Final Results
BLACKROCK GREATER EUROPE INVESTMENT TRUST PLC
LEI - 5493003R8FJ6I76ZUW55
Annual Report and Financial Statements 31 August 2019
PERFORMANCE RECORD
| As at 31 August 2019 |
As at 31 August 2018 |
Change % |
|
| Net asset value per ordinary share (pence) | 399.52 | 382.17 | +4.5 |
| – with dividends reinvested1 | – | – | +6.3 |
| Net assets (£’000)2 | 338,442 | 330,419 | +2.4 |
| Ordinary share price (mid-market) (pence) | 385.00 | 363.00 | +6.1 |
| – with dividends reinvested1 | – | – | +7.9 |
| FTSE World Europe ex UK Index (total return) | 1457.46 | 1390.67 | +4.8 |
| ========= | ========= | ========= | |
| For the year ended 31 August 2019 |
For the year ended 31 August 2018 |
Change % |
|
| Revenue | |||
| Net profit after taxation (£’000) | 4,160 | 5,347 | -22.2 |
| Revenue profit per ordinary share (pence)3 | 4.87 | 5.95 | -18.4 |
| ========= | ========= | ========= |
1 This measures the Company’s NAV and share price total return, which assumes dividends paid by the Company have been reinvested. Further details of the calculation of performance with dividends reinvested are given in the Glossary on page 93 of the Annual Report and Financial Statements.
2 The change in net assets reflects the tender offer implemented in the year, buyback of shares into treasury, market movements and dividends paid.
3 Further details are given in the Glossary on page 92 of the Annual Report and Financial Statements.
CHAIRMAN’S STATEMENT
PERFORMANCE OVERVIEW
During the year to 31 August 2019 the Company’s net asset value per share (NAV) increased by 6.3%, outperforming the FTSE World Europe ex UK Index which rose by 4.8%. The share price increase was even better, rising by 7.9% over the same period. (All percentages calculated in sterling terms with dividends reinvested.)
European markets trended higher during the year despite concerns over trade relations between the US and China and a softer global growth outlook which have stoked greater uncertainty. Growth indicators in Europe have been lacklustre, leading to the European Central Bank (ECB) leaving policy unchanged and announcing that interest rates would remain at all-time-lows into the first half of 2020. This increasingly dovish tone in monetary policy since the start of 2019 has pushed yields on European governments bonds to record lows which has added to the relative appeal of equities.
The Company’s Portfolio Managers focus on investing over the longer term in good quality and well capitalised companies with strong management teams. It has therefore been pleasing to see the Company’s NAV outperform the index despite the uncertain and challenging market. Additional information on European markets and key contributors to, and detractors from, portfolio performance are set out in the Investment Manager’s report below.
Since the financial year end and up to close of business on 21 October 2019, the Company’s NAV has decreased by 2.8% compared with a fall in the FTSE World Europe ex UK Index of 1.7% over the same period.
REVENUE EARNINGS AND DIVIDENDS
The Company’s revenue return per share for the year ended 31 August 2019 amounted to 4.87p per share, which compares with 5.95p per share for the previous year, a decrease of 18.2%. This in part reflects the absence this year of the one-off receipt of French withholding tax reclaims which was a feature of earnings in 2018 and also the repositioning of the portfolio over the past two years or so into lower yielding growth stocks.
In April the Board declared an interim dividend of 1.75p per share (2018: 1.75p). The Board is proposing the payment of a final dividend of 4.10p per share for the year (2018: 4.00p). This, together with the interim dividend, makes a total dividend for the year of 5.85p per share (2018: 5.75p), an increase of 1.7%.
Given that the Company has revenue reserves and also has the ability to make dividend distributions out of special reserves and capital reserves, the Board does not believe that there is an overriding requirement for the annual dividend to be covered by current year revenue alone. The Board is therefore prepared to pay out a small amount from revenue reserves to maintain a progressive dividend policy, which the Company has achieved to date.
Subject to shareholder approval, the dividend will be paid on 10 December 2019 to shareholders on the Company’s register on 1 November 2019, the ex-dividend date being 31 October 2019.
DISCOUNT CONTROL
The Board continues to monitor the Company’s discount to NAV and will look to buy back shares and/or operate six monthly tender offers if it is deemed to be in the interests of shareholders as a whole.
The Directors exercised their discretion to operate the half yearly tender offer in November 2018, which in common with previous tenders was for up to 20% of the ordinary shares in issue at the prevailing NAV. Valid tenders for 1,036,590 shares (1.20% of the shares in issue excluding treasury shares) were received at a price of 335.38p per share.
In March the Board announced that it would not be implementing the May semi-annual tender offer. Over the six months to 28 February 2019, the average discount to NAV (cum income) was 4.6% and the discount to NAV on a cum income basis (diluted for treasury shares) as at close of business on 22 March 2019 was 3.7%. It was also announced on 16 September 2019 that the Board had decided not to implement a semi-annual tender offer in November 2019. Over the six month period to 31 August 2019, the average discount to NAV (cum income) was 4.1% and the discount to NAV on a cum income basis (diluted for treasury shares) as at close of business on 13 September 2019 was 1.5%. The Board therefore concluded that it was not in the interests of shareholders as a whole to implement either the May or November 2019 semi-annual tender offers.
In addition to the November 2018 tender offer, during the year the Company has repurchased 710,000 ordinary shares in the market. 220,000 shares have also been purchased since the year end, up to and including the date of this report. All repurchased shares have been placed in treasury.
Resolutions to renew the Company’s semi-annual tender offers and share buyback authorities will be put to shareholders at the forthcoming Annual General Meeting.
AIC CODE OF CORPORATE GOVERNANCE AND COMPOSITION OF THE BOARD
Earlier this year, the Association of Investment Companies (AIC) published the 2019 Code of Corporate Governance (the AIC Code) which was endorsed by the Financial Reporting Council (FRC) as being appropriate for investment companies. The AIC Code applies to accounting periods beginning on or after 1 January 2019. The Board has determined that, effective from the Company’s new financial year, it will comply with the recommendations of the 2019 AIC Code. This in most material respects is the same as the FRC Code, save that there is greater flexibility regarding the tenure of office of the Chairman.
There have been no changes to the composition of the Board or its Committees during the year. The Board has a succession plan in place which ensures that a suitable balance of skills, knowledge, experience, independence and diversity is achieved to enable the Board to effectively discharge its duties. All members of the Board have currently been in office for less than nine years.
OUTLOOK
The near-term outlook for markets remains uncertain with concerns that the global trade wars could escalate or broaden to Europe and other economies, hitting market sentiment and leading to an extended lull in major economies thus weighing on global growth. The impact of the ongoing Brexit negotiations also continues as a risk on the horizon. However, the decisively dovish stance by the ECB should provide a tailwind and help to mitigate any potential negative effects that may arise. The Company’s Portfolio Managers will continue to position the portfolio to focus on quality companies with strong cash flows and the ability to grow to create value for shareholders over the long term.
ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held at the offices of BlackRock at 12 Throgmorton Avenue, London EC2N 2DL on Thursday, 5 December 2019 at 12 noon. As in previous years, the Portfolio Managers will make a presentation to shareholders on the Company’s progress and the outlook for the year ahead.
We, the Directors of your Company, regard the Annual General Meeting as the most important meeting of the year and we encourage you to come along. We have considered the resolutions proposed in the Notice of the Annual General Meeting and believe that all are in the interests of shareholders as a whole. We therefore recommend that you vote in favour of each resolution as we intend to do in respect of our beneficial holdings.
ERIC SANDERSON
Chairman
22 October 2019
INVESTMENT MANAGER’S REPORT
OVERVIEW
The Company enjoyed positive performance over the period with a share price increase of 7.9% and underlying NAV increase of 6.3% in the twelve months to 31 August 2019. By way of comparison, the FTSE World Europe ex UK Index gained 4.8% over the same period. (All percentages calculated in sterling terms with dividends reinvested.)
The year to the end of August 2019 proved volatile with several distinct market phases, largely related to changes in investor sentiment and perception of growth prospects. The latter part of 2018 saw a precipitous fall in global equity markets as bond market volatility spiked and the US 10-year bond yield moved resolutely above 3%. In the first instance, this put equity valuations under pressure and sparked a rotation in the market between those stocks that looked ‘cheap’ on a valuation basis and those exhibiting growth but were considered more expensive. Further pressure on the market during this period came from growing concerns of an incremental slowdown in global growth, which put those assets exposed to end markets that correlate to economic growth under pressure.
As we moved into the first half of 2019, the earnings season gave market participants the first chance to judge the extent of the global slowdown that had led to such weakness in equity markets. In aggregate, earnings and outlook statements from management teams supported the case for a slower rate of global growth but not recession. This lifted markets significantly, with a strong rally in European equities. However, demand for the asset class was overshadowed by political concerns around Italian populism and debt issues, as well as on-going Brexit negotiations. The latter had an impact on the currency with sterling depreciating modestly, circa 1%, versus the Euro over the period, benefiting the total return of the Company. Outflows from European equities had reached near US$100 billion year-to-date by the end of September (EPFR data of cross-border ETF and mutual fund flows).
Political rhetoric proved the primary driver of markets in the latter part of the period with US-Chinese tensions weighing significantly on earnings for certain sectors as companies looked to alter supply chains in the face of uncertainty. This led to cyclical assets, and particularly those within the industrial, chemicals and autos industries, to underperform. It also raised concerns about spill-over effects for economic growth. These concerns, and indeed concerns about the anaemic level of inflation, were reflected by the European Central Bank which took an increasingly dovish stance, sending fixed income yields lower still.
Volatility in the market creates opportunity for active investors to gain access to securities where the value of potential earnings and cash flow growth is not ascribed to the current share price. Whilst the Company’s portfolio turnover was relatively low at 36% for the period, we used these bouts of market volatility to increase our exposure to securities which looked to be at depressed valuations versus their fundamental outlook. We stuck to our key investment criteria; looking for companies with strong management teams, high rates of return, attractive free cash flow profiles, as well as something unique, such as a brand, product or contract structure which protects those returns. The Company’s outperformance was driven by positive stock selection with a number of our investments exhibiting positive earnings momentum over the period.
PORTFOLIO
The Company aims to construct a portfolio that is high conviction and concentrated in nature but diversified by end market exposures. Outperformance generated during the period reflected this, with the top five positively contributing stocks exposed to emerging market banking, both low- and high-end consumer retail globally, and industrial manufacturing.
Sberbank was the top performing position in the portfolio over the period. We had initiated the holding on the expectation that the earnings revision cycle was underestimated by the market. Following easing of sanctions towards Russia and realisation of improving earnings the stock rallied. As it reached what we deemed to be its fair value, we exited the position.
Within the consumer space, positions in Royal Unibrew, Ferrari and Adidas were all notable contributors to performance. Royal Unibrew is a new position initiated in the Company during the year, which operates in consolidated markets for both brewing and beverages. We like Royal Unibrew’s decentralised structure which allows for on-the-ground managers to respond quickly to trends for products, brands and packaging and make capital allocation decisions which support the realisation of strategic and financial targets. This has translated to an attractive return on invested capital (ROIC) of circa 25% for the business.
Shares in Ferrari performed well as the company continued to execute on its long-term targets to double earnings before interest and taxation (EBIT) by 2022 from 2017 base levels. Their most recent results saw EBIT ahead of consensus and Free Cash Flow targets upgraded, with the latter aided by this year’s supercar, the Monza. We believe Ferrari’s plan to double EBIT is more than achievable as they use their brand exclusivity to push through pricing increases on car models and ancillaries which will lead to EBIT margins of circa 38%. This compares very favourably to typical high-end car brands and, importantly, we believe it will be sustainable in the long-run.
The Company also realised strong performance from a holding in aerospace engine maker Safran. Safran has executed strongly on the ramp-up of its new LEAP engine, maintaining its dominance in the narrow body plane market. In addition to building for new deliveries, the business has enjoyed accelerating growth in their aftermarket civil business which is supported by the strong aerospace cycle as demand for air travel continues to grow. The aftermarket business is highly cash generative as aircraft come in for servicing on regulated schedules. This gives management the confidence to predict high-single-digit revenue growth for this portion of the business out to 2025, providing a level of resilience for earnings with any potential slowing in the aerospace cycle.
A long-standing position in Novo Nordisk was also a notable contributor to Company performance. Novo has a dominant diabetes drug franchise which has grown at a mid-single-digit rate in recent years. Further growth is being fuelled by the launch of new products, such as their injectable GLP-1 which has shown to have better cardio vascular and weight loss outcomes than competitor products, driving strong rates of adoption amongst the patient population. We expect Novo to file their oral GLP-1 towards the end of 2019, which will be sold into a US$12 billion addressable market at what we feel is likely a more attractive price point than the market is expecting. Novo’s clean accounting, sound corporate governance and strong capital allocation have made it a core holding within our portfolio.
From a sector stand point, the Company continued to exhibit a lower allocation to European financials and in particular European banks. This benefited relative returns as the banking sector saw downwards earnings revisions based not only on the cyclical pressure of low rates, but harsh competitive dynamics which have been further heightened by recent regulatory changes such as the Payments Service Directive II. With this regulation, and falling customer loyalty in a digital age, we believe the banks will suffer yet further competition from more nimble fintech players and thus continue to see key measures of profitability fall. Where we have invested in European banks we have looked for those operating in more consolidated markets with better pricing dynamics and higher Returns on Equity. Regrettably, our position in Danske Bank, which is fundamentally better positioned than the majority of European banks, detracted from returns as news headlines hit of Anti-Money Laundering scandals in their Estonian division. This led to reduced profitability in the financial year as management acted to donate all profits from this division. We opted to sell the position as guidance for future earnings was revised down.
Whilst the Company generally benefited from its consumer goods sector allocation over the year, relative returns were dented from not holding a large benchmark position in Nestlé. Nestlé realised strong returns over the period, in part fuelled by its ‘bond like’ characteristics which put the shares in high demand as both equity and fixed income markets exhibited a higher level of volatility. We recognise the strengths of the Nestlé investment case, with a resilient portfolio and some areas of attractive growth, such as pet food. However, in a highly concentrated portfolio which exhibits strong competition for capital, we have struggled to find a place for the shares over the last year, given its relative size in the index and the long-term conviction we have in the company’s ability to deliver above-market levels of growth.
Within the Emerging portion of the portfolio, a position in Bezeq Telecoms detracted from performance. We entered the position in anticipation of a regulatory change that would allow the industry to improve returns and increase investment in the Israeli telecom infrastructure. A series of delays at the political level culminating in two elections has interrupted this reform and put increasing pressure on returns and share prices. We maintain the position into the September 2019 election in the hope that regulatory reform may yet bear fruit.
A holding in marine and energy exposed engine manufacturer Wartsila also detracted from returns over the year. We had held the business based on a supportive outlook for both their energy and marine services operations, which were meant to be complemented by re-acceleration of growth in its high margin aftermarket business. We decided to sell the position as it became increasingly clear clients in Europe were delaying investment decisions on power generation projects due to uncertainty introduced by wholesale changes to the energy mix. At the same time, the outlook for the marine side of the business deteriorated as slower trade led to customers pushing out maintenance or replacing high margin spare parts purchases with lower cost alternatives.
The shape of the portfolio did not change greatly over the twelve months to the end of August 2019. We continued to focus the portfolio on companies which offer a higher return on invested capital, strong management and good free cash flow conversion. As mentioned, we had used market volatility and stock set-backs to top up high conviction positioning, increasing our exposure to companies such as Safran, DSV, Adidas and Novo Nordisk, for example.
Overall, the Company’s allocation to industrials fell during the year as we exited positions which were more sensitive to the economic cycle or were seeing deteriorating earnings and cash flow profiles, such as Wartsila, Schindler and Eiffage. The Company had zero exposure to oil & gas, having exited our position in Gazprom. We believe the traditional deep-water players within Europe continue to have limited attraction given the volatility of their earning streams, poor return profile and competitive disadvantage overall versus other oil producing regions, such as the Permian basin onshore US where the efficiency of extraction is better and associated cost lower.
We increased our exposure to consumer goods, adding to our positions in luxury goods companies Rémy Cointreau and Ferrari and initiating a new position in Royal Unibrew. We opted to exit Richemont, given the deteriorating outlook for the business based on underperformance of key portfolio brands resulting in growing inventory levels. We also exited our position in Unilever given reduced confidence in their ability to re-accelerate top-line growth and improve margins, while at the same time executing on targeted cost savings.
Within the health care sector our overall exposure was largely unchanged as we exited a position in Fresenius Medical Care, where the outlook for their US dialysis business was deteriorating and purchased a position in high quality diagnostic business DiaSorin. In the technology sector we bought a position in Amadeus, an IT provider for the global travel and tourism industry. We have always found the business model attractive but the valuation challenging at around 3.5% forward free cash flow yield. However, following the pullback (to circa 5% free cash flow yield) and with accelerating organic growth as new airlines are integrated on to the platform, we have added the company to the portfolio. The prospect of the company expanding into segments adjacent to its core expertise in airlines, particularly the hotel sector, is an exciting one and an area we have devoted considerable research time to.
At the end of the year, the Company had a higher allocation to technology, industrials, health care and consumer services when compared with the reference index. It held a lower weighting towards financials, utilities, oil & gas, consumer goods, telecommunications and basic materials.
OUTLOOK
Looking forward, the global economic environment is clearly deteriorating in response to the uncertainty caused by US-Chinese relations. We believe this has created disruption within supply chains and potential delays to capital expenditure, but do not see structural imbalances in the economy at this point in time. Policy remains supportive in Europe and the consumer resilient with Eurozone retail sales growing 2.6% year-on-year to June. Second quarter earnings releases in 2019 have unveiled a slowdown in companies exposed to short-term activity within the industrial sector, however our portfolios are generally not exposed to these types of businesses. At present, we do not see contagion beyond this. Valuation dispersion within the market remains an investment debate, but we believe the prevailing environment and structural headwinds warrant ‘cheap valuations’ for some sectors. Our portfolio capital is positioned to where we see the best upside driven by fundamentals. Whilst markets can respond to statistical indicators in the near-term, at times causing sector rotation, we believe company fundamentals drive long-term performance. We continue to have a small pro-cyclical tilt in our portfolio, primarily expressed through late cycle industrials, such as aerospace stocks, and consumer exposed names, such as luxuries.
STEFAN GRIES AND SAM VECHT
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
22 October 2019
PORTFOLIO
TEN LARGEST INVESTMENTS
1 2018 2nd
Novo Nordisk
Health Care
Market value £22,910,000
Share of investments 6.7%
is a Danish multinational pharmaceutical company which is a leader in diabetes care. We believe the company offers attractive long-term growth potential at high returns and sector leading cash flow conversion with any excess cash being returned to shareholders.
2 2018 3rd
Safran
Industrials
Market value £22,547,000
Share of investments 6.6%
is a French multinational supplier of systems and equipment for aerospace, defence and security. We believe Safran is a structural winner within the European aerospace sector, with strong execution in its new LEAP engine and growing after-market servicing for previous engine models.
3 2018 4th
SAP
Technology
Market value £20,079,000
Share of investments 5.9%
is one of the leading global enterprise software providers. We believe this has created a platform for profitable, multi-year growth at high returns and a more stable revenue profile from subscription based contracts.
4 2018 35th
Adidas
Consumer Goods
Market value £17,660,000
Share of investments 5.2%
is a global sportswear manufacturer based in Germany. Having been underrepresented in key sportswear markets, their strategy to increase penetration in China, North America and e-commerce we believe underpins a long?term opportunity for growth and improving returns.
5 2018 5th
Sika
Industrials
Market value £17,617,000
Share of investments 5.2%
is a speciality chemical company with a leading position in both the building sector and automotive industry. Sika has proprietary technology within adhesives, which has an increasing array of applications as technology advances. The company has a growing addressable market, which helps drive attractive organic growth rates.
6 2018 n/a
Royal Unibrew
Consumer Goods
Market value £16,861,000
Share of investments 4.9%
is a brewing and beverage company based in Denmark. The company operates in consolidated markets, driving growth by acquisition, partnerships and innovation. A decentralised organisational structure allows for on-the-ground managers to respond to trends for products, brands and packaging, as well as capital allocation decisions to support the realisation of clearly defined strategic and financial targets.
7 2018 1st
Lonza Group
Health Care
Market value £16,460,000
Share of investments 4.8%
is a Swiss biotechnology and speciality chemicals company. Through its Pharma & Biotech division, Lonza is one of the leading players in contract development and manufacturing of high-end drugs. We believe the company offers attractive growth, which should ultimately be less dependent upon the general economic cycle, given their large and diversified biopharma and speciality chemicals client base.
8 2018 10th
DSV
Industrials
Market value £16,325,000
Share of investments 4.8%
is a Danish freight forwarding company with a strong acquisitive history. Their success in making acquisitions has been facilitated by their strong IT platform which drives operational efficiencies leading to high conversion margins.
9 2018 14th
RELX
Consumer Services
Market value £15,705,000
Share of investments 4.6%
is a multinational information and analytics company which has high barriers to entry in most of its divisions, including scientific publishing. The capital light business model allows for a high rate of cash flow conversion with repeatable revenues built on subscription models.
10 2018 12th
ASML
Technology
Market value £14,142,000
Share of investments 4.1%
is a Dutch company which specialises in the supply of photolithography systems for the semiconductor industry. The company is at the forefront of technological change and invests in leading research and development to capture the structural growth opportunity supported by growth in mobile devices and microchip components.
All percentages reflect the value of the holding as a percentage of total investments.
Percentages in brackets represent the value of the holding as at 31 August 2019.
Together, the ten largest investments represent 52.8% of the Company’s portfolio (31 August 2018: 41.1%).
INVESTMENTS AS AT 31 AUGUST 2019
Country of operation |
Market value £’000 |
% of investments |
|
| Industrials | |||
| Safran | France | 22,547 | 6.6 |
| Sika | Switzerland | 17,617 | 5.2 |
| DSV | Denmark | 16,325 | 4.8 |
| Vinci | France | 9,993 | 2.9 |
| Thales | France | 9,603 | 2.8 |
| Assa Abloy | Sweden | 7,051 | 2.1 |
| Kingspan | Ireland | 5,702 | 1.7 |
| ------------------- | ------------------- | ||
| 88,838 | 26.1 | ||
| ------------------- | ------------------- | ||
| Health Care | |||
| Novo Nordisk | Denmark | 22,910 | 6.7 |
| Lonza Group | Switzerland | 16,460 | 4.8 |
| Straumann Holding | Switzerland | 9,189 | 2.7 |
| Grifols | Spain | 8,107 | 2.4 |
| DiaSorin | Italy | 7,189 | 2.1 |
| Chr. Hansen | Denmark | 3,582 | 1.1 |
| Stratec Biomedical Systems | Germany | 3,444 | 1.0 |
| ------------------- | ------------------- | ||
| 70,881 | 20.8 | ||
| ------------------- | ------------------- | ||
| Technology | |||
| SAP | Germany | 20,079 | 5.9 |
| ASML | Netherlands | 14,142 | 4.1 |
| Amadeus IT Group | Spain | 10,253 | 3.0 |
| Hexagon | Sweden | 8,045 | 2.4 |
| Infineon Technologies | Germany | 5,138 | 1.5 |
| ------------------- | ------------------- | ||
| 57,657 | 16.9 | ||
| ------------------- | ------------------- | ||
| Consumer Goods | |||
| Adidas | Germany | 17,660 | 5.2 |
| Royal Unibrew | Denmark | 16,861 | 4.9 |
| Ferrari | Italy | 12,680 | 3.7 |
| Rémy Cointreau | France | 8,791 | 2.6 |
| ------------------- | ------------------- | ||
| 55,992 | 16.4 | ||
| ------------------- | ------------------- | ||
| Financials | |||
| FinecoBank | Italy | 7,430 | 2.2 |
| Partners Group | Switzerland | 7,059 | 2.1 |
| Bank Pekao | Poland | 6,569 | 1.9 |
| KBC Groep | Belgium | 4,933 | 1.5 |
| Alpha Bank | Greece | 3,158 | 0.9 |
| ------------------- | ------------------- | ||
| 29,149 | 8.6 | ||
| ------------------- | ------------------- | ||
| Consumer Services | |||
| RELX | United Kingdom | 15,705 | 4.6 |
| Kering | France | 5,174 | 1.5 |
| ------------------- | ------------------- | ||
| 20,879 | 6.1 | ||
| ------------------- | ------------------- | ||
| Basic Materials | |||
| IMCD | Netherlands | 7,101 | 2.1 |
| Israel Chemicals | Israel | 4,865 | 1.4 |
| ------------------- | ------------------- | ||
| 11,966 | 3.5 | ||
| ------------------- | ------------------- | ||
| Telecommunications | |||
| Bezeq – Israeli Telecommunications | Israel | 5,452 | 1.6 |
| ------------------- | ------------------- | ||
| 5,452 | 1.6 | ||
| ------------------- | ------------------- | ||
| Total investments | 340,814 | 100.0 | |
| ============ | ============ |
All investments are in ordinary shares unless otherwise stated. The total number of investments held at 31 August 2019 was 33 (31 August 2018: 41).
As at 31 August 2019, the Company did not hold any equity interests comprising more than 3% of any company’s share capital.
INVESTMENT EXPOSURE AS AT 31 AUGUST 2019
MARKET CAPITALISATION
| % of Portfolio | |
| <€1bn | 1.0 |
| €1bn to €10bn | 21.4 |
| €10bn to €20bn | 17.4 |
| €20bn to €50bn | 27.3 |
| >€50bn | 32.9 |
INVESTMENT SIZE
| Number of investments | % of Portfolio | |
| <£1m | 0 | 0 |
| £1m to £3m | 0 | 0 |
| £3m to £5m | 5 | 5.9 |
| £5m to £10m | 16 | 34.6 |
| >£10m | 12 | 59.5 |
DISTRIBUTION OF INVESTMENTS
| % | |
| Industrials | 26.1 |
| Health Care | 20.8 |
| Technology | 16.9 |
| Consumer Goods | 16.4 |
| Financials | 8.6 |
| Consumer Services | 6.1 |
| Basic Materials | 3.5 |
| Telecommunications | 1.6 |
Source: BlackRock.
GOVERNANCE
STRATEGIC REPORT
The Directors present the Strategic Report of the Company for the year ended 31 August 2019. 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 during the year under review.
PRINCIPAL ACTIVITY
The Company carries on business as an investment trust and has a premium listing on the London Stock Exchange. 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 objective is the achievement of capital growth, primarily through investment in a focused portfolio constructed from a combination of the securities of large, mid and small capitalisation European companies, together with some investment in the developing markets of Europe. The Company will also have the flexibility to invest in any country included in the FTSE World Europe ex UK Index, as well as the freedom to invest in developing countries not included in the Index but considered by the Manager and the Directors as part of greater Europe.
STRATEGY, BUSINESS MODEL AND OBJECTIVE
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). 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 Manager delegates fund accounting services to the Investment Manager, which in turn sub-delegates these services to The Bank of New York Mellon (International) Limited. The Company delegates registration services to the Registrar, Computershare Investor Services PLC. Other service providers include the Depositary, The Bank of New York Mellon (International) Limited. Details of the contractual terms with these service providers are set out in the Directors’ Report on page 31 of the Annual Report and Financial Statements.
Investment policy
The Company’s policy is that the portfolio should consist of approximately 30-70 securities and the majority of the portfolio will be invested in larger capitalisation companies, being companies with a market capitalisation of over €5 billion. Up to 25% of the portfolio may be invested in companies in developing Europe. The Company may also invest up to 5% of the portfolio in unquoted investments. However, overall exposure to developing European companies and unquoted investments will not in aggregate exceed 25% of the Company’s portfolio.
As at 31 August 2019, the Company held 33 investments and 1.9% of the portfolio was invested in developing Europe. The Company had no unquoted investments.
Investment in developing European securities may be either direct or through other funds, including those managed by BlackRock Fund Managers Limited, subject to a maximum of 15% of the portfolio. Direct investment in Russia is limited to 10% of the Company’s assets. Investments may also include depositary receipts or similar instruments representing underlying securities.
The Company also has the flexibility to invest up to 20% of the portfolio in debt securities, such as convertible bonds and corporate bonds. No bonds were held at 31 August 2019. The use of any derivative instruments such as financial futures, options and warrants and the entering into of stock lending arrangements will only be for the purposes of efficient portfolio management.
While the Company may hold shares in other investment companies (including investment trusts), the Board has agreed that the Company will not invest more than 15%, in aggregate, of its gross assets in other listed closed-ended investment funds (save to the extent that such closed-ended investment funds have published investment policies to invest no more than 15% of their total assets in such other listed closed-ended investment funds).
The Company achieves an appropriate spread of risk by investing in a diversified portfolio of securities.
The Investment Manager believes that appropriate use of gearing can add value over time. This gearing typically is in the form of an overdraft facility which can be repaid at any time. The level and benefit of any gearing is discussed and agreed regularly by the Board. The Investment Manager generally aims to be fully invested and it is anticipated that gearing will not exceed 15% of net asset value (NAV) at the time of drawdown of the relevant borrowings. At the balance sheet date the Company had net gearing of 0.7% (2018: 1.9%).
INVESTMENT PROCESS
The Investment Manager takes a bottom-up approach to investing, meaning companies are analysed on an individual basis upon a number of qualitative and quantitative measures. Research is comprehensive and collaborative, backed by a team of 21 European Equity analysts and a further seven Emerging European analysts who conduct over 1,200 company meetings a year.
Idea generation is the first step of the investment process and important in ensuring that there is a continuous flow of new ideas entering the team’s proprietary research process. There is a structured approach to research, a dedicated research coordinator, and a formal research pipeline to ensure that efficient use is made of team resources and to prioritise research to take advantage of the most promising investment opportunities.
As part of their research, the analyst will conduct a thorough industry and company analysis using a range of valuation techniques depending on the company and sector. Time is spent analysing a company’s market dynamics, revenue drivers, financial statements, valuations and risks to the central scenario. The team also seek to understand the factors that influence a share price, as well as what the market is anticipating or missing.
As part of the company analysis, the analyst completes a proprietary research template which has been designed to capture all data relevant to the investment case in a concise and consistent framework. This consistency drives focus on debate and discussion and helps to ensure the investment case is robust.
Research on each company belongs to the analyst; however, portfolio construction and investment decisions within the Company are entirely the responsibility of the Investment Manager. Primary investment criteria the Investment Manager looks for includes:
• Quality management
• Strong free cash flow conversion
• Options to invest in growth
• Unique aspects
We believe this focus on sustainable cash returns and unique franchises will help concentrate the portfolio towards the best ideas delivered by the European and Emerging European Equity teams and drive positive outcomes for our clients.
PERFORMANCE
In the year to 31 August 2019, the Company’s NAV per share returned 6.3% (compared with a return in the FTSE World Europe ex UK Index of 4.8%) and the share price returned 7.9% (all percentages 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 Income Statement. The total profit for the year, after taxation, was £18,993,000 (2018: £34,784,000) which is reflected in the increase in the net asset value of the Company. The revenue return amounted to £4,160,000 (2018: £5,347,000) and relates to net revenue earnings from dividends received during the year after adjusting for expenses.
As explained in the Company’s half yearly financial report, the Directors declared an interim dividend of 1.75p per share (2018: 1.75p). The Directors recommend the payment of a final dividend of 4.10p per share, making a total dividend of 5.85p per share (2018: 5.75p). Subject to approval at the forthcoming Annual General Meeting, the dividend will be paid on 10 December 2019 to shareholders on the register of members at the close of business on 1 November 2019.
KEY PERFORMANCE INDICATORS
A number of key performance indicators (KPIs) are used to monitor and assess the Company’ success in achieving its objectives and to measure its progress and performance.
The principal KPIs are described below.
Performance
At each meeting, the Board reviews the performance of the portfolio, as well as the net asset value and share price for the Company and compares this against various companies and indices. The Company does not have a benchmark; however, the Board reviews performance in the context of the performance of the FTSE World Europe ex UK Index. The Company outperformed the index in the year ended 31 August 2019.
Share price discount to NAV per share
The Company publishes a NAV per share figure on a daily basis through the official newswire of the London Stock Exchange. This figure is calculated in accordance with the Association of Investment Companies (AIC) formula. At each Board meeting, the Board monitors the level of the Company’s discount to NAV and reviews the average discount/premium for the Company’s relevant sector.
The Board considers the use of share buybacks and semi-annual tender offers to enhance shareholder value. At its regular meetings, it also undertakes reviews of marketing/ investor relations and sales reports from the Manager and considers their effectiveness, as well as measures of investor sentiment.
Further details setting out how the discount or premium at which the Company’s shares trade is calculated, is included in the Glossary on page 91 of the Annual Report and Financial Statements.
Ongoing charges
The ongoing charges are based on actual costs incurred in the year as being the best estimate of future costs. The Board reviews the Company’s ongoing charges and monitors expenses to ensure that the total costs incurred by shareholders in the running of the Company remain competitive when measured against peer group funds.
An analysis of the Company’s costs, including the management fee, Directors’ fees and general expenses, is submitted to each Board meeting. The management fee is reviewed at least annually. A definition setting out in detail how the operating charges ratio is calculated is included in the Glossary on page 92 of the Annual Report and Financial Statements.
The table that follows sets out the key KPIs for the Company. 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 on pages 91 to 93 of the Annual Report and Financial Statements.
| As at 31 August 2019 |
As at 31 August 2018 |
|
| Net asset value per share | 399.52p | 382.17p |
| Net asset value total return1 | +6.3% | +11.8% |
| Share price | 385.00p | 363.00p |
| Share price total return1 | +7.9% | +12.5% |
| Discount to net asset value2 | 3.6% | 5.0% |
| ============= | ============= |
| Year ended 31 August 2019 |
Year ended 31 August 2018 |
|
| Revenue return per share | 4.87p | 5.95p |
| Ongoing charges3 | 1.08% | 1.09% |
| ============= | ============= |
1 This measures the Company’s share price and NAV total return, which assumes dividends paid by the Company have been reinvested.
2 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.
3 Ongoing charges represent the management fee and all other operating expenses, excluding finance costs, transaction costs and taxation, as a % of average shareholders’ funds.
PRINCIPAL RISKS
The Company is exposed to a variety of risks and uncertainties. The Board has put in place a robust process to identify, assess and monitor the principal risks. 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 controls established for mitigation. A residual risk rating is then calculated for each risk based on the outcome of the assessment.
The risk register is regularly reviewed and the risks reassessed. The risk environment in which the Company operates is also monitored and regularly appraised. New risks are also added to the register as they are identified which ensures that the document continues to be an effective risk management tool.
The risk register, its method of preparation and the operation of key controls in the Manager’s and other 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 the Manager’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 periodically receives and reviews internal control reports from BlackRock and the Company’s custodian (The Bank of New York (International) Limited). The custodian is appointed by the Company’s Depositary and does not have a direct contractual relationship with the Company.
The Board has undertaken a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. Those principal risks have been described in the table below, together with how they are managed and mitigated. The Board will continue to assess these risks on an ongoing basis. In relation to the 2016 UK Corporate Governance 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 The returns achieved are reliant primarily upon the performance of the portfolio. The Board is responsible for: • setting 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 FTSE World Europe ex UK 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. 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, the Market Abuse Regulation, the Bribery Act 2010, Criminal Finances Act 2017 and General Data Protection Regulation 2018. |
The Investment Manager monitors investment movements, the level and type 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 are 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 the Manager also monitor changes in government policy and legislation which may have an impact on the Company. Following authorisation under the Alternative Investment Fund Managers’ Directive (AIFMD), the Company and its Alternative Investment Fund Manager (AIFM) are subject to the risks that the requirements of the Directive are not correctly complied with. The Board and the AIFM monitor changes in government policy and legislation which may have an impact on the Company. The Market Abuse Regulation came into force across the European Union on 3 July 2016. The Board has taken steps to ensure that individual Directors (and their Persons Closely Associated) are aware of their obligations under the regulation and has updated internal processes, where necessary, to ensure the risk of non-compliance is effectively mitigated. |
| 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, including the impact of the UK leaving the EU, can also substantially and adversely affect the securities and, as a consequence, the Company’s prospects and share price. The Brexit risk is currently considered to be elevated due to continuing uncertainty about the political and regulatory outlook. |
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. While it is not possible to predict fully the impact Brexit will have on the Company and our markets, the Board and Manager continue to monitor external events to ensure that we are prepared for any short-term risks that could be faced in an immediate aftermath of a deal not being reached between the UK and EU. |
| 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 The Bank of New York Mellon (International) Limited (which acts as both Depositary, Custodian and Fund Accountant and 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 third party service providers. Failure by any service provider to carry out its obligations to the Company 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. Third party service providers, BlackRock and The Bank of New York Mellon, 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 assets are subject to a strict liability regime and, in the event of a loss of assets, the Depositary must return assets 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. |
| 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 15 on pages 71 to 76 of the Annual Report and Financial Statements, together with a summary of the policies for managing these risks. |
| 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. 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 C.2.2 of the 2016 UK Corporate Governance Code, the Directors have assessed the prospects of the Company for a period of three years. This is generally the investment holding period investors consider while investing in the European sector. In its assessment of the viability of the Company, the Directors have noted that:
• the Company invests predominantly in highly liquid, large listed companies so its assets are readily realisable;
• the Company has limited gearing and no concerns around facilities, headroom or covenants;
• the Company’s forecasts for revenues, expenses and liabilities are relatively stable and it has largely fixed overheads which comprise a small percentage of net assets (1.08%); and
• the business model should remain attractive for much longer than three years, unless there is significant economic or regulatory change.
The Directors have also reviewed:
• the Company’s principal risks and uncertainties as set out above;
• the ongoing relevance of the Company’s investment objective, business model and investment policy in the current environment; and
• the level of demand for the Company’s shares.
The Directors reviewed the assumptions and considerations underpinning the Company’s existing going concern assertion which are based on:
• processes for monitoring costs;
• key financial ratios;
• evaluation of risk management controls;
• compliance with the investment objective;
• portfolio risk profile;
• share price discount;
• gearing; and
• counterparty exposure and liquidity risk.
Based on the results of their analysis, 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.
FUTURE PROSPECTS
The Board’s main focus is to achieve capital growth. The future performance of the Company is dependent upon the success of the investment strategy and, to a large extent, on the performance of financial markets. The outlook for the Company is discussed in both the Chairman’s Statement and Investment Manager’s Report.
EMPLOYEES, 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 on pages 43 and 44 of the Annual Report and Financial Statements.
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 August 2019, all of whom held office throughout the year, are set out in the Directors’ Biographies on pages 21 and 22 of the Annual Report and Financial Statements. The Board consists of two male Directors and two female Directors. The Company’s policy on diversity is set out on page 41 of the Annual Report and Financial Statements. The Company does not have any employees; therefore there are no disclosures to be made in that respect.
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 22 October 2019.
BY ORDER OF THE BOARD
CAROLINE DRISCOLL
FOR AND ON BEHALF OF
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
Company Secretary
22 October 2019
RELATED PARTY TRANSACTIONS
BlackRock Fund Managers Limited (BFM) was appointed as the Company’s AIFM with effect from 2 July 2014, having been authorised as an AIFM by the FCA on 1 May 2014. The management contract is terminable by either party on six months’ notice. Under the agreement, the Board continues to be independent from the AIFM. The agreement provides the appropriate balance between the Board’s control over the Company, its investment policies and compliance with regulatory obligations.
BlackRock Investment Management (UK) Limited (BIM (UK)) continues to act as the Company’s Investment Manager under a delegation agreement with BFM. BIM (UK) also acted as the Secretary of the Company throughout the year. The Company pays an annual management fee to BFM which is calculated based on 0.85% of net asset value on the last day of each month. Where the Company invests in other investments or cash funds managed by BIM (UK), any underlying fee charged is rebated. Fees are adjusted by adding all dividends declared during the period. No penalty on termination of the investment management contract would be payable by the Company in the event that six months’ written notice is given to the Manager. There are no provisions relating to the payment of fees in lieu of notice.
The Company contributes to a focused investment trust sales and marketing initiative operated by BIM (UK) on behalf of the investment trusts under its management. The Company’s contribution to the consortium element of the initiative, which enables the trusts to achieve efficiencies by combining certain sales and marketing activities, represents a budget of up to 0.025% per annum of its net assets (£275.1 million) as at 31 December 2018 and this contribution is matched by BIM (UK). In addition, a budget of a further £15,000 has been allocated for Company specific sales and marketing activity. Total fees paid or payable for these services for the year ended 31 August 2019 amounted to £103,000 (excluding VAT) (2018: £99,000). The purpose of the programme overall is to ensure effective communication with existing shareholders and to attract new shareholders to the Company. This has the benefit of improving liquidity in the Company’s shares and helps sustain the stock market rating of the Company.
The Board currently consists of four non-executive Directors, all of whom are considered to be independent of the Company’s Manager. None of the Directors has a service contract with the Company. The Chairman receives an annual fee of £41,000, the Chairman of the Audit and Management Engagement Committee receives an annual fee of £32,500 and each other Director receives an annual fee of £28,000. Three members of the Board hold shares in the Company. Eric Sanderson holds 4,000 ordinary shares, Peter Baxter holds 5,000 ordinary shares and Paola Subacchi holds 590 ordinary shares.
As at 31 August 2019, fees of £10,000 (2018: £10,000) were outstanding to Directors in respect of their annual 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 law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
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 United Kingdom Generally Accepted Accounting Practice 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 applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and 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, the 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 at the date of this report, whose names are listed on pages 21 and 22 of the Annual Report and Financial Statements, confirm to the best of their knowledge that:
• the financial statements, prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and 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 2016 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 fulfils these requirements. The process by which the Committee has reached these conclusions is set out in the Audit and Management Engagement Committee’s Report on pages 46 to 49 of the Annual Report and Financial Statements. As a result, the Board has concluded that the Annual Report for the year ended 31 August 2019, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position, performance, business model and strategy.
FOR AND ON BEHALF OF THE BOARD
ERIC SANDERSON
Chairman
22 October 2019
FINANCIAL STATEMENTS
INCOME STATEMENT FOR THE YEAR ENDED 31 AUGUST 2019
| Revenue | Capital | Total | |||||
| Notes |
2019 £’000 |
2018 £’000 |
2019 £’000 |
2018 £’000 |
2019 £’000 |
2018 £’000 |
|
| Gains on investments held at fair value through profit or loss | – | – | 17,320 | 31,646 | 17,320 | 31,646 | |
| (Losses)/gains on foreign exchange | – | – | (315) | 100 | (315) | 100 | |
| Income from investments held at fair value through profit or loss | 3 | 5,924 | 6,948 | – | – | 5,924 | 6,948 |
| Other income | 3 | 2 | 41 | – | – | 2 | 41 |
| ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ||
| Total income | 5,926 | 6,989 | 17,005 | 31,746 | 22,931 | 38,735 | |
| ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ||
| Expenses | |||||||
| Investment management fee | 4 | (531) | (537) | (2,122) | (2,147) | (2,653) | (2,684) |
| Other operating expenses | 5 | (710) | (779) | (25) | (44) | (735) | (823) |
| ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ||
| Total operating expenses | (1,241) | (1,316) | (2,147) | (2,191) | (3,388) | (3,507) | |
| ========= | ========= | ========= | ========= | ========= | ========= | ||
| Net profit on ordinary activities before finance costs and taxation | 4,685 | 5,673 | 14,858 | 29,555 | 19,543 | 35,228 | |
| Finance costs | (40) | (51) | (25) | (118) | (65) | (169) | |
| ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ||
| Net profit on ordinary activities before taxation | 4,645 | 5,622 | 14,833 | 29,437 | 19,478 | 35,059 | |
| Taxation | (485) | (275) | – | – | (485) | (275) | |
| ========= | ========= | ========= | ========= | ========= | ========= | ||
| Net profit on ordinary activities after taxation | 7 | 4,160 | 5,347 | 14,833 | 29,437 | 18,993 | 34,784 |
| ========= | ========= | ========= | ========= | ========= | ========= | ||
| Earnings per ordinary share (pence) | 7 | 4.87 | 5.95 | 17.35 | 32.76 | 22.22 | 38.71 |
| ========= | ========= | ========= | ========= | ========= | ========= | ||
The total column of this statement represents the Company’s profit and loss account. The supplementary revenue and capital columns 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 net profit on ordinary activities for the year disclosed above represents the Company’s total comprehensive income.
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 AUGUST 2019
Note |
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 August 2019 | ||||||||
| At 31 August 2018 | 110 | – | 130 | 54,869 | 264,422 | 10,888 | 330,419 | |
| Total comprehensive income: | ||||||||
| Net profit for the year | – | – | – | – | 14,833 | 4,160 | 18,993 | |
| Transaction with owners, recorded directly to equity: | ||||||||
| Ordinary shares purchased into treasury | 8 | – | – | – | (2,520) | – | – | (2,520) |
| Tender offers into treasury | 8 | – | – | – | (3,477) | – | – | (3,477) |
| Share purchase and tender costs | 8 | – | – | – | (70) | – | – | (70) |
| Share purchase and tender costs written back | – | – | – | 43 | – | – | 43 | |
| Dividends paid1 | 6 | – | – | – | – | – | (4,946) | (4,946) |
| ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ||
| At 31 August 2019 | 110 | – | 130 | 48,845 | 279,255 | 10,102 | 338,442 | |
| ========= | ========= | ========= | ========= | ========= | ========= | ========= | ||
| For the year ended 31 August 2018 | ||||||||
| At 31 August 2017 | 110 | 63,214 | 130 | – | 256,652 | 10,621 | 330,727 | |
| Total comprehensive income: | ||||||||
| Net profit for the year | – | – | – | – | 29,437 | 5,347 | 34,784 | |
| Transaction with owners, recorded directly to equity: | ||||||||
| Cancellation of share premium account2 | – | (63,214) | – | 63,214 | – | – | – | |
| Ordinary shares purchased into treasury | – | – | – | (78) | – | – | (78) | |
| Tender offers into treasury | – | – | – | (8,143) | (21,675) | – | (29,818) | |
| Share purchase and tender costs | – | – | – | (124) | (203) | – | (327) | |
| Tender cost accruals written back | – | – | – | – | 211 | – | 211 | |
| Dividends paid3 | 6 | – | – | – | – | – | (5,080) | (5,080) |
| ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ||
| At 31 August 2018 | 110 | – | 130 | 54,869 | 264,422 | 10,888 | 330,419 | |
| ========= | ========= | ========= | ========= | ========= | ========= | ========= |
1 Interim dividend paid in respect of the year ended 31 August 2019 of 1.75p per share was declared on 1 May 2019 and paid on 31 May 2019. Final dividend paid in respect of the year ended 31 August 2018 of 4.00p per share was declared on 24 October 2018 and paid on 10 December 2018.
2 Share premium account cancelled pursuant to Court approval on 13 February 2018 and £63,214,000 was transferred to a special reserve.
3 Interim dividend paid in respect of the year ended 31 August 2018 of 1.75p per share was declared on 25 April 2018 and paid on 31 May 2018. Final dividend paid in respect of the year ended 31 August 2017 of 3.70p per share was declared on 23 October 2017 and paid on 8 December 2017.
BALANCE SHEET AS AT 31 AUGUST 2019
| Notes |
2019 £’000 |
2018 £’000 |
|
| Fixed assets | |||
| Investments held at fair value through profit or loss | 340,814 | 336,832 | |
| ---------------- | ---------------- | ||
| Current assets | |||
| Debtors | 1,702 | 1,635 | |
| Cash and cash equivalents | 268 | – | |
| ---------------- | ---------------- | ||
| 1,970 | 1,635 | ||
| ---------------- | ---------------- | ||
| Creditors – amounts falling due within one year | |||
| Bank overdraft | (173) | (5,589) | |
| Other creditors | (4,169) | (2,459) | |
| ---------------- | ---------------- | ||
| (4,342) | (8,048) | ||
| ---------------- | ---------------- | ||
| Net current liabilities | (2,372) | (6,413) | |
| ---------------- | ---------------- | ||
| Net assets | 338,442 | 330,419 | |
| ========= | ========= | ||
| Capital and reserves | |||
| Called up share capital | 8 | 110 | 110 |
| Capital redemption reserve | 130 | 130 | |
| Special reserve | 48,845 | 54,869 | |
| Capital reserves | 279,255 | 264,422 | |
| Revenue reserve | 10,102 | 10,888 | |
| ---------------- | ---------------- | ||
| Total shareholders’ funds | 338,442 | 330,419 | |
| ---------------- | ---------------- | ||
| Net asset value per ordinary share (pence) | 7 | 399.52 | 382.17 |
| ========= | ========= |
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 AUGUST 2019
| Note |
2019 £’000 |
2018 £’000 |
|
| Operating activities | |||
| Net profit on ordinary activities before taxation | 19,478 | 35,059 | |
| Add back finance costs | 65 | 169 | |
| Gains on investments held at fair value through profit or loss | (17,320) | (31,646) | |
| Losses/(gains) on foreign exchange | 315 | (100) | |
| Sales of investments held at fair value through profit or loss | 127,363 | 228,091 | |
| Purchase of investments held at fair value through profit or loss | (114,096) | (195,027) | |
| Decrease in debtors | 96 | 16 | |
| Increase/(decrease) in other creditors | 1,825 | (556) | |
| Taxation on investment income | (383) | (1,349) | |
| Interest paid | (65) | (169) | |
| (Deduction)/refund of withholding taxes | (266) | 804 | |
| ---------------- | ---------------- | ||
| Net cash generated from operating activities | 17,012 | 35,292 | |
| ---------------- | ---------------- | ||
| Financing activities | |||
| Ordinary shares purchased into treasury | (2,520) | (78) | |
| Tender offers into treasury | (3,477) | (29,818) | |
| Share purchase and tender costs | (70) | (257) | |
| Dividends paid | 6 | (4,946) | (5,080) |
| ---------------- | ---------------- | ||
| Net cash used in financing activities | (11,013) | (35,233) | |
| ---------------- | ---------------- | ||
| Increase in cash and cash equivalents | 5,999 | 59 | |
| ---------------- | ---------------- | ||
| Cash and cash equivalents at the start of the year | (5,589) | (5,748) | |
| Effect of foreign exchange rate changes | (315) | 100 | |
| ---------------- | ---------------- | ||
| Cash and cash equivalents at the end of the year | 95 | (5,589) | |
| ---------------- | ---------------- | ||
| Comprised of: | |||
| Cash at bank | 268 | – | |
| Bank overdraft | (173) | (5,589) | |
| ---------------- | ---------------- | ||
| 95 | (5,589) | ||
| ---------------- | ---------------- |
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2019
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.
2. ACCOUNTING POLICIES
The principal accounting policies adopted by the Company are set out below:
(a) Basis of preparation
The financial statements have been prepared on a going concern basis in accordance with ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ (FRS 102) and the revised Statement of Recommended Practice – ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’ (SORP) issued by the Association of Investment Companies (AIC) in November 2014 and updated in February 2018 and the provisions of the Companies Act 2006.
The principal accounting policies adopted by the Company are set out below. Unless specified otherwise, the policies have been applied consistently throughout the year and are consistent with those applied in the preceding year. All of the Company’s operations are of a continuing nature.
The preparation of the Company’s financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. These assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in the current and future periods, depending on circumstance. 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.
The Company’s financial statements are presented in sterling, which is 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.
(b) Presentation of Income Statement
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 Income Statement between items of a revenue and a capital nature has been presented alongside the Income Statement.
(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 treated 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. Provisions are made for dividends not expected to be received.
Special dividends are recognised on an ex-dividend basis and treated as capital or revenue depending on the facts or circumstances of each dividend.
Dividends are accounted for in accordance with Section 29 of FRS 102 on the basis of income actually receivable, without adjustment for tax credits attaching to the dividend. Dividends from overseas companies continue to be shown gross of withholding tax.
Deposit interest receivable 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 income. 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 column of the Income Statement, except as follows:
• expenses which are incidental to the acquisition or disposal of an investment are treated as capital. Details of transaction costs on the purchases and sales of investments are disclosed in note 10 on page 69 of the Annual Report and Financial Statements; and
• the investment management fee has been allocated 80% to the capital column and 20% to the revenue column of the Income Statement 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) Finance costs
Finance costs are accounted for on an effective yield method and on an accruals basis. Finance costs are allocated, insofar as they relate to the financing of the Company’s investments, 80% to the capital column and 20% to the revenue column of the Income Statement, 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.
(g) Taxation
The current tax effect of different items of expenditure is allocated between capital and revenue 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 timing differences at the financial reporting date, where transactions or events that result in an obligation to pay more taxation in the future or right to less taxation in the future have occurred at the balance sheet date. Deferred taxation is measured on a non-discounted basis, at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. This is subject to deferred taxation 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 timing differences can be deducted.
(h) Investments held at fair value through profit or loss
The Company’s investments are classified as held at fair value through profit or loss in accordance with Section 11 and 12 of FRS 102 and are managed and evaluated on a fair value basis in accordance with its investment strategy.
All investments are designated upon initial recognition as held at fair value through profit or loss. Purchases of investments are recognised on a trade date basis. Sales are recognised at the trade date of the disposal and the proceeds are measured at fair value, which is regarded as the proceeds of the sale less any transaction costs.
The fair value of the financial investments is based on their quoted bid price at the balance sheet date on the exchange on which the investment is quoted, without deduction for the estimated future selling costs.
Changes in the value of investments held at fair value through profit or loss and gains and losses on disposal are recognised in the Income Statement as ‘Gains or losses on investments held at fair value through profit or loss’. Also included within this heading are transaction costs in relation to the purchase or sale of investments.
The fair value hierarchy consists of the following three levels:
Level 1 – Quoted market price for identical instruments in active markets.
Level 2 – Valuation techniques using observable inputs.
Level 3 – Valuation techniques using significant unobservable inputs.
(i) Debtors
Debtors include sales for future settlement, other debtors and pre-payments and accrued income in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current assets.
(j) Creditors
Creditors include purchases for future settlements, interest payable, share buyback costs and accruals in the ordinary course of business. Creditors are classified as creditors – amounts due within one year if payment is due within one year or less. If not, they are presented as creditors - amounts due after more than one year.
(k) Dividends payable
Under Section 32 of FRS 102, final dividends should not be accrued in the financial statements unless they have been approved by shareholders before the balance sheet date. Dividends payable to equity shareholders are recognised in the Statement of Changes in Equity when they have been approved by shareholders and have become a liability of the Company. Interim dividends are only recognised in the financial statements in the period in which they are paid.
(l) Cash and cash equivalents
Cash comprises cash in hand and demand deposits. Cash equivalents include bank overdrafts repayable on demand and 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.
(m) Foreign currency translation
In accordance with Section 30 of FRS 102, the Company is required to nominate a functional currency being the currency in which the Company predominately operates. The functional and reporting currency is sterling, reflecting the primary economic environment in which the Company operates. Transactions in foreign currencies are translated into sterling at the rates of exchange ruling on the date of the transaction. Foreign currency monetary assets and liabilities and non-monetary assets held at fair value are translated into sterling at the rates of exchange ruling at the balance sheet date. Profits and losses thereon are recognised in the capital column of the Income Statement and taken to the capital reserve.
(n) Shares repurchased/tendered and held in treasury
The full cost of shares repurchased/tendered and held in treasury can be charged to either capital reserves or the special reserve.
3. INCOME
| 2019 £’000 |
2018 £’000 |
|
| Investment income: | ||
| UK dividends | 345 | – |
| Overseas dividends | 5,441 | 6,836 |
| Overseas special dividends | 138 | 112 |
| ---------------- | ---------------- | |
| 5,924 | 6,948 | |
| ---------------- | ---------------- | |
| Other income: | ||
| Bank interest | 2 | 2 |
| Interest on withholding tax reclaims | – | 39 |
| ---------------- | ---------------- | |
| 2 | 41 | |
| ---------------- | ---------------- | |
| Total | 5,926 | 6,989 |
| ========= | ========= |
Dividends and interest received during the period amounted to £5,062,000 and £2,000 respectively (2018: £6,999,000 and £41,000).
No special dividends have been recognised in capital during the year (2018: nil).
4. INVESTMENT MANAGEMENT FEE
| 2019 | 2018 | |||||
| Revenue £’000 |
Capital £’000 |
Total £’000 |
Revenue £’000 |
Capital £’000 |
Total £’000 |
|
| Investment management fee | 531 | 2,122 | 2,653 | 537 | 2,147 | 2,684 |
| ======== | ======== | ======== | ======== | ======== | ======== | |
The investment management fee is levied quarterly, based on 0.85% per annum of net asset value on the last day of each month. The investment management fee is allocated 80% to capital reserves and 20% to the revenue reserve.
5. OTHER OPERATING EXPENSES
| 2019 £’000 |
2018 £’000 |
|
| Allocated to revenue: | ||
| Broker fees | 49 | 48 |
| Custody fees | 44 | 42 |
| Depositary fees | 41 | 44 |
| Audit fees | 29 | 26 |
| Legal fees | 30 | 84 |
| Registrars’ fees | 80 | 81 |
| Directors’ emoluments | 130 | 131 |
| Marketing fees | 103 | 99 |
| Postage and printing fees | 38 | 64 |
| Tax agent fees | 36 | 33 |
| AIC fees | 25 | 21 |
| Professional fees | 16 | 20 |
| Other administration costs | 89 | 86 |
| ---------------- | ---------------- | |
| 710 | 779 | |
| ---------------- | ---------------- | |
| Allocated to capital: | ||
| Custody transaction costs | 25 | 44 |
| ---------------- | ---------------- | |
| 735 | 823 | |
| ---------------- | ---------------- | |
| The Company’s ongoing charges – calculated as a percentage of average shareholders’ funds using operating expenses and excluding transaction costs, finance costs and taxation were: | 1.08% | 1.09% |
| ========= | ========= |
6. DIVIDENDS
Dividends paid on equity shares |
Record date |
Payment date |
2019 £’000 |
2018 £’000 |
| 2017 Final dividend of 3.70p | 3 November 2017 | 8 December 2017 | – | 3,526 |
| 2018 Interim dividend of 1.75p | 4 May 2018 | 31 May 2018 | – | 1,554 |
| 2018 Final dividend of 4.00p | 2 November 2018 | 10 December 2018 | 3,458 | – |
| 2019 Interim dividend of 1.75p | 10 May 2019 | 31 May 2019 | 1,488 | – |
| ---------------- | ---------------- | |||
| 4,946 | 5,080 | |||
| ========= | ========= |
The Directors have proposed a final dividend of 4.10p per share in respect of the year ended 31 August 2019. The dividend will be paid on 10 December 2019, subject to shareholders’ approval on 5 December 2019, to shareholders on the Company’s register on 1 November 2019. The proposed final dividend has not been included as a liability in these financial statements.
The total dividends payable in respect of the year which form the basis of determining retained income for the purpose of section 1158 of the Corporation Tax Act 2010 and section 833 of the Companies Act 2006, and the amount proposed for the year ended 31 August 2019, meet the relevant requirements as set out in this legislation.
Dividends paid or proposed or declared on equity shares |
2019 £’000 |
2018 £’000 |
| Interim paid of 1.75p (2018: 1.75p) | 1,488 | 1,554 |
| Final proposed of 4.10p* (2018: 4.00p) | 3,464 | 3,458 |
| ---------------- | ---------------- | |
| 4,952 | 5,012 | |
| ========= | ========= |
* Based on 84,493,101 ordinary shares (excluding treasury shares) in issue on 22 October 2019.
All dividends paid or payable are distributed from the Company’s revenue profits.
7. Earnings and net asset value per ordinary share
Revenue, capital earnings and net asset value per ordinary share are shown below and have been calculated using the following:
| 2019 | 2018 | |
| Net revenue profit attributable to ordinary shareholders (£’000) | 4,160 | 5,347 |
| Net capital profit attributable to ordinary shareholders (£’000) | 14,833 | 29,437 |
| ---------------- | ---------------- | |
| Total profit attributable to ordinary shareholders (£’000) | 18,993 | 34,784 |
| ========= | ========= | |
| Total shareholders’ funds (£’000) | 338,442 | 330,419 |
| ---------------- | ---------------- | |
| Earnings per share | ||
| The weighted average number of ordinary shares in issue during the year on which the earnings per ordinary share was calculated was: | 85,459,456 | 89,850,956 |
| ---------------- | ---------------- | |
| The actual number of ordinary shares in issue at the end of the year on which the net asset value was calculated was: | 84,713,101 | 86,459,691 |
| ---------------- | ---------------- | |
| Calculated on weighted average number of ordinary shares | ||
| Revenue profit (pence) | 4.87 | 5.95 |
| Capital profit (pence) | 17.35 | 32.76 |
| ---------------- | ---------------- | |
| Total (pence) | 22.22 | 38.71 |
| ========= | ========= |
| 2019 | 2018 | |
| Net asset value per share (pence) | 399.52 | 382.17 |
| ---------------- | ---------------- | |
| Ordinary share price (pence) | 385.00 | 363.00 |
| ========= | ========= |
There were no dilutive securities at the year end.
8. SHARE CAPITAL
| Ordinary shares number |
Treasury shares number |
Total shares number |
Nominal value £’000 |
|
| Allotted, called up and fully paid share capital comprised: | ||||
| Ordinary shares of 0.1p each | ||||
| At 31 August 2018 | 86,459,691 | 23,869,247 | 110,328,938 | 110 |
| Shares repurchased and held in treasury | (710,000) | 710,000 | – | – |
| Shares bought back to treasury pursuant to tender offer | (1,036,590) | 1,036,590 | – | – |
| ---------------- | ---------------- | ---------------- | ---------------- | |
| At 31 August 2019 | 84,713,101 | 25,615,837 | 110,328,938 | 110 |
| ========= | ========= | ========= | ========= |
During the year 710,000 ordinary shares were repurchased and held in treasury (2018: 25,000) for a total consideration, including expenses, of £2,537,000 (2018: £79,000). Additionally, during the year there was a tender offer (2018: two) and 1,036,590 shares were transferred to treasury (2018: 8,811,262) for a total consideration of £3,501,000 (2018: £30,144,000). The number of ordinary shares in issue at the year end was 110,328,938 (2018: 110,328,938) of which 25,615,837 were held in treasury (2018: 23,869,247). No treasury shares were issued or cancelled during the year (2018: nil).
9. VALUATION OF FINANCIAL INSTRUMENTS
Financial assets and financial liabilities are either carried in the Balance Sheet at their fair value (investments) 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). Section 34 of FRS 102 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.
Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset.
The 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 and regularly 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 in active markets 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.
Level 3 – Valuation techniques using significant unobservable inputs
This category includes all instruments where the valuation technique includes inputs not based on observable market data and the observable inputs could have a significant impact on the instrument’s valuation.
This category also 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. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 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.
The table below is an analysis of the Company’s financial instruments measured at fair value at the balance sheet date.
| Financial assets at fair value through profit or loss at 31 August 2019 |
Level 1 £’000 |
Level 2 £’000 |
Level 3 £’000 |
Total £’000 |
| Equity investments | 340,814 | – | – | 340,814 |
| ========= | ========= | ========= | ========= |
| Financial assets at fair value through profit or loss at 31 August 2018 |
Level 1 £’000 |
Level 2 £’000 |
Level 3 £’000 |
Total £’000 |
| Equity investments | 336,832 | – | – | 336,832 |
| ========= | ========= | ========= | ========= |
There were no transfers between levels for financial assets and financial liabilities during the year recorded at fair value as at 31 August 2019 and 31 August 2018. The Company did not hold any Level 3 securities throughout the financial year or as at 31 August 2019 (2018: nil).
10. TRANSACTIONS WITH THE MANAGER AND INVESTMENT MANAGER
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 on pages 30 and 31 of the Annual Report and Financial Statements.
The investment management fee is levied quarterly, based on 0.85% per annum of net asset value on the last day of each month. The investment management fee due for the year ended 31 August 2019 amounted to £2,653,000 (2018: £2,684,000). At the year end, £1,994,000 was outstanding in respect of the management fee (2018: £687,000).
In addition to the above services, BIM (UK) provided the Company with marketing services. The total fees paid or payable for these services for the period ended 31 August 2019 amounted to £103,000 excluding VAT (2018: £99,000). Marketing fees of £177,000 were outstanding at 31 August 2019 (2018: £74,000).
11. RELATED PARTY DISCLOSURE
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 on pages 38 and 39 of the Annual Report and Financial Statements. At 31 August 2019, £10,000 (2018: £10,000) was outstanding in respect of Directors’ fees.
12. CONTINGENT LIABILITIES
There were no contingent liabilities at 31 August 2019 (2018: nil).
13. 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 August 2019 will be filed with the Registrar of Companies after the Annual General Meeting.
The figures set out above have been reported upon by the auditor, whose report for the year ended 31 August 2019 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 Greater Europe Investment Trust plc for the year ended 31 August 2018, 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.
14. 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 Greater Europe Investment Trust plc, 12 Throgmorton Avenue, London EC2N 2DL.
15. 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 Thursday, 5 December 2019 at 12.00 noon.
ENDS
The Annual Report will also be available on the BlackRock website at blackrock.co.uk/brge. 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:
Melissa Gallagher, Co-head, Closed End Funds, BlackRock Investment Management (UK) Limited
Tel: 020 7743 3893
Stefan Gries, Fund Manager, BlackRock Investment Management (UK) Limited
Tel: 020 7743 3000
Press enquiries:
Lucy Horne, Lansons Communications – Tel: 020 7294 3689
E-mail: lucyh@lansons.com
12 Throgmorton Avenue
London
EC2N 2DL
22 October 2019
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