to disruptive forces. From a sustainability standpoint, our selection of companies includes a mix of Environmental, Social and Governance (ESG) leaders such as Gildan Activewear (1.0% of the portfolio) and Panasonic (1.8% of the portfolio), as well as ESG improvers with clear roadmaps for better ESG adherence and disclosures (i.e. General Motors’ commitment to electric vehicles and Ralph Lauren’s Global Citizen initiative).
Information Technology (IT): 5.0% overweight (14.8% of the portfolio)
An increasing number of companies in the technology sector are what we refer to as ‘industrial tech’. These firms are competitively insulated from disruptors, well-positioned to take advantage of long-term secular tailwinds and exhibit growth in earnings and free cash flow. Strong earnings growth and free cash flow generation is also translating to an increasing number of companies paying growing dividends to shareholders. This is in stark contrast to the dot-com era where growth was often prioritised over shareholder returns. We believe this trend is poised to continue. Our preferred exposures in the sector include communications equipment and IT services companies with sticky revenue streams such as Cisco Systems (4.0% of the portfolio), Cognizant Technology Solutions (3.2% of the portfolio) and Fidelity National Information Services (1.9% of the portfolio). We also continue to invest in software companies with capital-light business models such as Microsoft (1.7% of the portfolio) and SS&C Technologies Holdings (2.8% of the portfolio). IT broadly scores well on ESG metrics given the generally lower environmental impact than other sectors, with our selection of companies including a mix of ESG leaders (Microsoft and Cisco Systems) and ESG improvers (Fidelity National Information Services and SS&C Technologies Holdings).
Financials: 3.3% overweight (25.2% of the portfolio)
Financials represent our portfolio’s largest absolute sector allocation and we remain particularly bullish on companies in the banks, insurance and wealth management industries. The U.S. banks offer investors a combination of strong balance sheets (their capital levels are meaningfully higher post financial crisis), attractive valuations and the potential for relative upside versus the broader market from inflation and higher interest rates. We believe the current credit cycle is in its early stages as loan growth is starting to pick up and consumer balance sheets remain quite healthy. In our view this set-up could result in upside surprise versus consensus expectations on both growth and credit expectations over the next several years. Secondly, we continue to like insurers and insurance brokers as these companies operate relatively stable businesses and trade at attractive valuations. We categorise most of our holdings in this space as ESG improvers, with opportunities for company managements to enact stronger corporate governance and human capital development policies. Lastly, we have also identified stock specific investments in wealth management as companies such as Morgan Stanley (2.1% of the portfolio) and Charles Schwab (1.6% of the portfolio) stand out from peers due to their differentiated investment platforms, proximity to end customers and runways for long-term growth.
Health Care: 1.0% overweight (18.4% of the portfolio)
Secular growth opportunities in health care are a byproduct of demographic trends. Older populations spend more on health care than younger populations. In the United States, a combination of greater demand for health care services and rising costs, facilitates a need for increased efficiency within the health care ecosystem. We believe innovation and strong cost control can work together to address this need and companies that can contribute to this outcome may be poised to benefit. On the innovation front, we are finding opportunities in pharmaceuticals and among companies in the health care equipment and supplies industry. We prefer to invest in pharmaceutical companies with a proven ability to generate high research and development productivity versus those that focus on one or two key drugs and rely upon raising their prices to drive growth. Outside of pharma, our search for attractively priced innovators is more stock specific as we like Alcon (1.9% of the portfolio), a leading eye care company that serves more than 140 countries, and Zimmer Biomet (2.9% of the portfolio), a manufacturer of orthopaedic implants (primarily hips and knees) that provide relief for patients with debilitating health conditions. From a cost perspective, health maintenance organisations (HMOs) have an economic incentive to drive down costs as they provide health insurance coverage to constituents. These efforts ultimately help to make health care insurance affordable to more people and the HMOs also play a substantial role in improving the access to and quality of health care its members receive. Fundamentally, we believe our holdings in the space can benefit from downward pressure on cost-trend, new membership growth and further industry consolidation over time. Furthermore, they trade at meaningfully discounted valuations versus peers, offering us an attractive risk versus reward opportunity.
Utilities: 0.3% overweight (5.2% of the portfolio)
Relative valuations for regulated utilities have become more attractive over the last year and this shift has contributed to our modest overweight in the sector. Portfolio exposures are stock specific as we are finding pockets of investment opportunity among U.S. regulated utilities, which add a level of stability and defensiveness to the portfolio through their durable earnings and dividend profiles. Our investments in the sector primarily focus on ESG leaders that have specific targets for reduction in carbon emissions and maintain significant exposure to renewables or generate power through cleaner means such as natural gas.
Materials: 0.1% overweight (3.8% of the portfolio)
Our exposure to the materials sector is stock specific. In the metals and mining industry we have positions in Steel Dynamics (1.6% of the portfolio), the fifth largest U.S. steel producer, and Newmont Corporation (1.2% of the portfolio), an advantaged gold miner that operates on the lower end of the cost curve. Both are ESG leaders in their respective disciplines. Steel Dynamics is an EAF (electric arc furnace) ‘clean’ steel producer and EAF mills use a lower-cost, less carbon-intensive process for manufacturing steel than conventional blast furnaces. Meanwhile, Newmont Corporation stands above its gold mining peers due to its strong governance, safety record and environmental management commitments. We also recently initiated a position in Sealed Air, a manufacturer of film packaging for perishable food and industrials/e-commerce. Sealed Air operates a high return business, has good pricing power and in our view offers a relatively stable growth outlook. From a sustainability standpoint, plastic packagers generally score poorly on waste and water stress. The key issue for plastic is how to improve circularity and management has pledged to have 100% recyclable/reusable solutions and 50% average recycled/renewable content by 2025, which is well ahead of peers.
Energy: 0.1% underweight (5.3% of the portfolio)
The Company currently invests in four energy stocks and we have a neutral weight in the sector relative to the reference index. Our focus on sustainability places a high hurdle for energy companies to be included in the portfolio, but we believe the sector remains investable, as more traditional oil & gas operators are critical in the energy transition towards less carbon intensive sources. For example, natural gas is 40% to 60% less carbon-intensive to produce and combust versus coal and oil. We view natural gas as a key ‘bridge fuel’ and like companies such as Woodside Petroleum (1.3% of the portfolio) and EQT (0.9% of the portfolio). Fundamentally, we generally seek to invest in attractively priced operators with good resource assets that have opportunities to improve upon environmental issues or demonstrate clear leadership in sustainability (i.e. through their exposure to renewables or commitments to net zero/carbon neutral outcomes). We also prefer to target companies with experienced management teams, low financial leverage and disciplined capex spending plans as these elements can contribute to positive free cash flow generation over time.
Communication Services: 2.1% underweight (5.7% of the portfolio)
The portfolio has an underweight to communication services. Our underweight is driven by expensive valuations and a lack of dividend payers in the entertainment and interactive media and services industries. Meanwhile, the portfolio is overweight to the diversified telecommunication services and wireless telecom services industries. Notable portfolio holdings include Verizon Communications (diversified telecom: 2.2% of the portfolio), Rogers Communications (wireless telecom: 1.7% of the portfolio), and Fox Corp (media: 1.8% of the portfolio). Verizon Communications and Rogers Communications trade at reasonable valuations, boast strong competitive positions and rank well on ESG metrics versus peers. We also like that their core businesses, operating telecom networks, can be a key enabler of smart cities of the future, with potential to reduce energy consumption and provide other social benefits. Fox Corp, meanwhile, is a leading cable news company that we believe has an underappreciated portfolio of assets. We classify the business as an ESG improver and like that management has upgraded the firm’s data security controls and taken steps to improve the working environment for employees through implementation of both non-discriminatory and whistleblower policies.
Consumer Staples: 3.0% underweight (4.0% of the portfolio)
The consumer staples sector is a common destination for the conservative equity income investor. Historically, many of these companies have offered investors recognisable brands, diverse revenue streams, exposure to growing end markets and the ability to garner pricing power. These characteristics, in turn, have translated into strong and often stable free cash flow and growing dividends for shareholders. In recent years some of these secular advantages have become challenged, in our view, due to changing consumer preferences, greater end market competition from local brands and disruption from the rapid adoption of online shopping. These challenges, combined with higher than historical valuations, have facilitated our underweight positioning in the sector. Notable portfolio holdings include PepsiCo (2.1% of the portfolio), Lamb Weston Holdings (0.9% of the portfolio) and Danone (0.9% of the portfolio). We view each of these businesses as ESG leaders: PepsiCo stands out for reducing its water usage and product carbon footprint; Lamb Weston Holdings is at the forefront of implementing strong corporate governance practices; and Danone is making strides in reducing its greenhouse gas emissions, reducing its water usage, and increasing its mix of recyclable and reusable packaging.
Real Estate: 3.9% underweight (0.9% of the portfolio)
The portfolio has an underweight allocation to real estate, as we are finding few companies in the sector with both attractive valuations and strong or improving fundamentals. For example, retail REITs are facing challenges due to e-commerce and its negative impact on traditional brick and mortar retailers. Meanwhile, data center and logistics companies have strong fundamentals, but we view their valuations as unattractive. Our lone portfolio holding is SL Green Realty (0.9% of the portfolio), an office REIT with a knowledgeable management team that has successfully navigated the New York City real estate cycle and, in our view, made astute capital allocation decisions over time. SL Green Realty is the largest NYC landlord and over 90% of its office footprint is Leadership in Energy and Environmental Design (LEED) Gold or Silver certified, well above the NYC and U.S. averages. LEED is a leading rating system for sustainable and ‘green’ buildings and the certification is administered by the U.S. Green Building Council, a private non-profit organisation. LEED ratings range across four tiers including LEED certification, LEED Silver certification, LEED Gold certification and LEED Platinum certification.
Industrials: 6.8% underweight (4.9% of the portfolio)
The portfolio is meaningfully underweight to the industrials sector. Our selectivity is driven by relative valuations, which we view as expensive in many cases, versus other cyclical value segments of the U.S. equity market. Notable positions include Komatsu (3.0% of the portfolio), a Japanese manufacturer of construction and mining equipment, and Norfolk Southern (1.9% of the portfolio), a major U.S. east coast railroad operator. We view both companies as ESG leaders in their respective domains. Komatsu has set meaningful targets for reduced CO2 emissions from its products by 2030 and to achieve carbon neutrality by 2050. Furthermore, Norfolk Southern provides us with exposure to a consolidated industry with pricing power that emits roughly one third as much CO2 as trucks (the main shipping alternative), in moving an equivalent amount of cargo.
Market outlook
‘Unprecedented’ fittingly describes the market environment over the past 18 months. The global pandemic, the intertwined monetary-fiscal policy collaboration and the post-lockdown economic restart are all unique relative to history. The performance of U.S. stocks has followed this tone as the S&P 500 has rallied at its fastest pace in the post-Second World War era. Notably, the index doubled in 354 trading days versus the average 1,000 required to achieve such a feat, according to an August 16 CNBC analysis. Amid noisy economic data that lacks relevant historical comparisons, we believe it is important to find useful anchors for our investment convictions.
A look at earnings, fundamentals and valuations offers some helpful clues. Firstly, the composition of recent quarterly earnings speaks to corporate resilience as companies have beaten analyst expectations on both earnings per share (EPS) and revenue growth. Secondly, fundamentals indicate corporate pricing power and pent-up demand. Why? Revenue growth has been particularly strong, suggesting companies have been able to raise prices and push higher costs on to the end consumer, a reflection of pent-up demand and the consumer’s willingness to pay. Thirdly, while U.S. stock valuations are high on a price-to-earnings (P/E) basis versus history, the equity risk premium1 indicates stocks are undervalued relative to the risk versus reward they offer. All told, we remain constructive on U.S. equities, but cautious that starting points matter, and more muted return expectations are sensible at this stage of the recovery. We continue to believe that companies which run their businesses in a sustainable way, and which take into account all important stakeholders, can provide superior returns in the long run. Moreover, we believe our focus on both ESG leaders and ESG improvers provides a useful framework in which to capture this feature. After an extended market rally, we also believe markets are exiting a period of ‘rising tides lifting all boats’. If true, selectivity could play a greater role in investment returns in the months ahead.
The biggest concern or risk to our market outlook is inflation, as inflation has proven to be more durable than first anticipated. Our concerns centre on inflation’s potential to squeeze corporate profit margins, particularly if consumers grow less willing to pay up for goods and services. Additionally, persistently high inflation presents a more difficult challenge for Fed policymakers and it increases the risk of a potential policy mistake. We also continue to view COVID-19 as a market risk worth monitoring. Although we view the risks from current variants as manageable, we recognise that further COVID-19 upsets are possible and require a necessary measure of humility.
TONY DESPIRITO, DAVID ZHAO AND LISA YANG
BLACKROCK INVESTMENT MANAGEMENT LLC
8 February 2022
1 The equity risk premium (ERP) gauges whether investors are compensated for the greater risk in equities versus ‘risk-free’ government bonds. The ERP has been well above its long-term average for the past ten years, suggesting stocks are undervalued for the relative risk/reward they offer.
TEN LARGEST INVESTMENTS
1
+ Cisco Systems (2020: 41st)
Information Technology
Market value: £6,649,000
Share of investments: 4.0% (2020: 1.0%)
Cisco Systems is the world’s largest networking equipment vendor, with leading positions in most of its core end markets. As one of the largest suppliers of network security solutions, the company’s products help customers to enhance data security and privacy. Despite market concerns regarding competition and cloud migration, we believe they can still deliver sustainable revenue and earnings growth due to better than feared market positions, a diversified portfolio and a large existing installed base. Cisco Systems is also an ESG leader, ranking in the top quartile of its peers in terms of carbon emissions and water usage, and the company continues to push for emissions reductions including a targeted 30% decrease in supply chain-related scope 3 GHG emissions by 2030.
2
+ AstraZeneca (2020: 29th)
Health Care
Market value: £5,716,000
Share of investments: 3.5% (2020: 1.4%)
AstraZeneca is a diversified pharmaceutical company that conducts research & development (R&D) in high growth areas including oncology, cardiovascular diseases and immunology. They are also a leader in increasing access to health care in the developing world and we are encouraged by the aggressive stance they have taken on addressing their carbon footprint. The company has improved its R&D productivity and cost control in recent years and we believe continued strong execution by management has the potential to deliver further revenue growth and cost savings.
3
+ Comerica (2020: n/a)
Financials
Market value: £5,648,000
Share of investments: 3.4% (2020: n/a)
Comerica is one of the 20 largest U.S. banks and most of their business is in commercial loans. They have a strong independent risk management committee that focuses on detecting unethical behaviour and have established processes to attract and retain talent, including a focus on diversity. We see Comerica as offering us access to higher growth geographies in the U.S. and believe their significant excess capital above regulatory minimums can help them execute on their long-term goals.
4
+ Wells Fargo (2020: 9th)
Financials
Market value: £5,374,000
Share of investments: 3.3% (2020: 2.3%)
Wells Fargo (WFC) is one of the largest U.S. banks and it operates in three segments including community banking, wholesale banking and wealth & investment management. The company has a strong deposit franchise and we like its history of strong investment returns and prudent credit risk management. While WFC has a chequered history, we believe its current management team, led by CEO Charlie Scharf (hired in October 2019), can restore the firm’s reputation as a premier community bank. Operational improvements require patience, but we believe that risk and control remediation, as well as time-passed, can ultimately improve WFC’s low social and governance scores. In summary, we view shares of the company as underappreciated today in an environment characterised by low credit losses and ample access to liquidity.
5
- Cognizant Technology Solutions (2020: 4th)
Information Technology
Market value: £5,235,000
Share of investments: 3.2% (2020: 2.5%)
Cognizant Technology Solutions is an IT Services company with a diversified revenue base across industry verticals and geographies. As a service provider, they help enterprise and small and medium business clients to transition to cloud infrastructure, which is more efficient versus sub-scale in-house data centers. The company also exhibits strong governance as evidenced by an independent chairman, an independent majority of directors and a gender diverse board. After a period of market share loss and earnings guide-downs, we do not believe the company is structurally impaired. Rather, we see an attractive turnaround opportunity under CEO Brian Humphries (who joined the firm in April 2019).
6
+ Komatsu (2020: n/a)
Industrials
Market value: £4,941,000
Share of investments: 3.0% (2020: n/a)
Komatsu is a Japanese manufacturer of construction and mining equipment and a provider of aftermarket parts and services. Lax management as it relates to investment returns has left the company underperforming its potential, but we believe sales are at a cyclical trough and that forward estimates are too low (i.e. the sales recovery following the pandemic is underappreciated). From a sustainability standpoint, the company is a leader in incorporating a broad range of power sources (i.e. hybrids, hydrogen, trolley, battery-electric) in its product portfolio. Furthermore, company management has set targets to reduce CO2 emissions from its products by 50% by 2030 and to achieve carbon neutrality by 2050.
7
+ Zimmer Biomet (2020: 56th)
Health Care
Market value: £4,836,000
Share of investments: 2.9% (2020: 0.7%)
Zimmer Biomet designs and manufactures implants focused on orthopaedic markets and the company’s products help to provide patient relief and rehabilitation for those with debilitating health conditions. Over 90% of total hip arthroplasty and total knee arthroplasty patients indicate satisfaction. We see potential for the company to drive market share gains in its hip and knee franchises, due in part to potentially strong placements of its ROSA robotics surgery platform.
8
- American International (2020: 6th)
Financials
Market value: £4,757,000
Share of investments: 2.9% (2020: 2.4%)
American International Group (AIG) is a diversified insurance company with exposure to both property casualty insurance and life insurance. AIG’s business model entails pooling and diversifying risk and this includes insuring against adverse events related to climate change such as floods, hurricanes, etc. New management at AIG has spent the past several years fixing a variety of operational issues at the firm. Notably, AIG has expanded margins, increased reserves, lowered expenses and better managed catastrophe losses via improved use of reinsurance. Despite these developments, the stock still trades at an underappreciated valuation.
9
+ SS&C Technologies Holdings (2020: n/a)
Information Technology
Market value: £4,697,000
Share of investments: 2.8% (2020: n/a)
SS&C Technologies Holdings provides software-enabled mission critical services for the financial services industry including software for accounting, recordkeeping, regulatory reporting, investor services, etc. This is a good quality, low growth business with high levels of recurring revenue and customer retention. Regarding ESG issues, the company has begun to address some of its shortcomings including improvements in its pay practices (corporate governance).
10
+ Ralph Lauren (2020: n/a)
Consumer Discretionary
Market value: £4,208,000
Share of investments: 2.5% (2020: n/a)
Ralph Lauren is a leading global apparel company with solid brand momentum that trades at an attractive valuation. We think the company is pulling the right levers to maintain profit margins and brand equity, and we believe the market underestimates the company’s potential for improved profit margins in the medium term. We also believe the company is poised to improve its ESG scores over time. Notably, company management recently shared an updated global citizenship and sustainability plan that includes a net zero greenhouse gas emissions target by 2040. The strategy also outlines goals for increasing racial diversity in leadership, increasing the sustainability of the clothing industry and increasing ESG disclosures. Moreover, ESG key performance indicators are now used as metrics for executive compensation, which we view as a positive step.
All percentages reflect the value of the holding as a percentage of total investments.
Percentages in brackets represent the value of the holding as of 31 October 2020.
Together, the ten largest investments represent 31.7% of the Company’s portfolio (31 October 2020: 26.8%).
INVESTMENTS AS AT 31 OCTOBER 2021
|
Company |
Country |
Sector |
Securities |
Market value £000 |
% of total portfolio |
| Cisco Systems | United States | Information Technology | Ordinary shares | 6,649 | 4.0 |
| AstraZeneca | United Kingdom | Health Care | Ordinary shares | 5,716 | 3.5 |
| Comerica | United States | Financials | Ordinary shares | 5,648 | 3.4 |
| Wells Fargo | United States | Financials | Ordinary shares | 5,374 | 3.3 |
| Cognizant Technology Solutions | United States | Information Technology | Ordinary shares | 5,235 | 3.2 |
| Komatsu | Japan | Industrials | Ordinary shares | 4,941 | 3.0 |
| Zimmer Biomet | United States | Health Care | Ordinary shares | 4,836 | 2.9 |
| American International | United States | Financials | Ordinary shares | 4,757 | 2.9 |
| SS&C Technologies Holdings | United States | Information Technology | Ordinary shares | 4,697 | 2.8 |
| Ralph Lauren | United States | Consumer Discretionary | Ordinary shares | 4,208 | 2.5 |
| Anthem | United States | Health Care | Ordinary shares | 4,054 | 2.5 |
| Sanofi | France | Health Care | Ordinary shares | 3,860 | 2.3 |
| Lowe’s Companies | United States | Consumer Discretionary | Ordinary shares | 3,772 | 2.3 |
| Verizon Communications | United States | Communication Services | Ordinary shares | 3,706 | 2.3 |
| Bank of America | United States | Financials | Ordinary shares | 3,669 | 2.2 |
| Cigna | United States | Health Care | Ordinary shares | 3,661 | 2.2 |
| General Motors | United States | Consumer Discretionary | Ordinary shares | 3,598 | 2.2 |
| PepsiCo | United States | Consumer Staples | Ordinary shares | 3,459 | 2.1 |
| Morgan Stanley | United States | Financials | Ordinary shares | 3,401 | 2.1 |
| Citigroup | United States | Financials | Ordinary shares | 3,370 | 2.0 |
| Quest Diagnostics | United States | Health Care | Ordinary shares | 3,308 | 2.0 |
| Fidelity National Information Services | United States | Information Technology | Ordinary shares | 3,174 | 1.9 |
| Alcon | Switzerland | Health Care | Ordinary shares | 3,116 | 1.9 |
| Norfolk Southern | United States | Industrials | Ordinary shares | 3,079 | 1.9 |
| Fox Corp | United States | Communication Services | Ordinary shares | 3,023 | 1.8 |
| Equinor | Norway | Energy | Ordinary shares | 2,995 | 1.8 |
| Panasonic | Japan | Consumer Discretionary | Ordinary shares | 2,938 | 1.8 |
| Invesco | United States | Financials | Ordinary shares | 2,918 | 1.8 |
| Willis Towers Watson | United States | Financials | Ordinary shares | 2,852 | 1.7 |
| Microsoft | United States | Information Technology | Ordinary shares | 2,775 | 1.7 |
| Rogers Communications | Canada | Communication Services | Ordinary shares | 2,734 | 1.7 |
| Arthur J. Gallagher & Co | United States | Financials | Ordinary shares | 2,703 | 1.6 |
| Steel Dynamics | United States | Materials | Ordinary shares | 2,640 | 1.6 |
| Charles Schwab | United States | Financials | Ordinary shares | 2,627 | 1.6 |
| Public Service Enterprise Group | United States | Utilities | Ordinary shares | 2,511 | 1.5 |
| CenterPoint Energy | United States | Utilities | Ordinary shares | 2,491 | 1.5 |
| Sempra | United States | Utilities | Ordinary shares | 2,344 | 1.4 |
| ConocoPhillips | United States | Energy | Ordinary shares | 2,108 | 1.3 |
| Woodside Petroleum | Australia | Energy | Ordinary shares | 2,099 | 1.3 |
| Novo Nordisk | Denmark | Health Care | Ordinary shares | 2,063 | 1.3 |
| CDK Global | United States | Information Technology | Ordinary shares | 2,042 | 1.3 |
| Newmont Corporation | United States | Materials | Ordinary shares | 2,034 | 1.2 |
| First American | United States | Financials | Ordinary shares | 1,848 | 1.1 |
| Sealed Air | United States | Materials | Ordinary shares | 1,690 | 1.0 |
| Dollar General | United States | Consumer Discretionary | Ordinary shares | 1,682 | 1.0 |
| Gildan Activewear | Canada | Consumer Discretionary | Ordinary shares | 1,668 | 1.0 |
| Danone | France | Consumer Staples | Ordinary shares | 1,555 | 0.9 |
| SL Green Realty | United States | Real Estate | Ordinary shares | 1,532 | 0.9 |
| EQT | United States | Energy | Ordinary shares | 1,511 | 0.9 |
| Lamb Weston Holdings | United States | Consumer Staples | Ordinary shares | 1,476 | 0.9 |
| Fidelity National | United States | Financials | Ordinary shares | 1,448 | 0.9 |
| Consolidated Edison | United States | Utilities | Ordinary shares | 1,269 | 0.8 |
| American Express | United States | Financials | Ordinary shares | 1,239 | 0.8 |
| Lear | United States | Consumer Discretionary | Ordinary shares | 868 | 0.5 |
| --------------- | --------------- | ||||
| Portfolio | 164,971 | 100.0 | |||
| ========= | ========= |
All investments are in ordinary shares unless otherwise stated. The number of holdings as at 31 October 2021 was 54 (31 October 2020: 78).
At 31 October 2021, the Company did not hold any equity interests comprising more than 3% of any company’s share capital.
DISTRIBUTION OF INVESTMENTS AS AT 31 OCTOBER 2021
| Total % | Benchmark % | |
| Communication Services | 5.7 | 7.8 |
| Consumer Discretionary | 11.3 | 5.6 |
| Consumer Staples | 4.0 | 7.0 |
| Energy | 5.3 | 5.4 |
| Financials | 25.2 | 21.9 |
| Health Care | 18.4 | 17.4 |
| Industrials | 4.9 | 11.7 |
| Information Technology | 14.8 | 9.8 |
| Materials | 3.8 | 3.7 |
| Real Estate | 0.9 | 4.8 |
| Utilities | 5.2 | 4.9 |
| Cash | 0.5 | 0.0 |
Sources: BlackRock and Datastream.
STRATEGIC REPORT
The Directors present the Strategic Report of the Company for the year ended 31 October 2021. The aim of the Strategic Report is to provide shareholders with the information to assess how the Directors have performed their duty to promote the success of the Company for the collective benefit of shareholders.
The Chairman’s Statement together with the Investment Manager’s Report form part of this Strategic Report. The Strategic Report was approved by the Board at its meeting on 8 February 2022.
PRINCIPAL ACTIVITY
The Company carries on business as an investment trust and its principal activity is portfolio investment. Investment trusts are pooled investment vehicles which allow exposure to a diversified range of assets through a single investment, thus spreading investment risk.
OBJECTIVE
The Company’s investment objective is to provide an attractive level of income return together with capital appreciation over the long term in a manner consistent with the principles of sustainable investing adopted by the Company.
STRATEGY, BUSINESS MODEL AND INVESTMENT POLICY
Strategy
The Company invests in accordance with the objective given above. The Board is collectively responsible to shareholders for the long-term success of the Company and is its governing body. There is a clear division of responsibility between the Board and BlackRock Fund Managers Limited (the Manager). Matters reserved for the Board include setting the Company’s strategy, including its investment objective and policy, setting limits on gearing, capital structure, governance, and appointing and monitoring of performance of service providers, including the Manager.
Business model
The Company’s business model follows that of an externally managed investment trust. Therefore, the Company does not have any employees and outsources its activities to third-party service providers including the Manager who is the principal service provider. In accordance with the Alternative Investment Fund Managers’ Directive (AIFMD) the Company is an Alternative Investment Fund (AIF). BlackRock Fund Managers Limited is the Company’s Alternative Investment Fund Manager.
The management of the investment portfolio and the administration of the Company have been contractually delegated to the Manager who in turn (with the permission of the Company) has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited (the Investment Manager or BIM (UK)). The Manager, operating under guidelines determined by the Board, has direct responsibility for the decisions relating to the day-to-day running of the Company and is accountable to the Board for the investment, financial and operating performance of the Company.
The Company delegates fund accounting services to the Manager, which in turn sub-delegates these services to The Bank of New York Mellon (International) Limited (BNYM). Other service providers include the Depositary (also BNYM) and the Registrar, Computershare Investor Services PLC. Details of the contractual terms with the Manager and the Depositary and more details of arrangements in place governing custody services are set out in the Directors’ Report contained within the Annual Report and Financial Statements for the year ended 31 October 2021.
Investment policy
The Company invests primarily in a diversified portfolio of North American* equity securities, with a focus on large-cap and medium-cap companies that pay and grow their dividends. ‘North America’, in accordance with the United Nations publication ‘Standard Country or Area Codes for Statistical Use’, means Bermuda, Canada, Greenland, Saint Pierre and Miquelon and United States of America and ‘North American’ shall be construed accordingly. The Company may also invest in the equity securities of companies outside North America, subject to the restrictions set out below, and may invest in securities denominated in currencies other than the official currencies of the relevant countries or areas within North America. The Company may also hold other securities from time-to-time including, inter alia, options, futures contracts, convertible securities, fixed interest securities, preference shares, non-convertible preferred stock and depositary receipts (such securities other than equity securities, together ‘Other Securities’). The Company may also write covered call options in respect of its portfolio.
To achieve the Company’s investment objective, the Investment Manager adopts a stock specific approach in managing the Company’s portfolio, selecting investments that it believes will both increase in value over the long term and provide income. The Company does not invest in companies which are not listed, quoted or traded on an exchange at the time of investment, although it may have exposure to such companies where, following investment, the relevant securities cease to be listed, quoted or traded on an exchange. Typically, it is expected that the investment portfolio will comprise between 30 and 60 equity securities. As at 31 October 2021, there were 54 holdings in the Company’s portfolio.
The Company may invest in derivatives for efficient portfolio management and in options for investment purposes and may, for investment purposes, write covered call options in respect of its portfolio. Any use of derivatives for efficient portfolio management and/or options for investment purposes is made based on the same principles of risk spreading and diversification that apply to the Company’s direct investments. For the avoidance of doubt, the Company does not enter into physical or synthetic short positions or write any uncovered options.
Portfolio risk is mitigated by investing in a diversified spread of investments. In particular, the Company observes the following investment restrictions: no single investment (including for the avoidance of doubt, any single derivative instrument) at the time of investment, shall account for more than 10% of the gross asset value of the Company; no more than 25% of the gross asset value of the Company, at the time of investment, shall be invested in securities which are not deemed to be North American* securities; no more than 35% of the gross asset value of the Company, at the time of investment, shall be exposed to any one sector; no more than 20% of the gross asset value of the Company, at the time of investment, shall be invested in Other Securities; and no more than 20% of the Company’s portfolio will be under option at any given time. (*Securities may be deemed to be North American securities if: (i) the company’s principal operations are conducted from North America; or (ii) the company’s equity securities are listed, quoted or traded on a North American stock exchange; or (iii) the company does a substantial amount of business in North America; or (iv) the issuer of securities is included in the Company’s reference index.)
In managing the Company’s portfolio, the Investment Manager, in addition to other investment criteria, takes into account the environmental, social and governance (ESG) characteristics of the relevant issuers of securities and seeks to deliver a superior ESG outcome versus the reference index by aiming for the Company’s portfolio to achieve: (i) a better ESG score than the reference index; and (ii) a lower carbon emissions intensity score than the reference index. The reference index is the Russell 1000 Value Index, or such other index as may be agreed by the Company and the Investment Manager to be appropriate from time to time. However, there can be no guarantee that these aims will be achieved and the ESG rating of the Company’s portfolio and its carbon emission intensity score may vary.
The Investment Manager also applies a screening policy (currently the BlackRock EMEA Baseline Screens policy) at the time of investment through which it seeks to limit and/ or exclude direct investment (as applicable) in companies which, in the opinion of the Investment Manager, have exposure to, or ties with, certain sectors (in some cases subject to specific revenue thresholds) including but not limited to: (i) the production of certain types of controversial weapons; (ii) the distribution or production of firearms or small arms ammunition intended for retail civilians; (iii) the extraction of certain types of fossil fuel and/or the generation of power from them; (iv) the production of tobacco products or certain activities in relation to tobacco-related products; and (v) issuers which have been deemed to have failed to comply with United Nations Global Compact Principles.
Following application of the screening policy outlined above, those companies which have not yet been excluded from investment are then evaluated by the Investment Manager based on their ability to manage the risks and opportunities associated with ESG-consistent business practices and their ESG risk and opportunity credentials, such as their leadership and governance framework, which is considered essential for sustainable growth, their ability to strategically manage longer-term issues surrounding ESG and the potential impact this may have on a company’s financials. To undertake the required analyses, the Investment Manager may use data provided by external ESG data providers, proprietary models and local intelligence and may undertake site visits.
Should holdings which are compliant with the screening policy applied by the Investment Manager outlined above at the time of investment subsequently become ineligible, they will be divested within a reasonable period of time. The Company may gain limited exposure (including, but not limited to, through investment in other listed closed-ended investment funds and derivatives) to issuers with exposures that do not meet the sustainable investment principles described above. Circumstances in which such exposure may arise include, but are not limited to, where a counterparty to a derivative in which the Company invests posts collateral which is inconsistent with the Company’s sustainable investment principles or where a fund in which the Company invests does not apply any or the same sustainable investment principles as the Company and so provides exposure to securities which are inconsistent with the Company’s sustainable investment principles. The Investment Manager may take corrective action in such circumstances.
The Company may borrow up to 20 per cent of its net asset value (calculated at the time of draw down), although typically borrowings are not expected to exceed 10 per cent of its net asset value at the time of draw down. Borrowings may be used for investment purposes. The Company has entered into an overdraft facility for this purpose. The Company may enter into interest rate hedging arrangements.
The Company’s foreign currency investments are not hedged to Sterling as a matter of general policy. However, the investment team may employ currency hedging, either back to Sterling or between currencies (i.e. cross-hedging of portfolio investments).
In order to comply with the current Listing Rules, the Company also complies with the following investment restrictions (which do not form part of the Company’s investment policy): the Company will not conduct any trading activity which is significant in the context of its group as a whole; and the Company will not invest more than 10% of its gross asset value in other listed closed-ended investment funds, whether managed by the Investment Manager or not, except that this restriction shall not apply to investments in listed closed-ended investment funds which themselves have stated investment policies to invest no more than 15% of their gross assets in other listed closed-ended investment funds.
Information regarding the Company’s investment exposures is contained within the schedule of investments above. Further information regarding investment risk and activity throughout the year can be found in the Investment Manager’s Report.
No material change will be made to the investment policy without the approval of shareholders by ordinary resolution.
ENVIRONMENTAL IMPACT
The direct impact of the Company’s activities is minimal as it has no employees, premises, physical assets or operations either as a producer or a provider of goods or services. Neither does it have customers. Its indirect impact occurs through the investments that it makes and this is mitigated through BlackRock’s environmental, social and governance policies.
PERFORMANCE
Over the year ended 31 October 2021, the Company’s net asset value returned +36.0% compared with a return of +35.6% in the Russell 1000 Value Index. The ordinary share price returned +42.4% (all percentages are calculated in Sterling terms with dividends reinvested). The Investment Manager’s Report includes a review of the main developments during the year, together with information on investment activity within the Company’s portfolio.
RESULTS AND DIVIDENDS
The results for the Company are set out in the Statement of Comprehensive Income. The total return for the year, after taxation, was a profit of £44,734,000 (2020: loss of £13,315,000) of which the revenue return amounted to a profit of £3,248,000 (2020: £5,367,000) and the capital return amounted to a profit of £41,486,000 (2020: loss of £18,682,000).
The Company pays dividends quarterly. Four quarterly interim dividends of 2.00p per share were paid on 29 April 2021, 2 July 2021, 1 October 2021 and 4 January 2022. Total dividends of 8.00p per share were paid or declared in the year ended 31 October 2021 (2020: 8.00p).
FUTURE PROSPECTS
The Board’s main focus is to provide an attractive level of income together with capital appreciation over the long term in a manner consistent with the principles of sustainable investing. The future of the Company is dependent upon the success of the investment strategy. The outlook for the Company in the next twelve months is discussed in both the Chairman’s Statement and in the Investment Manager’s Report.
SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES
As an investment trust with no employees, the Company has no direct social or community responsibilities or impact on the environment. However, the Company believes that it is in shareholders’ interests to consider human rights issues and environmental, social and governance factors when selecting and retaining investments. Details of the Company’s policy on socially responsible investment are set out below.
MODERN SLAVERY ACT
As an investment vehicle the Company does not provide goods or services in the normal course of business and does not 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. In any event, the Board considers the Company’s supply chains, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.
DIRECTORS, GENDER REPRESENTATION AND EMPLOYEES
The Directors of the Company on 31 October 2021, all of whom held office throughout the year, are set out in the Directors’ Biographies in the Company’s Annual Report for the year ended 31 October 2021. The Board consists of three male Directors and two female Directors. The Company does not have any executive employees.
KEY PERFORMANCE INDICATORS
At each Board meeting, the Directors consider a number of performance measures to assess the Company’s success in achieving its objectives. The key performance indicators (KPIs) used to measure the progress and performance of the Company over time and which are comparable to other investment trusts are set out below. As indicated in the footnote to the table, some of these KPIs fall within the definition of ‘Alternative Performance Measures’ under guidance issued by the European Securities and Markets Authority (ESMA) and additional information explaining how these are calculated is set out in the Glossary in the Company’s Annual Report for the year ended 31 October 2021.
Additionally, the Board regularly reviews the performance of the portfolio, as well as the net asset value and share price of the Company and compares this against various companies and indices. The Board also reviews the performance of the portfolio against the Russell 1000 Value Index. Information on the Company’s performance is given in the Chairman’s Statement.
|
|
Year ended 31 October 2021 |
Year ended 31 October 2020 |
| Net asset value per ordinary share | 206.08p | 158.06p |
| Ordinary share price (mid-market) | 198.25p | 145.50p |
| Net asset value total return1 | +36.0% | -8.9% |
| Reference index2 | +35.6% | -7.5% |
| Share price total return1 | +42.4% | -17.9% |
| Dividends per share | 8.00p | 8.00p |
| Discount to cum income net asset value3 | 3.8% | 7.9% |
| Revenue return per share | 4.06p | 6.65p |
| Ongoing charges4 | 1.06% | 1.06% |
| ========= | ========= |
1 This measures the Company’s share price and NAV total return, which assumes dividends paid by the Company have been reinvested.
2 Russell 1000 Value Index, total return basis.
3 This is the difference between the share price and the NAV per share with debt at par. It is an indicator of the need for shares to be bought back or, in the event of a premium to NAV per share, issued.
4 Ongoing charges represent the management fee and all other operating expenses excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items as a % of average daily net assets.
PRINCIPAL RISKS
The Company is exposed to a variety of risks and uncertainties. As required by the 2018 UK Corporate Governance Code (the UK Code), the Board has put in place a robust ongoing process to identify, assess and monitor the principal and emerging risks facing the Company. A core element of this process is the Company’s risk register which identifies the risks facing the Company and assesses the likelihood and potential impact of each risk and the quality of controls operating to mitigate it. A residual risk rating is then calculated for each risk based on the outcome of the assessment.
The risk register, its method of preparation and the operation of key controls in BlackRock’s and third-party service providers’ systems of internal control, are reviewed on a regular basis by the Audit and Management Engagement Committee. In order to gain a more comprehensive understanding of BlackRock’s and other third-party service providers’ risk management processes and how these apply to the Company’s business, BlackRock’s internal audit department provides an annual presentation to the Audit Committee chairmen of the BlackRock investment trusts setting out the results of testing performed in relation to BlackRock’s internal control processes. The Audit and Management Engagement Committee also periodically receives and reviews internal control reports from BlackRock and the Company’s service providers.
The Board has undertaken a robust assessment of both the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The COVID-19 pandemic has given rise to unprecedented challenges for businesses across the globe and the Board has taken into consideration the risks posed to the Company by the crisis and incorporated these into the Company’s risk register. The threat of climate change has also reinforced the importance of more sustainable practices and environmental responsibility.
Emerging risks are considered by the Board as they come into view and are incorporated into the existing review of the Company’s risk register. Additionally, the Manager considers emerging risks in numerous forums and the Risk and Quantitative Analysis team produces an annual risk survey. Any material risks of relevance to the Company identified through the annual risk survey will be communicated to the Board.
The Board will continue to assess these risks on an ongoing basis. In relation to the UK Code, the Board is confident that the procedures that the Company has put in place are sufficient to ensure that the necessary monitoring of risks and controls has been carried out throughout the reporting period.
The principal risks and uncertainties faced by the Company during the financial year, together with the potential effects, controls and mitigating factors are set out in the following table.
| Principal Risk | Mitigation/Control |
|
Counterparty
The potential loss that the Company could incur if a counterparty is unable (or unwilling) to perform on its commitments. |
Due diligence is undertaken before contracts are entered into and exposures are diversified across a number of counterparties. The Depositary is liable for restitution for the loss of financial instruments held in custody unless able to demonstrate the loss was a result of an event beyond its reasonable control. |
|
Investment performance
Returns achieved are reliant primarily upon the performance of the portfolio. The Board is responsible for: · deciding the investment strategy to fulfil the Company’s objective; and · monitoring the performance of the Investment Manager and the implementation of the investment strategy. An inappropriate investment policy may lead to: · underperformance compared to the reference index; · a reduction or permanent loss of capital; and · dissatisfied shareholders and reputational damage. |
To manage this risk the Board: · regularly reviews the Company’s investment mandate and long-term strategy; · has set investment restrictions and guidelines which the Investment Manager monitors and regularly reports on; · receives from the Investment Manager a regular explanation of stock selection decisions, portfolio exposure, gearing and any changes in gearing and the rationale for the composition of the investment portfolio; · monitors and maintains an adequate spread of investments in order to minimise the risks associated with particular countries or factors specific to particular sectors, based on the diversification requirements inherent in the investment policy; · receives and reviews regular reports showing an analysis of the Company’s performance against the Russell 1000 Value Index and other similar indices; and · has been assured that the Investment Manager has training and development programmes in place for its employees and its recruitment and remuneration packages are developed in order to retain key staff. |
|
Legal & Regulatory Compliance
The Company has been approved by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant eligibility conditions, and operates as an investment trust in accordance with Chapter 4 of Part 24 of the Corporation Tax Act 2010. As such, the Company is exempt from capital gains tax on the profits realised from the sale of its investments. Any breach of the relevant eligibility conditions could lead to the Company losing investment trust status and being subject to corporation tax on capital gains realised within the Company’s portfolio. In such event, the investment returns of the Company may be adversely affected. Any serious breach could result in the Company and/or the Directors being fined or the subject of criminal proceedings or the suspension of the Company’s shares which would in turn lead to a breach of the Corporation Tax Act 2010. Amongst other relevant laws, the Company is required to comply with the provisions of the Companies Act 2006, the Alternative Investment Fund Managers’ Directive, the UK Listing Rules, Disclosure Guidance and Transparency Rules and the Market Abuse Regulation. |
The Investment Manager monitors investment movements, the level of forecast income and expenditure and the amount of proposed dividends to ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached. The results are reported to the Board at each meeting. Compliance with the accounting rules affecting investment trusts is also carefully and regularly monitored. The Company Secretary, Manager and the Company’s professional advisers provide regular reports to the Board in respect of compliance with all applicable rules and regulations. The Board and Manager also monitor changes in government policy and legislation which may have an impact on the Company. |
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Market
Market risk arises from volatility in the prices of the Company’s investments. It represents the potential loss the Company might suffer through realising investments in the face of negative market movements. Changes in general economic and market conditions, such as currency exchange rates, interest rates, rates of inflation, industry conditions, tax laws, political events and trends can also substantially and adversely affect the securities and, as a consequence, the Company’s prospects and share price. Market risk includes the potential impact of events which are outside the Company’s control, such as the COVID-19 pandemic. Companies operating in sectors in which the Company invests may be impacted by new legislation governing climate change and environmental issues, which may have a negative impact on their valuation and share price. |
The Board considers the diversification of the portfolio, asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Investment Manager. The Board monitors the implementation and results of the investment process with the Investment Manager. The Board also recognises the benefits of a closed-end fund structure in extremely volatile markets such as those experienced with the COVID-19 pandemic. Unlike open-ended counterparts, closed-end funds are not obliged to sell-down portfolio holdings at low valuations to meet liquidity requirements for redemptions. During times of elevated volatility and market stress, the ability of a closed-end fund structure to remain invested for the long term enables the Portfolio Managers to adhere to disciplined fundamental analysis from a bottom-up perspective and be ready to respond to dislocations in the market as opportunities present themselves. The Portfolio Managers spend a considerable amount of time understanding the ESG risks and opportunities facing investee companies and conduct research and due diligence on new investments and when monitoring investments in the portfolio. |
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Operational
In common with most other investment trust companies, the Company has no employees. The Company therefore relies on the services provided by third parties and is dependent on the control systems of the Manager and BNYM (the Depositary, Custodian and Fund Accountant), which maintains the Company’s assets, dealing procedures and accounting records. The security of the Company’s assets, dealing procedures, accounting records and adherence to regulatory and legal requirements depend on the effective operation of the systems of these other third-party service providers. There is a risk that a major disaster, such as floods, fire, a global pandemic, or terrorist activity, renders the Company’s service providers unable to conduct business at normal operating effectiveness. Failure by any service provider to carry out its obligations could have a material adverse effect on the Company’s performance. Disruption to the accounting, payment systems or custody records (including cyber security risk) could prevent the accurate reporting and monitoring of the Company’s financial position. |
Due diligence is undertaken before contracts are entered into with third-party service providers. Thereafter, the performance of the provider is subject to regular review and reported to the Board. The Board reviews on a regular basis an assessment of the fraud risks that the Company could potentially be exposed to and also a summary of the controls put in place by the Manager, Depositary, Custodian, Fund Accountant and Registrar specifically to mitigate these risks. Most third-party service providers produce internal control reports to provide assurance regarding the effective operation of internal controls as reported on by their reporting accountants. These reports are provided to the Audit and Management Engagement Committee for review. The Committee would seek further representations from service providers if not satisfied with the effectiveness of their control environment. The Company’s financial instruments held in custody are subject to a strict liability regime and, in the event of a loss of such financial instruments held in custody, the Depositary must return financial instruments of an identical type or the corresponding amount, unless able to demonstrate the loss was a result of an event beyond its reasonable control. The Board reviews the overall performance of the Manager, Investment Manager and all other third-party service providers on a regular basis and compliance with the Investment Management Agreement annually. The Board also considers the business continuity arrangements of the Company’s key service providers on an ongoing basis and reviews these as part of its review of the Company’s risk register. In respect of the risks posed by the COVID-19 pandemic in terms of the ability of service providers to function effectively, the Board has received reports from key service providers setting out the measures that they have put in place to address the crisis, in addition to their existing business continuity framework. Having considered these arrangements and reviewed service levels since the crisis has evolved, the Board is confident that a good level of service has and will be maintained. |
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Financial
The Company’s investment activities expose it to a variety of financial risks which include market risk, counterparty credit risk, liquidity risk and the valuation of financial instruments. |
Details of these risks are disclosed in note 14 to the Financial Statements in the Annual Report for the year ended 31 October 2021, together with a summary of the policies for managing these risks. |
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Marketing
Marketing efforts are inadequate or do not comply with relevant regulatory requirements. There is a failure to communicate adequately with shareholders or reach out to potential new shareholders resulting in reduced demand for the Company’s shares and a widening of the discount. |
The Board reviews marketing strategy and initiatives and the Manager is required to provide regular updates on progress. BlackRock has a dedicated investment trust sales team visiting both existing and potential clients on a regular basis. The Manager also devotes considerable resources marketing to self-directed private investors. Data on client meetings and issues raised are provided to the Board on a regular basis. All investment trust marketing documents are subject to appropriate review and authorisation. |
VIABILITY STATEMENT
In accordance with provision 31 of the 2018 UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the twelve months referred to by the ‘Going Concern’ guidelines. The Company is an investment trust with the objective of providing an attractive level of income return together with capital appreciation over the long term.
The Directors expect the Company to continue for the foreseeable future and have therefore conducted this review for a period up to the Annual General Meeting in 2025. The Directors assess viability over a rolling three-year period as they believe it best balances the Company’s long-term objective, its financial flexibility and scope with the difficulty in forecasting economic conditions which could affect both the Company and its shareholders. The Company also undertakes a continuation vote every three years with the next one taking place at the forthcoming Annual General Meeting.
In making an assessment on the viability of the Company, the Board has considered the following:
· the impact of a significant fall in U.S. equity markets on the value of the Company’s investment portfolio;
· the ongoing relevance of the Company’s investment objective, business model and investment policy in the prevailing market;
· the principal and emerging risks and uncertainties, as set out above, and their potential impact;
· the level of ongoing demand for the Company’s shares;
· the Company’s share price discount/premium to NAV;
· the liquidity of the Company’s portfolio; and
· the level of income generated by the Company and future income and expenditure forecasts.
The Directors have concluded that there is a reasonable expectation that the Company will continue in operation and meet its liabilities as they fall due over the period of their assessment based on the following considerations:
· the Investment Manager’s compliance with the investment objective and policy, its investment strategy and asset allocation;
· the portfolio mainly comprises readily realisable assets which can be sold to meet funding requirements if necessary. As at 4 February 2022, 100% of the portfolio was estimated as being capable of being liquidated within two days;
· the operational resilience of the Company and its key service providers and their ability to continue to provide a good level of service for the foreseeable future;
· the effectiveness of business continuity plans in place for the Company and its key service providers;
· the ongoing processes for monitoring operating costs and income which are considered to be reasonable in comparison to the Company’s total assets;
· the Board’s discount management policy; and
· the Company is a closed-end investment company and therefore does not suffer from the liquidity issues arising from unexpected redemptions.
In addition, the Board’s assessment of the Company’s ability to operate in the foreseeable future is included in the Going Concern Statement which can be found in the Directors’ Report.
SECTION 172 STATEMENT: PROMOTING THE SUCCESS OF THE COMPANY
The Companies (Miscellaneous Reporting) Regulations 2018 require directors of large companies to explain more fully how they have discharged their duties under Section 172(1) of the Companies Act 2006 in promoting the success of their companies for the benefit of members as a whole. This includes the likely consequences of their decisions in the longer term and how they have taken wider stakeholders’ needs into account.
The disclosure that follows covers how the Board has engaged with and understands the views of stakeholders and how stakeholders’ needs have been taken into account, the outcome of this engagement and the impact that it has had on the Board’s decisions. The Board considers the main stakeholders in the Company to be the Manager, Investment Manager and the shareholders. In addition to this, the Board considers investee companies and key service providers of the Company to be stakeholders; the latter comprise the Company’s Custodian, Depositary, Registrar and Broker.
Stakeholders
| Shareholders | Manager and Investment Manager |
Other key service providers | Investee companies |
| Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. The Board is focused on fostering good working relationships with shareholders and on understanding the views of shareholders in order to incorporate them into the Board’s strategy and objectives in delivering an attractive level of income return together with capital appreciation over the long term in a manner consistent with the principles of sustainable investing adopted by the Company. | The Board’s main working relationship is with the Manager, who is responsible for the Company’s portfolio management (including asset allocation, stock and sector selection) and risk management, as well as ancillary functions such as administration, secretarial, accounting and marketing services. The Manager has sub-delegated portfolio management to the Investment Manager. Successful management of shareholders’ assets by the Investment Manager is critical for the Company to successfully deliver its investment strategy and meet its objective. The Company is also reliant on the Manager as AIFM to provide support in meeting relevant regulatory obligations under the AIFMD and other relevant legislation. | In order for the Company to function as an investment trust with a listing on the premium segment of the official list of the Financial Conduct Authority and trade on the London Stock Exchange’s (LSE) main market for listed securities, the Board relies on a diverse range of advisors for support in meeting relevant obligations and safeguarding the Company’s assets. For this reason, the Board considers the Company’s Custodian, Depositary, Registrar and Broker to be stakeholders. The Board maintains regular contact with its key external service providers and receives regular reporting from them through the Board and Committee meetings, as well as outside of the regular meeting cycle. | Portfolio holdings are ultimately shareholders’ assets and the Board recognises the importance of good stewardship and communication with investee companies in meeting the Company’s investment objective and strategy. The Board monitors the Manager’s stewardship arrangements and receives regular feedback from the Manager in respect of meetings with the management. |
| Areas of Engagement | Issue | Engagement | Impact |
| Investment mandate and objective | The Board has responsibility to shareholders to ensure that the Company’s portfolio of assets is invested in line with the stated investment objective and in a way that ensures an appropriate balance between spread of risk and portfolio returns. | The Board worked closely with the Investment Manager throughout the year in further developing investment strategy and underlying policies in the interests of shareholders and future investors. Consultations with shareholders, undertaken in conjunction with the Company’s Broker, underlined certain key elements of the investment objective and investment policy which were valued by shareholders and, following a thorough review and after careful consideration, the Board recommended that the Company’s investment objective and policy be amended. |
Following shareholder approval on 29 July 2021, the Company altered its investment mandate with the objective of providing an attractive level of income together with capital growth over the long term in a manner consistent with the principles of sustainable investing. As a result, the Company’s investment process and its holdings has changed to comply with the new requirements. The Board believes that it has become a more attractive investment strategy with the additional alpha potential that the increased ESG integration will provide. |
| Shareholders | Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. | The Board is committed to maintaining open channels of communication and to engage with shareholders. The Company welcomes and encourages attendance and participation from shareholders at its Annual General Meetings. Shareholders will have the opportunity to meet the Directors and Investment Manager and to address questions to them directly. The Investment Manager will also provide a presentation on the Company’s performance and outlook. The Annual Report and Half Yearly Financial Report are available on the BlackRock website and are also circulated to shareholders. In addition, regular updates on performance, monthly factsheets, the daily NAV and other information are also published on the Manager’s website at blackrock.com/uk/brsa. Unlike trading companies, one-to-one shareholder meetings normally take the form of a meeting with the Investment Manager as opposed to members of the Board. The Company’s willingness to enter into discussions with institutional shareholders is also demonstrated by the programmes of institutional presentations by the Investment Manager. If shareholders wish to raise issues or concerns with the Board, they are welcome to do so at any time. The Chairman is available to meet directly with shareholders periodically to understand their views on governance and the Company’s performance where they wish to do so. He may be contacted via the Company Secretary whose details are given in the Company’s Annual Report for the year ended 31 October 2021. |
The Board values any feedback and questions from shareholders ahead of and during Annual General Meetings in order to gain an understanding of their views and will take action when and as appropriate. Feedback and questions will also help the Company evolve its reporting, aiming to make reports more transparent and understandable. Feedback from all substantive meetings between the Investment Manager and shareholders will be shared with the Board. The Directors will also receive updates from the Company’s Broker on any feedback from shareholders, as well as share trading activity, share price performance and an update from the Investment Manager. Portfolio holdings are ultimately shareholders’ assets and the Board recognises the importance of good stewardship and communication with investee companies in meeting the Company’s investment objective and strategy. The Board monitors the Manager’s stewardship arrangements and receives regular feedback from the Investment Manager in respect of meetings with the management of portfolio companies. |
| Responsible investing | More than ever, the importance of good governance and consideration of sustainable investment are key factors in making investment decisions. Climate change is becoming a defining factor in companies’ long-term prospects across the investment spectrum, with significant and lasting implications for economic growth and prosperity. | The Board believes that responsible investment and sustainability are important to the longer-term delivery of the Company’s success. The Board works closely with the Investment Manager to regularly review the Company’s performance, investment strategy and underlying policies to ensure that the Company’s investment objective continues to be met in an effective and responsible way in the interests of shareholders and future investors. The Investment Manager’s approach to the consideration of ESG factors in respect of the Company’s portfolio, as well as the Investment Manager’s engagement with investee companies to encourage the adoption of sustainable business practices which support long-term value creation, are kept under review by the Board. The Board also expects to be informed by the Manager of any sensitive voting issues involving the Company’s investments. The Investment Manager reports to the Board in respect of its ESG policies and how these are integrated into the investment process; a summary of BlackRock’s approach to ESG and sustainability is set out below. The Investment Manager’s engagement and voting policy is detailed on the BlackRock website. |
The Board and Investment Manager believe there is likely to be a positive correlation between strong ESG practices and investment performance over time. |
| Discount management | The Board recognises that it is in the long-term interests of shareholders that shares do not trade at a significant discount (or premium) to their prevailing NAV. The Board believes this may be achieved by the use of share buyback powers and the issue of shares. | The Board monitors the Company’s share rating on an ongoing basis and receives regular updates from the Manager and the Company’s Broker regarding the level of discount. The Board believes that the best way of maintaining the share rating at an optimal level over the long term is to create demand for the shares in the secondary market. To this end, the Investment Manager is devoting considerable effort to broadening the awareness of the Company, particularly to wealth managers and to the wider retail market. In addition, the Board has worked closely with the Manager to develop the Company’s marketing strategy, with the aim of ensuring effective communication with existing shareholders and to attract new shareholders to the Company in order to improve liquidity in the Company’s shares and to sustain the share rating of the Company. |
The Board continues to monitor the Company’s discount to NAV and will look to buy back shares if it is deemed to be in the interests of shareholders as a whole. The Company’s average discount for the year to 31 October 2021 was 4.8% and the discount at 4 February 2022 stood at 5.9%. |
| Service levels of third-party providers | The Board acknowledges the importance of ensuring that the Company’s principal suppliers are providing a suitable level of service, including the Manager in respect of investment performance and delivering on the Company’s investment mandate; the Custodian and Depositary in respect of their duties towards safeguarding the Company’s assets; the Registrar in its maintenance of the Company’s share register and dealing with investor queries; and the Company’s Broker in respect of the provision of advice and acting as a market maker for the Company’s shares. | The Manager reports to the Board on the Company’s performance on a regular basis. The Board carries out a robust annual evaluation of the Manager’s performance, their commitment and available resources. The Board performs an annual review of the service levels of all third-party service providers and concludes on their suitability to continue in their role. The Board receives regular updates from the AIFM, Depositary, Registrar and Broker on an ongoing basis. In light of the challenges presented by the COVID-19 pandemic to the operation of businesses across the globe, the Board has worked closely with the Manager to gain comfort that relevant business continuity plans are operating effectively for all of the Company’s key service providers. |
All performance evaluations were performed on a timely basis and the Board concluded that all key third-party service providers, including the Manager, were operating effectively and providing a good level of service. The Board has received updates in respect of business continuity planning from the Company’s Manager, Custodian, Depositary, Fund Accountant, Registrar and Printer and is confident that arrangements are in place to ensure a good level of service will continue to be provided despite the impact of the COVID-19 pandemic. |
| Board composition | The Board is committed to ensuring that its own composition brings an appropriate balance of knowledge, experience and skills and that it is compliant with best corporate governance practice under the UK Code, including guidance on tenure and the composition of the Board’s committees. | All Directors are subject to a formal evaluation process on an annual basis (more details and the conclusions of the 2021 evaluation process are given in the Company’s Annual Report for the year ended 31 October 2021). All Directors stand for re-election by shareholders annually. Shareholders may attend the Annual General Meeting and raise any queries in respect of Board composition or individual Directors in person or may contact the Company Secretary or the Chairman using the details provided in the Company’s Annual Report for the year ended 31 October 2021 with any issues. The Board is currently undertaking a review of succession planning arrangements having identified the need for a new Director. The services of an external search consultant, Cornforth Consulting Ltd, are being used to identify potential candidates. |
As at the date of this report, the Board was comprised of three men and two women. Three Directors have a tenure in excess of nine years. Mr Irvine is not seeking re-election at the forthcoming Annual General Meeting and Mr Miller plans to retire as Chairman in October 2022. Details of each Director’s contribution to the success and promotion of the Company are set out in the Directors’ Report in the Company’s Annual Report for the year ended 31 October 2021 and details of Directors’ biographies can be found in the Company’s Annual Report for the year ended 31 October 2021. The Directors are not aware of any issues that have been raised directly by shareholders in respect of Board composition in the year under review. Details of the proxy voting results in favour and against individual Directors’ re-election at the 2021 Annual General Meeting are given on the Manager’s website at www.blackrock.com/uk/brsa. |
Sustainability and ESG
THE BOARD’S APPROACH TO ESG
The Board believes that responsible investment and sustainability are integral to the longer-term delivery of the Company’s success. The Board works closely with the Investment Manager regularly to review the Company’s performance, investment strategy and underlying policies to ensure that the Company’s investment objective continues to be met in an effective, responsible and sustainable way in the interests of shareholders and future investors.
The Board has been mindful of the increase in demand for investment products that place a sustainable investment philosophy at their core, a trend that has accelerated in recent years. Accordingly, following a thorough review and shareholder approval at a General Meeting held on 29 July 2021, the Company’s investment objective and investment policy were amended to incorporate a sustainable investment approach into the investment policy so that the Company is managed in a way which is compatible with the principles of sustainable investment. In addition, one of the Company’s non-executive Directors has responsibility for sustainability, working alongside the rest of the Board and the Investment Manager.
The Company promotes environmental or social characteristics under the EU Sustainable Finance Disclosure Regulation (SFDR) and is classified as an Article 8 product. Further detail around how the Company has achieved these characteristics and objectives, including the extent of any investments that meet the EU criteria for environmentally sustainable economic activities, is included in the SFDR Review section below for the period under review.
SFDR REVIEW
From the date of application of SFDR to the Company on 29 July 2021 to 31 October 2021 (as a result of the approval by shareholders of changes to the investment objective and policy on 29 July 2021), the environmental and social characteristics being promoted by the Company were met through the application of exclusionary screens based on certain environmental and social related characteristics as set out in the Company's investment objective and policy and the AIFMD Fund Disclosures document available on the Company's website. In addition, the Company delivered a superior ESG outcome versus the reference index as measured by a leading external ratings agency, by the Company’s portfolio achieving: (i) a better ESG score than the reference index; and (ii) a lower carbon emissions intensity score than the reference index. The Investment Manager remains satisfied that the underlying investments in companies continue to maintain the good governance criteria set out in the AIFMD Fund Disclosures document available on the Company's website.
SUSTAINABLE INVESTING: BLACKROCK’S APPROACH
The Technical Screening Criteria (TSC) of the EU Taxonomy Regulation (Taxonomy) were finalised only on 9 December 2021 (i.e., in respect of the first two Taxonomy environmental objectives of climate change mitigation and climate change adaptation) or have not yet been developed (i.e. for the other four Taxonomy environmental objectives). These detailed criteria will require the availability of multiple, specific data points regarding each investment. During the reporting period, there was insufficient reliable, timely and verifiable data available for the Investment Manager to be able to assess investments using the TSC.
In addition, the Regulatory Technical Standards (RTS) under the SFDR, which define the methodology for the calculation of the share of environmentally sustainable investments and the templates for these disclosures are not yet in force. During the reporting period, the Investment Manager is not able to provide standardised and comparable disclosures on the Taxonomy alignments of the Company.
While there may be investments held by the Company that are in economic activities that contribute to an environmental objective and may be eligible to be assessed against the TSC, the Investment Manager was not currently in a position to describe:
1) the extent to which the investments of the Company are in economic activities that qualify as environmentally sustainable and are aligned with the Taxonomy Regulation;
2) the proportion, as a percentage of the Company’s portfolio, of investments in environmentally sustainable economic activities which are aligned with the Taxonomy Regulation; or
3) the proportion, as a percentage of the Company’s portfolio, of enabling and transitional activities (as described in the Taxonomy Regulation).
The Investment Manager is keeping this situation under active review and where, in its discretion, it has assessed that it has sufficient reliable, timely and verifiable data on the Company’s investments, the Investment Manager will provide the descriptions referred to above, in which case the Company’s prospectus or the relevant supplement will be updated. For further information please refer to https://www.blackrock.com/corporate/literature/prospectus/eu-taxonomy.pdf.
In January 2020, Larry Fink, CEO of BlackRock, wrote a letter to CEOs saying that climate change will fundamentally reshape modern finance. In addition, BlackRock announced it would make sustainability its new standard for investing, by doubling down on product innovation while also achieving full ESG integration across our active platform. BlackRock’s sustainability strategy is focused on long-term value creation. As a fiduciary asset manager, BlackRock believes that our clients should consider how climate change, policy and economic shifts will affect returns in their portfolios. BlackRock believes that climate risk is investment risk. Further, BlackRock believes that the net zero transition will reshape the real economy and financial portfolios, presenting risks and opportunities for investors.
BlackRock’s strategy is built on the investment conviction that sustainability risk and climate risk are investment risks, and that integrating sustainability can help investors build more resilient portfolios and achieve better long-term, risk-adjusted returns. This investment conviction is built on a two-part thesis:
1) First, asset prices and portfolio risks do not yet fully reflect a broad set of sustainability-related considerations; and
2) Second, the market is at the front end of a significant reallocation of capital towards sustainable investing, which BlackRock believes will result in a flow of capital towards issuers and assets with positive sustainability characteristics (and away from those with negative ones). This in turn will also impact the relative pricing of risk and assets in portfolios.
BlackRock also announced in January 2021 that it was committed to supporting the goal of ‘net zero’ (building an economy that emits no more carbon dioxide than it removes from the atmosphere) by 2050 (the scientifically-established threshold necessary to keep global warming below 2ºC). BlackRock is taking a number of steps to help investors prepare their portfolios for a net zero world, including capturing opportunities created by the net zero transition.
BlackRock’s firmwide ESG integration statement outlines how we are integrating ESG investment insights and data across our entire platform. Fund-level ESG integration statements can be found on BlackRock’s product pages, or are available upon request. https://www.blackrock.com/corporate/literature/ publication/blk-esg-investment-statement-web.pdf.
BlackRock believes that climate change is now a defining factor in companies’ long-term prospects, and that it will have a significant and lasting impact on economic growth and prosperity. BlackRock believes that climate risk is investment risk, and this will drive a profound reassessment of risk and asset values as investors seek to react to the impact of climate policy changes. This in turn is likely to drive a significant reallocation of capital away from traditional carbon intensive industries over the next decade. BlackRock also announced in January 2021 that it was committed to supporting the goal of ‘net zero’ (building an economy that emits no more carbon dioxide than it removes from the atmosphere) by 2050 (the scientifically established threshold necessary to keep global warming well below 2ºC). BlackRock is taking a number of steps to help investors prepare their portfolios for a net zero world, including capturing opportunities created by the net zero transition.
INVESTMENT STEWARDSHIP
BlackRock also places a strong emphasis on sustainability in its stewardship activities and has engaged with companies on sustainability-related questions for a number of years. BlackRock has made an explicit ask that companies align their disclosures to the Task Force on Climate-related Financial Disclosures (TCFD) framework and the Sustainability Accounting Standards Board (SASB) standards. This includes each company’s plan for operating under a scenario where the Paris Agreement’s goal of limiting global warming to less than two degrees is fully realised, as expressed by the TCFD guidelines. To this end, BlackRock joined Climate Action 100+, a natural progression in its work to advance sustainable business practices aligned with TCFD. BlackRock has aligned its engagement and stewardship priorities to UN Sustainable Development Goals (including Gender Equality and Affordable and Clean Energy). BlackRock is committed to voting against management to the extent that they have not demonstrated sufficient progress on sustainability issues.
BlackRock is committed to transparency in terms of disclosure on its engagement with companies and voting rationales. During the twelve months to 30 June 2021, BlackRock held 3,000 engagements with companies based in 54 markets and voted on than 165,000 management and shareholder proposals at more than 16,000 meetings. BlackRock also voted against or withheld votes from 6,500 directors at 3,400 different companies driven by concerns regarding director independence, executive compensation, insufficient progress on board diversity, and overcommitted directors reflecting our intensified focus on sustainability risks. In the 2020-21 proxy year, BlackRock voted against 255 directors and against 319 companies for climate-related concerns that could negatively affect long-term shareholder value.
More details about BlackRock’s investment stewardship process can be found on BlackRock’s website at www.blackrock.com/corporate/about-us/investment-stewardship.
In terms of its own reporting, BlackRock believes that the SASB provides a clear set of standards for reporting sustainability information across a wide range of issues, from labour practices to data privacy to business ethics. For evaluating and reporting climate-related risks, as well as the related governance issues that are essential to managing them, the TCFD provides a valuable framework. BlackRock recognises that reporting to these standards requires significant time, analysis, and effort. BlackRock’s own SASB-aligned disclosure is available on its website at: www.blackrock.com/corporate/literature/continuous-disclosure-and-important-information/blackrock-2020-sasb-disclosure.pdf and BlackRock is committed to publishing a detailed TCFD-aligned report in 2022 on its 2021 activities.
BY ORDER OF THE BOARD
CAROLINE DRISCOLL
FOR AND ON BEHALF OF
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
Company Secretary
8 February 2022
RELATED PARTY TRANSACTIONS
BlackRock Fund Managers Limited (BFM) provides management and administration services to the Company under a contract which is terminable on six months’ notice. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Further details of the investment management contract are disclosed in the Directors’ Report in the Company’s Annual Report.
The investment management fee due for the year ended 31 October 2021 amounted to £1,137,000 (2020: £1,001,000). At the year end, £876,000 was outstanding in respect of the management fee (2020: £725,000).
In addition to the above services, BlackRock has provided marketing services. The total fees paid or payable for these services for the year ended 31 October 2021 amounted to £37,000 excluding VAT (2020: £46,000), of which marketing fees of £29,000 excluding VAT (2020: £31,000) were outstanding as at the year end.
At the date of this report, the Board consists of five non-executive Directors, all of whom are considered to be independent of the Manager by the Board.
Disclosures of the Directors’ interests in the ordinary shares of the Company and fees and expenses payable to the Directors are set out in the Directors’ Remuneration Report in the Company’s Annual Report for the year ended 31 October 2021. At 31 October 2021, £14,000 (2020: £14,000) was outstanding in respect of Directors’ fees.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable United Kingdom law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements under international accounting standards in conformity with the requirements of the Companies Act 2006.
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 as at the end of each financial year and of the profit or loss of the Company for that period.
In preparing those financial statements, the Directors are required to:
· present fairly the financial position, financial performance and cash flows of the Company;
· select suitable accounting policies in accordance with IAS 8, ‘Accounting Policies, Changes in Accounting Estimates and Errors,’ and then apply them consistently;
· present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
· make judgements and estimates that are reasonable and prudent;
· state whether the financial statements have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006, subject to any material departures disclosed and explained in the financial statements;
· provide additional disclosures when compliance with the specific requirements in international accounting standards in conformity with the requirements of the Companies Act 2006 is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company’s financial position and financial performance; and
· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are also responsible for preparing the Strategic Report, Directors’ Report, the Directors’ Remuneration Report, the Corporate Governance Statement and the Report of the Audit and Management Engagement Committee in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure Guidance and Transparency Rules. The Directors have delegated responsibility to the Manager for the maintenance and integrity of the Company’s corporate and financial information included on the BlackRock website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the Directors confirm to the best of their knowledge that:
· the financial statements, which have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006, give a true and fair view of the assets, liabilities, financial position and net profit of the Company; and
· the Strategic Report contained in the Annual Report and Financial Statements 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.
The 2018 UK Corporate Governance Code also requires Directors to ensure that the Annual Report and Financial Statements are fair, balanced and understandable. In order to reach a conclusion on this matter, the Board has requested that the Audit and Management Engagement Committee advise on whether it considers that the Annual Report and Financial Statements fulfil these requirements. The process by which the Committee has reached these conclusions is set out in the Audit and Management Engagement Committee’s report in the Company’s Annual Report for the year ended 31 October 2021. As a result, the Board has concluded that the Annual Report and Financial Statements for the year ended 31 October 2021, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position, performance, business model and strategy.
FOR AND ON BEHALF OF THE BOARD
SIMON MILLER
Chairman
8 February 2022
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 OCTOBER 2021
| Revenue | Capital | Total | |||||
|
|
Notes |
2021 £000 |
2020 £000 |
2021 £000 |
2020 £000 |
2021 £000 |
2020 £000 |
| Income from investments held at fair value through profit or loss | 3 | 3,617 | 4,015 | 2 | – | 3,619 | 4,015 |
| Other income | 3 | 897 | 2,954 | – | – | 897 | 2,954 |
| -------------- | -------------- | -------------- | -------------- | -------------- | -------------- | ||
| Total revenue | 4,514 | 6,969 | 2 | – | 4,516 | 6,969 | |
| ======== | ======== | ======== | ======== | ======== | ======== | ||
| Net profit/(loss) on investments and options held at fair value through profit or loss | – | – | 42,989 | (18,286) | 42,989 | (18,286) | |
| Net (loss)/profit on foreign exchange | – | – | (653) | 233 | (653) | 233 | |
| -------------- | -------------- | -------------- | -------------- | -------------- | -------------- | ||
| Total | 4,514 | 6,969 | 42,338 | (18,053) | 46,852 | (11,084) | |
| ======== | ======== | ======== | ======== | ======== | ======== | ||
| Expenses | |||||||
| Investment management fee | 4 | (284) | (250) | (853) | (751) | (1,137) | (1,001) |
| Other operating expenses | 5 | (547) | (451) | (13) | (21) | (560) | (472) |
| -------------- | -------------- | -------------- | -------------- | -------------- | -------------- | ||
| Total operating expenses | (831) | (701) | (866) | (772) | (1,697) | (1,473) | |
| ======== | ======== | ======== | ======== | ======== | ======== | ||
| Net profit/(loss) on ordinary activities before taxation | 3,683 | 6,268 | 41,472 | (18,825) | 45,155 | (12,557) | |
| Taxation (charge)/credit | (435) | (901) | 14 | 143 | (421) | (758) | |
| -------------- | -------------- | -------------- | -------------- | -------------- | -------------- | ||
| Profit/(loss) for the year | 3,248 | 5,367 | 41,486 | (18,682) | 44,734 | (13,315) | |
| ======== | ======== | ======== | ======== | ======== | ======== | ||
| Earnings/(loss) per ordinary share (pence) | 7 | 4.06 | 6.65 | 51.84 | (23.14) | 55.90 | (16.49) |
| ======== | ======== | ======== | ======== | ======== | ======== | ||
The total column of this statement represents the Company’s Statement of Comprehensive Income, prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006. The supplementary revenue and capital accounts are both prepared under guidance published by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. All income is attributable to the equity holders of the Company.
The Company does not have any other comprehensive income/(loss). The net profit/(loss) for the year disclosed above represents the Company’s total comprehensive income/(loss).
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 OCTOBER 2021
|
|
Notes |
Called up share capital £000 |
Share premium account £000 |
Capital redemption reserve £000 |
Special reserve £000 |
Capital reserves £000 |
Revenue reserve £000 |
Total £000 |
| For the year ended 31 October 2021 | ||||||||
| At 31 October 2020 | 1,004 | 44,533 | 1,460 | 37,839 | 38,222 | 3,352 | 126,410 | |
| Total comprehensive income: | ||||||||
| Net profit for the year | – | – | – | – | 41,486 | 3,248 | 44,734 | |
| Transactions with owners, recorded directly to equity: | ||||||||
| Ordinary shares reissued from treasury | 8, 9 | – | 340 | – | 548 | – | – | 888 |
| Share issue costs | 9 | – | – | – | (2) | – | – | (2) |
| Ordinary shares bought back into treasury | 8, 9 | – | – | – | (294) | – | – | (294) |
| Share purchase costs | 9 | – | – | – | (1) | – | – | (1) |
| Dividends paid1 | 6 | – | – | – | – | (339) | (6,062) | (6,401) |
| -------------- | -------------- | -------------- | -------------- | -------------- | -------------- | -------------- | ||
| At 31 October 2021 | 1,004 | 44,873 | 1,460 | 38,090 | 79,369 | 538 | 165,334 | |
| ======== | ======== | ======== | ======== | ======== | ======== | ======== | ||
| For the year ended 31 October 2020 | ||||||||
| At 31 October 2019 | 1,004 | 42,596 | 1,460 | 36,373 | 58,113 | 3,240 | 142,786 | |
| Total comprehensive (loss)/income: | ||||||||
| Net (loss)/profit for the year | – | – | – | – | (18,682) | 5,367 | (13,315) | |
| Transactions with owners, recorded directly to equity: | ||||||||
| Ordinary shares reissued from treasury | – | 1,937 | – | 3,388 | – | – | 5,325 | |
| Share issue costs | – | – | – | (10) | – | – | (10) | |
| Ordinary shares bought back into treasury | – | – | – | (1,901) | – | – | (1,901) | |
| Share purchase costs | – | – | – | (11) | – | – | (11) | |
| Dividends paid2 | 6 | – | – | – | – | (1,209) | (5,255) | (6,464) |
| -------------- | -------------- | -------------- | -------------- | -------------- | -------------- | -------------- | ||
| At 31 October 2020 | 1,004 | 44,533 | 1,460 | 37,839 | 38,222 | 3,352 | 126,410 | |
| ======== | ======== | ======== | ======== | ======== | ======== | ======== |
1 4th interim dividend of 2.00p per share for the year ended 31 October 2020, declared on 4 November 2020 and paid on 4 January 2021; 1st interim dividend of 2.00p per share for the year ended 31 October 2021, declared on 23 March 2021 and paid on 29 April 2021; 2nd interim dividend of 2.00p per share for the year ended 31 October 2021, declared on 5 May 2021 and paid on 2 July 2021; and 3rd interim dividend of 2.00p per share for the year ended 31 October 2021, declared on 5 August 2021 and paid on 1 October 2021.
2 4th interim dividend of 2.00p per share for the year ended 31 October 2019, declared on 7 November 2019 and paid on 3 January 2020; 1st interim dividend of 2.00p per share for the year ended 31 October 2020, declared on 20 March 2020 and paid on 29 April 2020; 2nd interim dividend of 2.00p per share for the year ended 31 October 2020, declared on 5 May 2020 and paid on 3 July 2020; and 3rd interim dividend of 2.00p per share for the year ended 31 October 2020, declared on 6 August 2020 and paid on 1 October 2020.
For information on the Company’s distributable reserves please refer to note 9 below.
STATEMENT OF FINANCIAL POSITION AS AT 31 OCTOBER 2021
|
|
Notes |
2021 £000 |
2020 £000 |
| Non current assets | |||
| Investments held at fair value through profit or loss | 164,971 | 119,434 | |
| Current assets | |||
| Other receivables | 2,243 | 764 | |
| Current tax asset | 96 | 86 | |
| Cash and cash equivalents | 1,240 | 8,069 | |
| -------------- | -------------- | ||
| Total current assets | 3,579 | 8,919 | |
| ======== | ======== | ||
| Total assets | 168,550 | 128,353 | |
| ======== | ======== | ||
| Current liabilities | |||
| Other payables | (3,216) | (1,417) | |
| Current tax liability | – | (178) | |
| Derivative financial liabilities held at fair value through profit or loss | – | (348) | |
| -------------- | -------------- | ||
| Total current liabilities | (3,216) | (1,943) | |
| ======== | ======== | ||
| Net assets | 165,334 | 126,410 | |
| ======== | ======== | ||
| Equity attributable to equity holders | |||
| Called up share capital | 8 | 1,004 | 1,004 |
| Share premium account | 9 | 44,873 | 44,533 |
| Capital redemption reserve | 9 | 1,460 | 1,460 |
| Special reserve | 9 | 38,090 | 37,839 |
| Capital reserves | 9 | 79,369 | 38,222 |
| Revenue reserve | 9 | 538 | 3,352 |
| -------------- | -------------- | ||
| Total equity | 165,334 | 126,410 | |
| ======== | ======== | ||
| Net asset value per ordinary share (pence) | 7 | 206.08 | 158.06 |
| ======== | ======== |
CASH FLOW STATEMENT FOR THE YEAR ENDED 31 OCTOBER 2021
| 2021 £000 |
2020 £000 |
|
| Operating activities | ||
| Net profit/(loss) on ordinary activities before taxation | 45,155 | (12,557) |
| Net (profit)/loss on investments and options held at fair value through profit or loss (including transaction costs) | (42,989) | 18,286 |
| Net loss/(profit) on foreign exchange | 653 | (233) |
| Sales of investments held at fair value through profit or loss | 199,237 | 115,627 |
| Purchases of investments held at fair value through profit or loss | (202,133) | (122,956) |
| Decrease/(increase) in other receivables | 35 | (59) |
| Increase in other payables | 143 | 217 |
| Increase in amounts due from brokers | (1,514) | (496) |
| Increase in amounts due to brokers | 1,656 | 12 |
| -------------- | -------------- | |
| Net cash inflow/(outflow) from operating activities before taxation | 243 | (2,159) |
| Taxation paid | (609) | (706) |
| -------------- | -------------- | |
| Net cash outflow from operating activities | (366) | (2,865) |
| ======== | ======== | |
| Financing activities | ||
| Net cash proceeds from ordinary shares reissued from treasury | 886 | 5,870 |
| Net cash outflow from ordinary shares bought back into treasury | (295) | (1,912) |
| Dividends paid | (6,401) | (6,464) |
| -------------- | -------------- | |
| Net cash outflow from financing activities | (5,810) | (2,506) |
| ======== | ======== | |
| Decrease in cash and cash equivalents | (6,176) | (5,371) |
| Effect of foreign exchange rate changes | (653) | 233 |
| -------------- | -------------- | |
| Change in cash and cash equivalents | (6,829) | (5,138) |
| Cash and cash equivalents at start of year | 8,069 | 13,207 |
| -------------- | -------------- | |
| Cash and cash equivalents at end of year | 1,240 | 8,069 |
| ======== | ======== | |
| Comprised of: | ||
| Cash at bank | 666 | 8,069 |
| Cash Fund1 | 574 | – |
| ======== | ======== | |
| 1,240 | 8,069 | |
| ======== | ======== |
1 Cash Fund represents funds held on deposit with the BlackRock Institutional Cash Series plc – US Dollar Liquid Environmentally Aware Fund.
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 2021
1. PRINCIPAL ACTIVITY
The principal activity of the Company is that of an investment trust company within the meaning of Section 1158 of the Corporation Tax Act 2010. The Company was incorporated in England and Wales on 30 August 2012 and this is the ninth Annual Report.
2. ACCOUNTING POLICIES
The principal accounting policies adopted by the Company have been applied consistently, other than where new policies have been adopted, and are set out below.
(a) Basis of preparation
The financial statements have been prepared under the historic cost convention modified by the revaluation of financial assets and financial liabilities held at fair value through profit or loss and in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 (IASs). All of the Company’s operations are of a continuing nature.
Insofar as the Statement of Recommended Practice (SORP) for investment trust companies and venture capital trusts issued by the Association of Investment Companies (AIC) in October 2019 is compatible with international accounting standards in conformity with the requirements of the Companies Act 2006, the financial statements have been prepared in accordance with the guidance set out in the SORP.
Substantially all of the assets of the Company consist of securities that are readily realisable and, accordingly, the Directors believe that the Company has adequate resources to continue in operational existence for the foreseeable future, being a period of at least one year from the date of approval of the financial statements and therefore consider the going concern assumption to be appropriate. The Directors have considered any potential impact of the COVID-19 pandemic, its potential longer-term effects on the global economy, the triennial continuation vote taking place at the forthcoming Annual General Meeting and the mitigation measures which key service providers, including the Manager, have in place to maintain operational resilience on the going concern of the Company. The Directors have reviewed the income and expense projections and the liquidity of the investment portfolio in making their assessment.
The Company’s financial statements are presented in Sterling, which is the functional currency of the Company and the currency of the primary economic environment in which the Company operates. All values are rounded to the nearest thousand pounds (£000) except where otherwise indicated.
Adoption of new and amended standards and interpretations:
Amendments to IFRS 3 – Definition of a business (effective 1 January 2020). This amendment revised the definition of a business. According to feedback received by the International Accounting Standards Board (IASB), application of the current guidance is commonly thought to be too complex and it results in too many transactions qualifying as business combinations. The adoption of this standard has had no impact on the financial statements of the Company.
Amendments to IAS 1 and IAS 8 – Definition of material (effective 1 January 2020). The amendments to IAS 1, ‘Presentation of Financial Statements’ and IAS 8, ‘Accounting Policies, Changes in Accounting Estimates and Errors’, and consequential amendments to other IASs, require companies to:
(i) use a consistent definition of materiality throughout IASs and the Conceptual Framework for Financial Reporting;
(ii) clarify the explanation of the definition of material; and
(iii) incorporate some of the guidance of IAS 1 about immaterial information.
The adoption of this standard has had no impact on the financial statements of the Company.
Amendments to IFRS 9, IAS 39 and IFRS 7 – Interest rate benchmark reform (effective 1 January 2020). These amendments provide certain reliefs in connection with the interest rate benchmark reform (excluding phase 2 reforms). These reliefs relate to hedge accounting and have the effect that the Inter Bank Offer Rate (IBOR) reform should not generally cause hedge accounting to terminate. However, any hedge ineffectiveness should continue to be recorded in the income statement. Given the pervasive nature of hedges involving IBOR based contracts, the reliefs will affect companies in all industries.
The adoption of this standard has had no impact on the financial statements of the Company.
Relevant IAS standards that have yet to be adopted:
IAS 12- Deferred tax related to assets and liabilities arising from a single transaction (effective 1 January 2023). The IASB has amended IAS 12, ‘Income taxes’, to require companies to recognise deferred tax on particular transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. According to the amended guidance, a temporary difference that arises on initial recognition of an asset or liability is not subject to the initial recognition exemption if that transaction gave rise to equal amounts of taxable and deductible temporary differences. These amendments might have a significant impact on the preparation of financial statements by companies that have substantial balances of right-of-use assets, lease liabilities, decommissioning, restoration and similar liabilities. The impact for those affected would be the recognition of additional deferred tax assets and liabilities.
The adoption of this standard is unlikely to have any significant impact on the Company.
(b) Presentation of the Statement of Comprehensive Income
In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and a capital nature has been presented alongside the Statement of Comprehensive Income.
(c) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single segment of business being investment business.
(d) Income
Dividends receivable on equity shares are recognised as revenue for the year on an ex-dividend basis. Where no ex-dividend date is available, dividends receivable on or before the year end are treated as revenue for the year. Provision is made for any dividends not expected to be received. Special dividends, if any, are treated as a capital or a revenue receipt depending on the facts or circumstances of each dividend. The return on a debt security is recognised on a time apportionment basis so as to reflect the effective yield on the debt security.
Options may be purchased or written over securities held in the portfolio for generating or protecting capital returns, or for generating or maintaining revenue returns. Where the purpose of the option is the generation of income, the premium is treated as a revenue item. Where the purpose of the option is the maintenance of capital, the premium is treated as a capital item.
Option premium income is recognised as revenue evenly over the life of the option contract and included in the revenue account of the Statement of Comprehensive Income unless the option has been written for the maintenance and enhancement of the Company’s investment portfolio and represents an incidental part of a larger capital transaction, in which case any premia arising are allocated to the capital account of the Statement of Comprehensive Income.
Deposit interest receivable is accounted for on an accruals basis. Interest income from the Cash Fund is accounted for on an accruals basis.
Where the Company has elected to receive its dividends in the form of additional shares rather than in cash, the cash equivalent of the dividend is recognised as revenue. Any excess in the value of the shares received over the amount of the cash dividend is recognised in capital.
(e) Expenses
All expenses, including finance costs, are accounted for on an accruals basis. Expenses have been charged wholly to the revenue account of the Statement of Comprehensive Income, except as follows:
· expenses which are incidental to the acquisition or sale of an investment are charged to the capital account of the Statement of Comprehensive Income. Details of transaction costs on the purchases and sales of investments are disclosed within note 9 to the financial statements in the Company’s Annual Report for the year ended 31 October 2021;
· expenses are treated as capital where a connection with the maintenance or enhancement of the value of the investments can be demonstrated;
· the investment management fee and finance costs have been allocated 75% to the capital account and 25% to the revenue account of the Statement of Comprehensive Income in line with the Board’s expected long term split of returns, in the form of capital gains and income, respectively, from the investment portfolio.
(f) Taxation
The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Statement of Comprehensive Income because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that were applicable at the balance sheet date.
Where expenses are allocated between capital and revenue, any tax relief in respect of expenses is allocated between capital and revenue returns on the marginal basis using the Company’s effective rate of corporation tax for the accounting period.
Deferred taxation is recognised in respect of all temporary differences that have originated but not reversed at the financial reporting date, where transactions or events that result in an obligation to pay more taxation in the future or right to pay less taxation in the future have occurred at the financial reporting date. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the temporary differences can be deducted. Deferred tax assets and liabilities are measured at the rates applicable to the legal jurisdictions in which they arise.
(g) Investments held at fair value through profit or loss
In accordance with IFRS 9, the Company classifies its investments at initial recognition as held at fair value through profit or loss and are managed and evaluated on a fair value basis in accordance with its investment strategy and business model.
All investments are measured initially and subsequently at fair value through profit or loss. Purchases of investments are recognised on a trade date basis. Sales of investments are recognised at the trade date of the disposal.
The fair value of the financial investments is based on their quoted bid price at the financial reporting date, without deduction for the estimated selling costs. This policy applies to all current and non-current asset investments held by the Company.
Changes in the value of investments held at fair value through profit or loss and gains and losses on disposal are recognised in the Statement of Comprehensive Income as ‘Net profits/losses on investments held at fair value through profit or loss’. Also included within the heading are transaction costs in relation to the purchase or sale of investments.
For all financial instruments not traded in an active market, the fair value is determined by using various valuation techniques. Valuation techniques include market approach (i.e., using recent arm’s length market transactions adjusted as necessary and reference to the current market value of another instrument that is substantially the same) and the income approach (e.g., discounted cash flow analysis and option pricing models making use of available and supportable market data where possible).
(h) Options
Options are held at fair value through profit or loss based on the bid/offer prices of the options written to which the Company is exposed. The value of the option is subsequently marked-to-market to reflect the fair value through profit or loss of the option based on traded prices. Where the premium is taken to revenue, an appropriate amount is shown as capital return such that the total return reflects the overall change in the fair value of the option. When an option is exercised, the gain or loss is accounted for as a capital gain or loss. Any cost on closing out an option is transferred to revenue along with any remaining unamortised premium.
(i) Other receivables and other payables
Other receivables and other payables do not carry any interest and are short-term in nature and are accordingly stated on an amortised cost basis.
(j) Dividends payable
Under IASs, final dividends should not be recognised in the financial statements unless they have been approved by shareholders before the financial reporting date. Interim dividends should not be accrued in the financial statements unless they have been paid.
Dividends payable to equity shareholders are recognised in the Statement of Changes in Equity.
(k) Foreign currency translation
Transactions involving foreign currencies are converted at the rate ruling at the date of the transaction. Foreign currency monetary assets and liabilities and non-monetary assets held at fair value are translated into British Pound Sterling at the rate ruling on the financial reporting date. Foreign exchange differences arising on translation are recognised in the Statement of Comprehensive Income as a revenue or capital item depending on the income or expense to which they relate. For investment transactions and investments held at the year end, denominated in a foreign currency, the resulting gains or losses are included in the profit/(loss) on investments held at fair value through profit or loss in the Statement of Comprehensive Income.
(l) Cash and cash equivalents
Cash comprises cash in hand, bank overdrafts and on demand deposits. Cash equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value.
The Cash Fund is a fund managed by a company within the BlackRock Group. The investment is managed as part of the Company’s cash and cash equivalents as defined under IAS 7 and is presented as a cash equivalent in the Financial Statements.
(m) Bank borrowings
Bank overdrafts are recorded as the proceeds received. Finance charges, including any premium payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the Statement of Comprehensive Income.
(n) Share repurchases and reissues
Shares repurchased and subsequently cancelled – share capital is reduced by the nominal value of the shares repurchased and the capital redemption reserve is correspondingly increased in accordance with Section 733 of the Companies Act 2006. The full cost of the repurchase is charged to the special reserve.
Shares repurchased and held in treasury – the full cost of the repurchase is charged to the special reserve.
Where treasury shares are subsequently reissued:
· amounts received to the extent of the repurchase price are credited to the special reserve; and
· any surplus received in excess of the repurchase price is taken to the share premium account.
(o) Critical accounting estimates and judgements
The Company makes estimates and assumptions concerning the future. The resulting accounting estimates and assumptions will, by definition, seldom equal the related actual results. Estimates and judgements are regularly evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Directors do not believe that any accounting judgements or estimates have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year. There are no critical accounting estimates or judgements.
3. INCOME
|
|
2021 £000 |
2020 £000 |
| Investment income: | ||
| UK dividends | 297 | 353 |
| Overseas dividends | 3,228 | 3,606 |
| Overseas special dividends | 73 | – |
| Overseas scrip dividends | – | 56 |
| Overseas REIT dividends | 19 | – |
| -------------- | -------------- | |
| Total investment income | 3,617 | 4,015 |
| ======== | ======== | |
| Deposit interest | – | 72 |
| Option premium income | 897 | 2,882 |
| -------------- | -------------- | |
| 897 | 2,954 | |
| ======== | ======== | |
| Total income | 4,514 | 6,969 |
| ======== | ======== |
During the year, the Company received option premium income in cash totalling £585,000 (2020: £2,919,000) for writing covered call options for the purposes of revenue generation.
Option premium income is amortised evenly over the life of the option contract and accordingly, during the year, option premiums of £897,000 (2020: £2,882,000) were amortised to revenue.
At 31 October 2021, there were no open positions or associated liability (2020: 171 open positions with an associated liability of £348,000).
All derivative transactions were based on constituent stocks in the Russell 1000 Value Index.
Dividends and interest received in cash during the year amounted to £3,127,000 and £nil (2020: £3,411,000 and £72,000).
Special dividends of £2,000 have been recognised in capital (2020: £nil).
4. INVESTMENT MANAGEMENT FEE
| 2021 | 2020 | |||||
|
|
Revenue £000 |
Capital £000 |
Total £000 |
Revenue £000 |
Capital £000 |
Total £000 |
| Investment management fee | 284 | 853 | 1,137 | 250 | 751 | 1,001 |
| -------------- | -------------- | -------------- | -------------- | -------------- | -------------- | |
| Total | 284 | 853 | 1,137 | 250 | 751 | 1,001 |
| ======== | ======== | ======== | ======== | ======== | ======== | |
Up to 29 July 2021, the investment management fee was payable in quarterly arrears, calculated at the rate of 0.75% of the Company’s net assets. With effect from 30 July 2021, the investment management fee is payable in quarterly arrears, calculated at the rate of 0.70% of the Company's net assets. The investment management fee is allocated 75% to the capital account and 25% to the revenue account.
There is no additional fee for company secretarial and administration services.
5. OTHER OPERATING EXPENSES
|
|
2021 £000 |
2020 £000 |
| Allocated to revenue: | ||
| Custody fee | 3 | 6 |
| Auditors’ remuneration – audit services1 | 38 | 35 |
| Registrar’s fee | 32 | 28 |
| Directors’ emoluments2 | 164 | 164 |
| Broker fees | 75 | 40 |
| Depositary fees | 14 | 13 |
| Printing fees | 44 | 19 |
| Legal and professional fees | 63 | 23 |
| Marketing fees | 37 | 46 |
| AIC fees | 9 | 7 |
| FCA fees | 8 | 8 |
| Other administrative costs | 60 | 62 |
| -------------- | -------------- | |
| 547 | 451 | |
| ======== | ======== | |
| Allocated to capital: | ||
| Custody transaction charges3 | 13 | 21 |
| -------------- | -------------- | |
| 560 | 472 | |
| ======== | ======== | |
| The Company’s ongoing charges4, calculated as a percentage of average daily net assets and using the management fee and all other operating expenses excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items were: | 1.06% | 1.06% |
| ======== | ======== |
1 No non-audit services were provided by the Company’s auditors.
2 Further information on Directors’ emoluments can be found in the Directors’ Remuneration Report. The Company has no employees.
3 For the year ended 31 October 2021, expenses of £13,000 (2020: £21,000) were charged to the capital account of the Statement of Comprehensive Income. These relate to transaction costs charged by the custodian on sale and purchase trades.
4 Alternative Performance Measure, see Glossary in the Company’s Annual Report for the year ended 31 October 2021.
6. DIVIDENDS
|
Dividends paid on equity shares |
Record date |
Payment date |
2021 £000 |
2020 £000 |
| 4th interim dividend of 2.00p per share paid for the year ended 31 October 2020 (2019: 2.00p) | 27 November 2020 | 4 January 2021 | 1,596 | 1,601 |
| 1st interim dividend of 2.00p per share paid for the year ended 31 October 2021 (2020: 2.00p) | 6 April 2021 | 29 April 2021 | 1,596 | 1,624 |
| 2nd interim dividend of 2.00p per share paid for the year ended 31 October 2021 (2020: 2.00p) | 21 May 2021 | 2 July 2021 | 1,605 | 1,624 |
| 3rd interim dividend of 2.00p per share paid for the year ended 31 October 2021 (2020: 2.00p) | 20 August 2021 | 1 October 2021 | 1,604 | 1,615 |
| -------------- | -------------- | |||
| Accounted for in the financial statements | 6,401 | 6,464 | ||
| ======== | ======== |
The total dividends payable in respect of the year ended 31 October 2021 which form the basis of Section 1158 of the Corporation Tax Act 2010 and Section 833 of the Companies Act 2006, and the amounts declared, meet the relevant requirements as set out in this legislation.
|
Dividends paid or declared on equity shares: |
2021 £000 |
2020 £000 |
| 1st interim dividend of 2.00p per share paid for the year ended 31 October 2021 (2020: 2.00p) | 1,596 | 1,624 |
| 2nd interim dividend of 2.00p per share paid for the year ended 31 October 2021 (2020: 2.00p) | 1,605 | 1,624 |
| 3rd interim dividend of 2.00p per share paid for the year ended 31 October 2021 (2020: 2.00p) | 1,604 | 1,615 |
| 4th interim dividend of 2.00p per share payable on 4 January 2022 for the year ended 31 October 20211 (2020: 2.00p) | 1,604 | 1,596 |
| -------------- | -------------- | |
| 6,409 | 6,459 | |
| ======== | ======== |
1 Based on 80,229,044 ordinary shares in issue on 25 November 2021 (the ex-dividend date).
7. EARNINGS AND NET ASSET VALUE PER ORDINARY SHARE
Total revenue, capital return/(loss) and net asset value per share are shown below and have been calculated using the following:
|
|
Year ended 31 October 2021 |
Year ended 31 October 2020 |
| Net revenue profit attributable to ordinary shareholders (£000) | 3,248 | 5,367 |
| Net capital profit/(loss) attributable to ordinary shareholders (£000) | 41,486 | (18,682) |
| ---------------- | ---------------- | |
| Total profit/(loss) attributable to ordinary shareholders (£000) | 44,734 | (13,315) |
| ========= | ========= | |
| Equity shareholders’ funds (£000) | 165,334 | 126,410 |
| ========= | ========= | |
| The weighted average number of ordinary shares in issue during the year, on which the return per ordinary share was calculated was: | 80,031,140 | 80,754,136 |
| The actual number of ordinary shares in issue at the year end, on which the net asset value per ordinary share was calculated was: | 80,229,044 | 79,974,044 |
| Return per ordinary share | ||
| Revenue earnings per share (pence) – basic and diluted | 4.06 | 6.65 |
| Capital earnings/(loss) per share (pence) – basic and diluted | 51.84 | (23.14) |
| ---------------- | ---------------- | |
| Total earnings/(loss) per share (pence) – basic and diluted | 55.90 | (16.49) |
| ========= | ========= |
|
|
As at 31 October 2021 |
As at 31 October 2020 |
| Net asset value per ordinary share (pence) | 206.08 | 158.06 |
| Ordinary share price (pence) | 198.25 | 145.50 |
| ======== | ======== |
There were no dilutive securities at the year end.
8. CALLED UP SHARE CAPITAL
|
|
Ordinary shares in issue number |
Treasury shares number |
Total shares number |
Nominal value £000 |
| Allotted, called up and fully paid share capital comprised: | ||||
| Ordinary shares of 1 pence each | ||||
| At 31 October 2020 | 79,974,044 | 20,387,261 | 100,361,305 | 1,004 |
| Ordinary shares reissued from treasury | 445,000 | (445,000) | – | – |
| Ordinary shares bought back into treasury | (190,000) | 190,000 | – | – |
| ----------------- | ----------------- | ----------------- | ----------------- | |
| At 31 October 2021 | 80,229,044 | 20,132,261 | 100,361,305 | 1,004 |
| ========== | ========== | ========== | ========== |
During the year ended 31 October 2021, the Company reissued 445,000 (2020: 2,805,000) shares from treasury for a total consideration after costs of £886,000 (2020: £5,315,000).
The Company also bought back and transferred 190,000 (2020: 1,230,000) shares into treasury for a total consideration including costs of £295,000 (2020: £1,912,000).
9. RESERVES
| Distributable reserves | ||||||
|
|
Share premium account £000 |
Capital redemption reserve £000 |
Special reserve £000 |
Capital reserve arising on investments sold £000 |
Capital reserve arising on revaluation of investments held £000 |
Revenue reserve £000 |
| At 31 October 2020 | 44,533 | 1,460 | 37,839 | 47,280 | (9,058) | 3,352 |
| Movement during the year: | ||||||
| Total comprehensive income: | ||||||
| Net profit for the year | – | – | – | 15,683 | 25,803 | – |
| Revenue return for the year | – | – | – | – | – | 3,248 |
| Transactions with owners, recorded directly to equity: | ||||||
| Ordinary shares reissued from treasury | 340 | – | 548 | – | – | – |
| Share issue costs | – | – | (2) | – | – | – |
| Ordinary shares bought back into treasury | – | – | (294) | – | – | – |
| Share purchase costs | – | – | (1) | – | – | – |
| Dividends paid | – | – | – | (339) | – | (6,062) |
| -------------- | -------------- | --------------- | --------------- | --------------- | --------------- | |
| At 31 October 2021 | 44,873 | 1,460 | 38,090 | 62,624 | 16,745 | 538 |
| ======== | ======== | ======== | ======== | ======== | ======== | |
| Distributable reserves | ||||||
|
|
Share premium account £000 |
Capital redemption reserve £000 |
Special reserve £000 |
Capital reserve arising on investments sold £000 |
Capital reserve arising on revaluation of investments held £000 |
Revenue reserve £000 |
| At 31 October 2019 | 42,596 | 1,460 | 36,373 | 49,921 | 8,192 | 3,240 |
| Movement during the year: | ||||||
| Total comprehensive (loss)/income: | ||||||
| Net loss for the year | – | – | – | (1,432) | (17,250) | – |
| Revenue return for the year | – | – | – | – | – | 5,367 |
| Transactions with owners, recorded directly to equity: | ||||||
| Ordinary shares reissued from treasury | 1,937 | – | 3,388 | – | – | – |
| Share issue costs | – | – | (10) | – | – | – |
| Ordinary shares bought back into treasury | – | – | (1,901) | – | – | – |
| Share purchase costs | – | – | (11) | – | – | – |
| Dividends paid | – | – | – | (1,209) | – | (5,255) |
| -------------- | -------------- | --------------- | --------------- | --------------- | -------------- | |
| At 31 October 2020 | 44,533 | 1,460 | 37,839 | 47,280 | (9,058) | 3,352 |
| ======== | ======== | ======== | ======== | ======== | ======== | |
The share premium account and capital redemption reserve are not distributable profits under the Companies Act 2006. In accordance with ICAEW Technical Release 02/17BL on Guidance on Realised and Distributable Profits under the Companies Act 2006, the special reserve and capital reserve may be used as distributable profits for all purposes and, in particular, the repurchase by the Company of its ordinary shares and for payments as dividends. In accordance with the Company’s Articles of Association, special reserves, capital reserves and revenue reserves may be distributed by way of dividend. The capital reserve arising on the revaluation of investments of £16,745,000 (2020: loss of £9,058,000) is subject to fair value movements and may not be readily realisable at short notice, as such it may not be entirely distributable. The investments are subject to financial risks, as such capital reserves (arising on investments sold) and the revenue reserve may not be entirely distributable if a loss occurred during the realisation of these investments.
10. VALUATION OF FINANCIAL INSTRUMENTS
Financial assets and financial liabilities are either carried in the Statement of Financial Position at their fair value (investment and derivatives) or at an amount which is a reasonable approximation of fair value (due from brokers, dividends and interest receivable, due to brokers, accruals, cash at bank and bank overdrafts). IFRS 13 requires the Company to classify fair value measurements using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The valuation techniques used by the Company are explained in the accounting policies note 2(g) to the Financial Statements above.
Categorisation within the hierarchy has been determined on the basis of the lowest level of input that is significant to the fair value measurement of the relevant asset.
The fair value hierarchy has the following levels:
Level 1 – Quoted market price for identical instruments in active markets
A financial instrument is regarded as quoted in an active market if quoted prices are readily available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The Company does not adjust the quoted price for these instruments.
Level 2 – Valuation techniques using observable inputs
This category includes instruments valued using quoted prices for similar instruments in markets that are considered less than active, or other valuation techniques where all significant inputs are directly or indirectly observable from market data.
Valuation techniques used for non-standardised financial instruments such as options, currency swaps and other over-the-counter derivatives include the use of comparable recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants making the maximum use of market inputs and relying as little as possible on entity specific inputs.
Level 3 – Valuation techniques using significant unobservable inputs
This category includes all instruments where the valuation technique includes inputs not based on market data and these inputs could have a significant impact on the instrument’s valuation.
This category includes instruments that are valued based on quoted prices for similar instruments where significant entity determined adjustments or assumptions are required to reflect differences between the instruments and instruments for which there is no active market. The Investment Manager considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement.
Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability. The determination of what constitutes ‘observable’ inputs requires significant judgement by the Investment Manager.
Over-the-counter derivative option contracts have been classified as Level 2 investments as their valuation has been based on market observable inputs represented by the underlying quoted securities to which these contracts expose the Company.
Fair values of financial assets and financial liabilities
The table below sets out fair value measurements using the IFRS 13 fair value hierarchy.
|
Financial assets at fair value through profit or loss at 31 October 2021 |
Level 1 £000 |
Level 2 £000 |
Level 3 £000 |
Total £000 |
| Assets: | ||||
| Equity investments | 164,971 | – | – | 164,971 |
| -------------- | -------------- | -------------- | -------------- | |
| 164,971 | – | – | 164,971 | |
| ======== | ======== | ======== | ======== |
|
Financial assets/(liabilities) at fair value through profit or loss at 31 October 2020 |
Level 1 £000 |
Level 2 £000 |
Level 3 £000 |
Total £000 |
| Assets: | ||||
| Equity investments | 119,434 | – | – | 119,434 |
| Liabilities: | ||||
| Derivative financial instruments – written options | – | (348) | – | (348) |
| -------------- | -------------- | -------------- | -------------- | |
| 119,434 | (348) | – | 119,086 | |
| ======== | ======== | ======== | ======== |
There were no transfers between levels of financial assets and financial liabilities during the year recorded at fair value as at 31 October 2021 and 31 October 2020. The Company did not hold any Level 3 securities throughout the financial year or as at 31 October 2021 (2020: nil).
11. RELATED PARTY DISCLOSURE
Directors’ Emoluments
At the date of this report, the Board consists of five non-executive Directors, all of whom are considered to be independent of the Manager by the Board.
Disclosures of the Directors’ interests in the ordinary shares of the Company and fees and expenses payable to the Directors are set out in the Directors’ Remuneration Report in the Company’s Annual Report for the year ended 31 October 2021. At 31 October 2021, £14,000 (2020: £14,000) was outstanding in respect of Directors’ fees.
Significant Holdings
The following investors are:
a. funds managed by the BlackRock Group or are affiliates of BlackRock, Inc. (Related BlackRock Funds); or
b. investors (other than those listed in (a) above) who held more than 20% of the voting shares in issue in the Company and are as a result, considered to be related parties to the Company (Significant Investors).
As at 31 October 2021
|
Total % of shares held by Related BlackRock Funds |
Total % of shares held by Significant Investors who are not affiliates of BlackRock Group or BlackRock, Inc. |
Number of Significant Investors who are not affiliates of BlackRock Group or BlackRock, Inc. |
| 1.6 | n/a | n/a |
As at 31 October 2020
|
Total % of shares held by Related BlackRock Funds |
Total % of shares held by Significant Investors who are not affiliates of BlackRock Group or BlackRock, Inc. |
Number of Significant Investors who are not affiliates of BlackRock Group or BlackRock, Inc. |
| 1.7 | n/a | n/a |
12. TRANSACTIONS WITH THE INVESTMENT MANAGER AND AIFM
BlackRock Fund Managers Limited (BFM) provides management and administration services to the Company under a contract which is terminable on six months’ notice. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Further details of the investment management contract are disclosed in the Directors’ Report in the Company’s Annual Report.
The investment management fee due for the year ended 31 October 2021 amounted to £1,137,000 (2020: £1,001,000). At the year end, £876,000 was outstanding in respect of the management fee (2020: £725,000).
In addition to the above services, BlackRock has provided marketing services. The total fees paid or payable for these services for the year ended 31 October 2021 amounted to £37,000 excluding VAT (2020: £46,000), of which marketing fees of £29,000 excluding VAT (2020: £31,000) were outstanding as at the year end.
The ultimate holding company of the Manager and the Investment Manager is BlackRock, Inc., a company incorporated in Delaware USA.
The Company has an investment in the BlackRock Institutional Cash Series plc – US Dollar Liquid Environmentally Aware Fund of £574,000 (2020: £nil) at the year end, which is a fund managed by a company within the BlackRock Group.
13. CONTINGENT LIABILITIES
There were no contingent liabilities at 31 October 2021 (2020: nil).
14. PUBLICATION OF NON-STATUTORY ACCOUNTS
The financial information contained in this announcement does not constitute statutory accounts as defined in the Companies Act 2006. The Annual Report and Financial Statements for the year ended 31 October 2021 will be filed with the Registrar of Companies after the Annual General Meeting.
The figures set out above have been reported upon by the auditors, whose report for the year ended 31 October 2021 contains no qualification or statement under section 498(2) or (3) of the Companies Act 2006.
The comparative figures are extracts from the audited financial statements of BlackRock North American Income Trust plc for the year ended 31 October 2020, which have been filed with the Registrar of Companies. The report of the auditor on those financial statements contained no qualification or statement under section 498 of the Companies Act.
15. ANNUAL REPORT
Copies of the Annual Report and Financial Statements will be published shortly and will be available from the registered office, c/o The Company Secretary, BlackRock Sustainable American Income Trust plc, 12 Throgmorton Avenue, London EC2N 2DL.
16. ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held at the offices of BlackRock, 12 Throgmorton Avenue, London EC2N 2DL on Tuesday, 22 March 2022 at 12.00 noon.
ENDS
The Annual Report will also be available on the BlackRock website at blackrock.com/uk/brsa. Neither the contents of the Manager’s website nor the contents of any website accessible from hyperlinks on the Manager’s website (or any other website) is incorporated into, or forms part of, this announcement.
For further information please contact:
Simon White, Managing Director, Investment Trusts, BlackRock Investment Management (UK) Limited
Tel: 020 7743 5284
Press enquiries:
Ed Hooper, Lansons Communications
Tel: 020 7294 3620
E-mail: BlackRockInvestmentTrusts@lansons.com or EdH@lansons.com
12 Throgmorton Avenue
London
EC2N 2DL
8 February 2022
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